e10vq
UNITED STATES SECURITIES
AND
EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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(Mark One)
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x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
March 31,
2011
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OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
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Commission file number 1-7436
HSBC USA INC.
(Exact name of registrant as
specified in its charter)
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Maryland
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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 April 30, 2011, 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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9
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85
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85
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92
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95
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100
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100
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108
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114
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125
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128
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131
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136
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144
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145
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145
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Part II
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145
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145
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146
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148
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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 (UNAUDITED)
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Three Months Ended March 31,
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2011
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2010
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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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923
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$
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1,211
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Securities
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319
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242
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Trading assets
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51
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32
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Short-term investments
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31
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28
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Other
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12
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11
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Total interest income
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1,336
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1,524
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Interest expense:
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Deposits
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116
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163
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Short-term borrowings
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13
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21
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Long-term debt
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163
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140
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Total interest expense
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292
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324
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Net interest income
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1,044
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1,200
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Provision for credit losses
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106
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211
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Net interest income after provision for credit
losses
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938
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989
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Other revenues:
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Credit card fees
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169
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233
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Other fees and commissions
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198
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285
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Trust income
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28
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26
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Trading revenue
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224
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186
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Net
other-than-temporary
impairment
losses(1)
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-
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(28
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)
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Other securities gains, net
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44
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21
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Servicing and other fees from HSBC affiliates
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46
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33
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Residential mortgage banking revenue (loss)
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(35
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)
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(37
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)
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Gain on instruments designated at fair value and related
derivatives
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21
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46
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Other income
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29
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158
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Total other revenues
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724
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923
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Operating expenses:
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Salaries and employee benefits
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293
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264
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Support services from HSBC affiliates
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461
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510
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Occupancy expense, net
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68
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71
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Other expenses
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278
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209
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Total operating expenses
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1,100
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1,054
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Income from continuing operations before income tax expense
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562
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858
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Income tax expense
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82
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314
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Income from continuing operations
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480
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544
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Discontinued operations (Note 2):
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Income (loss) from discontinued operations before income tax
(benefit) expense
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(2
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)
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16
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Income tax (benefit) expense
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(1
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)
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6
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(Loss) income from discontinued operations
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(1
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)
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10
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Net income
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$
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479
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$
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554
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(1) |
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During the three months ended
March 31, 2011 there were no
other-than-temporary
impairment (OTTI) losses on securities recognized in
other revenues and no OTTI losses in the non-credit component on
securities were recognized in accumulated other comprehensive
loss (AOCL). During the three months ended
March 31, 2010, OTTI losses on securities
available-for-sale
and
held-to-maturity
totaling $28 million were recognized in other revenues and
losses in the non-credit component recognized in AOCL were not
significant.
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The accompanying notes are an integral part of the consolidated
financial statements.
3
HSBC USA Inc.
CONSOLIDATED
BALANCE SHEET (UNAUDITED)
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March 31,
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December 31,
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2011
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2010
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(in millions)
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Assets(1)
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Cash and due from banks
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$
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1,968
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$
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1,576
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Interest bearing deposits with banks
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27,838
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8,202
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Federal funds sold and securities purchased under agreements to
resell
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6,774
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8,236
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Trading assets
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32,980
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32,402
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Securities
available-for-sale
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40,575
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45,523
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Securities
held-to-maturity
(fair value of $2.4 billion and $3.4 billion at
March 31, 2011 and December 31, 2010, respectively,
and includes $881 million at December 31, 2010
collateralizing short-term borrowings)
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2,222
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3,190
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Loans (includes $1.5 billion at December 31, 2010
collateralizing debt)
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71,718
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73,069
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Less allowance for credit losses
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1,832
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2,170
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Loans, net
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69,886
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70,899
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Loans held for sale (includes $814 million and
$1.3 billion designated under fair value option at
March 31, 2011 and December 31, 2010, respectively)
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1,688
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2,390
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Properties and equipment, net
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532
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549
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Intangible assets, net
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425
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424
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Goodwill
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2,626
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2,626
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Other assets
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8,949
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7,677
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Assets of discontinued operations
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124
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119
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|
|
|
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Total assets
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$
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196,587
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$
|
183,813
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Liabilities(1)
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Debt:
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|
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|
Deposits in domestic offices:
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Noninterest bearing
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$
|
23,342
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|
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$
|
23,078
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Interest bearing (includes $8.3 billion and
$7.4 billion designated under fair value option at
March 31, 2011 and December 31, 2010, respectively)
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75,584
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|
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72,808
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|
Deposits in foreign offices:
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Noninterest bearing
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1,301
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1,263
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Interest bearing
|
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32,534
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23,502
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|
|
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Total deposits
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132,761
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|
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|
120,651
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Short-term borrowings
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13,820
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|
|
|
15,187
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|
Long-term debt (includes $5.4 billion designated under fair
value option at March 31, 2011 and December 31, 2010
and $150 million at December 31, 2010, collateralized
by loans and
available-for-sale
securities)
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16,986
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|
|
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17,230
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|
|
|
|
|
|
|
|
|
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Total debt
|
|
|
163,567
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|
|
|
153,068
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|
Trading liabilities
|
|
|
11,165
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|
|
|
10,528
|
|
Interest, taxes and other liabilities
|
|
|
4,625
|
|
|
|
3,470
|
|
Liabilities of discontinued operations
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|
|
9
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|
|
|
14
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|
|
|
|
|
|
|
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Total liabilities
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|
|
179,366
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|
|
|
167,080
|
|
|
|
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|
|
|
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Shareholders equity
|
|
|
|
|
|
|
|
|
Preferred stock
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|
1,565
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|
|
|
1,565
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Common shareholders equity:
|
|
|
|
|
|
|
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Common stock ($5 par; 150,000,000 shares authorized;
712 shares issued and outstanding at March 31, 2011
and December 31, 2010)
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|
-
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|
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-
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|
Additional paid-in capital
|
|
|
13,808
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|
|
|
13,785
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Retained earnings
|
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|
1,997
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|
|
|
1,536
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|
Accumulated other comprehensive loss
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|
|
(149
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)
|
|
|
(153
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)
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|
|
|
|
|
|
|
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Total common shareholders equity
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|
15,656
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|
|
|
15,168
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|
|
|
|
|
|
|
|
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Total shareholders equity
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|
|
17,221
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|
|
|
16,733
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|
|
|
|
|
|
|
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Total liabilities and shareholders equity
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$
|
196,587
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|
|
$
|
183,813
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|
|
|
|
|
|
|
|
|
|
|
|
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(1) |
|
The following table summarizes
assets and liabilities related to variable interest entities
(VIEs) as of March 31, 2011 and
December 31, 2010 which are consolidated on our balance
sheet. Assets and liabilities exclude intercompany balances that
eliminate in consolidation.
|
4
HSBC USA Inc.
CONSOLIDATED
BALANCE SHEET (UNAUDITED) (Continued)
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|
March 31,
|
|
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December 31,
|
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|
|
2011
|
|
|
2010
|
|
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(in millions)
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|
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Assets
|
|
|
|
|
|
|
|
|
Interest bearing deposits with banks
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$
|
90
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|
$
|
759
|
|
Securities
held-to-maturity
|
|
|
-
|
|
|
|
881
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Loans, net
|
|
|
11,658
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|
|
|
14,183
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|
Other assets
|
|
|
690
|
|
|
|
(543
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)
|
|
|
|
|
|
|
|
|
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Total assets
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|
$
|
12,438
|
|
|
$
|
15,280
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|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
23
|
|
|
$
|
20
|
|
Short-term borrowings
|
|
|
-
|
|
|
|
3,022
|
|
Long-term debt
|
|
|
55
|
|
|
|
205
|
|
Interest, taxes and other liabilities
|
|
|
1,251
|
|
|
|
373
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
1,329
|
|
|
$
|
3,620
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an
integral part of the consolidated financial statements.
5
HSBC USA Inc.
CONSOLIDATED
STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
(UNAUDITED)
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(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
|
|
|
13,785
|
|
|
|
13,795
|
|
Capital contributions from parent
|
|
|
21
|
|
|
|
-
|
|
Return of capital on preferred shares issued to CT Financial
Services, Inc.
|
|
|
-
|
|
|
|
(3
|
)
|
Employee benefit plans and other
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
13,808
|
|
|
|
13,794
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
|
1,536
|
|
|
|
45
|
|
Adjustment to initially apply new guidance for consolidation of
VIEs, net of tax
|
|
|
-
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period, as adjusted
|
|
|
1,536
|
|
|
|
46
|
|
Net income
|
|
|
479
|
|
|
|
554
|
|
Cash dividends declared on preferred stock
|
|
|
(18
|
)
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
1,997
|
|
|
|
581
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
|
(153
|
)
|
|
|
(228
|
)
|
Adjustment to initially apply new guidance for consolidation of
VIEs, net of tax
|
|
|
-
|
|
|
|
(246
|
)
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period, as adjusted
|
|
|
(153
|
)
|
|
|
(474
|
)
|
Net change in unrealized gains (losses), net of tax as
applicable on:
|
|
|
|
|
|
|
|
|
Securities
available-for-sale,
not
other-than-temporarily
impaired
|
|
|
(147
|
)
|
|
|
104
|
|
Other-than-temporarily
impaired securities available for
sale(1)
|
|
|
1
|
|
|
|
25
|
|
Other-than-temporarily
impaired securities held to
maturity(1)
|
|
|
11
|
|
|
|
26
|
|
Adjustment to reverse
other-than-temporary
impairment on securities
held-to-maturity
due to deconsolidation of VIE
|
|
|
142
|
|
|
|
-
|
|
Derivatives designated as cash flow hedges
|
|
|
(4
|
)
|
|
|
6
|
|
Unrecognized actuarial gains, transition obligation and prior
service costs relating to pension and postretirement benefits,
net of tax
|
|
|
1
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income, net of tax
|
|
|
4
|
|
|
|
164
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
(149
|
)
|
|
|
(310
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
$
|
17,221
|
|
|
$
|
15,630
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
479
|
|
|
$
|
554
|
|
Other comprehensive income, net of tax
|
|
|
4
|
|
|
|
164
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
483
|
|
|
$
|
718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
During the three months ended
March 31, 2011 there were no OTTI losses on securities
recognized in other revenues and no OTTI losses in the
non-credit component on securities were recognized in AOCL.
During the three months ended March 31, 2010, OTTI losses
on securities
available-for-sale
and
held-to-maturity
totaling $28 million were recognized in other revenues and
losses in the non-credit component recognized in AOCL were not
significant.
|
The accompanying notes are an
integral part of the consolidated financial statements.
6
HSBC USA Inc.
CONSOLIDATED
STATEMENT OF CASH FLOWS (UNAUDITED)
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
479
|
|
|
$
|
554
|
|
Income (loss) from discontinued operations
|
|
|
(1
|
)
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
480
|
|
|
|
544
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
203
|
|
|
|
154
|
|
Impairment of internally developed software
|
|
|
78
|
|
|
|
-
|
|
Provision for credit losses
|
|
|
106
|
|
|
|
211
|
|
Other-than-temporary
impairment losses relating to credit
|
|
|
-
|
|
|
|
28
|
|
Realized gains on securities available for sale
|
|
|
(44
|
)
|
|
|
(21
|
)
|
Net change in other assets and liabilities
|
|
|
(225
|
)
|
|
|
2,573
|
|
Net change in loans held for sale:
|
|
|
|
|
|
|
|
|
Originations of loans
|
|
|
(1,052
|
)
|
|
|
(947
|
)
|
Sales and collection of loans held for sale
|
|
|
1,600
|
|
|
|
1,516
|
|
Tax refund anticipation loans:
|
|
|
|
|
|
|
|
|
Originations of loans
|
|
|
-
|
|
|
|
(3,068
|
)
|
Transfers of loans to HSBC Finance, including premium
|
|
|
-
|
|
|
|
3,072
|
|
Net change in trading assets and liabilities
|
|
|
191
|
|
|
|
2,931
|
|
LOCOM on loans held for sale
|
|
|
12
|
|
|
|
(85
|
)
|
Mark-to-market
on financial instruments designated at fair value and related
derivatives
|
|
|
-
|
|
|
|
(25
|
)
|
Net change in fair value of derivatives and hedged items
|
|
|
(73
|
)
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities continuing
operations
|
|
|
1,276
|
|
|
|
6,862
|
|
Cash used in operating activities discontinued
operations
|
|
|
(5
|
)
|
|
|
(144
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
1,271
|
|
|
|
6,718
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Net change in interest bearing deposits with banks
|
|
|
(19,636
|
)
|
|
|
(12,354
|
)
|
Net change in federal funds sold and securities purchased under
agreements to resell
|
|
|
1,462
|
|
|
|
(1,852
|
)
|
Securities
available-for-sale:
|
|
|
|
|
|
|
|
|
Purchases of securities
available-for-sale
|
|
|
(4,818
|
)
|
|
|
(12,721
|
)
|
Proceeds from sales of securities
available-for-sale
|
|
|
8,499
|
|
|
|
6,076
|
|
Proceeds from maturities of securities
available-for-sale
|
|
|
991
|
|
|
|
699
|
|
Securities
held-to-maturity:
|
|
|
|
|
|
|
|
|
Purchases of securities
held-to-maturity
|
|
|
-
|
|
|
|
(2,036
|
)
|
Proceeds from maturities of securities
held-to-maturity
|
|
|
371
|
|
|
|
706
|
|
Change in loans:
|
|
|
|
|
|
|
|
|
Originations, net of collections
|
|
|
6,902
|
|
|
|
10,862
|
|
Recurring loans purchases from HSBC Finance
|
|
|
(7,906
|
)
|
|
|
(7,834
|
)
|
Loans sold to third parties
|
|
|
155
|
|
|
|
41
|
|
Net cash used for acquisitions of properties and equipment
|
|
|
(5
|
)
|
|
|
(14
|
)
|
Other, net
|
|
|
(7
|
)
|
|
|
98
|
|
|
|
|
|
|
|
|
|
|
Cash used in investing activities continuing
operations
|
|
|
(13,992
|
)
|
|
|
(18,329
|
)
|
Cash used in investing activities discontinued
operations
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(13,992
|
)
|
|
|
(18,329
|
)
|
|
|
|
|
|
|
|
|
|
7
HSBC USA Inc.
CONSOLIDATED
STATEMENT OF CASH FLOWS (UNAUDITED) (Continued)
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Net change in deposits
|
|
|
12,085
|
|
|
|
6,363
|
|
Debt:
|
|
|
|
|
|
|
|
|
Net change in short-term borrowings
|
|
|
1,260
|
|
|
|
5,029
|
|
Issuance of long-term debt
|
|
|
776
|
|
|
|
678
|
|
Repayment of long-term debt
|
|
|
(975
|
)
|
|
|
(1,171
|
)
|
Debt repayment related to structured note vehicle VIEs
|
|
|
-
|
|
|
|
(150
|
)
|
Repayment of debt issued related to the sale and leaseback of
452 Fifth Avenue property
|
|
|
(11
|
)
|
|
|
-
|
|
Return of capital on preferred shares issued to CT Financial
Services, Inc.
|
|
|
-
|
|
|
|
(3
|
)
|
Other increases in capital surplus
|
|
|
2
|
|
|
|
2
|
|
Dividends paid
|
|
|
(18
|
)
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
Cash provided by financing activities continuing
operations
|
|
|
13,119
|
|
|
|
10,729
|
|
Cash provided by financing activities discontinued
operations
|
|
|
-
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
13,119
|
|
|
|
10,743
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and due from banks
|
|
|
398
|
|
|
|
(868
|
)
|
Cash and due from banks at beginning of
period(1)
|
|
|
1,693
|
|
|
|
3,159
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks at end of
period(2)
|
|
$
|
2,091
|
|
|
$
|
2,291
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash flow investing
activities
|
|
|
|
|
|
|
|
|
Trading securities pending settlement
|
|
$
|
132
|
|
|
$
|
(757
|
)
|
|
|
|
(1) |
|
Cash at beginning of period
includes $117 million and $1,060 million for
discontinued operations as of January 1, 2011 and 2010,
respectively.
|
|
(2) |
|
Cash at end of period includes
$123 million and $771 million for discontinued
operations as of March 31, 2011 and 2010, respectively.
|
The accompanying notes are an
integral part of the consolidated financial statement
8
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, 2010 (the 2010
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. Unless otherwise noted,
information included in these notes to the consolidated
financial statements relates to continuing operations for all
periods presented. See Note 2, Discontinued
Operations for further details. Interim results should not
be considered indicative of results in future periods.
As of March 31, 2011, we no longer have a controlling
financial interest in Bryant Park Funding LLC (Bryant
Park) and as a result, we no longer consolidate this
variable interest entity. See Note 17, Variable
Interest Entities, for further details and related impact.
2. Discontinued
Operations
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, made the decision to exit this
business. This business, which was 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. As a
result of this decision, we recorded closure costs of
$14 million during 2010, primarily relating to termination
and other employee benefits. No significant additional closure
costs are expected to be incurred. At March 31, 2011, the
remaining liability associated with these costs totaled
$2 million.
9
HSBC USA Inc.
As part of the decision to exit the Banknotes Business, in
October 2010 we sold 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.
Because the carrying value of the assets being sold exceeded the
agreed-upon
sales price, we recorded a lower of cost or fair value
adjustment of $12 million in the third quarter of 2010.
The exit of our Banknotes Business, including the sale of our
Asian Banknotes Operations, was substantially completed in the
fourth quarter of 2010 and as a result, we report the results of
our Banknotes Business as discontinued operations. The table
below summarizes the operating results of our Banknotes Business
for the periods presented.
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2011
|
|
2010
|
|
|
|
(in millions)
|
|
Net interest income and other revenues
|
|
$
|
16
|
|
|
$
|
28
|
|
Income (loss) from discontinued operations before income tax
(benefit) expense
|
|
|
(2
|
)
|
|
|
16
|
|
The following summarizes the assets and liabilities of our
Banknotes Business which are now reported as assets of
discontinued operations and liabilities of discontinued
operations in our consolidated balance sheet.
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Cash
|
|
$
|
123
|
|
|
$
|
117
|
|
Other assets
|
|
|
1
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Assets of discontinued operations
|
|
$
|
124
|
|
|
$
|
119
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
$
|
9
|
|
|
$
|
14
|
|
|
|
|
|
|
|
|
|
|
Liabilities of discontinued operations
|
|
$
|
9
|
|
|
$
|
14
|
|
|
|
|
|
|
|
|
|
|
10
HSBC USA Inc.
3. Trading
Assets and Liabilities
Trading assets and liabilities are summarized in the following
table.
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Trading assets:
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
|
$
|
2,164
|
|
|
$
|
1,874
|
|
U.S. Government agency
|
|
|
189
|
|
|
|
62
|
|
U.S. Government sponsored
enterprises(1)
|
|
|
30
|
|
|
|
632
|
|
Asset-backed securities
|
|
|
1,133
|
|
|
|
1,148
|
|
Corporate and foreign bonds
|
|
|
9,289
|
|
|
|
5,897
|
|
Other securities
|
|
|
49
|
|
|
|
52
|
|
Precious metals
|
|
|
13,594
|
|
|
|
16,725
|
|
Fair value of derivatives
|
|
|
6,532
|
|
|
|
6,012
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
32,980
|
|
|
$
|
32,402
|
|
|
|
|
|
|
|
|
|
|
Trading liabilities:
|
|
|
|
|
|
|
|
|
Securities sold, not yet purchased
|
|
$
|
349
|
|
|
$
|
212
|
|
Payables for precious metals
|
|
|
5,377
|
|
|
|
5,326
|
|
Fair value of derivatives
|
|
|
5,439
|
|
|
|
4,990
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,165
|
|
|
$
|
10,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes mortgage-backed securities
of $14 million and $598 million issued or guaranteed
by the Federal National Mortgage Association (FNMA)
and $16 million and $34 million issued or guaranteed
by the Federal Home Loan Mortgage Corporation
(FHLMC) at March 31, 2011 and December 31,
2010, respectively
|
At March 31, 2011 and December 31, 2010, the fair
value of derivatives included in trading assets has been reduced
by $3.2 billion and $3.1 billion, respectively,
relating to amounts recognized for the obligation to return cash
collateral received under master netting agreements with
derivative counterparties.
At March 31, 2011 and December 31, 2010, the fair
value of derivatives included in trading liabilities has been
reduced by $5.8 billion, relating to amounts recognized for
the right to reclaim cash collateral paid under master netting
agreements with derivative counterparties.
11
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Component of
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
OTTI
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
March 31, 2011
|
|
Cost
|
|
|
Securities
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
|
|
(in millions)
|
|
|
Securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
|
$
|
15,938
|
|
|
$
|
-
|
|
|
$
|
95
|
|
|
$
|
(470
|
)
|
|
$
|
15,563
|
|
U.S. Government sponsored
enterprises:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
45
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
44
|
|
Direct agency obligations
|
|
|
2,188
|
|
|
|
-
|
|
|
|
68
|
|
|
|
(12
|
)
|
|
|
2,244
|
|
U.S. Government agency issued or guaranteed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
10,558
|
|
|
|
-
|
|
|
|
192
|
|
|
|
(34
|
)
|
|
|
10,716
|
|
Collateralized mortgage obligations
|
|
|
6,935
|
|
|
|
-
|
|
|
|
129
|
|
|
|
(48
|
)
|
|
|
7,016
|
|
Direct agency obligations
|
|
|
19
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
18
|
|
Obligations of U.S. states and political subdivisions
|
|
|
569
|
|
|
|
-
|
|
|
|
11
|
|
|
|
(5
|
)
|
|
|
575
|
|
Asset backed securities collateralized by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
13
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
11
|
|
Commercial mortgages
|
|
|
505
|
|
|
|
-
|
|
|
|
10
|
|
|
|
(1
|
)
|
|
|
514
|
|
Home equity
|
|
|
436
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(102
|
)
|
|
|
334
|
|
Student loans
|
|
|
27
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
25
|
|
Other
|
|
|
117
|
|
|
|
-
|
|
|
|
1
|
|
|
|
(15
|
)
|
|
|
103
|
|
Corporate and other domestic debt
securities(2)
|
|
|
575
|
|
|
|
-
|
|
|
|
6
|
|
|
|
-
|
|
|
|
581
|
|
Foreign debt
securities(2)(6)
|
|
|
2,649
|
|
|
|
-
|
|
|
|
48
|
|
|
|
-
|
|
|
|
2,697
|
|
Equity
securities(3)
|
|
|
126
|
|
|
|
-
|
|
|
|
8
|
|
|
|
-
|
|
|
|
134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
available-for-sale
securities
|
|
$
|
40,700
|
|
|
$
|
-
|
|
|
$
|
568
|
|
|
$
|
(693
|
)
|
|
$
|
40,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government sponsored
enterprises:(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
1,528
|
|
|
$
|
-
|
|
|
$
|
148
|
|
|
$
|
-
|
|
|
$
|
1,676
|
|
U.S. Government agency issued or guaranteed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
90
|
|
|
|
-
|
|
|
|
15
|
|
|
|
-
|
|
|
|
105
|
|
Collateralized mortgage obligations
|
|
|
324
|
|
|
|
-
|
|
|
|
35
|
|
|
|
-
|
|
|
|
359
|
|
Obligations of U.S. states and political subdivisions
|
|
|
101
|
|
|
|
-
|
|
|
|
3
|
|
|
|
(1
|
)
|
|
|
103
|
|
Asset backed securities collateralized by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
179
|
|
|
|
-
|
|
|
|
9
|
|
|
|
(2
|
)
|
|
|
186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
held-to-maturity
securities
|
|
$
|
2,222
|
|
|
$
|
-
|
|
|
$
|
210
|
|
|
$
|
(3
|
)
|
|
$
|
2,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
HSBC USA Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Component of
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
OTTI
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
December 31, 2010
|
|
Cost
|
|
|
Securities
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
|
|
(in millions)
|
|
|
Securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
|
$
|
19,300
|
|
|
$
|
-
|
|
|
$
|
200
|
|
|
$
|
(402
|
)
|
|
$
|
19,098
|
|
U.S. Government sponsored
enterprises:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
47
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
46
|
|
Direct agency obligations
|
|
|
2,100
|
|
|
|
-
|
|
|
|
93
|
|
|
|
(9
|
)
|
|
|
2,184
|
|
U.S. Government agency issued or guaranteed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
11,229
|
|
|
|
-
|
|
|
|
260
|
|
|
|
(27
|
)
|
|
|
11,462
|
|
Collateralized mortgage obligations
|
|
|
7,566
|
|
|
|
-
|
|
|
|
160
|
|
|
|
(52
|
)
|
|
|
7,674
|
|
Direct agency obligations
|
|
|
19
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
18
|
|
Obligations of U.S. states and political subdivisions
|
|
|
571
|
|
|
|
-
|
|
|
|
13
|
|
|
|
(5
|
)
|
|
|
579
|
|
Asset backed securities collateralized by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
13
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
11
|
|
Commercial mortgages
|
|
|
537
|
|
|
|
-
|
|
|
|
17
|
|
|
|
(2
|
)
|
|
|
552
|
|
Home equity
|
|
|
464
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
(111
|
)
|
|
|
352
|
|
Student loans
|
|
|
29
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
27
|
|
Other
|
|
|
120
|
|
|
|
-
|
|
|
|
1
|
|
|
|
(17
|
)
|
|
|
104
|
|
Corporate and other domestic debt
securities(2)
|
|
|
676
|
|
|
|
-
|
|
|
|
7
|
|
|
|
-
|
|
|
|
683
|
|
Foreign debt
securities(2)(6)
|
|
|
2,540
|
|
|
|
-
|
|
|
|
65
|
|
|
|
-
|
|
|
|
2,605
|
|
Equity
securities(3)
|
|
|
126
|
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
available-for-sale
securities
|
|
$
|
45,337
|
|
|
$
|
(1
|
)
|
|
$
|
818
|
|
|
$
|
(631
|
)
|
|
$
|
45,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government sponsored
enterprises:(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
1,586
|
|
|
$
|
-
|
|
|
$
|
151
|
|
|
$
|
-
|
|
|
$
|
1,737
|
|
U.S. Government agency issued or guaranteed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
94
|
|
|
|
-
|
|
|
|
15
|
|
|
|
-
|
|
|
|
109
|
|
Collateralized mortgage obligations
|
|
|
327
|
|
|
|
-
|
|
|
|
36
|
|
|
|
-
|
|
|
|
363
|
|
Obligations of U.S. states and political subdivisions
|
|
|
111
|
|
|
|
-
|
|
|
|
4
|
|
|
|
(1
|
)
|
|
|
114
|
|
Asset backed securities collateralized by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
191
|
|
|
|
-
|
|
|
|
8
|
|
|
|
(3
|
)
|
|
|
196
|
|
Asset-backed securities (predominantly credit card) and other
debt securities held by consolidated
VIE(5)
|
|
|
1,034
|
|
|
|
(153
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
held-to-maturity
securities
|
|
$
|
3,343
|
|
|
$
|
(153
|
)
|
|
$
|
214
|
|
|
$
|
(4
|
)
|
|
$
|
3,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
HSBC USA Inc.
|
|
|
(1) |
|
Includes securities at amortized
cost of $28 million and $30 million issued or
guaranteed by the FNMA at March 31, 2011 and
December 31, 2010, respectively, and $17 million
issued or guaranteed by FHLMC at March 31, 2011 and
December 31, 2010.
|
|
(2) |
|
At March 31, 2011, other
domestic debt securities included $575 million of
securities at amortized cost fully backed by the Federal Deposit
Insurance Corporation (FDIC) and foreign debt
securities consisted of $2.3 billion of securities fully
backed by foreign governments. At December 31, 2010, other
domestic debt securities included $676 million of
securities at amortized cost fully backed by the FDIC and
foreign debt securities consisted of $2.2 billion of
securities fully backed by foreign governments.
|
|
(3) |
|
Includes preferred equity
securities at amortized cost issued by FNMA of $2 million
at March 31, 2011 and December 31, 2010. Balances at
March 31, 2011 and December 31, 2010 reflect
cumulative
other-than-temporary
impairment charges of $203 million.
|
|
(4) |
|
Includes securities at amortized
cost of $621 million and $622 million issued or
guaranteed by FNMA at March 31, 2011 and December 31,
2010, respectively, and $907 million and $964 million
issued and guaranteed by FHLMC at March 31, 2011 and
December 31, 2010, respectively.
|
|
(5) |
|
Relates to securities held by
Bryant Park Funding LLC, a variable interest entity which was
consolidated at December 31, 2010. See Note 17,
Variable Interest Entities for additional
information.
|
|
(6) |
|
There were no foreign debt
securities issued by the governments of Portugal, Ireland,
Italy, Greece or Spain at March 31, 2011 and
December 31, 2010.
|
A summary of gross unrealized losses and related fair values as
of March 31, 2011 and December 31, 2010, 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
|
|
|
Number of
|
|
|
Unrealized
|
|
|
Fair Value
|
|
March 31, 2011
|
|
Securities
|
|
|
Losses
|
|
|
of Investment
|
|
|
Securities
|
|
|
Losses
|
|
|
of Investment
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
|
|
37
|
|
|
$
|
(470
|
)
|
|
$
|
13,438
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
U.S. Government sponsored enterprises
|
|
|
17
|
|
|
|
(12
|
)
|
|
|
209
|
|
|
|
14
|
|
|
|
(1
|
)
|
|
|
10
|
|
U.S. Government agency issued or guaranteed
|
|
|
64
|
|
|
|
(82
|
)
|
|
|
3,996
|
|
|
|
2
|
|
|
|
(1
|
)
|
|
|
2
|
|
Obligations of U.S. states and political subdivisions
|
|
|
26
|
|
|
|
(3
|
)
|
|
|
125
|
|
|
|
5
|
|
|
|
(2
|
)
|
|
|
36
|
|
Asset backed securities
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
50
|
|
|
|
(122
|
)
|
|
|
489
|
|
Foreign debt securities
|
|
|
2
|
|
|
|
-
|
|
|
|
184
|
|
|
|
1
|
|
|
|
-
|
|
|
|
25
|
|
Equity securities
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available-for-sale
|
|
|
149
|
|
|
$
|
(567
|
)
|
|
$
|
17,952
|
|
|
|
72
|
|
|
$
|
(126
|
)
|
|
$
|
562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government sponsored enterprises
|
|
|
24
|
|
|
$
|
-
|
|
|
$
|
9
|
|
|
|
1
|
|
|
$
|
-
|
|
|
$
|
-
|
|
U.S. Government agency issued or guaranteed
|
|
|
610
|
|
|
|
-
|
|
|
|
2
|
|
|
|
6
|
|
|
|
-
|
|
|
|
-
|
|
Obligations of U.S. states and political subdivisions
|
|
|
25
|
|
|
|
-
|
|
|
|
8
|
|
|
|
10
|
|
|
|
(1
|
)
|
|
|
13
|
|
Asset backed securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5
|
|
|
|
(2
|
)
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
held-to-maturity
|
|
|
659
|
|
|
$
|
-
|
|
|
$
|
19
|
|
|
|
22
|
|
|
$
|
(3
|
)
|
|
$
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
HSBC USA Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Year or Less
|
|
|
Greater Than One Year
|
|
|
|
Number
|
|
|
Gross
|
|
|
Aggregate
|
|
|
Number
|
|
|
Gross
|
|
|
Aggregate
|
|
|
|
of
|
|
|
Unrealized
|
|
|
Fair Value
|
|
|
of
|
|
|
Unrealized
|
|
|
Fair Value
|
|
December 31, 2010
|
|
Securities
|
|
|
Losses
|
|
|
of Investment
|
|
|
Securities
|
|
|
Losses
|
|
|
of Investment
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
|
|
40
|
|
|
$
|
(402
|
)
|
|
$
|
7,911
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
U.S. Government sponsored enterprises
|
|
|
14
|
|
|
|
(9
|
)
|
|
|
131
|
|
|
|
13
|
|
|
|
(1
|
)
|
|
|
10
|
|
U.S. Government agency issued or guaranteed
|
|
|
70
|
|
|
|
(80
|
)
|
|
|
4,409
|
|
|
|
2
|
|
|
|
-
|
|
|
|
2
|
|
Obligations of U.S. states and political subdivisions
|
|
|
27
|
|
|
|
(3
|
)
|
|
|
127
|
|
|
|
5
|
|
|
|
(2
|
)
|
|
|
36
|
|
Asset backed securities
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
51
|
|
|
|
(134
|
)
|
|
|
506
|
|
Corporate and other domestic debt securities
|
|
|
3
|
|
|
|
-
|
|
|
|
200
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Foreign debt securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available-for-sale
|
|
|
157
|
|
|
$
|
(494
|
)
|
|
$
|
12,778
|
|
|
|
72
|
|
|
$
|
(137
|
)
|
|
$
|
579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government sponsored enterprises
|
|
|
21
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
1
|
|
|
$
|
-
|
|
|
$
|
-
|
|
U.S. Government agency issued or guaranteed
|
|
|
570
|
|
|
|
-
|
|
|
|
2
|
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
Obligations of U.S. states and political subdivisions
|
|
|
14
|
|
|
|
-
|
|
|
|
7
|
|
|
|
12
|
|
|
|
(1
|
)
|
|
|
14
|
|
Asset backed securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6
|
|
|
|
(3
|
)
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
held-to-maturity
|
|
|
605
|
|
|
$
|
-
|
|
|
$
|
9
|
|
|
|
21
|
|
|
$
|
(4
|
)
|
|
$
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross unrealized losses within the
available-for-sale
portfolio increased overall in the first three months of 2011
primarily due to an increase in rates on U.S. Treasury
securities. 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 months ended March 31, 2011,
none of our debt securities were determined to have either
initial
other-than-temporary
impairment or changes to previous
other-than-temporary
impairment estimates relating to the credit component and
changes in the non-credit portion represent a reversal of a
portion of previously recorded impairment losses that were
recognized in other comprehensive income. During the three
months ended March 31, 2010, 19 debt securities were
determined to have either initial
other-than-temporary
impairment or changes to previous
other-than-temporary
impairment estimates. The credit loss component of the
applicable debt securities totaling $28 million was
recorded as a component of net
other-than-temporary
impairment losses in the accompanying consolidated statement of
income, while there was no significant losses in the non-credit
component of such impaired securities reflected in AOCL and
changes in the non-credit portion primarily represent a net
reversal of a portion of previously recorded impairment losses
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
15
HSBC USA Inc.
unrealized loss has suffered
other-than-temporary
impairment. A debt security is considered impaired if its 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 88 percent and 89 percent of total
available-for-sale
and
held-to-maturity
securities as of March 31, 2011 and December 31, 2010,
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 improvement,
and consumer confidence remains low compared to historical
levels;
|
|
|
|
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;
|
|
|
|
The level of excess 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
16
HSBC USA Inc.
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.
The excess of amortized cost over the present value of expected
future cash flows recognized during the three months ended
March 31, 2010 on our
other-than-temporarily
impaired debt securities, which represents the credit loss
associated with these securities, was $28 million. For the
three months ended March 31, 2011 there were no
other-than-temporary
impairment losses recognized related to credit loss. 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 $154 million at December 31,
2010. At March 31, 2011, there are no remaining non-credit
component amounts recognized. Since we did not have the
intention to sell the securities and had sufficient capital and
liquidity to hold these securities until a full recovery of the
fair value occurs, only the credit loss component was reflected
in the consolidated statement of income. The non-credit
component of the unrealized loss was recorded, net of taxes, in
other comprehensive income (loss).
The following table summarizes the roll-forward of credit losses
on debt securities that were other-than-temporarily impaired
which were recognized in income:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Credit losses at the beginning of the period
|
|
$
|
36
|
|
|
$
|
81
|
|
Credit losses related to securities for which an
other-than-temporary
impairment was not previously recognized
|
|
|
-
|
|
|
|
18
|
|
Increase in credit losses for which an
other-than-temporary
impairment was previously recognized
|
|
|
-
|
|
|
|
10
|
|
Reduction for credit losses previously recognized on sold
securities
|
|
|
(4
|
)
|
|
|
(15
|
)
|
Reduction for credit losses previously recognized on held to
maturity securities due to deconsolidation of VIE
|
|
|
(31
|
)
|
|
|
-
|
|
Reduction of credit losses for increases in cash flows expected
to be collected that are recognized over the remaining life of
the security
|
|
|
-
|
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance of credit losses on debt securities held for
which a portion of an
other-than-temporary
impairment may have been recognized in other comprehensive
income (loss)
|
|
$
|
1
|
|
|
$
|
74
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2011, we held 76 individual asset-backed
securities in the
available-for-sale
portfolio, of which 23 were also wrapped by a monoline insurance
company. The asset-backed securities backed by a monoline wrap
comprised $420 million of the total aggregate fair value of
asset-backed securities of $987 million at March 31,
2011. The gross unrealized losses on these securities were
$117 million at March 31, 2011. We did not take into
consideration the value of the monoline wrap of any
non-investment grade monoline insurers as of March 31, 2011
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 $146 million. One security
wrapped by a below investment grade monoline insurance company
with an aggregate fair value of $1 million was deemed to be
other-than-temporarily
impaired at March 31, 2011.
At December 31, 2010, we held 78 individual asset-backed
securities in the
available-for-sale
portfolio, of which 24 were also wrapped by a monoline insurance
company. The asset-backed securities backed by a monoline wrap
comprised $437 million of the total aggregate fair value of
asset-backed securities of $1.0 billion at
December 31, 2010. The gross unrealized losses on these
securities were $127 million at December 31, 2010. We
did not take into consideration the value of the monoline wrap
of any non-investment grade monoline insurers as of
December 31,
17
HSBC USA Inc.
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 $156 million. Two
securities wrapped by below investment grade monoline insurance
companies with an aggregate fair value of $5 million were
deemed to be
other-than-temporarily
impaired at December 31, 2010.
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.
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
|
|
|
Realized
|
|
|
|
Gains
|
|
|
(Losses)
|
|
|
Gains (Losses)
|
|
|
|
|
|
(in millions)
|
|
|
Three months ended March 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available-for-sale
|
|
$
|
82
|
|
|
$
|
(38
|
)
|
|
$
|
44
|
|
Securities held to maturity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
82
|
|
|
$
|
(38
|
)
|
|
$
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available-for-sale
|
|
$
|
32
|
|
|
$
|
(34
|
)
|
|
$
|
(2
|
)
|
Securities held to maturity
|
|
|
-
|
|
|
|
(5
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
32
|
|
|
$
|
(39
|
)
|
|
$
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amortized cost and fair values of securities
available-for-sale
and securities
held-to-maturity
at March 31, 2011, are summarized in the table below by
contractual maturity. Expected maturities differ from
contractual maturities because borrowers have the right to
prepay obligations without prepayment penalties in certain
cases. Securities
available-for-sale
amounts exclude equity securities as they do not have stated
maturities. The table below also reflects the distribution of
maturities of debt securities held at March 31, 2011,
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
18
HSBC USA Inc.
outstanding at March 31, 2011. Yields on tax-exempt
obligations have been computed on a taxable equivalent basis
using applicable statutory tax rates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After One
|
|
|
After Five
|
|
|
|
|
|
|
|
|
|
Within
|
|
|
But Within
|
|
|
But Within
|
|
|
After Ten
|
|
Taxable Equivalent Basis
|
|
One Year
|
|
|
Five Years
|
|
|
Ten Years
|
|
|
Years
|
|
as of March 31, 2011
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
|
$
|
-
|
|
|
|
-
|
%
|
|
$
|
4,288
|
|
|
|
1.64
|
%
|
|
$
|
7,977
|
|
|
|
2.69
|
%
|
|
$
|
3,673
|
|
|
|
4.30
|
%
|
U.S. Government sponsored enterprises
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,967
|
|
|
|
3.99
|
|
|
|
266
|
|
|
|
4.21
|
|
U.S. Government agency issued or guaranteed
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
4.73
|
|
|
|
211
|
|
|
|
4.80
|
|
|
|
17,300
|
|
|
|
3.90
|
|
Obligations of U.S. states and political subdivisions
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
272
|
|
|
|
4.25
|
|
|
|
297
|
|
|
|
4.48
|
|
Asset backed securities
|
|
|
-
|
|
|
|
-
|
|
|
|
88
|
|
|
|
5.36
|
|
|
|
6
|
|
|
|
1.40
|
|
|
|
1,004
|
|
|
|
2.95
|
|
Other domestic debt securities
|
|
|
359
|
|
|
|
2.05
|
|
|
|
216
|
|
|
|
0.56
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Foreign debt securities
|
|
|
1,196
|
|
|
|
2.43
|
|
|
|
1,443
|
|
|
|
2.28
|
|
|
|
10
|
|
|
|
5.36
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortized cost
|
|
$
|
1,555
|
|
|
|
2.34
|
%
|
|
$
|
6,036
|
|
|
|
1.81
|
%
|
|
$
|
10,443
|
|
|
|
3.02
|
%
|
|
$
|
22,540
|
|
|
|
3.94
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value
|
|
$
|
1,577
|
|
|
|
|
|
|
$
|
6,065
|
|
|
|
|
|
|
$
|
10,248
|
|
|
|
|
|
|
$
|
22,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government sponsored enterprises
|
|
$
|
-
|
|
|
|
-
|
%
|
|
$
|
20
|
|
|
|
7.95
|
%
|
|
$
|
2
|
|
|
|
6.93
|
%
|
|
$
|
1,506
|
|
|
|
6.16
|
%
|
U.S. Government agency issued or guaranteed
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6
|
|
|
|
7.66
|
|
|
|
408
|
|
|
|
6.54
|
|
Obligations of U.S. states and political subdivisions
|
|
|
11
|
|
|
|
5.14
|
|
|
|
22
|
|
|
|
5.59
|
|
|
|
19
|
|
|
|
4.79
|
|
|
|
49
|
|
|
|
5.17
|
|
Asset backed securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
179
|
|
|
|
6.16
|
|
Foreign debt securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortized cost
|
|
$
|
11
|
|
|
|
5.14
|
%
|
|
$
|
42
|
|
|
|
6.72
|
%
|
|
$
|
27
|
|
|
|
5.58
|
%
|
|
$
|
2,142
|
|
|
|
6.21
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value
|
|
$
|
11
|
|
|
|
|
|
|
$
|
46
|
|
|
|
|
|
|
$
|
26
|
|
|
|
|
|
|
$
|
2,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in Federal Home Loan Bank (FHLB) stock
and Federal Reserve Bank (FRB) stock of
$119 million and $477 million, respectively, were
included in other assets at March 31, 2011 and
December 31, 2010.
19
HSBC USA Inc.
5. Loans
Loans consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Commercial loans:
|
|
|
|
|
|
|
|
|
Construction and other real estate
|
|
$
|
8,281
|
|
|
$
|
8,228
|
|
Business banking and middle markets enterprises
|
|
|
8,054
|
|
|
|
7,945
|
|
Large
corporate(1)
|
|
|
11,878
|
|
|
|
10,745
|
|
Other commercial
|
|
|
2,844
|
|
|
|
3,356
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
31,057
|
|
|
|
30,274
|
|
|
|
|
|
|
|
|
|
|
Consumer loans:
|
|
|
|
|
|
|
|
|
Home equity mortgages
|
|
|
3,678
|
|
|
|
3,820
|
|
Other residential mortgages
|
|
|
13,868
|
|
|
|
13,697
|
|
Private label cards
|
|
|
12,014
|
|
|
|
13,296
|
|
Credit cards
|
|
|
10,014
|
|
|
|
10,811
|
|
Other consumer
|
|
|
1,087
|
|
|
|
1,171
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
40,661
|
|
|
|
42,795
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
71,718
|
|
|
$
|
73,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes $1.2 billion of
commercial loans at December 31, 2010 related to a VIE
which was consolidated at December 31, 2010.
|
Deferred origination costs, excluding MasterCard and Visa annual
fees net of direct lending costs, totaled $86 million and
$90 million at March 31, 2011 and December 31,
2010, respectively. MasterCard and Visa annual fees are netted
with direct lending costs, deferred and amortized on a
straight-line basis over one year. Deferred MasterCard and Visa
annual fees, net of direct lending costs related to these loans
totaled $24 million at both March 31, 2011 and
December 31, 2010.
At March 31, 2011 and December 31, 2010, we had net
unamortized premium on our loans of $414 million and
$436 million, respectively. We amortized $143 million
and $85 million of net premiums on our loans for the three
months ended March 31, 2011 and 2010, respectively.
Collateralized Funding Transactions Involving
Securitization There were no financings secured by
private label cards or credit card receivables at March 31,
2011. Secured financings of $30 million and
$120 million at December 31, 2010 were secured by
$44 million and $189 million of private label cards
and credit cards, respectively.
Purchased Loan Portfolios In January 2009, we
purchased the General Motors MasterCard receivable portfolio
(GM Portfolio) and the AFL-CIO Union Plus
MasterCard/Visa receivable portfolio (UP Portfolio)
with an aggregate outstanding principal balance of
$6.3 billion and $6.1 billion, respectively from HSBC
Finance Corporation (HSBC Finance). The aggregate
purchase price for the GM and UP Portfolios was
$12.2 billion, which included the transfer of approximately
$6.1 billion of indebtedness, resulting in a cash
consideration of $6.1 billion.
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 carrying
amount of the Purchased Credit-Impaired Loans, net of credit
loss reserves at March 31, 2011 totaled $19 million
for the UP Portfolio, and is included in credit card loans. The
outstanding contractual balances at March 31, 2011 for UP
Portfolio were
20
HSBC USA Inc.
$29 million. The carrying amount of the Purchased
Credit-Impaired Loans, net of credit loss reserves at
December 31, 2010 totaled $23 million for the UP
Portfolio and is included in credit card loans. The outstanding
contractual balances at December 31, 2010 for UP Portfolio
were $36 million. Credit loss reserves of $2 million
and $3 million as of March 31, 2011 and
December 31, 2010, respectively, were held for the
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 March 31,
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Accretable yield at beginning of period
|
|
$
|
(8
|
)
|
|
$
|
(29
|
)
|
Accretable yield amortized to interest income during the period
|
|
|
2
|
|
|
|
7
|
|
Reclassification to non-accretable difference
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Accretable yield at end of
period(1)
|
|
$
|
(6
|
)
|
|
$
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
At March 31, 2011, 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.
|
Age Analysis of Past Due Loans The
following table summarizes the past due status of our loans at
March 31, 2011 and December 31, 2010. The aging of
past due amounts are determined based on the contractual
delinquency status of payments under the loan. An account is
generally considered to be contractually delinquent when
payments have not been made in accordance with the loan terms.
Delinquency status may be affected by customer account
management policies and practices such as re-age or modification.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Days Past Due
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2011
|
|
1 - 29 days
|
|
|
30 - 89 days
|
|
|
90+ days
|
|
|
Total Past Due
|
|
|
Current
|
|
|
Total Loans
|
|
|
|
|
|
(in millions)
|
|
|
Commercial loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and other real estate
|
|
$
|
27
|
|
|
$
|
65
|
|
|
$
|
377
|
|
|
$
|
469
|
|
|
$
|
7,812
|
|
|
$
|
8,281
|
|
Business banking and middle market enterprises
|
|
|
292
|
|
|
|
134
|
|
|
|
78
|
|
|
|
504
|
|
|
|
7,550
|
|
|
|
8,054
|
|
Large corporate
|
|
|
269
|
|
|
|
69
|
|
|
|
74
|
|
|
|
412
|
|
|
|
11,466
|
|
|
|
11,878
|
|
Other commercial
|
|
|
71
|
|
|
|
43
|
|
|
|
72
|
|
|
|
186
|
|
|
|
2,658
|
|
|
|
2,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
659
|
|
|
|
311
|
|
|
|
601
|
|
|
|
1,571
|
|
|
|
29,486
|
|
|
|
31,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HELOC and home equity mortgages
|
|
|
270
|
|
|
|
55
|
|
|
|
93
|
|
|
|
418
|
|
|
|
3,260
|
|
|
|
3,678
|
|
Other residential mortgages
|
|
|
115
|
|
|
|
459
|
|
|
|
812
|
|
|
|
1,386
|
|
|
|
12,482
|
|
|
|
13,868
|
|
Credit card receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private label cards
|
|
|
418
|
|
|
|
225
|
|
|
|
243
|
|
|
|
886
|
|
|
|
11,128
|
|
|
|
12,014
|
|
Credit cards
|
|
|
226
|
|
|
|
163
|
|
|
|
194
|
|
|
|
583
|
|
|
|
9,431
|
|
|
|
10,014
|
|
Other consumer
|
|
|
9
|
|
|
|
12
|
|
|
|
34
|
|
|
|
55
|
|
|
|
1,032
|
|
|
|
1,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
1,038
|
|
|
|
914
|
|
|
|
1,376
|
|
|
|
3,328
|
|
|
|
37,333
|
|
|
|
40,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
1,697
|
|
|
$
|
1,225
|
|
|
$
|
1,977
|
|
|
$
|
4,899
|
|
|
$
|
66,819
|
|
|
$
|
71,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
HSBC USA Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Days Past Due
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010
|
|
1 - 29 days
|
|
|
30 - 89 days
|
|
|
90+ days
|
|
|
Total Past Due
|
|
|
Current
|
|
|
Total Loans
|
|
|
|
|
|
(in millions)
|
|
|
Commercial loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and other real estate
|
|
$
|
72
|
|
|
$
|
200
|
|
|
$
|
433
|
|
|
$
|
705
|
|
|
$
|
7,523
|
|
|
$
|
8,228
|
|
Business banking and middle market enterprises
|
|
|
367
|
|
|
|
84
|
|
|
|
66
|
|
|
|
517
|
|
|
|
7,428
|
|
|
|
7,945
|
|
Large corporate
|
|
|
902
|
|
|
|
90
|
|
|
|
74
|
|
|
|
1,066
|
|
|
|
9,679
|
|
|
|
10,745
|
|
Other commercial
|
|
|
80
|
|
|
|
86
|
|
|
|
24
|
|
|
|
190
|
|
|
|
3,166
|
|
|
|
3,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
1,421
|
|
|
|
460
|
|
|
|
597
|
|
|
|
2,478
|
|
|
|
27,796
|
|
|
|
30,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HELOC and home equity mortgages
|
|
|
327
|
|
|
|
83
|
|
|
|
93
|
|
|
|
503
|
|
|
|
3,317
|
|
|
|
3,820
|
|
Other residential mortgages
|
|
|
123
|
|
|
|
525
|
|
|
|
900
|
|
|
|
1,548
|
|
|
|
12,149
|
|
|
|
13,697
|
|
Credit card receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private label cards
|
|
|
475
|
|
|
|
260
|
|
|
|
295
|
|
|
|
1,030
|
|
|
|
12,266
|
|
|
|
13,296
|
|
Credit cards
|
|
|
312
|
|
|
|
212
|
|
|
|
250
|
|
|
|
774
|
|
|
|
10,037
|
|
|
|
10,811
|
|
Other consumer
|
|
|
12
|
|
|
|
14
|
|
|
|
34
|
|
|
|
60
|
|
|
|
1,111
|
|
|
|
1,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
1,249
|
|
|
|
1,094
|
|
|
|
1,572
|
|
|
|
3,915
|
|
|
|
38,880
|
|
|
|
42,795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
2,670
|
|
|
$
|
1,554
|
|
|
$
|
2,169
|
|
|
$
|
6,393
|
|
|
$
|
66,676
|
|
|
$
|
73,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual Loans Nonaccrual loans totaled
$1.9 billion and $2.0 billion at March 31, 2011
and December 31, 2010, respectively. Interest income that
would have been recorded if such nonaccrual loans had been
current and in accordance with contractual terms was
approximately $26 million and $45 million for three
months ended March 31, 2011 and 2010, respectively.
Interest income that was included in finance and other interest
income on these loans was approximately $1 million and
$3 million for three months ended March 31, 2011 and
2010, respectively. For an analysis of reserves for credit
losses, see Note 6, Allowance for Credit Losses.
22
HSBC USA Inc.
Nonaccrual loans and accruing receivables 90 days or more
delinquent are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Nonaccrual loans:
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
Construction and land loans
|
|
$
|
70
|
|
|
$
|
70
|
|
Other real estate
|
|
|
553
|
|
|
|
529
|
|
Business banking and middle markets enterprises
|
|
|
107
|
|
|
|
116
|
|
Large corporate
|
|
|
74
|
|
|
|
74
|
|
Other commercial
|
|
|
12
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
816
|
|
|
|
801
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
Residential mortgages, excluding home equity mortgages
|
|
|
812
|
|
|
|
900
|
|
Home equity mortgages
|
|
|
93
|
|
|
|
93
|
|
|
|
|
|
|
|
|
|
|
Total residential mortgages
|
|
|
905
|
|
|
|
993
|
|
Credit card receivables
|
|
|
-
|
|
|
|
-
|
|
Other consumer loans
|
|
|
9
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
Total consumer loans
|
|
|
914
|
|
|
|
1,002
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual loans held for sale
|
|
|
169
|
|
|
|
186
|
|
|
|
|
|
|
|
|
|
|
Total nonaccruing loans
|
|
|
1,899
|
|
|
|
1,989
|
|
|
|
|
|
|
|
|
|
|
Accruing loans contractually past due 90 days or
more:
|
|
|
|
|
|
|
|
|
Total commercial:
|
|
|
|
|
|
|
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
Construction and land loans
|
|
|
-
|
|
|
|
-
|
|
Other real estate
|
|
|
48
|
|
|
|
137
|
|
Business banking and middle market enterprises
|
|
|
37
|
|
|
|
47
|
|
Large corporate
|
|
|
-
|
|
|
|
-
|
|
Other commercial
|
|
|
13
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
98
|
|
|
|
196
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
Private label card receivables
|
|
|
243
|
|
|
|
295
|
|
Credit card receivables
|
|
|
194
|
|
|
|
250
|
|
Other consumer
|
|
|
25
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
Total consumer loans
|
|
|
462
|
|
|
|
570
|
|
|
|
|
|
|
|
|
|
|
Total accruing loans contractually past due 90 days or
more
|
|
|
560
|
|
|
|
766
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans
|
|
$
|
2,459
|
|
|
$
|
2,755
|
|
|
|
|
|
|
|
|
|
|
23
HSBC USA Inc.
Impaired Loans A 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. Commercial and consumer
loans for which we have modified the loan terms as part of a
troubled debt restructuring are considered to be impaired loans.
Additionally, commercial loans in nonaccrual status, or that
have been partially charged-off or assigned a specific allowance
for credit losses are also considered impaired loans.
Troubled debt restructurings The following tables
present information about our TDR Loans and the related credit
loss reserves for TDR Loans:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
TDR
Loans(1)(2):
|
|
|
|
|
|
|
|
|
Commercial loans:
|
|
|
|
|
|
|
|
|
Construction and other real estate
|
|
$
|
294
|
|
|
$
|
308
|
|
Business banking and middle market enterprises
|
|
|
57
|
|
|
|
64
|
|
Large corporate
|
|
|
-
|
|
|
|
-
|
|
Other commercial
|
|
|
58
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
409
|
|
|
|
429
|
|
|
|
|
|
|
|
|
|
|
Consumer loans:
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
461
|
|
|
|
402
|
|
Private label cards
|
|
|
208
|
|
|
|
230
|
|
Credit cards
|
|
|
240
|
|
|
|
250
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
909
|
|
|
|
882
|
|
|
|
|
|
|
|
|
|
|
Total TDR
Loans(3):
|
|
$
|
1,318
|
|
|
$
|
1,311
|
|
|
|
|
|
|
|
|
|
|
24
HSBC USA Inc.
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Allowance for credit losses for TDR
Loans(4):
|
|
|
|
|
|
|
|
|
Commercial loans:
|
|
|
|
|
|
|
|
|
Construction and other real estate
|
|
$
|
24
|
|
|
$
|
44
|
|
Business banking and middle market enterprises
|
|
|
7
|
|
|
|
8
|
|
Large corporate
|
|
|
-
|
|
|
|
-
|
|
Other commercial
|
|
|
-
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
31
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
Consumer loans:
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
65
|
|
|
|
53
|
|
Private label cards
|
|
|
72
|
|
|
|
78
|
|
Credit cards
|
|
|
80
|
|
|
|
88
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
217
|
|
|
|
219
|
|
|
|
|
|
|
|
|
|
|
Total Allowance for credit losses for TDR Loans
|
|
$
|
248
|
|
|
$
|
272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
TDR Loans are considered to be
impaired loans. For consumer loans, all such loans are
considered impaired loans regardless of accrual status. For
commercial loans, impaired loans include other loans in addition
to TDRs which totaled $754 million and $698 million at
March 31, 2011 and December 31, 2010, respectively.
|
|
(2) |
|
The TDR Loan balances included in
the table above reflect the current carrying amount of TDR Loans
and includes all basis adjustments on the loan, such as unearned
income, unamortized deferred fees and costs on originated loans
and premiums or discounts on purchased loans. The following
table reflects the unpaid principal balance of TDR Loans:
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Commercial loans:
|
|
|
|
|
|
|
|
|
Construction and other real estate
|
|
$
|
322
|
|
|
$
|
335
|
|
Business banking and middle market enterprises
|
|
|
109
|
|
|
|
96
|
|
Large corporate
|
|
|
-
|
|
|
|
-
|
|
Other commercial
|
|
|
60
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
491
|
|
|
|
491
|
|
|
|
|
|
|
|
|
|
|
Consumer loans:
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
510
|
|
|
|
431
|
|
Private label cards
|
|
|
205
|
|
|
|
227
|
|
Credit cards
|
|
|
261
|
|
|
|
276
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
976
|
|
|
|
934
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,467
|
|
|
$
|
1,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3) |
|
Includes balances of
$214 million and $255 million at March 31, 2011
and December 31, 2010, respectively, which are classified
as nonaccrual loans.
|
|
(4) |
|
Included in the allowance for
credit losses.
|
25
HSBC USA Inc.
Additional information relating to TDR Loans is presented in the
table below.
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Average balance of TDR Loans
|
|
|
|
|
|
|
|
|
Commercial loans:
|
|
|
|
|
|
|
|
|
Construction and other real estate
|
|
$
|
301
|
|
|
$
|
120
|
|
Business banking and middle market enterprises
|
|
|
61
|
|
|
|
18
|
|
Large corporate
|
|
|
-
|
|
|
|
-
|
|
Other commercial
|
|
|
57
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
419
|
|
|
|
199
|
|
|
|
|
|
|
|
|
|
|
Consumer loans:
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
434
|
|
|
|
194
|
|
Private label cards
|
|
|
219
|
|
|
|
223
|
|
Credit cards
|
|
|
245
|
|
|
|
116
|
|
Auto
finance(1)
|
|
|
-
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
898
|
|
|
|
571
|
|
|
|
|
|
|
|
|
|
|
Total average balance of TDR Loans
|
|
$
|
1,317
|
|
|
$
|
770
|
|
|
|
|
|
|
|
|
|
|
Interest income recognized on TDR Loans
|
|
|
|
|
|
|
|
|
Commercial loans:
|
|
|
|
|
|
|
|
|
Construction and other real estate
|
|
$
|
2
|
|
|
$
|
1
|
|
Business banking and middle market enterprises
|
|
|
-
|
|
|
|
-
|
|
Large corporate
|
|
|
-
|
|
|
|
-
|
|
Other commercial
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
3
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Consumer loans:
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
3
|
|
|
|
2
|
|
Private label cards
|
|
|
6
|
|
|
|
6
|
|
Credit cards
|
|
|
4
|
|
|
|
3
|
|
Auto
finance(1)
|
|
|
-
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
13
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
Total interest income recognized on TDR Loans
|
|
$
|
16
|
|
|
$
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
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).
|
26
HSBC USA Inc.
Impaired commercial loans Impaired commercial loan
statistics are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
Amount with
|
|
|
without
|
|
|
|
|
|
|
|
|
|
Impairment
|
|
|
Impairment
|
|
|
Total Impaired
|
|
|
Impairment
|
|
|
|
Reserves
|
|
|
Reserves
|
|
|
Commercial
Loans(1)(2)
|
|
|
Reserve
|
|
|
|
|
|
(in millions)
|
|
|
At March 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and other real estate
|
|
$
|
413
|
|
|
$
|
406
|
|
|
$
|
819
|
|
|
$
|
88
|
|
Business banking and middle market enterprises
|
|
|
102
|
|
|
|
64
|
|
|
|
166
|
|
|
|
28
|
|
Large corporate
|
|
|
72
|
|
|
|
2
|
|
|
|
74
|
|
|
|
70
|
|
Other commercial
|
|
|
20
|
|
|
|
84
|
|
|
|
104
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
607
|
|
|
$
|
556
|
|
|
$
|
1,163
|
|
|
$
|
191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and other real estate
|
|
$
|
378
|
|
|
$
|
377
|
|
|
$
|
755
|
|
|
$
|
84
|
|
Business banking and middle market enterprises
|
|
|
113
|
|
|
|
39
|
|
|
|
152
|
|
|
|
26
|
|
Large corporate
|
|
|
103
|
|
|
|
2
|
|
|
|
105
|
|
|
|
72
|
|
Other commercial
|
|
|
26
|
|
|
|
89
|
|
|
|
115
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
620
|
|
|
$
|
507
|
|
|
$
|
1,127
|
|
|
$
|
188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes impaired commercial loans
which are also considered TDR Loans as follows:
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Construction and other real estate
|
|
$
|
294
|
|
|
$
|
308
|
|
Business banking and middle market enterprises
|
|
|
57
|
|
|
|
64
|
|
Large corporate
|
|
|
-
|
|
|
|
-
|
|
Other commercial
|
|
|
58
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
409
|
|
|
$
|
429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2) |
|
The impaired commercial loan
balances included in the table above reflect the current
carrying amount of the loan and includes all basis adjustments,
such as unamortized deferred fees and costs on originated loans
and any premiums or discounts. The unpaid principal balance of
impaired commercial loans included in the table above are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Construction and other real estate
|
|
$
|
848
|
|
|
$
|
782
|
|
Business banking and middle market enterprises
|
|
|
218
|
|
|
|
184
|
|
Large corporate
|
|
|
74
|
|
|
|
105
|
|
Other commercial
|
|
|
106
|
|
|
|
118
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,246
|
|
|
$
|
1,189
|
|
|
|
|
|
|
|
|
|
|
27
HSBC USA Inc.
The following table presents information about average impaired
commercial loan balances and interest income recognized on the
impaired commercial loans:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Average balance of impaired commercial loans:
|
|
|
|
|
|
|
|
|
Construction and other real estate
|
|
$
|
787
|
|
|
$
|
710
|
|
Business banking and middle market enterprises
|
|
|
159
|
|
|
|
146
|
|
Large corporate
|
|
|
89
|
|
|
|
339
|
|
Other commercial
|
|
|
110
|
|
|
|
197
|
|
|
|
|
|
|
|
|
|
|
Total average balance of impaired commercial loans
|
|
$
|
1,145
|
|
|
$
|
1,392
|
|
|
|
|
|
|
|
|
|
|
Interest income recognized on impaired commercial loans:
|
|
|
|
|
|
|
|
|
Construction and other real estate
|
|
$
|
2
|
|
|
$
|
1
|
|
Business banking and middle market enterprises
|
|
|
1
|
|
|
|
2
|
|
Large corporate
|
|
|
-
|
|
|
|
3
|
|
Other commercial
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
Total interest income recognized on impaired commercial loans
|
|
$
|
4
|
|
|
$
|
7
|
|
|
|
|
|
|
|
|
|
|
Commercial Loan Credit Quality Indicators The
following credit quality indicators are monitored for our
commercial loan portfolio:
Criticized asset classifications These
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. Criticized
assets for commercial loans are summarized in the following
table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Total
|
|
|
|
|
|
(in millions)
|
|
|
At March 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and other real estate
|
|
$
|
1,499
|
|
|
$
|
1,109
|
|
|
$
|
158
|
|
|
$
|
2,766
|
|
Business banking and middle market enterprises
|
|
|
402
|
|
|
|
443
|
|
|
|
16
|
|
|
|
861
|
|
Large corporate
|
|
|
247
|
|
|
|
379
|
|
|
|
74
|
|
|
|
700
|
|
Other commercial
|
|
|
131
|
|
|
|
105
|
|
|
|
9
|
|
|
|
245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,279
|
|
|
$
|
2,036
|
|
|
$
|
257
|
|
|
$
|
4,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and other real estate
|
|
$
|
1,324
|
|
|
$
|
1,230
|
|
|
$
|
115
|
|
|
$
|
2,669
|
|
Business banking and middle market enterprises
|
|
|
465
|
|
|
|
504
|
|
|
|
5
|
|
|
|
974
|
|
Large corporate
|
|
|
260
|
|
|
|
386
|
|
|
|
74
|
|
|
|
720
|
|
Other commercial
|
|
|
235
|
|
|
|
140
|
|
|
|
8
|
|
|
|
383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,284
|
|
|
$
|
2,260
|
|
|
$
|
202
|
|
|
$
|
4,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
HSBC USA Inc.
Nonperforming The status of our commercial loan
portfolio is summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing Loans
|
|
|
|
|
|
|
Performing
|
|
|
Nonaccrual
|
|
|
Contractually Past
|
|
|
|
|
|
|
Loans
|
|
|
Loans
|
|
|
Due 90 days or More
|
|
|
Total
|
|
|
|
|
|
(in millions)
|
|
|
At March 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and other real estate
|
|
$
|
7,610
|
|
|
$
|
623
|
|
|
$
|
48
|
|
|
$
|
8,281
|
|
Business banking and middle market enterprise
|
|
|
7,910
|
|
|
|
107
|
|
|
|
37
|
|
|
|
8,054
|
|
Large corporate
|
|
|
11,804
|
|
|
|
74
|
|
|
|
-
|
|
|
|
11,878
|
|
Other commercial
|
|
|
2,819
|
|
|
|
12
|
|
|
|
13
|
|
|
|
2,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
$
|
30,143
|
|
|
$
|
816
|
|
|
$
|
98
|
|
|
$
|
31,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and other real estate
|
|
$
|
7,492
|
|
|
$
|
599
|
|
|
$
|
137
|
|
|
$
|
8,228
|
|
Business banking and middle market enterprise
|
|
|
7,782
|
|
|
|
116
|
|
|
|
47
|
|
|
|
7,945
|
|
Large corporate
|
|
|
10,671
|
|
|
|
74
|
|
|
|
-
|
|
|
|
10,745
|
|
Other commercial
|
|
|
3,332
|
|
|
|
12
|
|
|
|
12
|
|
|
|
3,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
$
|
29,277
|
|
|
$
|
801
|
|
|
$
|
196
|
|
|
$
|
30,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit risk profile The following table shows the
credit risk profile of our commercial loan portfolio at
March 31, 2011 and December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Grade(1)
|
|
|
Non-Investment Grade
|
|
|
Total
|
|
|
|
|
|
(in millions)
|
|
|
At March 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and other real estate
|
|
$
|
2,303
|
|
|
$
|
5,978
|
|
|
$
|
8,281
|
|
Business banking and middle market enterprises
|
|
|
3,226
|
|
|
|
4,828
|
|
|
|
8,054
|
|
Large corporate
|
|
|
7,546
|
|
|
|
4,332
|
|
|
|
11,878
|
|
Other commercial
|
|
|
352
|
|
|
|
2,492
|
|
|
|
2,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
$
|
13,427
|
|
|
$
|
17,630
|
|
|
$
|
31,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and other real estate
|
|
$
|
1,900
|
|
|
$
|
6,328
|
|
|
$
|
8,228
|
|
Business banking and middle market enterprises
|
|
|
2,866
|
|
|
|
5,079
|
|
|
|
7,945
|
|
Large corporate
|
|
|
6,808
|
|
|
|
3,937
|
|
|
|
10,745
|
|
Other commercial
|
|
|
855
|
|
|
|
2,501
|
|
|
|
3,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
$
|
12,429
|
|
|
$
|
17,845
|
|
|
$
|
30,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Investment grade includes
commercial loans with credit ratings of at least BBB- or above
or the equivalent based on our internal credit rating system.
|
29
HSBC USA Inc.
Consumer Loan Credit Quality Indicators The
following credit quality indicators are monitored for our
consumer loan portfolio:
Delinquency The following table summarizes dollars
of two-months-and-over contractual delinquency and as a percent
of total loans and loans held for sale (delinquency
ratio) for our consumer loan portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011
|
|
|
December 31, 2010
|
|
|
|
Dollars of
|
|
|
Delinquency
|
|
|
Dollars of
|
|
|
Delinquency
|
|
|
|
Delinquency
|
|
|
Ratio
|
|
|
Delinquency
|
|
|
Ratio
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage, excluding home equity mortgages
|
|
$
|
1,164
|
|
|
|
7.96
|
%
|
|
$
|
1,248
|
|
|
|
8.52
|
%
|
Home equity mortgages
|
|
|
168
|
|
|
|
4.57
|
|
|
|
182
|
|
|
|
4.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total residential mortgages
|
|
|
1,332
|
|
|
|
7.28
|
|
|
|
1,430
|
|
|
|
7.74
|
|
Private label card receivables
|
|
|
336
|
|
|
|
2.80
|
|
|
|
403
|
|
|
|
3.03
|
|
Credit card receivables
|
|
|
267
|
|
|
|
2.67
|
|
|
|
339
|
|
|
|
3.13
|
|
Other consumer
|
|
|
36
|
|
|
|
3.08
|
|
|
|
36
|
|
|
|
2.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
$
|
1,971
|
|
|
|
4.75
|
%
|
|
$
|
2,208
|
|
|
|
5.04
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming The status of our consumer loan
portfolio is summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing Loans
|
|
|
|
|
|
|
Performing
|
|
|
Nonaccrual
|
|
|
Contractually Past
|
|
|
|
|
|
|
Loans
|
|
|
Loans
|
|
|
Due 90 days or More
|
|
|
Total
|
|
|
|
|
|
(in millions)
|
|
|
At March 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage, excluding home equity mortgages
|
|
$
|
13,056
|
|
|
$
|
812
|
|
|
$
|
-
|
|
|
$
|
13,868
|
|
Home equity mortgages
|
|
|
3,585
|
|
|
|
93
|
|
|
|
-
|
|
|
|
3,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total residential mortgages
|
|
|
16,641
|
|
|
|
905
|
|
|
|
-
|
|
|
|
17,546
|
|
Private label card receivables
|
|
|
11,771
|
|
|
|
-
|
|
|
|
243
|
|
|
|
12,014
|
|
Credit card receivables
|
|
|
9,820
|
|
|
|
-
|
|
|
|
194
|
|
|
|
10,014
|
|
Other consumer
|
|
|
1,053
|
|
|
|
9
|
|
|
|
25
|
|
|
|
1,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
$
|
39,285
|
|
|
$
|
914
|
|
|
$
|
462
|
|
|
$
|
40,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage, excluding home equity mortgages
|
|
$
|
12,797
|
|
|
$
|
900
|
|
|
$
|
-
|
|
|
$
|
13,697
|
|
Home equity mortgages
|
|
|
3,727
|
|
|
|
93
|
|
|
|
-
|
|
|
|
3,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total residential mortgages
|
|
|
16,524
|
|
|
|
993
|
|
|
|
-
|
|
|
|
17,517
|
|
Private label card receivables
|
|
|
13,001
|
|
|
|
-
|
|
|
|
295
|
|
|
|
13,296
|
|
Credit card receivables
|
|
|
10,561
|
|
|
|
-
|
|
|
|
250
|
|
|
|
10,811
|
|
Other consumer
|
|
|
1,137
|
|
|
|
9
|
|
|
|
25
|
|
|
|
1,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
$
|
41,223
|
|
|
$
|
1,002
|
|
|
$
|
570
|
|
|
$
|
42,795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
HSBC USA Inc.
Troubled debt restructurings See discussion of
impaired loans above for further details on this credit quality
indicator.
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 March 31, 2011 and
December 31, 2010, respectively.
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in billions)
|
|
|
Residential mortgage loans with high LTV and no mortgage
insurance(1)
|
|
$
|
1.2
|
|
|
$
|
1.2
|
|
Interest-only residential mortgage loans
|
|
|
2.8
|
|
|
|
2.7
|
|
ARM
loans(2)
|
|
|
8.1
|
|
|
|
7.8
|
|
|
|
|
(1) |
|
Residential mortgage loans with
high LTV and no mortgage insurance includes both fixed rate and
adjustable rate mortgages. Excludes $111 million and
$125 million of
sub-prime
residential mortgage loans held for sale at March 31, 2011
and December 31, 2010, respectively.
|
|
(2) |
|
ARM loan balances above exclude
$61 million and $99 million of
sub-prime
residential mortgage loans held for sale at March 31, 2011
and December 31, 2010, respectively. During the remainder
of 2011 and during 2012, approximately $333 million and
$395 million, respectively, of these ARM loans will
experience their first interest rate reset.
|
31
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 $763 million and
$1.0 billion at March 31, 2011 and December 31,
2010, respectively.
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Closed end:
|
|
|
|
|
|
|
|
|
First lien
|
|
$
|
13,868
|
|
|
$
|
13,697
|
|
Second lien
|
|
|
408
|
|
|
|
437
|
|
Revolving:
|
|
|
|
|
|
|
|
|
Second lien
|
|
|
3,270
|
|
|
|
3,383
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
17,546
|
|
|
$
|
17,517
|
|
|
|
|
|
|
|
|
|
|
6. Allowance
for Credit Losses
An analysis of the allowance for credit losses is presented in
the following table:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Balance at beginning of period
|
|
$
|
2,170
|
|
|
$
|
3,861
|
|
Provision for credit losses
|
|
|
106
|
|
|
|
211
|
|
Charge-offs
|
|
|
(535
|
)
|
|
|
(934
|
)
|
Recoveries
|
|
|
90
|
|
|
|
82
|
|
Other
|
|
|
1
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
1,832
|
|
|
$
|
3,224
|
|
|
|
|
|
|
|
|
|
|
32
HSBC USA Inc.
The following table summarizes the changes in the allowance for
credit losses by product and the related loan balance by product
during the three months ended March 31, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
Business
|
|
|
|
|
|
|
|
|
Residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking
|
|
|
|
|
|
|
|
|
Mortgage,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
and Middle
|
|
|
|
|
|
|
|
|
Excl Home
|
|
|
Home
|
|
|
Private
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and Other
|
|
|
Market
|
|
|
Large
|
|
|
Other
|
|
|
Equity
|
|
|
Equity
|
|
|
Label
|
|
|
Credit
|
|
|
Auto
|
|
|
Other
|
|
|
|
|
|
|
Real Estate
|
|
|
Enterprises
|
|
|
Corporate
|
|
|
Comml
|
|
|
Mortgages
|
|
|
Mortgages
|
|
|
Card
|
|
|
Card
|
|
|
Finance
|
|
|
Consumer
|
|
|
Total
|
|
|
|
|
|
(in millions)
|
|
|
Three Months Ended March 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses beginning of period
|
|
$
|
243
|
|
|
$
|
132
|
|
|
$
|
116
|
|
|
$
|
45
|
|
|
$
|
167
|
|
|
$
|
77
|
|
|
$
|
752
|
|
|
$
|
606
|
|
|
$
|
-
|
|
|
$
|
32
|
|
|
$
|
2,170
|
|
Provision charged to income
|
|
|
(28
|
)
|
|
|
(2
|
)
|
|
|
(5
|
)
|
|
|
(6
|
)
|
|
|
21
|
|
|
|
10
|
|
|
|
51
|
|
|
|
61
|
|
|
|
-
|
|
|
|
4
|
|
|
|
106
|
|
Charge offs
|
|
|
(4
|
)
|
|
|
(13
|
)
|
|
|
-
|
|
|
|
(5
|
)
|
|
|
(26
|
)
|
|
|
(20
|
)
|
|
|
(225
|
)
|
|
|
(229
|
)
|
|
|
-
|
|
|
|
(13
|
)
|
|
|
(535
|
)
|
Recoveries
|
|
|
6
|
|
|
|
2
|
|
|
|
-
|
|
|
|
1
|
|
|
|
1
|
|
|
|
-
|
|
|
|
46
|
|
|
|
31
|
|
|
|
-
|
|
|
|
3
|
|
|
|
90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge offs
|
|
|
2
|
|
|
|
(11
|
)
|
|
|
-
|
|
|
|
(4
|
)
|
|
|
(25
|
)
|
|
|
(20
|
)
|
|
|
(179
|
)
|
|
|
(198
|
)
|
|
|
-
|
|
|
|
(10
|
)
|
|
|
(445
|
)
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses end of period
|
|
$
|
217
|
|
|
$
|
119
|
|
|
$
|
111
|
|
|
$
|
35
|
|
|
$
|
163
|
|
|
$
|
67
|
|
|
$
|
624
|
|
|
$
|
470
|
|
|
$
|
-
|
|
|
$
|
26
|
|
|
$
|
1,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: collectively evaluated for impairment
|
|
$
|
129
|
|
|
$
|
91
|
|
|
$
|
41
|
|
|
$
|
30
|
|
|
$
|
102
|
|
|
$
|
63
|
|
|
$
|
552
|
|
|
$
|
388
|
|
|
$
|
-
|
|
|
$
|
26
|
|
|
$
|
1,422
|
|
Ending balance: individually evaluated for impairment
|
|
|
88
|
|
|
|
28
|
|
|
|
70
|
|
|
|
5
|
|
|
|
61
|
|
|
|
4
|
|
|
|
72
|
|
|
|
80
|
|
|
|
-
|
|
|
|
-
|
|
|
|
408
|
|
Ending balance: loans acquired with deteriorated credit quality
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allowance for credit losses
|
|
$
|
217
|
|
|
$
|
119
|
|
|
$
|
111
|
|
|
$
|
35
|
|
|
$
|
163
|
|
|
$
|
67
|
|
|
$
|
624
|
|
|
$
|
470
|
|
|
$
|
-
|
|
|
$
|
26
|
|
|
$
|
1,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively evaluated for impairment
|
|
$
|
7,462
|
|
|
$
|
7,888
|
|
|
$
|
11,804
|
|
|
$
|
2,740
|
|
|
$
|
12,668
|
|
|
$
|
3,669
|
|
|
$
|
11,806
|
|
|
$
|
9,753
|
|
|
$
|
-
|
|
|
$
|
1,087
|
|
|
$
|
68,877
|
|
Individually evaluated for
impairment(1)
|
|
|
819
|
|
|
|
166
|
|
|
|
74
|
|
|
|
104
|
|
|
|
452
|
|
|
|
9
|
|
|
|
208
|
|
|
|
240
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,072
|
|
Loans carried at net realizable value
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
748
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
748
|
|
Loans acquired with deteriorated credit quality
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
21
|
|
|
|
-
|
|
|
|
-
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
8,281
|
|
|
$
|
8,054
|
|
|
$
|
11,878
|
|
|
$
|
2,844
|
|
|
$
|
13,868
|
|
|
$
|
3,678
|
|
|
$
|
12,014
|
|
|
$
|
10,014
|
|
|
$
|
-
|
|
|
$
|
1,087
|
|
|
$
|
71,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses beginning of period
|
|
$
|
303
|
|
|
$
|
184
|
|
|
$
|
301
|
|
|
$
|
150
|
|
|
$
|
347
|
|
|
$
|
185
|
|
|
$
|
1,184
|
|
|
$
|
1,106
|
|
|
$
|
36
|
|
|
$
|
65
|
|
|
$
|
3,861
|
|
Provision charged to income
|
|
|
2
|
|
|
|
3
|
|
|
|
(77
|
)
|
|
|
(1
|
)
|
|
|
(19
|
)
|
|
|
(21
|
)
|
|
|
109
|
|
|
|
190
|
|
|
|
25
|
|
|
|
-
|
|
|
|
211
|
|
Charge offs
|
|
|
(16
|
)
|
|
|
(28
|
)
|
|
|
(4
|
)
|
|
|
(61
|
)
|
|
|
(49
|
)
|
|
|
(36
|
)
|
|
|
(335
|
)
|
|
|
(360
|
)
|
|
|
(24
|
)
|
|
|
(21
|
)
|
|
|
(934
|
)
|
Recoveries
|
|
|
3
|
|
|
|
6
|
|
|
|
-
|
|
|
|
1
|
|
|
|
1
|
|
|
|
-
|
|
|
|
42
|
|
|
|
25
|
|
|
|
-
|
|
|
|
4
|
|
|
|
82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge offs
|
|
|
(13
|
)
|
|
|
(22
|
)
|
|
|
(4
|
)
|
|
|
(60
|
)
|
|
|
(48
|
)
|
|
|
(36
|
)
|
|
|
(293
|
)
|
|
|
(335
|
)
|
|
|
(24
|
)
|
|
|
(17
|
)
|
|
|
(852
|
)
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses end of period
|
|
$
|
292
|
|
|
$
|
165
|
|
|
$
|
220
|
|
|
$
|
90
|
|
|
$
|
280
|
|
|
$
|
128
|
|
|
$
|
1,000
|
|
|
$
|
964
|
|
|
$
|
37
|
|
|
$
|
48
|
|
|
$
|
3,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: collectively evaluated for impairment
|
|
$
|
187
|
|
|
$
|
141
|
|
|
$
|
85
|
|
|
$
|
49
|
|
|
$
|
231
|
|
|
$
|
125
|
|
|
$
|
944
|
|
|
$
|
921
|
|
|
$
|
25
|
|
|
$
|
48
|
|
|
$
|
2,756
|
|
Ending balance: individually evaluated for
impairment(1)
|
|
|
105
|
|
|
|
24
|
|
|
|
135
|
|
|
|
41
|
|
|
|
49
|
|
|
|
3
|
|
|
|
56
|
|
|
|
32
|
|
|
|
12
|
|
|
|
-
|
|
|
|
457
|
|
Ending balance: loans acquired with deteriorated credit quality
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allowance for credit losses
|
|
$
|
292
|
|
|
$
|
165
|
|
|
$
|
220
|
|
|
$
|
90
|
|
|
$
|
280
|
|
|
$
|
128
|
|
|
$
|
1,000
|
|
|
$
|
964
|
|
|
$
|
37
|
|
|
$
|
48
|
|
|
$
|
3,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively evaluated for impairment
|
|
$
|
8,071
|
|
|
$
|
6,852
|
|
|
$
|
10,600
|
|
|
$
|
2,863
|
|
|
$
|
12,666
|
|
|
$
|
4,039
|
|
|
$
|
13,236
|
|
|
$
|
11,574
|
|
|
$
|
1,409
|
|
|
$
|
1,371
|
|
|
$
|
72,681
|
|
Individually evaluated for impairment
|
|
|
723
|
|
|
|
147
|
|
|
|
233
|
|
|
|
148
|
|
|
|
222
|
|
|
|
7
|
|
|
|
230
|
|
|
|
130
|
|
|
|
44
|
|
|
|
-
|
|
|
|
1,884
|
|
Loans carried at net realizable value
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
624
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
624
|
|
Loans acquired with deteriorated credit quality
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
109
|
|
|
|
-
|
|
|
|
-
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
8,794
|
|
|
$
|
6,999
|
|
|
$
|
10,833
|
|
|
$
|
3,011
|
|
|
$
|
13,512
|
|
|
$
|
4,046
|
|
|
$
|
13,466
|
|
|
$
|
11,813
|
|
|
$
|
1,453
|
|
|
$
|
1,371
|
|
|
$
|
75,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For consumer loans, these amounts
represent TDR Loans for which we evaluate reserves using a
discounted cash flow methodology. Each loan is individually
identified as a TDR Loan and then grouped together with other
TDR Loans with similar characteristics. The discounted cash flow
analysis is then applied to these groups of TDR Loans.
|
33
HSBC USA Inc.
7. Loans
Held for Sale
Loans held for sale consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Commercial loans
|
|
$
|
845
|
|
|
$
|
1,356
|
|
|
|
|
|
|
|
|
|
|
Consumer loans:
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
763
|
|
|
|
954
|
|
Other consumer
|
|
|
80
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
843
|
|
|
|
1,034
|
|
|
|
|
|
|
|
|
|
|
Total loans held for sale
|
|
$
|
1,688
|
|
|
$
|
2,390
|
|
|
|
|
|
|
|
|
|
|
We originate and syndicate commercial loans in connection with
our participation in a number of leveraged acquisition finance
transactions. A substantial majority of these loans are
originated with the intent of selling them to unaffiliated third
parties and are classified as commercial loans held for sale at
March 31, 2011 and December 31, 2010. The fair value
of commercial loans held for sale under this program was
$542 million and $1.0 billion at March 31, 2011
and December 31, 2010, respectively, all of which are
recorded at fair value as we have elected to designate these
loans under fair value option. We also have 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 under this program was $271 million and
$273 million at March 31, 2011 and December 31,
2010, respectively. 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
$304 million and $391 million at March 31, 2011
and December 31, 2010, 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.
Other consumer loans held for sale consist of student loans.
Excluding the commercial loans designated under fair value
option discussed above, loans held for sale are recorded at the
lower of cost or fair value. While the initial book value of
loans held for sale continued to exceed fair value at
March 31, 2011, we experienced a decrease in the valuation
allowance during 2011 due primarily to loan sales. The valuation
allowance on loans held for sale was $377 million and
$435 million at March 31, 2011 and December 31,
2010, 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 residential mortgage banking revenue
(loss) in the consolidated statement of income, were losses of
$12 million and $6 million during the three months
ended March 31, 2011 and 2010, respectively.
34
HSBC USA Inc.
8. Intangible
Assets
Intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Mortgage servicing rights
|
|
$
|
404
|
|
|
$
|
403
|
|
Other
|
|
|
21
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
$
|
425
|
|
|
$
|
424
|
|
|
|
|
|
|
|
|
|
|
Mortgage Servicing Rights
(MSRs) A servicing asset is a contract
under which estimated future revenues from contractually
specified cash flows, such as servicing fees and other ancillary
revenues, are expected to exceed the obligation to service the
financial assets. We recognize the right to service mortgage
loans as a separate and distinct asset at the time they are
acquired or when originated loans are sold.
MSRs are subject to credit, prepayment and interest rate risk,
in that their value will fluctuate as a result of changes in
these economic variables. Interest rate risk is mitigated
through an economic hedging program that uses securities and
derivatives to offset changes in the fair value of MSRs. Since
the hedging program involves trading activity, risk is
quantified and managed using a number of risk assessment
techniques, which are addressed in more detail in the 2010
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, including current
costs of servicing. The reasonableness of these valuation models
is periodically validated by reference to external independent
broker valuations and industry surveys.
Fair value of residential MSRs is calculated using the following
critical assumptions:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
2011
|
|
2010
|
|
|
Annualized constant prepayment rate (CPR)
|
|
|
13.5
|
%
|
|
|
14.1
|
%
|
Constant discount rate
|
|
|
13.8
|
%
|
|
|
13.6
|
%
|
Weighted average life
|
|
|
5.1 years
|
|
|
|
4.9 years
|
|
Residential MSRs activity is summarized in the following table:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Fair value of MSRs:
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
394
|
|
|
$
|
450
|
|
Additions related to loan sales
|
|
|
16
|
|
|
|
16
|
|
Changes in fair value due to:
|
|
|
|
|
|
|
|
|
Change in valuation inputs or assumptions used in the valuation
models
|
|
|
5
|
|
|
|
5
|
|
Realization of cash flows
|
|
|
(19
|
)
|
|
|
(27
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
396
|
|
|
$
|
444
|
|
|
|
|
|
|
|
|
|
|
35
HSBC USA Inc.
Information regarding residential mortgage loans serviced for
others, which are not included in the consolidated balance
sheet, is summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Outstanding principal balances at period end
|
|
$
|
43,579
|
|
|
$
|
44,407
|
|
|
|
|
|
|
|
|
|
|
Custodial balances maintained and included in noninterest
bearing deposits at period end
|
|
$
|
725
|
|
|
$
|
960
|
|
|
|
|
|
|
|
|
|
|
Servicing fees collected are included in residential mortgage
banking revenue and totaled $28 million and
$32 million during the three months ended March 31,
2011 and 2010, respectively.
Commercial Mortgage Servicing
Rights Commercial MSRs, which are accounted for
using the lower of cost or fair value method, totaled
$8 million and $9 million at March 31, 2011 and
December 31, 2010.
Other Intangible Assets Other intangible
assets, which result from purchase business combinations, are
comprised of favorable lease arrangements of $15 million
and $16 million at March 31, 2011 and
December 31, 2010, respectively, and customer lists in the
amount of $6 million and $5 million at March 31,
2011 and December 31, 2010, respectively.
9. Goodwill
Goodwill was $2.6 billion at March 31, 2011 and
December 31, 2010, and includes accumulated impairment
losses of $54 million.
10. Derivative
Financial Instruments
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.
36
HSBC USA Inc.
In the tables that follow below, the fair value disclosed does
not include swap collateral that we either receive or deposit
with our interest rate swap counterparties. Such swap collateral
is recorded on our balance sheet at an amount which approximates
fair value and is netted on the balance sheet with the fair
value amount recognized for derivative instruments.
Fair Value Hedges In the normal course of
business, we hold fixed-rate loans and securities and issue
fixed-rate senior and subordinated debt obligations. The fair
value of fixed-rate (USD and non-USD denominated) assets and
liabilities fluctuates in response to changes in interest rates
or foreign currency exchange rates. We utilize interest rate
swaps, interest rate forward and futures contracts and foreign
currency swaps to minimize the effect on earnings caused by
interest rate and foreign currency volatility.
For reporting purposes, changes in fair value of a derivative
designated in a qualifying fair value hedge, along with the
changes in the fair value of the hedged asset or liability that
is attributable to the hedged risk, are recorded in current
period earnings. We recognized net gains of $10 million and
$5 million during the three months ended March 31,
2011 and 2010, respectively, which are reported in other income
in the consolidated statement of income 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 life
of the hedged item. We recorded basis adjustments for active
fair value hedges which decreased the carrying value of our debt
by $40 million and increased the carrying value of our debt
by $27 million during the three months ended March 31,
2011 and 2010, respectively. We amortized $3 million and
$2 million of basis adjustments related to terminated
and/or
re-designated fair value hedge relationships during the three
months ended March 31, 2011 and 2010, respectively. The
total accumulated unamortized basis adjustment amounted to an
increase in the carrying value of our debt of $64 million
and $73 million as of March 31, 2011 and
December 31, 2010, respectively. Basis adjustments for
active fair value hedges of
available-for-sale
securities decreased the carrying value of the securities by
$36 million and increased the carrying value of the
securities by $23 million during the three months ended
March 31, 2011 and 2010, respectively. Total accumulated
unamortized basis adjustments amounted to a decrease in carrying
value of $31 million and an increase in carrying value of
$71 million as of March 31, 2011 and December 31,
2010, respectively.
The following table presents the fair value of derivative
instruments that are designated and qualifying as fair value
hedges and their location on the balance sheet.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
Assets(1)
|
|
|
Derivative
Liabilities(1)
|
|
|
|
|
|
Fair Value as of
|
|
|
|
|
Fair Value as of
|
|
|
|
Balance Sheet
|
|
March 31,
|
|
|
December 31,
|
|
|
Balance Sheet
|
|
March 31,
|
|
|
December 31,
|
|
|
|
Location
|
|
2011
|
|
|
2010
|
|
|
Location
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Interest rate contracts
|
|
Other assets
|
|
$
|
146
|
|
|
$
|
140
|
|
|
Interest, taxes & other liabilities
|
|
$
|
114
|
|
|
$
|
164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The derivative asset 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.
|
37
HSBC USA Inc.
The following table presents the gains and losses on derivative
instruments designated and qualifying as hedging instruments in
fair value hedges and their locations on the consolidated
statement of income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain
|
|
|
|
|
|
(Loss)
|
|
|
|
|
|
Recognized
|
|
|
|
Location of Gain (Loss)
|
|
in Income on
|
|
|
|
Recognized in Income on
|
|
Derivatives
|
|
Three Months Ended March 31,
|
|
Derivatives
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
(in millions)
|
|
|
Interest rate contracts
|
|
Other income
|
|
$
|
45
|
|
|
$
|
(13
|
)
|
Interest rate contracts
|
|
Interest income
|
|
|
(3
|
)
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
42
|
|
|
$
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) on
|
|
|
Gain (Loss) on
|
|
|
Gain (Loss) on
|
|
|
Gain (Loss) on
|
|
|
|
Derivative
|
|
|
Hedged Items
|
|
|
Derivative
|
|
|
Hedged Items
|
|
|
|
Interest
|
|
|
|
|
|
Interest
|
|
|
|
|
|
Interest
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
Income
|
|
|
Other
|
|
|
Income
|
|
|
Other
|
|
|
Income
|
|
|
Other
|
|
|
Income
|
|
|
Other
|
|
|
|
(Expense)
|
|
|
Income
|
|
|
(Expense)
|
|
|
Income
|
|
|
(Expense)
|
|
|
Income
|
|
|
(Expense)
|
|
|
Income
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts/AFS securities
|
|
$
|
(9
|
)
|
|
$
|
52
|
|
|
$
|
132
|
|
|
$
|
(47
|
)
|
|
$
|
(2
|
)
|
|
$
|
(39
|
)
|
|
$
|
43
|
|
|
$
|
38
|
|
Interest rate contracts/commercial loans
|
|
|
(5
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
(1
|
)
|
Interest rate contracts/subordinated debt
|
|
|
11
|
|
|
|
(7
|
)
|
|
|
(18
|
)
|
|
|
13
|
|
|
|
20
|
|
|
|
26
|
|
|
|
(40
|
)
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(3
|
)
|
|
$
|
45
|
|
|
$
|
114
|
|
|
$
|
(35
|
)
|
|
$
|
18
|
|
|
$
|
(13
|
)
|
|
$
|
4
|
|
|
$
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 March 31, 2011 and December 31,
2010, active cash flow hedge relationships extend or mature
through February 2031 and December 2012, respectively. During
the three months ended March 31, 2011 and 2010,
$2 million and $3 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
$8 million of remaining losses to earnings resulting from
these terminated
and/or
re-designated cash flow hedges. The interest accrual related to
the derivative contract is recognized in interest income.
38
HSBC USA Inc.
The following table presents the fair value of derivative
instruments that are designated and qualifying as cash flow
hedges and their location on the consolidated balance sheet.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
Assets(1)
|
|
|
Derivative
Liabilities(1)
|
|
|
|
|
|
Fair Value as of
|
|
|
|
|
Fair Value as of
|
|
|
|
Balance Sheet
|
|
March 31,
|
|
|
December 31,
|
|
|
Balance Sheet
|
|
March 31,
|
|
|
December 31,
|
|
|
|
Location
|
|
2011
|
|
|
2010
|
|
|
Location
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Interest rate contracts
|
|
Other assets
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Interest, taxes & other liabilities
|
|
$
|
27
|
|
|
$
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of Gain
|
|
in Income
|
|
|
Gain (Loss)
|
|
|
|
Gain (Loss)
|
|
(Loss)
|
|
on the
|
|
|
Recognized
|
|
|
|
Reclassified
|
|
Recognized
|
|
Derivative
|
|
|
in AOCL on
|
|
Location of Gain
|
|
From AOCL
|
|
in Income
|
|
(Ineffective
|
|
|
Derivative
|
|
(Loss) Reclassified
|
|
into Income
|
|
on the Derivative
|
|
Portion and Amount
|
|
|
(Effective
|
|
from AOCL
|
|
(Effective
|
|
(Ineffective Portion and
|
|
Excluded from
|
|
|
Portion)
|
|
into Income (Effective
|
|
Portion)
|
|
Amount Excluded from
|
|
Effectiveness Testing)
|
Three Months Ended March 31,
|
|
2011
|
|
2010
|
|
Portion)
|
|
2011
|
|
2010
|
|
Effectiveness Testing)
|
|
2011
|
|
2010
|
|
|
|
(in millions)
|
|
Interest rate contracts
|
|
$
|
(8
|
)
|
|
$
|
7
|
|
|
Other income
|
|
$
|
(2
|
)
|
|
$
|
(3
|
)
|
|
Other income
|
|
$
|
-
|
|
|
$
|
-
|
|
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 risk 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 while the derivative asset or
liability positions are reflected as other assets or other
liabilities. As of March 31, 2011, 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.
39
HSBC USA Inc.
The following table presents the fair value of derivative
instruments held for trading purposes and their location on the
consolidated balance sheet.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
Assets(1)
|
|
|
Derivative
Liabilities(1)
|
|
|
|
|
|
Fair Value as of
|
|
|
|
|
Fair Value as of
|
|
|
|
Balance Sheet
|
|
March 31,
|
|
|
December 31,
|
|
|
Balance Sheet
|
|
March 31,
|
|
|
December 31,
|
|
|
|
Location
|
|
2011
|
|
|
2010
|
|
|
Location
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Interest rate contracts
|
|
Trading assets
|
|
$
|
27,564
|
|
|
$
|
32,047
|
|
|
Trading liabilities
|
|
$
|
28,216
|
|
|
$
|
32,526
|
|
Foreign exchange contracts
|
|
Trading assets
|
|
|
17,249
|
|
|
|
16,367
|
|
|
Trading liabilities
|
|
|
17,523
|
|
|
|
16,742
|
|
Equity contracts
|
|
Trading assets
|
|
|
961
|
|
|
|
950
|
|
|
Trading liabilities
|
|
|
989
|
|
|
|
986
|
|
Precious Metals contracts
|
|
Trading assets
|
|
|
887
|
|
|
|
1,004
|
|
|
Trading liabilities
|
|
|
1,738
|
|
|
|
2,073
|
|
Credit contracts
|
|
Trading assets
|
|
|
11,676
|
|
|
|
12,766
|
|
|
Trading liabilities
|
|
|
11,380
|
|
|
|
12,506
|
|
Other
|
|
Trading assets
|
|
|
1
|
|
|
|
4
|
|
|
Trading liabilities
|
|
|
1
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
58,338
|
|
|
$
|
63,138
|
|
|
|
|
$
|
59,847
|
|
|
$
|
64,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The derivative assets and
derivative liabilities presented above may be eligible for
netting and consequently may be shown net against a different
line item on the consolidated balance sheet. Balance sheet
categories in the above table represent the location of the
assets and liabilities absent the netting of the balances.
|
The following table presents the fair value of derivative
instruments held for other purposes and their location on the
balance sheet.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
Assets(1)
|
|
|
Derivative
Liabilities(1)
|
|
|
|
|
|
Fair Value as of
|
|
|
|
|
Fair Value as of
|
|
|
|
Balance Sheet
|
|
March 31,
|
|
|
December 31,
|
|
|
Balance Sheet
|
|
March 31,
|
|
|
December 31,
|
|
|
|
Location
|
|
2011
|
|
|
2010
|
|
|
Location
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Interest rate contracts
|
|
Other assets
|
|
$
|
370
|
|
|
$
|
420
|
|
|
Interest, taxes & other liabilities
|
|
$
|
93
|
|
|
$
|
82
|
|
Foreign exchange contracts
|
|
Other assets
|
|
|
75
|
|
|
|
96
|
|
|
Interest, taxes & other liabilities
|
|
|
6
|
|
|
|
4
|
|
Equity contracts
|
|
Other assets
|
|
|
153
|
|
|
|
221
|
|
|
Interest, taxes & other liabilities
|
|
|
5
|
|
|
|
10
|
|
Credit contracts
|
|
Other assets
|
|
|
2
|
|
|
|
2
|
|
|
Interest, taxes & other liabilities
|
|
|
16
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
600
|
|
|
$
|
739
|
|
|
|
|
$
|
120
|
|
|
$
|
113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
40
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain
|
|
|
|
|
|
(Loss)
|
|
|
|
|
|
Recognized in
|
|
|
|
|
|
Income on
|
|
|
|
|
|
Derivatives
|
|
|
|
Location of Gain (Loss)
|
|
Three Months
|
|
|
|
Recognized in Income on
|
|
Ended March 31,
|
|
|
|
Derivatives
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
(in millions)
|
|
|
Interest rate contracts
|
|
Trading revenue
|
|
$
|
26
|
|
|
$
|
(53
|
)
|
Foreign exchange contracts
|
|
Trading revenue
|
|
|
175
|
|
|
|
(108
|
)
|
Equity contracts
|
|
Trading revenue
|
|
|
1
|
|
|
|
14
|
|
Precious Metals contracts
|
|
Trading revenue
|
|
|
(31
|
)
|
|
|
165
|
|
Credit contracts
|
|
Trading revenue
|
|
|
(12
|
)
|
|
|
(33
|
)
|
Other
|
|
Trading revenue
|
|
|
9
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
168
|
|
|
$
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents information on gains and losses on
derivative instruments held for other purposes and their
locations on the statement of income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss)
|
|
|
|
|
|
Recognized in
|
|
|
|
|
|
Income on Derivatives
|
|
|
|
Location of Gain (Loss)
|
|
Three Months
|
|
|
|
Recognized in Income
|
|
Ended March 31,
|
|
|
|
on Derivatives
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
(in millions)
|
|
|
Interest rate contracts
|
|
Other income
|
|
$
|
(6
|
)
|
|
$
|
57
|
|
Foreign exchange contracts
|
|
Other income
|
|
|
(24
|
)
|
|
|
(10
|
)
|
Equity contracts
|
|
Other income
|
|
|
102
|
|
|
|
142
|
|
Credit contracts
|
|
Other income
|
|
|
(2
|
)
|
|
|
(9
|
)
|
Other
|
|
Other income
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
70
|
|
|
$
|
180
|
|
|
|
|
|
|
|
|
|
|
|
|
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. If HSBC Bank USAs credit
ratings were to fall below the current ratings, the
counterparties to our derivative instruments could demand
additional collateral to be posted with them. The amount of
additional collateral required to be posted will depend on
whether HSBC Bank USA is downgraded by one or more notches as
well as whether the downgrade is in relation to long-term or
short-term ratings. The aggregate fair value of all derivative
instruments with credit-risk-related contingent features that
are in a liability position as of March 31, 2011, is
$4.6 billion for which we have posted collateral of
$7.2 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, 2010, is
$5.1 billion for which we have posted collateral of
$7.3 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 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+ or the
short-term ratings to go below
P-2 and
A-1 by
Moodys and S&P, respectively. The following tables
summarize
41
HSBC USA Inc.
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 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
|
|
$
|
-
|
|
|
$
|
6
|
|
|
$
|
69
|
|
P-2
|
|
|
57
|
|
|
|
59
|
|
|
|
117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S&P
|
|
Long-Term Ratings
|
Short-Term Ratings
|
|
AA
|
|
AA−
|
|
A+
|
|
|
|
(in millions)
|
|
A-1+
|
|
$
|
-
|
|
|
$
|
175
|
|
|
$
|
178
|
|
A-1
|
|
|
79
|
|
|
|
255
|
|
|
|
257
|
|
We would be required to post $86 million of additional
collateral on total return swaps and certain other transactions
if HSBC Bank USA is downgraded by S&P and Moodys by
two notches on our long term rating accompanied by one notch
downgrade in our short term rating.
Notional Value of Derivative Contracts The
following table summarizes the notional values of derivative
contracts.
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in billions)
|
|
|
Interest rate:
|
|
|
|
|
|
|
|
|
Futures and forwards
|
|
$
|
224.8
|
|
|
$
|
356.9
|
|
Swaps
|
|
|
1,795.4
|
|
|
|
1,773.0
|
|
Options written
|
|
|
59.8
|
|
|
|
62.9
|
|
Options purchased
|
|
|
61.6
|
|
|
|
63.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,141.6
|
|
|
|
2,256.7
|
|
|
|
|
|
|
|
|
|
|
Foreign Exchange:
|
|
|
|
|
|
|
|
|
Swaps, futures and forwards
|
|
|
724.4
|
|
|
|
603.3
|
|
Options written
|
|
|
29.5
|
|
|
|
22.0
|
|
Options purchased
|
|
|
30.3
|
|
|
|
22.3
|
|
Spot
|
|
|
94.6
|
|
|
|
56.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
878.8
|
|
|
|
704.1
|
|
|
|
|
|
|
|
|
|
|
Commodities, equities and precious metals:
|
|
|
|
|
|
|
|
|
Swaps, futures and forwards
|
|
|
35.0
|
|
|
|
36.1
|
|
Options written
|
|
|
8.6
|
|
|
|
9.1
|
|
Options purchased
|
|
|
16.2
|
|
|
|
16.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59.8
|
|
|
|
61.6
|
|
|
|
|
|
|
|
|
|
|
Credit derivatives
|
|
|
714.4
|
|
|
|
701.0
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,794.6
|
|
|
$
|
3,723.4
|
|
|
|
|
|
|
|
|
|
|
42
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.
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 March 31, 2011, commercial leveraged acquisition
finance loans held for sale and related unfunded commitments of
$542 million carried at fair value had an aggregate unpaid
principal balance of $567 million. As of December 31,
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.
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 March 31, 2011,
these commercial foreign currency denominated loans for which we
elected fair value option had a fair value of $271 million
and an unpaid principal balance of $270 million. At
December 31, 2010, these commercial foreign currency
denominated loans for which we elected fair value option had a
fair value of $273 million and an unpaid principal balance
of $270 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. Because a substantial majority of the loans elected for
the fair value option are floating rate assets, changes in their
fair value are primarily attributable to changes in
loan-specific credit risk factors. The components of gain (loss)
related to loans designated at fair value are summarized in the
table below. As of March 31, 2011 and December 31,
2010, 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 March 31, 2011
totaled $1.7 billion and had an aggregate unpaid principal
balance of $1.8 billion. Fixed-rate debt accounted for
under FVO at December 31, 2010 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. The components of gain (loss) related to
long-term debt designated at fair value are summarized in the
table below.
Hybrid Instruments We elected to apply fair
value option accounting principles to all of our hybrid
instruments, inclusive of structured notes and structured
deposits, issued after January 1, 2006. As of
March 31, 2011, interest bearing deposits in domestic
offices included $8.3 billion of structured deposits
accounted for under FVO which had an unpaid principal balance of
$8.3 billion. As of December 31, 2010, interest
bearing deposits in domestic offices included $7.4 billion
of structured deposits accounted for under FVO which had an
unpaid principal balance of $7.4 billion. Long-term debt at
March 31, 2011 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, 2010 included structured notes of
$3.7 billion accounted for under FVO which had an unpaid
principal balance of $3.4 billion. Interest on this
43
HSBC USA Inc.
debt is recorded as interest expense in the consolidated
statement of income. The components of gain (loss) related to
hybrid instruments designated at fair value which reflect the
instruments described above are summarized in the table below
Components of Gain on Instruments at Fair Value and
Related Derivatives Gain (loss) on instruments
designated at fair value and related derivatives includes the
changes in fair value related to both interest and credit risk
as well as the
mark-to-market
adjustment on derivatives related to the debt designated at fair
value and net realized gains or losses on these derivatives. The
components of gain (loss) on instruments designated at fair
value and related derivatives related to the changes in fair
value of fixed rate debt accounted for under FVO are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
Long-
|
|
|
|
|
|
|
|
|
|
|
|
Long-
|
|
|
|
|
|
|
|
|
|
|
|
|
Term
|
|
|
Hybrid
|
|
|
|
|
|
|
|
|
Term
|
|
|
Hybrid
|
|
|
|
|
|
|
Loans
|
|
|
Debt
|
|
|
Instruments
|
|
|
Total
|
|
|
Loans
|
|
|
Debt
|
|
|
Instruments
|
|
|
Total
|
|
|
|
|
|
(in millions)
|
|
|
Interest rate component
|
|
$
|
(1
|
)
|
|
$
|
36
|
|
|
$
|
(119
|
)
|
|
$
|
(84
|
)
|
|
$
|
1
|
|
|
$
|
(9
|
)
|
|
$
|
(174
|
)
|
|
$
|
(182
|
)
|
Credit risk component
|
|
|
31
|
|
|
|
(29
|
)
|
|
|
15
|
|
|
|
17
|
|
|
|
(6
|
)
|
|
|
11
|
|
|
|
23
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
mark-to-market
on financial instruments designated at fair value
|
|
|
30
|
|
|
|
7
|
|
|
|
(104
|
)
|
|
|
(67
|
)
|
|
|
(5
|
)
|
|
|
2
|
|
|
|
(151
|
)
|
|
|
(154
|
)
|
Net realized gains on the financial instrument
|
|
|
4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Mark-to-market
on the related derivatives
|
|
|
-
|
|
|
|
(39
|
)
|
|
|
106
|
|
|
|
67
|
|
|
|
5
|
|
|
|
10
|
|
|
|
164
|
|
|
|
179
|
|
Net realized gain (losses) on the related long-term debt
derivatives
|
|
|
-
|
|
|
|
17
|
|
|
|
-
|
|
|
|
17
|
|
|
|
-
|
|
|
|
21
|
|
|
|
-
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on instruments designated at fair value and related
derivatives
|
|
$
|
34
|
|
|
$
|
(15
|
)
|
|
$
|
2
|
|
|
$
|
21
|
|
|
$
|
-
|
|
|
$
|
33
|
|
|
$
|
13
|
|
|
$
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12. Income
Taxes
The following table presents our effective tax rates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Tax expense (benefit) at the U.S. federal statutory income tax
rate
|
|
$
|
197
|
|
|
|
35.0
|
%
|
|
$
|
300
|
|
|
|
35.0
|
%
|
Increase (decrease) in rate resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and local taxes, net of federal benefit
|
|
|
21
|
|
|
|
3.6
|
|
|
|
4
|
|
|
|
.5
|
|
Adjustment of tax rate used to value deferred taxes
|
|
|
26
|
|
|
|
4.7
|
|
|
|
(1
|
)
|
|
|
(.2
|
)
|
Valuation allowance on deferred tax assets
|
|
|
(135
|
)
|
|
|
(24.1
|
)
|
|
|
13
|
|
|
|
1.5
|
|
Tax exempt interest income
|
|
|
(3
|
)
|
|
|
(.5
|
)
|
|
|
(1
|
)
|
|
|
(.1
|
)
|
Low income housing and other tax credits
|
|
|
(21
|
)
|
|
|
(3.8
|
)
|
|
|
(22
|
)
|
|
|
(2.5
|
)
|
Uncertain tax provision
|
|
|
-
|
|
|
|
-
|
|
|
|
22
|
|
|
|
2.5
|
|
Other
|
|
|
(3
|
)
|
|
|
(.4
|
)
|
|
|
(1
|
)
|
|
|
(.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
$
|
82
|
|
|
|
14.5
|
%
|
|
$
|
314
|
|
|
|
36.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The effective tax rate for the three months ended March 31,
2011 was primarily impacted by a release of valuation allowance
previously established on foreign tax credits, utilization of
low income housing tax credits, state taxes and the change in
state tax rates used to value deferred taxes. The effective tax
rate for the three months ended March 31, 2010 reflects a
substantially higher level of pre-tax income, an increased level
of low income housing tax credits and an adjustment of uncertain
tax positions.
44
HSBC USA Inc.
HSBC North America Consolidated Income
Taxes We are included in HSBC North Americas
consolidated Federal income tax return and in various combined
state income tax returns. As such, we have entered into a tax
allocation agreement with HSBC North America and its subsidiary
entities (the HNAH Group) included in the
consolidated returns which govern the current amount of taxes to
be paid or received by the various entities included in the
consolidated return filings. As a result, we have looked at the
HNAH Groups consolidated deferred tax assets and various
sources of taxable income, including the impact of HSBC and HNAH
Group tax planning strategies, in reaching conclusions on
recoverability of deferred tax assets. Where a valuation
allowance is determined to be necessary at the HSBC North
America consolidated level, such allowance is allocated to
principal subsidiaries within the HNAH Group as described below
in a manner that is systematic, rational and consistent with the
broad principles of accounting for income taxes.
The HNAH Group evaluates deferred tax assets for recoverability
using a consistent approach which considers the relative impact
of negative and positive evidence, including historical
financial performance, projections of future taxable income,
future reversals of existing taxable temporary differences, tax
planning strategies and any available carryback capacity.
In evaluating the need for a valuation allowance, the HNAH Group
estimates future taxable income based on management approved
business plans, future capital requirements and ongoing tax
planning strategies, including capital support from HSBC
necessary as part of such plans and strategies. The HNAH Group
has continued to consider the impact of the economic environment
on the North American businesses and the expected growth of the
deferred tax assets. This evaluation process involves
significant management judgment about assumptions that are
subject to change from period to period.
In conjunction with the HNAH Group deferred tax evaluation
process, based on our forecasts of future taxable income, which
include assumptions about the depth and severity of home price
depreciation and the U.S. economic environment, 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 continuing operations
and relies to a greater extent on continued capital support from
our parent, HSBC, including tax planning strategies implemented
in relation to such support. HSBC has indicated they remain
fully committed and have the capacity and willingness to provide
capital as needed to run operations, maintain sufficient
regulatory capital, and fund certain tax planning strategies.
Only those tax planning strategies that are both prudent and
feasible, and which management has the ability and intent to
implement, are incorporated into our analysis and assessment.
The primary and most significant strategy is HSBCs
commitment to reinvest excess HNAH Group capital to reduce debt
funding or otherwise invest in assets to ensure that it is more
likely than not that the deferred tax assets will be utilized.
Currently, it has been determined that the HNAH Groups
primary tax planning strategy, in combination with other tax
planning strategies, provides support for the realization of the
net deferred tax assets recorded for the HNAH Group. Such
determination is based on HSBCs business forecasts and
assessment as to the most efficient and effective deployment of
HSBC capital, most importantly including the length of time such
capital will need to be maintained in the U.S. for purposes
of the tax planning strategy.
During the first quarter of 2011, the HNAH Group identified an
additional tax planning strategy that provides support for the
realization of the deferred tax assets recorded on its foreign
tax credits and certain state related deferred tax assets. The
use of foreign tax credits is limited by the HNAH Groups
U.S. tax liability and the availability of foreign source
income. The tax planning strategy includes the purchase of
foreign bonds and REMIC residual interests. These purchases are
expected to generate sufficient taxable foreign source income
that will allow for the utilization of the foreign tax credits
before the credits expire and recognition of certain state
deferred tax assets.
Notwithstanding the above, the HNAH Group has valuation
allowances against certain state tax loss carryforwards for
which the aforementioned tax planning strategies do not provide
appropriate support.
45
HSBC USA Inc.
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 tax planning strategies were to change, a
valuation allowance against some or all of the remaining net
deferred tax assets may need to be established which could have
a material adverse effect on our results of operations,
financial condition and capital position. The HNAH Group will
continue to update its assumptions and forecasts of future
taxable income, including relevant tax planning strategies, and
assess the need for such incremental valuation allowances.
Absent the capital support from HSBC and implementation of the
related tax planning strategies, the HNAH Group, including us,
would be required to record a valuation allowance against the
remaining deferred tax assets.
HSBC USA Inc. Income Taxes We recognize
deferred tax assets and liabilities for the future tax
consequences related to the differences between the financial
statement carrying amounts of existing assets and liabilities
and their respective tax bases, and for tax credits and state
net operating losses. Our net deferred tax assets, net of both
deferred tax liabilities and valuation allowances, totaled
$1.3 billion and $1.2 billion as of March 31,
2011 and December 31, 2010, respectively.
The Internal Revenue Service began its audit of our 2006 and
2007 income tax returns in 2009, with an anticipated completion
in 2011. We are currently under audit by various state and local
tax jurisdictions. Uncertain tax positions are reviewed on an
ongoing basis and are adjusted in light of changing facts and
circumstances, including progress of tax audits, developments in
case law and the closing of statute of limitations. Such
adjustments are reflected in the tax provision. As a result of a
recent state court decision in April 2011, we no longer believe
that we can uphold the more likely than not conclusion taken on
one of these uncertain tax positions. Therefore, tax reserves of
approximately $123 million and related accrued interest
expense of $63 million will be recorded in the second
quarter of 2011 as required by U.S. GAAP to recognize the
estimated tax exposure on this matter.
13. Pensions
and Other Postretirement Benefits
The components of pension expense for the defined benefit
pension plan reflected in our consolidated statement of income
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 March 31,
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Service cost benefits earned during the period
|
|
$
|
4
|
|
|
$
|
5
|
|
Interest cost on projected benefit obligation
|
|
|
18
|
|
|
|
17
|
|
Expected return on assets
|
|
|
(20
|
)
|
|
|
(15
|
)
|
Recognized losses
|
|
|
10
|
|
|
|
9
|
|
Amortization of prior service cost
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost
|
|
$
|
11
|
|
|
$
|
15
|
|
|
|
|
|
|
|
|
|
|
Pension expense declined in 2011 due to higher returns on plan
assets due to higher asset levels including additional
contributions to the plan as well as lower service cost and
interest cost as a result of a decrease in the number of active
participants in the Plan.
46
HSBC USA Inc.
Components of the net periodic benefit cost for our
postretirement benefits other than pensions are as follows:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Interest cost
|
|
$
|
1
|
|
|
$
|
1
|
|
Amortization of transition obligation
|
|
|
1
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net periodic postretirement benefit cost
|
|
$
|
2
|
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
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. All
extensions of credit by HSBC Bank USA to other HSBC affiliates
(other than FDIC-insured banks) are legally required to be
secured by eligible collateral. The following table presents
related party balances and the income and expense generated by
related party transactions:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
262
|
|
|
$
|
137
|
|
Interest bearing deposits with banks
|
|
|
1,526
|
|
|
|
1,287
|
|
Federal funds sold and securities purchased under resale
agreements
|
|
|
372
|
|
|
|
534
|
|
Trading
assets(1)
|
|
|
15,190
|
|
|
|
16,575
|
|
Loans
|
|
|
2,247
|
|
|
|
1,060
|
|
Other
|
|
|
1,618
|
|
|
|
655
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
21,215
|
|
|
$
|
20,248
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
15,743
|
|
|
$
|
10,337
|
|
Trading
liabilities(1)
|
|
|
17,508
|
|
|
|
19,211
|
|
Short-term borrowings
|
|
|
5,301
|
|
|
|
3,326
|
|
Other
|
|
|
2,158
|
|
|
|
1,553
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
40,710
|
|
|
$
|
34,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
47
HSBC USA Inc.
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Income/(Expense):
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
13
|
|
|
$
|
36
|
|
Interest expense
|
|
|
(13
|
)
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
-
|
|
|
$
|
26
|
|
|
|
|
|
|
|
|
|
|
HSBC affiliate income:
|
|
|
|
|
|
|
|
|
Fees and commissions:
|
|
|
|
|
|
|
|
|
HSBC Finance
|
|
$
|
19
|
|
|
$
|
2
|
|
HSBC Markets (USA) Inc. (HMUS)
|
|
|
2
|
|
|
|
3
|
|
Other HSBC affiliates
|
|
|
19
|
|
|
|
18
|
|
Fees on transfers of refund anticipation loans to HSBC Finance
|
|
|
-
|
|
|
|
4
|
|
Other HSBC affiliates income
|
|
|
6
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
Total affiliate income
|
|
$
|
46
|
|
|
$
|
33
|
|
|
|
|
|
|
|
|
|
|
Support services from HSBC affiliates:
|
|
|
|
|
|
|
|
|
HSBC Finance
|
|
$
|
154
|
|
|
$
|
224
|
|
HMUS
|
|
|
59
|
|
|
|
83
|
|
HSBC Technology & Services (USA) Inc.
(HTSU)
|
|
|
206
|
|
|
|
172
|
|
Other HSBC affiliates
|
|
|
42
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
Total support services from HSBC affiliates
|
|
$
|
461
|
|
|
$
|
510
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation expense with HSBC
|
|
$
|
9
|
|
|
$
|
11
|
|
|
|
|
|
|
|
|
|
|
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 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. The remaining 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
|
48
HSBC USA Inc.
|
|
|
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 substantially all new private label originations
from HSBC Finance. HSBC Finance continues to service these loans
for us for a fee. Information regarding these loans is
summarized in the table below.
|
|
|
In 2003 and 2004, we purchased approximately $3.7 billion
of residential mortgage loans from HSBC Finance. HSBC Finance
continues to service these loans for us for a fee. Information
regarding these loans is summarized in the table below.
|
The following table summarizes the private label card, private
label commercial and closed end loans, credit card (including
the GM and UP credit card portfolios) and real estate secured
loans serviced for us by HSBC Finance as well as the daily loans
purchased during the three months ended March 31, 2011 and
2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Label
|
|
|
Credit Cards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed
|
|
|
General
|
|
|
Union
|
|
|
|
|
|
Residential
|
|
|
|
|
|
|
Cards
|
|
|
End
Loans(1)
|
|
|
Motors
|
|
|
Privilege
|
|
|
Other
|
|
|
Mortgage
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in billions)
|
|
|
|
|
|
|
|
|
|
|
|
Loans serviced by HSBC Finance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011
|
|
$
|
11.9
|
|
|
$
|
.3
|
|
|
$
|
4.1
|
|
|
$
|
3.8
|
|
|
$
|
1.8
|
|
|
$
|
1.5
|
|
|
$
|
23.4
|
|
December 31, 2010
|
|
|
13.1
|
|
|
|
.4
|
|
|
|
4.5
|
|
|
|
4.1
|
|
|
|
2.0
|
|
|
|
1.5
|
|
|
|
25.6
|
|
Total loans purchased on a daily basis from HSBC Finance
during:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2011
|
|
|
3.2
|
|
|
|
-
|
|
|
|
3.1
|
|
|
|
.7
|
|
|
|
.9
|
|
|
|
-
|
|
|
|
7.9
|
|
Three months ended March 31, 2010
|
|
|
3.0
|
|
|
|
-
|
|
|
|
3.1
|
|
|
|
.7
|
|
|
|
1.0
|
|
|
|
-
|
|
|
|
7.8
|
|
|
|
|
(1) |
|
Private label commercial are
included in other commercial loans and private label closed end
loans are included in other consumer loans in Note 5,
Loans.
|
Fees paid for servicing these loan portfolios totaled
$150 million and $164 million during the three months
ended March 31, 2011 and 2010, respectively.
The GM and UP credit card receivables as well as the private
label credit card receivables that are purchased from HSBC
Finance on a daily basis at a sales price for each type of
portfolio determined using a fair value calculated semi-annually
in April and October by an independent third party based on the
projected future cash flows of the receivables. The projected
future cash flows are developed using various assumptions
reflecting the historical performance of the receivables and
adjusting for key factors such as the anticipated economic and
regulatory environment. The independent third party uses these
projected future cash flows and a discount rate to determine a
range of fair values. We use the mid-point of this range as the
sales price.
|
|
|
In the fourth quarter of 2009, an initiative was begun to
streamline the servicing of real estate secured receivables
across North America. As a result, certain functions that we had
previously performed for our mortgage customers are now being
performed by HSBC Finance for all North America mortgage
customers, including our mortgage customers. Additionally, we
are currently performing certain functions for all North America
mortgage customers where these functions had been previously
provided separately by each entity. During the three months
ended March 31, 2011 and 2010, we paid $2 million and
$1 million, respectively, for services we received from
HSBC Finance and received $2 million and $2 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
|
49
HSBC USA Inc.
|
|
|
these services. During the three months ended March 31,
2011, we received servicing revenue from HSBC Finance of
$17 million.
|
|
|
|
Excluding the servicing fees paid for the loan portfolios
discussed above, support services from HSBC affiliates also
includes charges by HSBC Finance under various service level
agreements for 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 $4 million and $60 million during the
three months ended March 31, 2011 and 2010, respectively.
|
|
|
Prior to 2011, our wholly-owned subsidiaries, HSBC Bank USA and
HSBC Trust Company (Delaware), N.A. (HTCD),
historically have been 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
was managed by HSBC Finance. By agreement, HSBC Bank USA and
HTCD historically processed applications, funded and
subsequently transferred a portion of these loans to HSBC
Finance. Prior to 2010, all loans were transferred to HSBC
Finance. In 2010, we kept a portion of these loans on our
balance sheet and earned a fee. The loans kept were transferred
to HSBC Finance at par only upon reaching a defined delinquency
status. We paid HSBC Finance a fee to service the loans we
retained on our balance sheet and to assume the credit risk
associated with these receivables. HSBC Bank USA and HTCD
originated approximately $9.3 billion of loans during the
three months ended March 31, 2010, of which
$3.1 billion was transferred to HSBC Finance. During the
three months ended March 31, 2010, we received fees of
$4 million 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 $62 million and
$56 million, respectively, during the three months ended
March 31, 2010.
|
In December 2010, as a result of Internal Revenue Service
decisions to stop providing information regarding certain unpaid
taxpayer obligations which historically served as a significant
part of the underwriting process, it was determined that tax
refund anticipation loans could no longer be offered in a safe
and sound manner and, therefore, we would no longer offer these
loans and other related products going forward. These products
have historically had an insignificant impact to our results of
operations.
|
|
|
Certain of our consolidated subsidiaries have revolving lines of
credit totaling $1.0 billion with HSBC Finance. There were
no balances outstanding under any of these lines of credit at
March 31, 2011 and December 31, 2010.
|
|
|
We extended a secured $1.5 billion uncommitted 364 day
credit facility to certain subsidiaries of HSBC Finance in
December 2009. This facility was renewed for an additional
364 days in December 2010. There were no balances
outstanding at March 31, 2011 and December 31, 2010.
|
|
|
We extended a $1.0 billion committed unsecured 364 day
credit facility to HSBC Bank Nevada, a subsidiary of HSBC
Finance, in December 2009. This facility was renewed for an
additional 364 days in December 2010. There were no
balances outstanding at March 31, 2011 and
December 31, 2010.
|
|
|
We serviced a portfolio of residential mortgage loans owned by
HSBC Finance with an outstanding principal balance of
$1.5 billion at December 31, 2009. During 2010, we
transferred servicing of this portfolio back to HSBC Finance
and, as a result, no longer service any loans for HSBC Finance.
The servicing fee income for servicing this portfolio was
$.3 million during the three months ended March 31,
2010 which is included in residential mortgage banking revenue
in the consolidated statement of income.
|
|
|
In the third quarter of 2009, we purchased $106 million of
Low Income Housing Tax Credit Investment Funds from HSBC Finance.
|
Transactions
Conducted with HMUS
|
|
|
We utilize HSBC Securities (USA) Inc. (HSI) 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
|
50
HSBC USA Inc.
|
|
|
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
March 31, 2011 and December 31, 2010. At
March 31, 2011 and December 31, 2010,
$1.6 billion and $867 million, respectively, was
outstanding on these loans and lines. Interest income on these
loans and lines totaled $2 million and $5 million
during the three months ended March 31, 2011 and 2010,
respectively.
|
Other
Transactions with HSBC Affiliates
|
|
|
In January 2011, we agreed to acquire Halbis Capital Management
(USA) Inc (Halbis), an asset management business, from an
affiliate, Halbis Capital Management (UK) Ltd. as part of a
reorganization which resulted in an increase to additional
paid-in-capital
of approximately $21 million.
|
|
|
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.
|
|
|
HNAH extended a $1.0 billion senior note to us in August
2009. This is a five year floating rate note which matures on
August 28, 2014 with interest due quarterly beginning in
November 2009. Interest expense on this note totaled
$4 million during the three months ended March 31,
2011 and 2010.
|
|
|
We have a committed unused line of credit with HSBC Bank plc of
$2.5 billion at March 31, 2011 and December 31,
2010.
|
|
|
We have an uncommitted unused line of credit with HSBC North
America Inc. (HNAI) of $150 million at
March 31, 2011 and December 31, 2010.
|
|
|
We have extended loans and lines of credit to various other HSBC
affiliates totaling $460 million at March 31, 2011 and
December 31, 2010. At March 31, 2011 and
December 31, 2010 there were no amounts outstanding on
these loans and lines of credit. Interest income on these lines
totaled $3 million during the three months ended
March 31, 2010.
|
|
|
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. No such commercial paper
was held at March 31, 2011. At December 31, 2010, we
held $75 million of commercial paper issued by an HSBC
affiliate sponsored ABCP conduit.
|
|
|
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
$806.6 billion and $774.1 billion at March 31,
2011 and December 31, 2010, respectively. The net credit
exposure (defined as the recorded fair value of derivative
receivables) related to the contracts was approximately
$15.2 billion and $16.6 billion at March 31, 2011
and December 31, 2010, respectively. Our Global Banking and
Markets business accounts for these transactions on a mark to
market basis, with the change in value of contracts with HSBC
affiliates substantially offset by the change in value of
related contracts entered into with unaffiliated third parties.
|
|
|
In December 2008, HSBC Bank USA entered into derivative
transactions with another HSBC affiliate to offset the risk
associated with the contingent loss trigger options
embedded in certain leveraged super senior (LSS)
tranched credit default swaps. These transactions are expected
to significantly reduce income volatility for HSBC Bank USA by
transferring the volatility to the affiliate. The recorded fair
value of derivative assets related to these derivative
transactions was approximately $11 million and
$25 million at March 31, 2011 and December 31,
2010, 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.
|
51
HSBC USA Inc.
|
|
|
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.
|
|
|
|
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 Postretirement 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 $9 million and $11 million during
the three months ended March 31, 2011 and 2010,
respectively.
|
|
|
We use HSBC Global Resourcing (UK) Ltd., an HSBC affiliate
located outside of the United States, to provide various support
services to our operations including among other areas customer
service, systems, collection and accounting functions. The
expenses related to these services of $6 million and
$7 million during the three months ended March 31,
2011 and 2010, respectively, are included as a component of
Support services from HSBC affiliates in the consolidated
statement of income and the table above. Prior to 2011, billing
for these services was processed by HTSU.
|
|
|
We did not pay any dividends to our immediate parent, HNAI, on
our common stock during the three months ended March 31,
2011 and 2010.
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
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.
|
|
$
|
22,880
|
|
|
|
10.00
|
%
|
|
|
18.72
|
%
|
|
$
|
22,070
|
|
|
|
10.00
|
%
|
|
|
18.14
|
%
|
HSBC Bank USA
|
|
|
23,217
|
|
|
|
10.00
|
|
|
|
19.22
|
|
|
|
22,177
|
|
|
|
10.00
|
|
|
|
18.41
|
|
Tier 1 capital ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HSBC USA Inc.
|
|
|
15,158
|
|
|
|
6.00
|
|
|
|
12.40
|
|
|
|
14,355
|
|
|
|
6.00
|
|
|
|
11.80
|
|
HSBC Bank USA
|
|
|
16,011
|
|
|
|
6.00
|
|
|
|
13.25
|
|
|
|
14,970
|
|
|
|
6.00
|
|
|
|
12.43
|
|
Tier 1 leverage ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HSBC USA Inc.
|
|
|
15,158
|
|
|
|
3.00
|
(2)
|
|
|
8.03
|
|
|
|
14,355
|
|
|
|
3.00
|
(2)
|
|
|
7.87
|
|
HSBC Bank USA
|
|
|
16,011
|
|
|
|
5.00
|
|
|
|
8.59
|
|
|
|
14,970
|
|
|
|
5.00
|
|
|
|
8.28
|
|
Risk weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HSBC USA Inc.
|
|
|
122,247
|
|
|
|
|
|
|
|
|
|
|
|
121,645
|
|
|
|
|
|
|
|
|
|
HSBC Bank USA
|
|
|
120,795
|
|
|
|
|
|
|
|
|
|
|
|
120,473
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
We did not receive any cash capital contributions from our
immediate parent, HNAI, during the first three months of 2011.
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
52
HSBC USA Inc.
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 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, of which
$103 million was sold during the first quarter of 2010.
Capital ratios and amounts at March 31, 2011 and
December 31, 2010 in the table above reflect this
reporting. At March 31, 2011, the remaining purchased
receivables subject to this requirement totaled
$2.8 billion of which $583 million are considered to
be low-quality assets.
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 March 31, 2011
and December 31, 2010, deferred tax assets of
$50 million and $360 million, respectively, were
excluded in the computation of regulatory capital.
16. Business
Segments
As discussed in our 2010
Form 10-K,
we initiated a process in late 2010 to re-evaluate the financial
information used to manage our business including the scope and
content of the financial data being reported to our management.
During the first quarter of 2011, we completed our evaluation
and decided we would no longer manage and evaluate the
performance of the receivables purchased from HSBC Finance as a
separate operating segment. Rather, we would manage and evaluate
the performance of these assets as a component of our Personal
Financial Services operating segment, consistent with
HSBCs globally defined business segments. As a result,
beginning in the first quarter of 2011, our management reporting
was changed to reflect this decision and going forward we will
now report our financial results under four reportable segments
which are generally based upon customer groupings and the
products and services offered: Personal Financial Services,
Commercial Banking, Global Banking and Markets and Private
Banking. Segment financial information has been restated for all
periods presented to reflect this new segmentation. There have
been no other changes in the basis of our segmentation or
measurement of segment profit as compared with the presentation
in our 2010
Form 10-K.
Our segment results are reported on a continuing operations
basis.
HSBC previously announced that with effect from March 1,
2011, Retail Banking and Wealth Management would be managed as a
single global business. This business is the existing Personal
Financial Services with Asset Management moving from Global
Banking and Markets to this new single business. Therefore, to
coincide with the change in our management reporting effective
beginning in the second quarter of 2011, we will change the name
of our Personal Financial Services segment to Retail Banking and
Wealth Management and will include the results of Asset
Management in this segment for all periods presented.
Net interest income of each segment represents the difference
between actual interest earned on assets and interest incurred
on liabilities of the segment, adjusted for a funding charge or
credit. Segments are charged a cost to fund assets (e.g.
customer loans) and receive a funding credit for funds provided
(e.g. customer deposits) based on equivalent market rates. The
objective of these charges/credits is to transfer interest rate
risk from the segments to one centralized unit in Global Banking
and Markets and more appropriately reflect the profitability of
segments.
Certain other revenue and operating expense amounts are also
apportioned among the business segments based upon the benefits
derived from this activity or the relationship of this activity
to other segment activity. These inter-segment transactions are
accounted for as if they were with third parties.
Our segment results are presented under IFRSs (a
non-U.S. GAAP
financial measure) on a legal entity basis (IFRS
Basis) as operating results are monitored and reviewed,
trends are evaluated and decisions about allocating resources,
such as employees are made almost exclusively on an IFRSs basis
since we report results to our parent,
53
HSBC USA Inc.
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 Basis segment results to the
U.S. GAAP consolidated totals are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IFRS Consolidated Amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments/
|
|
|
|
|
|
|
|
|
IFRS
|
|
|
U.S. GAAP
|
|
|
|
|
|
|
|
|
|
Global Banking
|
|
|
|
|
|
|
|
|
Reconciling
|
|
|
|
|
|
IFRS
|
|
|
Reclass-
|
|
|
Consolidated
|
|
|
|
PFS
|
|
|
CMB
|
|
|
and Markets
|
|
|
PB
|
|
|
Other
|
|
|
Items
|
|
|
Total
|
|
|
Adjustments(4)
|
|
|
ifications(5)
|
|
|
Totals
|
|
|
|
|
|
(In millions)
|
|
|
Three Months Ended March 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest
income(1)
|
|
$
|
656
|
|
|
$
|
175
|
|
|
$
|
132
|
|
|
$
|
46
|
|
|
$
|
(64
|
)
|
|
$
|
(8
|
)
|
|
$
|
937
|
|
|
$
|
61
|
|
|
$
|
46
|
|
|
$
|
1,044
|
|
Other operating income
|
|
|
27
|
|
|
|
105
|
|
|
|
429
|
|
|
|
36
|
|
|
|
(36
|
)
|
|
|
8
|
|
|
|
569
|
|
|
|
41
|
|
|
|
114
|
|
|
|
724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
|
683
|
|
|
|
280
|
|
|
|
561
|
|
|
|
82
|
|
|
|
(100
|
)
|
|
|
-
|
|
|
|
1,506
|
|
|
|
102
|
|
|
|
160
|
|
|
|
1,768
|
|
Loan impairment
charges(3)
|
|
|
151
|
|
|
|
(30
|
)
|
|
|
(17
|
)
|
|
|
(9
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
95
|
|
|
|
(1
|
)
|
|
|
12
|
|
|
|
106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
532
|
|
|
|
310
|
|
|
|
578
|
|
|
|
91
|
|
|
|
(100
|
)
|
|
|
-
|
|
|
|
1,411
|
|
|
|
103
|
|
|
|
148
|
|
|
|
1,662
|
|
Operating
expenses(2)
|
|
|
458
|
|
|
|
176
|
|
|
|
242
|
|
|
|
64
|
|
|
|
17
|
|
|
|
-
|
|
|
|
957
|
|
|
|
(5
|
)
|
|
|
148
|
|
|
|
1,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit before income tax expense
|
|
$
|
74
|
|
|
$
|
134
|
|
|
$
|
336
|
|
|
$
|
27
|
|
|
$
|
(117
|
)
|
|
$
|
-
|
|
|
$
|
454
|
|
|
$
|
108
|
|
|
$
|
-
|
|
|
$
|
562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at end of period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
49,926
|
|
|
$
|
19,495
|
|
|
$
|
178,641
|
|
|
$
|
6,139
|
|
|
$
|
105
|
|
|
$
|
-
|
|
|
$
|
254,306
|
|
|
$
|
(57,074
|
)
|
|
$
|
(769
|
)
|
|
$
|
196,463
|
|
Total loans, net
|
|
|
37,591
|
|
|
|
14,946
|
|
|
|
25,568
|
|
|
|
4,281
|
|
|
|
-
|
|
|
|
-
|
|
|
|
82,386
|
|
|
|
(2,725
|
)
|
|
|
(9,775
|
)
|
|
|
69,886
|
|
Goodwill
|
|
|
876
|
|
|
|
368
|
|
|
|
480
|
|
|
|
326
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,050
|
|
|
|
576
|
|
|
|
-
|
|
|
|
2,626
|
|
Total deposits
|
|
|
48,529
|
|
|
|
25,078
|
|
|
|
37,931
|
|
|
|
11,970
|
|
|
|
-
|
|
|
|
-
|
|
|
|
123,508
|
|
|
|
(3,206
|
)
|
|
|
12,459
|
|
|
|
132,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest
income(1)
|
|
$
|
764
|
|
|
$
|
188
|
|
|
$
|
142
|
|
|
$
|
46
|
|
|
$
|
(9
|
)
|
|
$
|
(8
|
)
|
|
$
|
1,123
|
|
|
$
|
59
|
|
|
$
|
18
|
|
|
$
|
1,200
|
|
Other operating income
|
|
|
66
|
|
|
|
154
|
|
|
|
412
|
|
|
|
35
|
|
|
|
12
|
|
|
|
8
|
|
|
|
687
|
|
|
|
27
|
|
|
|
209
|
|
|
|
923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
|
830
|
|
|
|
342
|
|
|
|
554
|
|
|
|
81
|
|
|
|
3
|
|
|
|
-
|
|
|
|
1,810
|
|
|
|
86
|
|
|
|
227
|
|
|
|
2,123
|
|
Loan impairment
charges(3)
|
|
|
207
|
|
|
|
1
|
|
|
|
(76
|
)
|
|
|
(11
|
)
|
|
|
2
|
|
|
|
-
|
|
|
|
123
|
|
|
|
100
|
|
|
|
(12
|
)
|
|
|
211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
623
|
|
|
|
341
|
|
|
|
630
|
|
|
|
92
|
|
|
|
1
|
|
|
|
-
|
|
|
|
1,687
|
|
|
|
(14
|
)
|
|
|
239
|
|
|
|
1,912
|
|
Operating
expenses(2)
|
|
|
300
|
|
|
|
150
|
|
|
|
200
|
|
|
|
55
|
|
|
|
15
|
|
|
|
-
|
|
|
|
720
|
|
|
|
95
|
|
|
|
239
|
|
|
|
1,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit before income tax expense
|
|
$
|
323
|
|
|
$
|
191
|
|
|
$
|
430
|
|
|
$
|
37
|
|
|
$
|
(14
|
)
|
|
$
|
-
|
|
|
$
|
967
|
|
|
$
|
(109
|
)
|
|
$
|
-
|
|
|
$
|
858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at end of period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
48,592
|
|
|
$
|
15,958
|
|
|
$
|
169,518
|
|
|
$
|
4,859
|
|
|
$
|
15
|
|
|
$
|
-
|
|
|
$
|
238,942
|
|
|
$
|
(52,678
|
)
|
|
$
|
(40
|
)
|
|
$
|
186,224
|
|
Total loans, net
|
|
|
41,746
|
|
|
|
14,312
|
|
|
|
18,538
|
|
|
|
4,162
|
|
|
|
-
|
|
|
|
-
|
|
|
|
78,758
|
|
|
|
(2,175
|
)
|
|
|
(4,509
|
)
|
|
|
72,074
|
|
Goodwill
|
|
|
876
|
|
|
|
368
|
|
|
|
480
|
|
|
|
326
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,050
|
|
|
|
576
|
|
|
|
-
|
|
|
|
2,626
|
|
Total deposits
|
|
|
49,273
|
|
|
|
23,097
|
|
|
|
30,602
|
|
|
|
10,990
|
|
|
|
-
|
|
|
|
-
|
|
|
|
113,962
|
|
|
|
(2,581
|
)
|
|
|
13,313
|
|
|
|
124,694
|
|
|
|
|
(1) |
|
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 Treasury and more appropriately reflect the
profitability of segments.
|
|
(2) |
|
Expenses for the segments include
fully apportioned corporate overhead expenses.
|
|
(3) |
|
The provision assigned to the
segments is based on the segments net charge offs and the
change in allowance for credit losses.
|
|
(4) |
|
Represents adjustments associated
with differences between IFRSs and U.S. GAAP basis of accounting.
|
|
(5) |
|
Represents differences in financial
statement presentation between IFRSs and U.S. GAAP.
|
Further discussion of the differences between IFRSs and
U.S. GAAP are presented in Item 2,
Managements Discussion and Analysis of Financial
Condition and Results of Operations of this
Form 10-Q
under the caption Basis of Reporting. A summary of
the significant differences between U.S. GAAP and IFRSs as
they impact our results are presented below:
Net
Interest Income
Effective interest rate The calculation of
effective interest rates under IFRS 39, Financial
Instruments: Recognition and Measurement (IAS 39),
requires an estimate of changes in estimated contractual cash
flows, including fees and points paid or recovered between
parties to the contract that are an integral part of
54
HSBC USA Inc.
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 operating income 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 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 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
(MasterCard Class B shares and Visa Class B shares),
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 loans
continue to be accounted for in accordance with 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 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 as
provision for credit losses while the component related to
interest rates and liquidity factors is reported in the
consolidated statement of income 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
55
HSBC USA Inc.
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. All subsequent adjustments to fair
value are 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 discounting of cash flows including recovery estimates at
the original effective interest rate of the pool of customer
loans. The amount of impairment relating to the discounting of
future cash flows unwinds with the passage of time, and is
recognized in interest income. Also under IFRSs, if the
recognition of a write-down to net realizable value on secure
loans decreases because collateral values have improved and the
improvement can be related objectively to an event occurring
after recognition of the write-down, such write-down can be
reversed, which is not permitted under U.S. GAAP.
Additionally under IFRSs, future recoveries on charged-off loans
or loans written down to net realizable value less cost to
obtain title and sell 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. Under IFRSs, interest on impaired
loans is recorded at the effective interest rate on the customer
loans balance net of impairment allowances, and therefore
reflects the collectibility of the loans.
As discussed above, under U.S. GAAP, the credit risk
component of the 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 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 exceeded the higher of the
projected benefit obligation or fair value of plan assets 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
56
HSBC USA Inc.
income recognition. Under US GAAP, these changes were considered
to be a negative plan amendment which resulted in no immediate
income recognition.
Share-based bonus arrangements Under IFRSs,
the recognition of compensation expense related to share-based
bonuses begins on January 1 of the current year for awards
expected to be granted in the first quarter of the following
year. Under U.S. GAAP, the recogntion of compensation
expense related to share-based bonuses does not begin until the
date the awards are granted.
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, under U.S. GAAP we
were determined to be the primary beneficiary and consolidated a
commercial paper conduit effective January 1, 2010. However
in 2011, changes involving liquidity asset purchase agreements
were made which resulted in us no longer being considered the
primary beneficiary and this commercial paper conduit was again
deconsolidated at March 31, 2011. 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 resulted in the consolidation
of one commercial paper conduit managed by HSBC Bank USA
effective January 1, 2010, however in March 2011, this
commercial paper conduit was again deconsolidated as discussed
more fully below.
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. A SPE can be a VIE, which is an entity that lacks
sufficient equity investment at risk to
57
HSBC USA Inc.
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.
Consolidated VIEs The following table
summarizes the assets and liabilities of our consolidated VIEs
as of March 31, 2011 and December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011
|
|
|
December 31, 2010
|
|
|
|
Consolidated
|
|
|
Consolidated
|
|
|
Consolidated
|
|
|
Consolidated
|
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Assets
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Asset-backed commercial paper conduit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits with banks
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
676
|
|
|
$
|
-
|
|
Held-to-maturity
securities
|
|
|
-
|
|
|
|
-
|
|
|
|
881
|
|
|
|
-
|
|
Loans, net
|
|
|
-
|
|
|
|
-
|
|
|
|
1,220
|
|
|
|
-
|
|
Other assets
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
|
|
-
|
|
Short-term borrowings
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,022
|
|
Other liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
-
|
|
|
|
-
|
|
|
|
2,780
|
|
|
|
3,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitization vehicles:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
|
11,658
|
|
|
|
-
|
|
|
|
12,963
|
|
|
|
-
|
|
Other assets
|
|
|
189
|
|
|
|
-
|
|
|
|
(1,055
|
)
|
|
|
-
|
|
Long-term debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
150
|
|
Deposits
|
|
|
-
|
|
|
|
23
|
|
|
|
-
|
|
|
|
20
|
|
Other liabilities
|
|
|
-
|
|
|
|
1,135
|
|
|
|
-
|
|
|
|
261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
11,847
|
|
|
|
1,158
|
|
|
|
11,908
|
|
|
|
431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Low income housing limited liability partnership:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits with banks
|
|
|
90
|
|
|
|
-
|
|
|
|
83
|
|
|
|
-
|
|
Other assets
|
|
|
501
|
|
|
|
-
|
|
|
|
509
|
|
|
|
-
|
|
Long term debt
|
|
|
-
|
|
|
|
55
|
|
|
|
-
|
|
|
|
55
|
|
Other liabilities
|
|
|
-
|
|
|
|
116
|
|
|
|
-
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
591
|
|
|
|
171
|
|
|
|
592
|
|
|
|
164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
12,438
|
|
|
$
|
1,329
|
|
|
$
|
15,280
|
|
|
$
|
3,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58
HSBC USA Inc.
Asset-backed commercial paper conduit 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 our commercial paper conduits, otherwise known as 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 various liquidity asset purchase agreements
(LAPAs), to provide liquidity support for the
commercial paper notes issued to fund the asset purchases. Under
the new VIE consolidation guidance effective in 2010, we began
to consolidate Bryant Park in our financial statements on
January 1, 2010 as we were 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 facilities Bryant Park provided in the form of
LAPAs 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 LAPAs, we
are obligated, subject to certain conditions, to purchase
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.
During the first quarter of 2011, in order to consolidate and
streamline conduit administration across HSBC as well as to
reduce risk and achieve operational and capital efficiencies, we
assigned a significant majority all of our LAPAs to HSBC Bank
plc. As a result, we no longer have a controlling financial
interest in Bryant Park and beginning in March 2011, we no
longer consolidate Bryant Park.
The deconsolidation of Bryant Park in March 2011 resulted in the
removal of $2.4 billion of assets (primarily commercial
loans and
held-to-maturity
securities) and $2.5 billion of liabilities (primarily
short-term borrowings). In addition, $142 million of
unrealized losses on
held-to-maturity
securities were reversed from accumulated other comprehensive
income (loss), while a reserve of $94 million was
established relating to the liquidity facilities still provided
by HSBC Bank USA with respect to certain securities held by
Bryant Park. The impact of deconsolidation on our results of
operations was not significant.
Securitization vehicles We have historically
utilized 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 transferred 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.
Certain assets of the consolidated VIEs serve as collateral for
the obligations of the VIE. These assets include loans of
$233 million at December 31, 2010. There were no such
assets at March 31, 2011. Debt securities issued by these
VIEs are reported as secured financings in long-term debt. The
holders of the debt securities issued by these vehicles have no
recourse to our general credit. The securitization vehicles also
held obligations to repay intercompany loans totaling
$7.9 billion and $8.8 billion at March 31, 2011
and December 31, 2010, respectively, related to the
transfer of receivables to the securitization vehicles which are
eliminated in consolidation and therefore are not presented in
the table above.
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
59
HSBC USA Inc.
projects. The LLP was deemed to be a VIE as it does not have
sufficient equity investment at risk to finance its activities.
Upon entering into this transaction, we concluded that we are
the primary beneficiary of the LLP due to the nature of our
continuing involvement and, as a result, consolidate the LLP and
report the equity interest issued to the third party investor as
other liabilities and the consolidated assets of the LLP in
other assets in our consolidated financial statements. The
investments held by the LLP represent equity investments in the
underlying low income housing partnerships for which the LLP
applies equity-method accounting. The LLP does not consolidate
the underlying partnerships because it does not have the power
to direct the activities of the partnerships that most
significantly impact the economic performance of the
partnerships.
Unconsolidated VIEs We also have variable
interests with other VIEs that were not consolidated at
March 31, 2011 and December 31, 2010 because we were
not the primary beneficiary. The following table provides
additional information on those unconsolidated VIEs, the
variable interests held by us and our maximum exposure to loss
arising from our involvements in those VIEs as of March 31,
2011 and December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable Interests
|
|
|
Variable Interests
|
|
|
Total Assets in
|
|
|
Maximum
|
|
|
|
Held Classified
|
|
|
Held Classified
|
|
|
Unconsolidated
|
|
|
Exposure
|
|
|
|
as Assets
|
|
|
as Liabilities
|
|
|
VIEs
|
|
|
to Loss
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
As of March 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed commercial paper conduits
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
14,045
|
|
|
$
|
911
|
|
Structured note vehicles
|
|
|
575
|
|
|
|
84
|
|
|
|
6,815
|
|
|
|
764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
575
|
|
|
$
|
84
|
|
|
$
|
20,860
|
|
|
$
|
1,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed commercial paper conduits
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
13,516
|
|
|
$
|
1,856
|
|
Structured note vehicles
|
|
|
537
|
|
|
|
87
|
|
|
|
6,734
|
|
|
|
900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
537
|
|
|
$
|
87
|
|
|
$
|
20,250
|
|
|
$
|
2,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Information on the types of variable interest entities with
which we are involved, the nature of our involvement and the
variable interests held in those entities is presented below.
Asset-backed commercial paper
conduits Separately from the facility discussed
above, we provide liquidity facilities to a number of
multi-seller and single-seller asset-backed commercial paper
conduits (ABCP conduits) sponsored by HSBC
affiliates and by third parties. These conduits support the
financing needs of customers by facilitating the customers
access to commercial paper markets.
Customers sell financial assets, such as trade receivables, to
ABCP conduits, which fund the purchases by issuing short-term
highly-rated commercial paper collateralized by the assets
acquired. In a multi-seller conduit, any number of companies may
be originating and selling assets to the conduit whereas a
single-seller conduit acquires assets from a single company. We,
along with other financial institutions, provide liquidity
facilities to ABCP conduits in the form of lines of credit or
asset purchase commitments. Liquidity facilities provided to
multi-seller conduits support transactions associated with a
specific seller of assets to the conduit and we would only be
required to provide support in the event of certain triggers
associated with those transactions and assets. Liquidity
facilities provided to single-seller conduits are not identified
with specific transactions or assets and we would be required to
provide support upon occurrence of certain triggers that
generally affect the conduit as a whole. Our obligations are
generally pari passu with those of other institutions that also
provide liquidity support to the same conduit or for the same
transactions. We do not provide any program-wide credit
enhancements to ABCP conduits.
Each seller of assets to an ABCP conduit typically provides
collateral in the form of excess assets and, therefore, bears
the risk of first loss related to the specific assets
transferred. We do not transfer our own assets to the conduits.
We have no ownership interests in, perform no administrative
duties for, and do not service any of the assets held by the
conduits. We are not the primary beneficiary and do not
consolidate any of the ABCP conduits to which we provide
liquidity facilities, other than Bryant Park as discussed above.
Credit risk related to the liquidity facilities
60
HSBC USA Inc.
provided is managed by subjecting them to our normal
underwriting and risk management processes. The
$911 million 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.
Structured note vehicles Our involvement in
structured note vehicles includes entering into derivative
transactions such as interest rate and currency swaps, and
investing in their debt instruments. With respect to several of
these VIEs, we hold variable interests in the form of total
return swaps entered into in connection with the transfer of
certain assets to the VIEs. In these transactions, we
transferred financial assets from our trading portfolio to the
VIEs and entered into total return swaps under which we receive
the total return on the transferred assets and pay a market rate
of return. The transfers of assets in these transactions do not
qualify as sales under the applicable accounting literature and
are accounted for as secured borrowings. Accordingly, the
transferred assets continue to be recognized as trading assets
on our balance sheet and the funds received are recorded as
liabilities in long-term debt. As of March 31, 2011, we
recorded approximately $118 million of trading assets and
$139 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,
2010, we recorded approximately $126 million of trading assets
and $147 million of long-term liabilities on our balance
sheet as a result of failed sale accounting
treatment for certain transfers of financial assets. 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 VIEs. The investments are
transacted at arms-length and decisions to invest are
based on credit analysis on underlying collateral assets or the
issuer. We are a passive investor in these issuers and do not
have the power to direct the activities of these issuers. As
such, we do not consolidate these securitization entities.
Additionally, we do not have other involvements in servicing or
managing the collateral assets or provide financial or liquidity
support to these issuers that potentially give rise to risk of
loss exposure. These investments are an integral part of the
disclosure in Note 4, Securities and
Note 20, Fair Value Measurements and,
therefore, are not disclosed in this note to avoid redundancy.
18. Guarantee
Arrangements 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.
61
HSBC USA Inc.
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
March 31, 2011 and December 31, 2010. Following the
table is a description of the various arrangements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011
|
|
|
December 31, 2010
|
|
|
|
Carrying
|
|
|
Notional/Maximum
|
|
|
Carrying
|
|
|
Notional/Maximum
|
|
|
|
Value
|
|
|
Exposure to Loss
|
|
|
Value
|
|
|
Exposure to Loss
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Credit
derivatives(1)(4)
|
|
$
|
561
|
|
|
$
|
359,611
|
|
|
$
|
(831
|
)
|
|
$
|
354,780
|
|
Financial standby letters of credit, net of
participations(2)(3)
|
|
|
-
|
|
|
|
4,441
|
|
|
|
-
|
|
|
|
4,264
|
|
Performance (non-financial)
guarantees(3)
|
|
|
-
|
|
|
|
3,414
|
|
|
|
-
|
|
|
|
2,895
|
|
Liquidity asset purchase
agreements(3)
|
|
|
-
|
|
|
|
911
|
|
|
|
-
|
|
|
|
1,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
561
|
|
|
$
|
368,377
|
|
|
$
|
(831
|
)
|
|
$
|
363,795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes $52.3 billion and
$49.4 billion issued for the benefit of HSBC affiliates at
March 31, 2011 and December 31, 2010, respectively.
|
|
(2) |
|
Includes $582 million and
$486 million issued for the benefit of HSBC affiliates at
March 31, 2011 and December 31, 2010, respectively.
|
|
(3) |
|
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.
|
|
(4) |
|
For credit derivatives, the maximum
loss is represented by the notional amounts without
consideration of mitigating effects from collateral or recourse
arrangements.
|
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 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
62
HSBC USA Inc.
on a net basis and, as such, retain no or a limited net sell
protection position at any time. The following table summarizes
our net credit derivative positions as of March 31, 2011
and December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011
|
|
|
December 31, 2010
|
|
|
|
Carrying (Fair)
|
|
|
|
|
|
Carrying (Fair)
|
|
|
|
|
|
|
Value
|
|
|
Notional
|
|
|
Value
|
|
|
Notional
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Sell-protection credit derivative positions
|
|
$
|
561
|
|
|
$
|
359,611
|
|
|
$
|
(831
|
)
|
|
$
|
354,780
|
|
Buy-protection credit derivative positions
|
|
|
222
|
|
|
|
354,837
|
|
|
|
1,631
|
|
|
|
346,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
position(1)
|
|
$
|
783
|
|
|
$
|
4,774
|
|
|
$
|
800
|
|
|
$
|
8,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. Furthermore, the credit loss triggering events for
individual sell protection credit derivatives may not be the
same or occur in the same period as those of the buy protection
credit derivatives thereby not providing an exact offset.
|
Standby letters of credit A standby letter of
credit is issued to a third party for the benefit of a customer
and is a guarantee that the customer will perform or satisfy
certain obligations under a contract. It irrevocably obligates
us to pay a specified amount to the third party beneficiary if
the customer fails to perform the contractual obligation. We
issue two types of standby letters of credit: performance and
financial. A performance standby letter of credit is issued
where the customer is required to perform some nonfinancial
contractual obligation, such as the performance of a specific
act, whereas a financial standby letter of credit is issued
where the customers contractual obligation is of a
financial nature, such as the repayment of a loan or debt
instrument. As of March 31, 2011, the total amount of
outstanding financial standby letters of credit (net of
participations) and performance guarantees were
$4.4 billion and $3.4 billion, respectively. As of
December 31, 2010, the total amount of outstanding
financial standby letters of credit (net of participations) and
performance guarantees were $4.3 billion and
$2.9 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 value of the
stand-ready obligation to perform under these guarantees,
amounting to $49 million and $47 million at
March 31, 2011 and December 31, 2010, respectively.
Also included in other liabilities is an allowance for credit
losses on unfunded standby letters of credit of $27 million
and $26 million at March 31, 2011 and
December 31, 2010, respectively.
Below is a summary of the credit ratings of credit risk related
guarantees including the credit ratings of counterparties
against which we sold credit protection and financial standby
letters of credit as of March 31, 2011 as an indicative
proxy of payment risk:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Ratings of the Obligors or the Transactions
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
|
|
|
Investment
|
|
|
Non-Investment
|
|
|
|
|
Notional/Contractual Amounts
|
|
(in years)
|
|
|
Grade
|
|
|
Grade
|
|
|
Total
|
|
|
|
|
|
|
|
|
(dollars are in millions)
|
|
|
|
|
|
Sell-protection Credit
Derivatives(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single name CDS
|
|
|
2.9
|
|
|
$
|
151,780
|
|
|
$
|
70,598
|
|
|
$
|
222,378
|
|
Structured CDS
|
|
|
2.4
|
|
|
|
71,299
|
|
|
|
4,693
|
|
|
|
75,992
|
|
Index credit derivatives
|
|
|
3.3
|
|
|
|
47,176
|
|
|
|
1,268
|
|
|
|
48,444
|
|
Total return swaps
|
|
|
9.0
|
|
|
|
12,460
|
|
|
|
337
|
|
|
|
12,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
|
|
|
|
282,715
|
|
|
|
76,896
|
|
|
|
359,611
|
|
Standby Letters of
Credit(2)
|
|
|
1.4
|
|
|
|
7,161
|
|
|
|
694
|
|
|
|
7,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
289,876
|
|
|
$
|
77,590
|
|
|
$
|
367,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63
HSBC USA Inc.
|
|
|
(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
March 31, 2011 and December 31, 2010, we have issued
$911 million and $1.9 billion, respectively, of
liquidity facilities to provide liquidity support to the
commercial paper issued by various conduits. The decline since
December 31, 2010 reflects the assignment of a significant
majority of these facilities to HSBC Bank plc during the first
quarter of 2011. See Note 17, Variable Interest
Entities, for further information.
Structured 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 due at maturity. We manage such
shortfall risk by, among other things, establishing structural
and investment constraints. Additionally, the structures require
liquidation of the underlying reference portfolio when certain
pre-determined triggers are breached and the proceeds from
liquidation are required to be invested in zero-coupon bonds
that would generate sufficient funds to repay the principal
amount upon maturity. We may be exposed to market (gap) risk at
liquidation and, as such, may be required to make up the
shortfall between the liquidation proceeds and the purchase
price of the zero coupon bonds. These structured products are
accounted for on a fair value basis. The notional amounts of
these structured products were not material as of March 31,
2011 and December 31, 2010. We have not made any payments
under the terms of these structured products and we consider the
probability of such payments to be remote.
Visa Covered Litigation 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
64
HSBC USA Inc.
(ii) the third anniversary of the IPO, whichever is later.
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 2009 and 2010,
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 collectively an
additional $2.0 billion into the escrow account. As a
result, we re-evaluated our contingent liability recorded
relating to this litigation and reduced our liability by
$24 million during 2009 and 2010. In March 2011, Visa again
exercised its rights to sell shares of existing Class B
shareholders and funded an additional $400 million into the
escrow account and we reduced our liability by $5 million.
At March 31, 2011, the net contingent liability recorded
was $4 million. 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.
Mortgage
Loan Repurchase Obligations
Sale of mortgage loans In the ordinary course
of business, we originate and sell mortgage loans primarily to
government sponsored entities (GSEs) 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 breach of representations and warranties are discovered
and repurchase is demanded.
We typically first become aware that a GSE or other third party
is evaluating a particular loan for repurchase when we receive a
request to review the underlying loan file. Generally, the
reviews focus on severely delinquent loans to identify alleged
fraud, misrepresentation or file documentation issues. Upon
completing its review, the GSE or other third party may submit a
repurchase demand. Historically, most file requests have not
resulted in repurchase demands. After receipt of a repurchase
demand, we perform a detailed evaluation of the substance of the
request and appeal any claim that we believe is either
unsubstantiated or contains errors, leveraging both dedicated
internal as well as retained external resources. In many cases,
we ultimately are not required to repurchase a loan as we are
able to resolve the purported defect. From initial inquiry to
ultimate resolution, a typical case is usually resolved within
12 months. Acceptance of a repurchase demand will involve
either a) repurchase of the loan at the unpaid principal
balance plus accrued interest or b) reimbursement for any
realized loss on a liquidated property (make-whole
payment).
To date, repurchase demands we have received primarily relate to
prime loans sourced during 2004 through 2008 from the legacy
broker channel which we exited from in late 2008. Loans sold to
GSEs and other third parties originated in 2004 through 2008
subject to representations and warranties for which we may be
liable had an outstanding principal balance of approximately
$21.8 billion and $23.0 billion at March 31, 2011
and December 31, 2010, respectively, including
$13.6 billion and $14.3 billion, respectively, of
loans sourced from our legacy broker channel.
65
HSBC USA Inc.
The following table shows the trend in repurchase demands
received on loans sold to GSEs and other third parties by loan
origination vintage during the three months ended March 31,
2011 and 2010, respectively:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Pre- 2004
|
|
$
|
1
|
|
|
$
|
3
|
|
2004
|
|
|
4
|
|
|
|
4
|
|
2005
|
|
|
8
|
|
|
|
6
|
|
2006
|
|
|
14
|
|
|
|
11
|
|
2007
|
|
|
40
|
|
|
|
47
|
|
2008
|
|
|
29
|
|
|
|
31
|
|
Post 2008
|
|
|
24
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Total repurchase demands
received(1)
|
|
$
|
120
|
|
|
$
|
104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes repurchase demands on
loans sourced from our legacy broker channel of $85 million
and $93 million at March 31, 2011 and 2010,
respectively.
|
The following table provides information about outstanding
repurchase demands received from GSEs and other third parties at
March 31, 2011 and December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
GSEs
|
|
$
|
91
|
|
|
$
|
92
|
|
Others
|
|
|
30
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
Total(1)
|
|
$
|
121
|
|
|
$
|
115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes repurchase demands on
loans sourced from our legacy broker channel of $86 million
and $87 million at March 31, 2011 and
December 31, 2010, respectively.
|
In estimating our repurchase liability arising from breaches of
representations and warranties, we consider the following:
|
|
|
|
|
The level of outstanding repurchase demands in inventory and our
historical defense rate;
|
|
|
|
The level of outstanding requests for loan files and the related
historical repurchase request conversion rate and defense rate
on such loans; and
|
|
|
|
The level of potential future demands based on historical
conversion rates of loans which we have not received a loan file
request but are two or more payments delinquent or expected to
become delinquent at an estimated conversion rate.
|
The following table summarizes the change in our estimated
repurchase liability for loans sold to the GSEs and other third
parties during the three months ended March 31, 2011 and
2010 for obligations arising from the breach of representations
and warranties associated with the sale of these loans:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Balance at beginning of period
|
|
$
|
262
|
|
|
$
|
66
|
|
Increase in liability recorded through earnings
|
|
|
44
|
|
|
|
73
|
|
Realized losses
|
|
|
(36
|
)
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
270
|
|
|
$
|
117
|
|
|
|
|
|
|
|
|
|
|
66
HSBC USA Inc.
Our reserve for potential repurchase liability exposures relates
primarily to previously originated mortgages through broker
channels. Our mortgage repurchase liability of $270 million
at March 31, 2011 represents our best estimate of the loss
that has been incurred resulting from various representations
and warranties in the contractual provisions of our mortgage
loan sales. Because the level of mortgage loan repurchase losses
are dependent upon economic factors, investor demand strategies
and other external risk factors such as housing market trends
that may change, the level of the liability for mortgage loan
repurchase losses requires significant judgment. As these
estimates are influenced by factors outside our control, there
is uncertainty inherent in these estimates making it reasonably
possible that they could change.
Pledged Assets Pledged assets included in the
consolidated balance sheet are summarized in the following table.
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Interest bearing deposits with banks
|
|
$
|
1,835
|
|
|
$
|
1,463
|
|
Trading
assets(1)
|
|
|
304
|
|
|
|
319
|
|
Securities
available-for-sale(2)
|
|
|
18,332
|
|
|
|
19,765
|
|
Securities held to maturity
|
|
|
391
|
|
|
|
1,004
|
|
Loans(3)
|
|
|
1,169
|
|
|
|
2,691
|
|
Other
assets(4)
|
|
|
5,334
|
|
|
|
5,598
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
27,365
|
|
|
$
|
30,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Trading assets are primarily
pledged against liabilities associated with consolidated
variable interest entities.
|
|
(2) |
|
Securities
available-for-sale
are primarily pledged against public fund 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) |
|
Loans are primarily residential
mortgage loans pledged against long-term borrowings from the
Federal Home Loan Bank. At December 31, 2010, loans also
include private label and credit card receivables pledged
against long-term secured borrowings and the loans of a
consolidated commercial paper conduit that collateralize the
conduits outstanding commercial paper.
|
|
(4) |
|
Other assets represent cash on
deposit with non-banks related to derivative collateral support
agreements.
|
19. Litigation
and Regulatory Matters
In addition to the matters described below, in the ordinary
course of business, we are routinely named as defendants in, or
as parties to, various legal actions and proceedings relating to
activities of our current
and/or
former operations. These actual or threatened legal actions and
proceedings may include claims for substantial or indeterminate
compensatory or punitive damages, or for injunctive relief. In
the ordinary course of business, we also are subject to
governmental and regulatory examinations, information-gathering
requests, investigations and proceedings (both formal and
informal), certain of which may result in adverse judgments,
settlements, fines, penalties, injunctions or other relief. In
connection with formal and informal inquiries by these
regulators, we receive numerous requests, subpoenas and orders
seeking documents, testimony and other information in connection
with various aspects of our regulated activities.
In view of the inherent unpredictability of litigation and
regulatory matters, particularly where the damages sought are
substantial or indeterminate or when the proceedings or
investigations are in the early stages, we cannot determine with
any degree of certainty the timing or ultimate resolution of
litigation and regulatory matters or the eventual loss, fines,
penalties or business impact, if any, that may result. We
established reserves for litigation and regulatory matters when
those matters present loss contingencies that are both probable
and can be reasonably estimated. The actual costs of resolving
litigation and regulatory matters, however, may be substantially
higher or lower than the amounts reserved for those matters.
We believe that the eventual outcome of litigation and
regulatory matters, unless otherwise noted below, would not be
likely to have a material adverse effect on our consolidated
financial condition. However, given the substantial or
indeterminate amounts sought in certain of these matters, and
the inherent unpredictability of such matters, an
67
HSBC USA Inc.
adverse outcome in certain of these matters could have a
material adverse effect on our consolidated results of
operations or cash flows in particular quarterly or annual
periods.
Litigation
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.
(MDL 1720). 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. On February 7, 2011, MasterCard Incorporated,
Visa Inc., the other defendants, including HSBC Bank USA, and
certain affiliates of the defendants entered into settlement and
judgment sharing agreements (the Agreements) that
provide for the apportionment of certain defined costs and
liabilities that the defendants, including HSBC Bank USA and our
affiliates, may incur, jointly
and/or
severally, in the event of an adverse judgment or global
settlement of one or all of these actions. The Agreements also
cover any other potential or future actions that are transferred
for coordinated pre-trial proceedings with MDL 1720. We continue
to defend the claims in this action vigorously and our entry
into the Agreements in no way serves as an admission as to the
validity of the allegations in the complaints. Similarly, the
Agreements have had no impact on our ability to quantify the
potential impact from this action, if any, and we are unable to
do so at this time.
Account Overdraft Litigation In February 2011, an
action captioned Ofra Levin et al. v. HSBC Bank USA,
N.A. et al. (E.D.N.Y. 11-CV-0701) was filed in
the Eastern District of New York against HSBC Bank USA, HSBC USA
and HSBC North America on behalf of a putative nationwide class
and New York
sub-class of
customers who allegedly incurred overdraft fees due to the
posting of debit card transactions to deposit accounts in
high-to-low
order. Levin asserts claims for breach of contract
and the implied covenant of good faith and fair dealing,
conversion, unjust enrichment, and violation of the New York
deceptive acts and practices statute. The plaintiffs dismissed
the Federal court action after the case was transferred to the
multi-district litigation pending in Miami, Florida, and
re-filed the case in New York state court on March 1, 2011.
The action, captioned Ofra Levin et al. v. HSBC Bank USA et
al. (N.Y. Sup. Ct. 650562/11), alleges a variety of common
law claims and violations on behalf of a New York class,
including breach of contract and implied covenant of good faith
and fair dealing, conversion, unjust enrichment and a violation
of the New York deceptive acts and practices statute. We filed a
motion to dismiss the complaint on May 2, 2011. At this
time we are unable to reasonably estimate the liability, if any,
that might arise as a result of this action and will defend the
claims vigorously.
Madoff Litigation In December 2008, Bernard L.
Madoff (Madoff) was arrested for running a Ponzi
scheme and a trustee was appointed for the liquidation of his
firm, Bernard L. Madoff Investment Securities LLC (Madoff
Securities), an SEC-registered broker-dealer and
investment adviser. In December 2010, the Madoff Securities
trustee commenced suits against various HSBC companies in
U.S. bankruptcy court and in the English High Court. The
U.S. action, captioned Picard v. HSBC et al
(Bankr, S.D.N.Y.
No. 09-01364),
which also names certain funds, investment managers, and other
entities and individuals, seeks $9 billion in damages and
additional recoveries from HSBC Bank USA, certain of our foreign
affiliates and the various other codefendants. It seeks damages
against the HSBC defendants for allegedly aiding and abetting
Madoffs fraud and breach of fiduciary duty. It also seeks,
pursuant to U.S. bankruptcy law, recovery of unspecified
amounts received by the HSBC defendants from funds invested with
Madoff, including amounts that the HSBC defendants received when
they redeemed units held in the
68
HSBC USA Inc.
various funds. The HSBC defendants acquired those fund units in
connection with financing transactions the HSBC defendants had
entered into with various clients. The trustees
U.S. bankruptcy law claims also seek recovery of fees
earned by the HSBC defendants for providing custodial,
administration and similar services to the funds. The
trustees English action seeks recovery of unspecified
transfers of money from Madoff Securities to or through HSBC on
the ground that the HSBC defendants actually or constructively
knew of Madoffs fraud.
Between October 2009 and March 2011, Fairfield Sentry Limited
and Fairfield Sigma Limited (Fairfield), funds whose
assets were directly or indirectly invested with Madoff
Securities, commenced multiple suits in the British Virgin
Islands and the U.S. against numerous fund shareholders,
including various HSBC companies that acted as nominees for
clients of HSBCs private banking business and other
clients who invested in the Fairfield funds. The Fairfield
actions, including an action captioned Fairfield Sentry
Ltd. v. Zurich Capital Markets et al. (Bankr.
S.D.N.Y.
No. 10-03634),
in which HSBC Bank USA is a defendant, seek restitution of
amounts paid to the defendants in connection with share
redemptions, on the ground that such payments were made by
mistake, based on inflated values resulting from Madoffs
fraud.
These actions are at an early stage. There are many factors that
may affect the range of possible outcomes, and the resulting
financial impact, of the various Madoff-related proceedings
including, but not limited to, the circumstances of the fraud,
the multiple jurisdictions in which proceeding have been brought
and the number of different plaintiffs and defendants in such
proceedings. For these reasons, among others, we are unable to
reasonably estimate the aggregate liability or ranges of
liability that might arise as a result of these claims but it
could be significant. In any event, we consider that we have
good defenses to these claims and will continue to defend them
vigorously.
Governmental
and Regulatory Matters
Foreclosure Practices As previously reported, HSBC
Bank USA and certain of our affiliates were among the servicers
subject to the joint examination by the Federal Reserve Board
(the Federal Reserve) and the Office of the
Comptroller of the Currency (the OCC) as part of
their broad horizontal review of industry foreclosure practices.
As a result of that review, HSBC Bank USA has entered into a
consent cease and desist order with the OCC, (the OCC Servicing
Consent Order) and our affiliate, HSBC Finance Corporation
and our common indirect parent, HSBC North America, have entered
into a similar consent order with the Federal Reserve (together
with the OCC Servicing Consent Order, the Servicing
Consent Orders). The OCC Servicing Consent Order requires
HSBC Bank USA to take prescribed actions to address the
deficiencies noted in the joint examination and described in the
consent order. These actions include the submission of plans,
programs, policies and procedures for:
|
|
|
|
|
strengthening board oversight of servicing operations, including
oversight of risk management, internal audit and compliance
programs;
|
|
|
|
coordinating communications with borrowers regarding loss
mitigation and foreclosure;
|
|
|
|
governance of outsourcing of servicing, loss mitigation and
foreclosure functions;
|
|
|
|
enhancing HSBC Bank USAs servicing compliance program;
|
|
|
|
enhancing control and oversight of the Mortgage Electronic
Registration System related activities;
|
|
|
|
review and remediation, as necessary, of management information
systems for servicing, loss mitigation and foreclosure
activities;
|
|
|
|
improving compliance training regarding servicing, loss
mitigation and foreclosure activities and communications with
borrowers; and
|
|
|
|
enhancing internal audit of servicing, loss mitigation and
foreclosure operations.
|
The OCC Servicing Consent Order also requires HSBC Bank USA to
retain a consultant to review specified foreclosure proceedings
and report on various aspects of our foreclosure processes,
including whether any borrower was injured financially as a
result of any identified deficiencies. HSBC Bank USA will be
required to remediate
69
HSBC USA Inc.
deficiencies identified in any foreclosure filings or
proceedings and reimburse or otherwise remediate borrowers where
required. The OCC Servicing Consent Order also requires HSBC
Bank USA to perform a comprehensive assessment of risk
management in our servicing operations and to submit a risk
management program to address, among other things, any findings
of weaknesses in the risk assessment. HSBC Bank USA is required
to submit quarterly progress reports to the OCC.
The Servicing Consent Orders do not preclude additional
enforcement actions against HSBC Bank USA or HSBC North America
by bank regulatory, governmental or law enforcement agencies,
such as state Attorneys General, which could include the
imposition of fines and actions to recover civil money penalties
and other financial penalties relating to the activities that
were the subject of the Servicing Consent Orders. We may also
see an increase in private litigation concerning our practices.
The Federal Reserve has indicated that it believes monetary
sanctions are appropriate for the enforcement actions it
recently announced and that it plans to announce monetary
penalties. While we believe it is possible that civil money
penalties will be imposed on HSBC Bank USA, we are unable at
this time to estimate reliably the amounts, or range of possible
amounts, of any such penalties.
Other Compliance Matters As previously disclosed,
HSBC Bank USA has also 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 in the first
week of October 2010 (together, the AML/BSA Consent
Orders). 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. Steps continue to be taken to address the
requirements of these AML/BSA Consent Orders and to ensure that
compliance and effective policies and procedures are maintained.
We are the subject of ongoing investigations, including Grand
Jury subpoenas and other requests for information, by
U.S. Government agencies, including the
U.S. Attorneys Office, the U.S. Department of
Justice and the New York County District Attorneys Office.
These investigations pertain to, among other matters, our bank
note business and dollar clearing services and their compliance
with BSA and AML controls, as well as our compliance with Office
of Foreign Assets Control (OFAC) requirements, and
adherence by certain customers to U.S. tax reporting
requirements. On April 11, 2011, HSBC Bank USA received a
John Doe summons from the Internal Revenue Service
directing us to produce records identifying U.S. taxpayers
with bank accounts at the India offices of our affiliate, The
Hongkong and Shanghai Banking Corporation. In all cases, we are
cooperating fully and engaging in efforts to resolve these
matters.
The AML/BSA Consent Orders do not preclude additional
enforcement actions against HSBC Bank USA or HSBC North America
by bank regulatory or law enforcement agencies, including
actions to recover civil money penalties, fines and other
financial penalties relating to activities which were the
subject of the AML/BSA Consent Orders and these could be
significant. In addition, it is likely that there could be some
form of formal enforcement action in respect to some or all of
the ongoing investigations. Actual or threatened enforcement
actions against other financial institutions for breaches of
BSA, AML and OFAC requirements have resulted in settlements
involving fines and penalties, some of which have been
significant depending upon the individual circumstances of each
action. The ongoing investigations are at an early stage. Based
on the facts currently known, we are unable at this time to
determine the terms on which the ongoing investigations will be
resolved or the timing of such resolution or for us to estimate
reliably the amounts, or range of possible amounts, of any fines
and/or
penalties. As matters progress, it is possible that any fines
and/or
penalties could be material to our financial statements.
Securitization Activity In addition to the
repurchase risk described in Note 27, Guarantee
Arrangements, we have also been involved as a
sponsor/seller of loans used to facilitate whole loan
securitizations underwritten by our affiliate, HSBC Securities
(USA) Inc. (HSI). In this regard, we began acquiring
residential mortgage loans beginning in 2005 which were
warehoused on our balance sheet with the intent of selling them
to HSI to facilitate HSIs whole loan securitization
program which was discontinued in the second half of 2007.
During
2005-2007,
we purchased and sold $24 billion of such loans to HSI
which were subsequently securitized and sold by HSI to third
parties. Based on the specifics of these transactions, the
obligation to repurchase loans in the event of a breach of loan
level representations and warranties resides predominantly with
the organization that originated the loan.
70
HSBC USA Inc.
While certain of these originators are or may become financially
impaired and, therefore, unable to fulfill their repurchase
obligations, we do not believe we have significant exposure for
repurchases on these loans.
We have received three subpoenas from the SEC seeking production
of documents and information relating to our involvement, and
the involvement of our affiliates, in specified private-label
residential mortgage-backed securities (RMBS)
transactions as an issuer, sponsor, underwriter, depositor,
trustee or custodian as well as our involvement as a servicer.
The first subpoena was received in December 2010, the second was
received in February 2011 and the third was received in April
2011. In February 2011, we also received a subpoena from the
U.S. Department of Justice (U.S. Attorneys Office,
Southern District of New York) seeking production of documents
and information relating to loss mitigation efforts with respect
to HUD-insured mortgages on residential properties located in
the State of New York.
20. 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.
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.
71
HSBC USA Inc.
The following table summarizes the carrying value and estimated
fair value of our financial instruments at March 31, 2011
and December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011
|
|
December 31, 2010
|
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
|
Value
|
|
Value
|
|
Value
|
|
Value
|
|
|
|
|
|
(in millions)
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term financial assets
|
|
$
|
30,696
|
|
|
$
|
30,696
|
|
|
$
|
10,665
|
|
|
$
|
10,665
|
|
Federal funds sold and securities purchased under resale
agreements
|
|
|
6,774
|
|
|
|
6,774
|
|
|
|
8,236
|
|
|
|
8,236
|
|
Non-derivative trading assets
|
|
|
26,448
|
|
|
|
26,448
|
|
|
|
26,390
|
|
|
|
26,390
|
|
Derivatives
|
|
|
7,278
|
|
|
|
7,278
|
|
|
|
6,891
|
|
|
|
6,891
|
|
Securities
|
|
|
42,797
|
|
|
|
43,004
|
|
|
|
48,713
|
|
|
|
48,923
|
|
Commercial loans, net of allowance for credit losses
|
|
|
30,575
|
|
|
|
31,073
|
|
|
|
29,735
|
|
|
|
30,154
|
|
Commercial loans designated under fair value option and held for
sale
|
|
|
845
|
|
|
|
845
|
|
|
|
1,356
|
|
|
|
1,356
|
|
Consumer loans, net of allowance for credit losses
|
|
|
39,311
|
|
|
|
34,307
|
|
|
|
41,164
|
|
|
|
36,238
|
|
Consumer loans held for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
763
|
|
|
|
767
|
|
|
|
954
|
|
|
|
957
|
|
Other consumer
|
|
|
80
|
|
|
|
80
|
|
|
|
80
|
|
|
|
80
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term financial liabilities
|
|
$
|
17,853
|
|
|
$
|
17,853
|
|
|
$
|
18,031
|
|
|
$
|
18,031
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Without fixed maturities
|
|
|
103,397
|
|
|
|
103,397
|
|
|
|
95,457
|
|
|
|
95,457
|
|
Fixed maturities
|
|
|
21,053
|
|
|
|
21,076
|
|
|
|
17,808
|
|
|
|
17,845
|
|
Deposits designated under fair value option
|
|
|
8,311
|
|
|
|
8,311
|
|
|
|
7,386
|
|
|
|
7,386
|
|
Non-derivative trading liabilities
|
|
|
5,726
|
|
|
|
5,726
|
|
|
|
5,538
|
|
|
|
5,538
|
|
Derivatives
|
|
|
5,699
|
|
|
|
5,699
|
|
|
|
5,285
|
|
|
|
5,285
|
|
Long-term debt
|
|
|
11,607
|
|
|
|
11,764
|
|
|
|
11,862
|
|
|
|
12,026
|
|
Long-term debt designated under fair value option
|
|
|
5,379
|
|
|
|
5,379
|
|
|
|
5,368
|
|
|
|
5,368
|
|
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
prevailing economic conditions during the past few years,
including house price depreciation, rising unemployment, changes
in consumer behavior, and changes in discount rates. Many
investors are non-bank financial institutions or hedge funds
with high equity levels and a high cost of debt. For certain
consumer loans, investors incorporate numerous assumptions in
predicting cash flows, such as higher charge-off levels
and/or
slower voluntary prepayment speeds than we, as the servicer of
these loans, believe will ultimately be the case. The investor
discount rates reflect this difference in overall cost of
capital as well as the potential volatility in the underlying
cash flow assumptions, the combination of which may yield a
significant pricing discount from our intrinsic value. The
estimated fair values at March 31, 2011 and
December 31, 2010 reflect these market conditions.
72
HSBC USA Inc.
Assets and Liabilities Recorded at Fair Value on a
Recurring Basis The following table presents
information about our assets and liabilities measured at fair
value on a recurring basis as of March 31, 2011 and
December 31, 2010, and indicates the fair value hierarchy
of the valuation techniques utilized to determine such fair
value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements on a Recurring Basis as of
March 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Balance
|
|
|
Netting(1)
|
|
|
Balance
|
|
|
|
|
|
(in millions)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading Securities, excluding derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury, U.S. Government agencies and sponsored enterprises
|
|
$
|
2,257
|
|
|
$
|
126
|
|
|
$
|
-
|
|
|
$
|
2,383
|
|
|
$
|
-
|
|
|
$
|
2,383
|
|
Collateralized debt obligations
|
|
|
-
|
|
|
|
-
|
|
|
|
800
|
|
|
|
800
|
|
|
|
-
|
|
|
|
800
|
|
Asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
-
|
|
|
|
328
|
|
|
|
-
|
|
|
|
328
|
|
|
|
-
|
|
|
|
328
|
|
Home equity
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
2
|
|
Student loans
|
|
|
-
|
|
|
|
3
|
|
|
|
-
|
|
|
|
3
|
|
|
|
-
|
|
|
|
3
|
|
Corporate and other domestic debt securities
|
|
|
-
|
|
|
|
7,281
|
|
|
|
866
|
|
|
|
8,147
|
|
|
|
-
|
|
|
|
8,147
|
|
Debt Securities issued by foreign entities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
-
|
|
|
|
443
|
|
|
|
269
|
|
|
|
712
|
|
|
|
-
|
|
|
|
712
|
|
Government
|
|
|
-
|
|
|
|
430
|
|
|
|
-
|
|
|
|
430
|
|
|
|
-
|
|
|
|
430
|
|
Equity securities
|
|
|
-
|
|
|
|
33
|
|
|
|
16
|
|
|
|
49
|
|
|
|
-
|
|
|
|
49
|
|
Precious metals trading
|
|
|
-
|
|
|
|
13,594
|
|
|
|
-
|
|
|
|
13,594
|
|
|
|
-
|
|
|
|
13,594
|
|
Derivatives(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
|
183
|
|
|
|
27,893
|
|
|
|
4
|
|
|
|
28,080
|
|
|
|
-
|
|
|
|
28,080
|
|
Foreign exchange contracts
|
|
|
19
|
|
|
|
17,094
|
|
|
|
211
|
|
|
|
17,324
|
|
|
|
-
|
|
|
|
17,324
|
|
Equity contracts
|
|
|
-
|
|
|
|
989
|
|
|
|
125
|
|
|
|
1,114
|
|
|
|
-
|
|
|
|
1,114
|
|
Precious metals contracts
|
|
|
-
|
|
|
|
867
|
|
|
|
20
|
|
|
|
887
|
|
|
|
-
|
|
|
|
887
|
|
Credit contracts
|
|
|
-
|
|
|
|
9,877
|
|
|
|
1,801
|
|
|
|
11,678
|
|
|
|
-
|
|
|
|
11,678
|
|
Other
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
1
|
|
Derivatives netting
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(51,806
|
)
|
|
|
(51,806
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
|
|
202
|
|
|
|
56,721
|
|
|
|
2,161
|
|
|
|
59,084
|
|
|
|
(51,806
|
)
|
|
|
7,278
|
|
Securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury, U.S. Government agencies and sponsored enterprises
|
|
|
23,413
|
|
|
|
12,188
|
|
|
|
-
|
|
|
|
35,601
|
|
|
|
-
|
|
|
|
35,601
|
|
Obligations of U.S. states and political subdivisions
|
|
|
-
|
|
|
|
575
|
|
|
|
-
|
|
|
|
575
|
|
|
|
-
|
|
|
|
575
|
|
Asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
-
|
|
|
|
11
|
|
|
|
-
|
|
|
|
11
|
|
|
|
-
|
|
|
|
11
|
|
Commercial mortgages
|
|
|
-
|
|
|
|
514
|
|
|
|
-
|
|
|
|
514
|
|
|
|
-
|
|
|
|
514
|
|
Home equity
|
|
|
-
|
|
|
|
334
|
|
|
|
-
|
|
|
|
334
|
|
|
|
-
|
|
|
|
334
|
|
Student loans
|
|
|
-
|
|
|
|
25
|
|
|
|
-
|
|
|
|
25
|
|
|
|
-
|
|
|
|
25
|
|
Other
|
|
|
-
|
|
|
|
103
|
|
|
|
-
|
|
|
|
103
|
|
|
|
-
|
|
|
|
103
|
|
Corporate and other domestic debt securities
|
|
|
-
|
|
|
|
581
|
|
|
|
-
|
|
|
|
581
|
|
|
|
-
|
|
|
|
581
|
|
Debt Securities issued by foreign entities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
-
|
|
|
|
967
|
|
|
|
-
|
|
|
|
967
|
|
|
|
-
|
|
|
|
967
|
|
Government
|
|
|
42
|
|
|
|
1,688
|
|
|
|
-
|
|
|
|
1,730
|
|
|
|
-
|
|
|
|
1,730
|
|
Equity securities
|
|
|
-
|
|
|
|
134
|
|
|
|
-
|
|
|
|
134
|
|
|
|
-
|
|
|
|
134
|
|
Loans(3)
|
|
|
-
|
|
|
|
802
|
|
|
|
12
|
|
|
|
814
|
|
|
|
-
|
|
|
|
814
|
|
Intangible(4)
|
|
|
-
|
|
|
|
-
|
|
|
|
396
|
|
|
|
396
|
|
|
|
-
|
|
|
|
396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
25,914
|
|
|
$
|
96,883
|
|
|
$
|
4,520
|
|
|
$
|
127,317
|
|
|
$
|
(51,806
|
)
|
|
$
|
75,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits in domestic
offices(5)
|
|
$
|
-
|
|
|
$
|
4,233
|
|
|
$
|
4,078
|
|
|
$
|
8,311
|
|
|
$
|
-
|
|
|
$
|
8,311
|
|
Trading liabilities, excluding derivatives
|
|
|
240
|
|
|
|
5,486
|
|
|
|
-
|
|
|
|
5,726
|
|
|
|
-
|
|
|
|
5,726
|
|
Derivatives(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
|
96
|
|
|
|
28,354
|
|
|
|
-
|
|
|
|
28,450
|
|
|
|
-
|
|
|
|
28,450
|
|
Foreign exchange contracts
|
|
|
18
|
|
|
|
17,297
|
|
|
|
214
|
|
|
|
17,529
|
|
|
|
-
|
|
|
|
17,529
|
|
Equity contracts
|
|
|
-
|
|
|
|
825
|
|
|
|
169
|
|
|
|
994
|
|
|
|
-
|
|
|
|
994
|
|
Precious metals contracts
|
|
|
55
|
|
|
|
1,663
|
|
|
|
20
|
|
|
|
1,738
|
|
|
|
-
|
|
|
|
1,738
|
|
Credit contracts
|
|
|
-
|
|
|
|
10,671
|
|
|
|
725
|
|
|
|
11,396
|
|
|
|
-
|
|
|
|
11,396
|
|
Other
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
1
|
|
Derivatives netting
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(54,409
|
)
|
|
|
(54,409
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
|
|
169
|
|
|
|
58,811
|
|
|
|
1,128
|
|
|
|
60,108
|
|
|
|
(54,409
|
)
|
|
|
5,699
|
|
Long-term
debt(6)
|
|
|
-
|
|
|
|
5,183
|
|
|
|
196
|
|
|
|
5,379
|
|
|
|
-
|
|
|
|
5,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
409
|
|
|
$
|
73,713
|
|
|
$
|
5,402
|
|
|
$
|
79,524
|
|
|
$
|
(54,409
|
)
|
|
$
|
25,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73
HSBC USA Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements on a Recurring Basis as of
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Balance
|
|
|
Netting(1)
|
|
|
Balance
|
|
|
|
|
|
(in millions)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading Securities, excluding derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury, U.S. Government agencies and sponsored enterprises
|
|
$
|
1,874
|
|
|
$
|
694
|
|
|
$
|
-
|
|
|
$
|
2,568
|
|
|
$
|
-
|
|
|
$
|
2,568
|
|
Collateralized debt obligations
|
|
|
-
|
|
|
|
-
|
|
|
|
793
|
|
|
|
793
|
|
|
|
-
|
|
|
|
793
|
|
Asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
-
|
|
|
|
344
|
|
|
|
-
|
|
|
|
344
|
|
|
|
-
|
|
|
|
344
|
|
Home equity
|
|
|
-
|
|
|
|
6
|
|
|
|
-
|
|
|
|
6
|
|
|
|
-
|
|
|
|
6
|
|
Student loans
|
|
|
-
|
|
|
|
5
|
|
|
|
-
|
|
|
|
5
|
|
|
|
-
|
|
|
|
5
|
|
Corporate and other domestic debt securities
|
|
|
-
|
|
|
|
4,257
|
|
|
|
833
|
|
|
|
5,090
|
|
|
|
-
|
|
|
|
5,090
|
|
Debt Securities issued by foreign entities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
-
|
|
|
|
133
|
|
|
|
243
|
|
|
|
376
|
|
|
|
-
|
|
|
|
376
|
|
Government
|
|
|
-
|
|
|
|
430
|
|
|
|
-
|
|
|
|
430
|
|
|
|
-
|
|
|
|
430
|
|
Equity securities
|
|
|
-
|
|
|
|
36
|
|
|
|
17
|
|
|
|
53
|
|
|
|
-
|
|
|
|
53
|
|
Precious metals trading
|
|
|
-
|
|
|
|
16,725
|
|
|
|
-
|
|
|
|
16,725
|
|
|
|
-
|
|
|
|
16,725
|
|
Derivatives(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
|
214
|
|
|
|
32,393
|
|
|
|
-
|
|
|
|
32,607
|
|
|
|
-
|
|
|
|
32,607
|
|
Foreign exchange contracts
|
|
|
23
|
|
|
|
16,233
|
|
|
|
207
|
|
|
|
16,463
|
|
|
|
-
|
|
|
|
16,463
|
|
Equity contracts
|
|
|
-
|
|
|
|
997
|
|
|
|
174
|
|
|
|
1,171
|
|
|
|
-
|
|
|
|
1,171
|
|
Precious metals contracts
|
|
|
-
|
|
|
|
982
|
|
|
|
22
|
|
|
|
1,004
|
|
|
|
-
|
|
|
|
1,004
|
|
Credit contracts
|
|
|
-
|
|
|
|
10,682
|
|
|
|
2,086
|
|
|
|
12,768
|
|
|
|
-
|
|
|
|
12,768
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
|
|
4
|
|
|
|
-
|
|
|
|
4
|
|
Derivatives netting
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(57,126
|
)
|
|
|
(57,126
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
|
|
237
|
|
|
|
61,287
|
|
|
|
2,493
|
|
|
|
64,017
|
|
|
|
(57,126
|
)
|
|
|
6,891
|
|
Securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury, U.S. Government agencies and sponsored enterprises
|
|
|
25,632
|
|
|
|
14,850
|
|
|
|
-
|
|
|
|
40,482
|
|
|
|
-
|
|
|
|
40,482
|
|
Obligations of U.S. states and political subdivisions
|
|
|
-
|
|
|
|
579
|
|
|
|
-
|
|
|
|
579
|
|
|
|
-
|
|
|
|
579
|
|
Asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
-
|
|
|
|
11
|
|
|
|
-
|
|
|
|
11
|
|
|
|
-
|
|
|
|
11
|
|
Commercial mortgages
|
|
|
-
|
|
|
|
552
|
|
|
|
-
|
|
|
|
552
|
|
|
|
-
|
|
|
|
552
|
|
Home equity
|
|
|
-
|
|
|
|
352
|
|
|
|
-
|
|
|
|
352
|
|
|
|
-
|
|
|
|
352
|
|
Student loans
|
|
|
-
|
|
|
|
27
|
|
|
|
-
|
|
|
|
27
|
|
|
|
-
|
|
|
|
27
|
|
Other
|
|
|
-
|
|
|
|
104
|
|
|
|
-
|
|
|
|
104
|
|
|
|
-
|
|
|
|
104
|
|
Corporate and other domestic debt securities
|
|
|
-
|
|
|
|
683
|
|
|
|
-
|
|
|
|
683
|
|
|
|
-
|
|
|
|
683
|
|
Debt Securities issued by foreign entities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
|
|
|
41
|
|
|
|
2,564
|
|
|
|
-
|
|
|
|
2,605
|
|
|
|
-
|
|
|
|
2,605
|
|
Equity securities
|
|
|
-
|
|
|
|
128
|
|
|
|
-
|
|
|
|
128
|
|
|
|
-
|
|
|
|
128
|
|
Loans(3)
|
|
|
-
|
|
|
|
1,277
|
|
|
|
11
|
|
|
|
1,288
|
|
|
|
-
|
|
|
|
1,288
|
|
Intangible(4)
|
|
|
-
|
|
|
|
-
|
|
|
|
394
|
|
|
|
394
|
|
|
|
-
|
|
|
|
394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
27,784
|
|
|
$
|
105,044
|
|
|
$
|
4,784
|
|
|
$
|
137,612
|
|
|
$
|
(57,126
|
)
|
|
$
|
80,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits in domestic
offices(5)
|
|
$
|
-
|
|
|
$
|
3,774
|
|
|
$
|
3,612
|
|
|
$
|
7,386
|
|
|
$
|
-
|
|
|
$
|
7,386
|
|
Trading liabilities, excluding derivatives
|
|
|
173
|
|
|
|
5,365
|
|
|
|
-
|
|
|
|
5,538
|
|
|
|
-
|
|
|
|
5,538
|
|
Derivatives(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
|
90
|
|
|
|
32,701
|
|
|
|
-
|
|
|
|
32,791
|
|
|
|
-
|
|
|
|
32,791
|
|
Foreign exchange contracts
|
|
|
15
|
|
|
|
16,520
|
|
|
|
211
|
|
|
|
16,746
|
|
|
|
-
|
|
|
|
16,746
|
|
Equity contracts
|
|
|
-
|
|
|
|
833
|
|
|
|
163
|
|
|
|
996
|
|
|
|
-
|
|
|
|
996
|
|
Precious metals contracts
|
|
|
101
|
|
|
|
1,951
|
|
|
|
21
|
|
|
|
2,073
|
|
|
|
-
|
|
|
|
2,073
|
|
Credit contracts
|
|
|
-
|
|
|
|
11,639
|
|
|
|
884
|
|
|
|
12,523
|
|
|
|
-
|
|
|
|
12,523
|
|
Other
|
|
|
8
|
|
|
|
10
|
|
|
|
5
|
|
|
|
23
|
|
|
|
-
|
|
|
|
23
|
|
Derivatives netting
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(59,867
|
)
|
|
|
(59,867
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
|
|
214
|
|
|
|
63,654
|
|
|
|
1,284
|
|
|
|
65,152
|
|
|
|
(59,867
|
)
|
|
|
5,285
|
|
Long-term
debt(6)
|
|
|
-
|
|
|
|
5,067
|
|
|
|
301
|
|
|
|
5,368
|
|
|
|
-
|
|
|
|
5,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
387
|
|
|
$
|
77,860
|
|
|
$
|
5,197
|
|
|
$
|
83,444
|
|
|
$
|
(59,867
|
)
|
|
$
|
23,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74
HSBC USA Inc.
|
|
|
(1) |
|
Represents counterparty and cash
collateral netting which allow the offsetting of amounts
relating to certain contracts if certain conditions are met.
|
|
(2) |
|
Includes trading derivative assets
of $6.5 billion and $6.0 billion and trading
derivative liabilities of $5.4 billion and
$5.0 billion as of March 31, 2011 and
December 31, 2010, 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 months ended March 31,
2011 and 2010.
Information on Level 3 assets and
liabilities The following table summarizes additional
information about changes in the fair value of Level 3
assets and liabilities during the three months ended
March 31, 2011 and 2010. As a risk management practice, we
may risk manage the Level 3 assets and liabilities, in
whole or in part, using securities and derivative positions that
are classified as Level 1 or Level 2 measurements
within the fair value hierarchy. Since those Level 1 and
Level 2 risk management positions are not included in the
table below, the information provided does not reflect the
effect of such risk management activities related to the
Level 3 assets and liabilities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gains and (Losses) Included
in(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
Transfers
|
|
|
Transfers
|
|
|
|
|
|
Current Period
|
|
|
|
Jan. 1,
|
|
|
Revenue
|
|
|
Other
|
|
|
Comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
Into
|
|
|
Out of
|
|
|
Mar. 31,
|
|
|
Unrealized
|
|
|
|
2011
|
|
|
(Loss)
|
|
|
Revenue
|
|
|
Income
|
|
|
Purchases
|
|
|
Issuances
|
|
|
Settlements
|
|
|
Level 3
|
|
|
Level 3
|
|
|
2011
|
|
|
Gains (Losses)
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading assets, excluding derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized debt obligations
|
|
$
|
793
|
|
|
$
|
11
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(4
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
800
|
|
|
$
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and other domestic debt securities
|
|
|
833
|
|
|
|
12
|
|
|
|
-
|
|
|
|
-
|
|
|
|
21
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
866
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities issued by foreign entities
|
|
|
243
|
|
|
|
26
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
269
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
17
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
5
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
|
(4
|
)
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity contracts
|
|
|
12
|
|
|
|
24
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(71
|
)
|
|
|
-
|
|
|
|
(10
|
)
|
|
|
(45
|
)
|
|
|
(35
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit contracts
|
|
|
1,202
|
|
|
|
(159
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(28
|
)
|
|
|
-
|
|
|
|
62
|
|
|
|
1,077
|
|
|
|
(193
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans(3)
|
|
|
11
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets, excluding
derivatives(4)
|
|
|
394
|
|
|
|
-
|
|
|
|
(14
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16
|
|
|
|
-
|
|
|
|
-
|
|
|
|
396
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,500
|
|
|
$
|
(86
|
)
|
|
$
|
(9
|
)
|
|
$
|
-
|
|
|
$
|
21
|
|
|
$
|
-
|
|
|
$
|
(86
|
)
|
|
$
|
-
|
|
|
$
|
52
|
|
|
$
|
3,392
|
|
|
$
|
(195
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits in domestic offices
|
|
$
|
3,612
|
|
|
$
|
18
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
553
|
|
|
$
|
(98
|
)
|
|
$
|
8
|
|
|
$
|
(15
|
)
|
|
|
4,078
|
|
|
$
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
301
|
|
|
|
9
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
74
|
|
|
|
(115
|
)
|
|
|
-
|
|
|
|
(73
|
)
|
|
|
196
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
3,913
|
|
|
$
|
27
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
627
|
|
|
$
|
(213
|
)
|
|
$
|
8
|
|
|
$
|
(88
|
)
|
|
$
|
4,274
|
|
|
$
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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75
HSBC USA Inc.
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|
Total Gains and (Losses) Included
in(1)
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Current
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Trading
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Other
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Transfers
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Transfers
|
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Period
|
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Jan. 1,
|
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Revenue
|
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Other
|
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Comprehensive
|
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Into
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Out of
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Mar. 31,
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Unrealized
|
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|
2010
|
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|
(Loss)
|
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Revenue
|
|
|
Income
|
|
|
Purchases
|
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|
Issuances
|
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Settlements
|
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|
Level 3
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Level 3
|
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|
2010
|
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|
Gains (Losses)
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|
(in millions)
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|
Assets:
|
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|
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|
Trading assets, excluding derivatives:
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|
Collateralized debt obligations
|
|
$
|
831
|
|
|
$
|
25
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
222
|
|
|
$
|
-
|
|
|
$
|
(324
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
754
|
|
|
$
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
817
|
|
|
|
13
|
|
|
|
-
|
|
|
|
-
|
|
|
|
94
|
|
|
|
-
|
|
|
|
(119
|
)
|
|
|
21
|
|
|
|
-
|
|
|
|
826
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgages
|
|
|
4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity
|
|
|
25
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
3
|
|
|
|
-
|
|
|
|
26
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and other domestic debt securities
|
|
|
1,202
|
|
|
|
(31
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
25
|
|
|
|
-
|
|
|
|
(368
|
)
|
|
|
-
|
|
|
|
(184
|
)
|
|
|
644
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities issued by foreign entities
|
|
|
196
|
|
|
|
27
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
223
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
21
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
19
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
|
(95
|
)
|
|
|
(25
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(119
|
)
|
|
|
(24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity contracts
|
|
|
81
|
|
|
|
83
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(57
|
)
|
|
|
(58
|
)
|
|
|
1
|
|
|
|
50
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit contracts
|
|
|
1,311
|
|
|
|
(181
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(70
|
)
|
|
|
218
|
|
|
|
66
|
|
|
|
1,344
|
|
|
|
(425
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
(4
|
)
|
|
|
-
|
|
|
|
6
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury, U.S. Government agencies and sponsored enterprises
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
515
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(71
|
)
|
|
|
73
|
|
|
|
(4
|
)
|
|
|
529
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgages
|
|
|
8
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity
|
|
|
175
|
|
|
|
-
|
|
|
|
-
|
|
|
|
45
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
215
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auto
|
|
|
42
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(14
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
28
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
|
|
|
-
|
|
|
|
12
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans(3)
|
|
|
4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11
|
|
|
|
(3
|
)
|
|
|
12
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets, excluding
derivatives(4)
|
|
|
450
|
|
|
|
-
|
|
|
|
21
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(27
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
444
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
5,586
|
|
|
$
|
(90
|
)
|
|
$
|
27
|
|
|
$
|
61
|
|
|
$
|
341
|
|
|
$
|
-
|
|
|
$
|
(1,059
|
)
|
|
$
|
280
|
|
|
$
|
(130
|
)
|
|
$
|
5,016
|
|
|
$
|
(263
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits in domestic offices
|
|
$
|
1,643
|
|
|
$
|
71
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
310
|
|
|
$
|
(74
|
)
|
|
$
|
7
|
|
|
$
|
(17
|
)
|
|
$
|
1,940
|
|
|
$
|
(53
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
419
|
|
|
|
12
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
209
|
|
|
|
(29
|
)
|
|
|
-
|
|
|
|
(7
|
)
|
|
|
604
|
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
2,062
|
|
|
$
|
83
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
519
|
|
|
$
|
(103
|
)
|
|
$
|
7
|
|
|
$
|
(24
|
)
|
|
$
|
2,544
|
|
|
$
|
(66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes realized and unrealized
gains and losses.
|
|
(2) |
|
Level 3 net derivatives
included derivative assets of $2.2 billion and
$3.0 billion and derivative liabilities of
$1.1 billion and $1.8 billion as of March 31,
2011 and 2010, 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.
|
Material Additions to and Transfers Into (Out of)
Level 3 Measurements During the three months
ended March 31, 2011, we transferred $62 million of
credit derivatives from Level 3 to Level 2 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 three months ended March 31, 2010, we
transferred $218 million of credit derivatives from
Level 2 to Level 3 as a result of a qualitative
analysis of the foreign exchange and credit correlation
attributes of our model used for certain credit default swaps.
In addition, we transferred $109 million of mortgage and
other asset-backed securities from Level 2 to Level 3
as the availability of observable inputs declined and the
discrepancy in valuation per independent pricing services
increased. We transferred $184 million of corporate bonds
from Level 3 to Level 2
76
HSBC USA Inc.
due to the availability of observable inputs in the market
including broker and independent pricing service valuations.
Assets and Liabilities Recorded at Fair Value on a
Non-recurring Basis Certain financial and
non-financial assets are measured at fair value on a
non-recurring basis and therefore, are not included in the
tables above. These assets include (a) mortgage and
consumer loans classified as held for sale reported at the lower
of cost or fair value and (b) impaired loans or assets that
are written down to fair value based on the valuation of
underlying collateral during the period. These instruments are
not measured at fair value on an ongoing basis but are subject
to fair value adjustment in certain circumstances (e.g.,
impairment). The following table presents the fair value
hierarchy level within which the fair value of the financial and
non-financial assets has been recorded as of March 31, 2011
and 2010. The gains (losses) during the three months ended
March 31, 2011 and 2010 are also included.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gains
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
|
Non-Recurring Fair Value Measurements
|
|
|
Three Months
|
|
|
|
as of March 31, 2011
|
|
|
Ended Mar. 31,
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
2011
|
|
|
|
|
|
(in millions)
|
|
|
Residential mortgage loans held for
sale(1)
|
|
$
|
-
|
|
|
$
|
175
|
|
|
$
|
328
|
|
|
$
|
503
|
|
|
$
|
5
|
|
Other consumer loans held for
sale(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
80
|
|
|
|
80
|
|
|
|
-
|
|
Impaired
loans(2)
|
|
|
-
|
|
|
|
-
|
|
|
|
457
|
|
|
|
457
|
|
|
|
1
|
|
Real estate
owned(3)
|
|
|
-
|
|
|
|
73
|
|
|
|
-
|
|
|
|
73
|
|
|
|
(3
|
)
|
Commercial loans held for sale
|
|
|
-
|
|
|
|
33
|
|
|
|
-
|
|
|
|
33
|
|
|
|
-
|
|
Impairment of certain previously capitalized software
development
costs(4)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(78
|
)
|
Building held for use
|
|
|
-
|
|
|
|
-
|
|
|
|
13
|
|
|
|
13
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value on a non-recurring basis
|
|
$
|
-
|
|
|
$
|
281
|
|
|
$
|
878
|
|
|
$
|
1,159
|
|
|
$
|
(75
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gains
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
|
Non-Recurring Fair Value Measurements
|
|
|
Three Months
|
|
|
|
as of March 31, 2010
|
|
|
Ended Mar. 31,
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Residential mortgage loans held for
sale(1)
|
|
$
|
-
|
|
|
$
|
150
|
|
|
$
|
761
|
|
|
$
|
911
|
|
|
$
|
(5
|
)
|
Other consumer loans held for
sale(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
28
|
|
|
|
28
|
|
|
|
-
|
|
Impaired
loans(2)
|
|
|
-
|
|
|
|
-
|
|
|
|
718
|
|
|
|
718
|
|
|
|
5
|
|
Real estate
owned(3)
|
|
|
-
|
|
|
|
63
|
|
|
|
-
|
|
|
|
63
|
|
|
|
1
|
|
Repossessed
vehicles(3)
|
|
|
-
|
|
|
|
5
|
|
|
|
-
|
|
|
|
5
|
|
|
|
-
|
|
Commercial loans held for sale
|
|
|
-
|
|
|
|
3
|
|
|
|
-
|
|
|
|
3
|
|
|
|
-
|
|
Held-to-maturity
asset-backed securities held by consolidated
VIE(5)
|
|
|
-
|
|
|
|
-
|
|
|
|
254
|
|
|
|
254
|
|
|
|
(5
|
)
|
Building held for use
|
|
|
-
|
|
|
|
-
|
|
|
|
15
|
|
|
|
15
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value on a non-recurring basis
|
|
$
|
-
|
|
|
$
|
221
|
|
|
$
|
1,776
|
|
|
$
|
1,997
|
|
|
$
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As of March 31, 2011 and 2010,
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.
|
77
HSBC USA Inc.
|
|
|
(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.
|
|
(3) |
|
Real estate owned and repossessed
vehicles are required to be reported on the balance sheet net of
transactions costs. The real estate owned and repossessed
vehicle amounts in the table above reflect the fair value
unadjusted for transaction costs.
|
|
(4) |
|
In the first quarter of 2011 it was
determined that certain previously capitalized software
development costs were no longer realizable as a result of the
decision to cancel certain projects and, therefore, we recorded
an impairment charge of $78 million representing the full
amount of the developed software capitalized associated with
these projects. The impairment charge was recorded in other
expenses in our consolidated statement of income and is included
in the results of our PFS segment.
|
|
(5) |
|
Represent
held-to-maturity
securities which were held at fair value at March 31, 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. 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
|
78
HSBC USA Inc.
|
|
|
reflects the current rates offered to borrowers of similar
credit standing for the remaining term to maturity and our own
estimate of liquidity premium.
|
|
|
|
Commercial impaired loans Fair value is determined
based on the pricing quotes obtained from an independent third
party appraisal.
|
|
|
Consumer Loans The estimated fair value of our
consumer loans were determined by developing an approximate
range of value from a mix of various sources as appropriate for
the respective pool of assets. These sources included, among
other things, value estimates from an HSBC affiliate which
reflect
over-the-counter
trading activity, forward looking discounted cash flow models
using assumptions we believe are consistent with those which
would be used by market participants in valuing such
receivables; trading input from other market participants which
includes observed primary and secondary trades; where
appropriate, the impact of current estimated rating agency
credit tranching levels with the associated benchmark credit
spreads; and general discussions held directly with potential
investors.
|
Model inputs include estimates of future interest rates,
prepayment speeds, loss curves and market discount rates
reflecting managements estimate of the rate that would be
required by investors in the current market 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
$49 million and $47 million at March 31, 2011 and
December 31, 2010, 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.
|
79
HSBC USA Inc.
|
|
|
|
|
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.
|
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
|
|
|
$
|
-
|
|
|
$
|
82
|
|
|
$
|
-
|
|
|
$
|
236
|
|
|
$
|
-
|
|
|
$
|
321
|
|
|
|
Home equity
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
Student loans
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total AAA -A
|
|
|
3
|
|
|
|
-
|
|
|
|
87
|
|
|
|
-
|
|
|
|
236
|
|
|
|
-
|
|
|
|
326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BBB -B
|
|
Residential mortgages
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
|
|
Home equity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total BBB -B
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CCC-Unrated
|
|
Residential mortgages
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
|
|
-
|
|
|
|
4
|
|
|
|
Home equity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total CCC -Unrated
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
|
|
-
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3
|
|
|
$
|
-
|
|
|
$
|
90
|
|
|
$
|
-
|
|
|
$
|
240
|
|
|
$
|
-
|
|
|
$
|
333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading collateralized debt obligations and related
collateral:
|
|
|
|
|
|
|
Rating of Securities:
|
|
Collateral Type:
|
|
Level 3
|
|
|
|
|
|
(in millions)
|
|
|
AAA -A
|
|
Commercial mortgages
|
|
$
|
-
|
|
|
|
Residential mortgages
|
|
|
9
|
|
|
|
Other
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total AAA -A
|
|
|
9
|
|
|
|
|
|
|
|
|
BBB -B
|
|
Commercial mortgages
|
|
|
195
|
|
|
|
Corporate loans
|
|
|
315
|
|
|
|
Other
|
|
|
153
|
|
|
|
|
|
|
|
|
|
|
Total BBB -B
|
|
|
663
|
|
|
|
|
|
|
|
|
CCC -Unrated
|
|
Commercial mortgages
|
|
|
65
|
|
|
|
Corporate loans
|
|
|
-
|
|
|
|
Residential mortgages
|
|
|
-
|
|
|
|
Other
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
Total CCC -Unrated
|
|
|
128
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
800
|
|
|
|
|
|
|
|
|
80
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
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6
|
|
|
|
Commercial mortgages
|
|
|
514
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
514
|
|
|
|
Home equity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
147
|
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
149
|
|
|
|
Student loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25
|
|
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
103
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total AAA -A
|
|
|
514
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
281
|
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BBB -B
|
|
Residential mortgages
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
Home equity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
100
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total BBB -B
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
101
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CCC -Unrated
|
|
Residential mortgages
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
|
|
Home equity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
84
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total CCC -Unrated
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
88
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
514
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
470
|
|
|
$
|
-
|
|
|
$
|
3
|
|
|
$
|
-
|
|
|
$
|
987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other domestic debt and foreign debt securities (corporate and
government) For non-callable corporate securities, a
credit spread scale is created for each issuer. These spreads
are then added to the equivalent maturity U.S. Treasury
yield to determine current pricing. Credit spreads are obtained
from the new market, secondary trading levels and dealer quotes.
For securities with early redemption features, an option
adjusted spread (OAS) model is incorporated to
adjust the spreads determined above. Additionally, we survey the
broker/dealer community to obtain relevant trade data including
benchmark quotes and updated spreads.
|
|
|
Equity securities Since most of our securities are
transacted in active markets, fair value measurements are
determined based on quoted prices for the identical security.
For mutual fund investments, we receive monthly statements from
the investment manager with the estimated fair value.
|
We perform validations of the fair values obtained from
independent pricing services. Such validations primarily include
sourcing security prices from other independent pricing services
or broker quotes. As the pricing for mortgage and other
asset-backed securities became less transparent during the
credit crisis, we further developed internal valuation
techniques to validate the fair value. The internal validation
techniques utilize inputs derived from observable market data,
incorporate external analysts estimates of probability of
default, loss recovery and prepayments speeds and apply the
discount rates that would be demanded by market participants
under the current market conditions. Depending on the results of
the validation, additional information may be gathered from
other market participants to support the fair value
measurements. A determination is made as to whether adjustments
to the observable inputs are necessary after investigations and
inquiries about the reasonableness of the inputs used and the
methodologies employed by the independent pricing services.
Derivatives Derivatives are recorded at fair
value. Asset and liability positions in individual derivatives
that are covered by legally enforceable master netting
agreements, including cash collateral are offset and presented
net in accordance with accounting principles which allow the
offsetting of amounts relating to certain contracts.
Derivatives traded on an exchange are valued using quoted
prices. OTC derivatives, which comprise a majority of derivative
contract positions, are valued using valuation techniques. The
fair value for the majority of our derivative instruments are
determined based on internally developed models that utilize
independently corroborated market parameters, including interest
rate yield curves, option volatilities, and currency rates. For
complex or long-dated derivative products where market data is
not available, fair value may be affected by the choice of
valuation model and the underlying assumptions about, among
other things, the timing of cash flows and credit spreads. The
fair
81
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:
|
|
|
|
|
Credit Derivatives Use credit default curves and
recovery rates which are generally provided by broker quotes and
various pricing services. Certain credit derivatives may also
use correlation inputs in their model valuation. Correlation is
derived using market quotes from brokers and various pricing
services.
|
|
|
|
Interest Rate Derivatives Swaps use interest rate
curves based on currency that are actively quoted by brokers and
other pricing services. Options will also use volatility inputs
which are also quoted in the broker market.
|
|
|
|
Foreign Exchange (FX) Derivatives FX
transactions use spot and forward FX rates which are quoted in
the broker market.
|
|
|
|
Equity Derivatives Use listed equity security
pricing and implied volatilities from equity traded options
position.
|
|
|
|
Precious Metal Derivative Use spot and forward metal
rates which are quoted in the broker market.
|
We may adjust valuations derived using the methods described
above in order to ensure that those values represent appropriate
estimates of fair value. These adjustments, which are applied
consistently over time, are generally required to reflect
factors such as bid-ask spreads and counterparty credit risk
that can affect prices in arms-length transactions with
unrelated third parties. Such adjustments are based on
management judgment and may not be observable.
Real estate owned Fair value is determined
based on third party appraisals obtained at the time we take
title to the property and, if less than the carrying value of
the loan, the carrying value of the loan is adjusted to the fair
value. The carrying value is further reduced, if necessary, on a
quarterly basis to reflect observable local market data
including local area sales data.
Repossessed autos Fair value is determined
based on current Black Book values, which represent current
observable prices in the wholesale auto auction market.
Mortgage servicing rights We elected to
measure residential mortgage servicing rights, which are
classified as intangible assets, at fair value. The fair value
for the residential mortgage servicing rights is determined
based on an option adjusted approach which involves discounting
servicing cash flows under various interest rate projections at
risk-adjusted rates. The valuation model also incorporates our
best estimate of the prepayment speed of the mortgage loans,
current 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.
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HSBC USA Inc.
Long-term debt We elected to apply fair value
option to certain own debt issuances for which fair value hedge
accounting otherwise would have been applied. These own debt
issuances elected under FVO are traded in secondary markets and,
as such, the fair value is determined based on observed prices
for the specific instrument. The observed market price of these
instruments reflects the effect of our own credit spreads. The
credit spreads applied to these instruments were derived from
the spreads recognized in the secondary market for similar debt
as of the measurement date.
For long-term debt recorded at cost, fair value is determined
based on quoted market prices where available. If quoted market
prices are not available, fair value is based on dealer quotes,
quoted prices of similar instruments, or internally developed
valuation models adjusted for own credit risks.
Deposits For fair value disclosure purposes,
the carrying amount of deposits with no stated maturity (e.g.,
demand, savings, and certain money market deposits), which
represents the amount payable upon demand, is considered to
approximate fair value. For deposits with fixed maturities, fair
value is estimated by discounting cash flows using market
interest rates currently offered on deposits with similar
characteristics and maturities.
Valuation adjustments Where applicable, we
make valuation adjustments to the measurements of financial
instruments to ensure that they are recorded at fair value.
Management judgment is required in determining the appropriate
level of valuation adjustments. The level of valuation
adjustments reflects the risks and the characteristics of a
specific type of product, related contractual terms and the
liquidity associated with the product and the market in which
the product transacts. Valuation adjustments for complex
instruments are unobservable. Such valuation adjustments, which
have been consistently applied, include the following:
|
|
|
|
|
Credit risk adjustment an adjustment to reflect the
creditworthiness of the counterparty for OTC products where the
market parameters may not be indicative of the creditworthiness
of the counterparty. For derivative instruments, the market
price implies parties to the transaction have credit ratings
equivalent to AA. Therefore, we will make an appropriate credit
risk adjustment to reflect the counterparty credit risk if
different from an AA credit rating.
|
|
|
|
Market data/model uncertainty an adjustment to
reflect uncertainties in the fair value measurements determined
based on unobservable market data inputs. Since one or more
significant parameters may be unobservable and must be
estimated, the resultant fair value estimates have inherent
measurement risk. In addition, the values derived from valuation
techniques are affected by the choice of valuation model. When
different valuation techniques are available, the choice of
valuation model can be subjective and in those cases, an
additional valuation adjustment may be applied to mitigate the
potential risk of measurement error. In most cases, we perform
analysis on key unobservable inputs to determine the appropriate
parameters to use in estimating the fair value adjustments.
|
|
|
|
Liquidity adjustment a type of bid-offer adjustment
to reflect the difference between the
mark-to-market
valuation of all open positions in the portfolio and the close
out cost. The liquidity adjustment is a portfolio level
adjustment and is a function of the liquidity and volatility of
the underlying risk positions.
|
21. New
Accounting Pronouncements
Clarifications to Accounting for Troubled Debt
Restructurings by Creditors In April 2011, the FASB
issued an Accounting Standards Update which provides additional
guidance to assist creditors in determining whether a
restructuring of a receivable meets the criteria to be
considered a troubled debt restructuring, for purposes of the
identification and disclosure of troubled debt restructurings,
as well as for recording impairment. For purposes of identifying
and disclosing troubled debt restructurings, the new guidance
would be effective for interim and annual reporting periods
beginning on or after June 15, 2011, and would be applied
retrospectively to restructurings occurring on or after
January 1, 2011. For purposes of measuring impairment of a
receivable restructured in a troubled debt restructuring, the
proposed clarifications would be effective on a prospective
basis for interim and annual periods beginning on or after
June 15, 2011, with retrospective application permitted. If
an entity applies the proposed clarifications prospectively for
impairment measurement, it must disclose the total amount of
receivables
83
HSBC USA Inc.
and the allowance for credit losses as of the end of the period
of adoption related to those receivables that have now been
identified as troubled debt restructurings. We currently believe
the impact of adopting this Accounting Standards Update will not
result in significant changes to either our reported troubled
debt restructures or our allowance for credit losses.
This Accounting Standards Update also clarified the effective
date for new disclosure requirements for troubled debt
restructurings. The new disclosure requirements for trouble debt
restructurings will also be effective for interim and annual
periods beginning on or after June 15, 2011.
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.
84
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, 2010 (the 2010
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.
The following discussion of our financial condition and results
of operations excludes the results of our discontinued
operations from all periods presented unless otherwise noted.
See Note 2, Discontinued Operations, in the
accompanying consolidated financial statement for further
discussion of these operations.
Current Environment During the first three months
of 2011, economic conditions in the United States continued to
improve. While the pace of improvement has generally been slow,
there are signs the recovery is gaining momentum as job growth
in the first quarter showed moderate improvement. However,
serious threats to economic growth remain including rising oil
prices, continued pressure and uncertainty in the housing market
and elevated unemployment levels. Marketplace liquidity
continues to remain ample and companies in the financial sector
continue to be 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. The prolonged
period of low Federal funds rates continues to put pressure on
spreads earned on our deposit base. During the first quarter of
2011, we continued to see home prices decline in many markets as
housing prices remain under pressure due to elevated foreclosure
levels. How sustainable these improvements will be in the
absence of government actions remains to be seen.
While job creation in the private sector improved during the
first quarter of 2011, there continues to be uncertainty as to
how pronounced the economic recovery will be. Despite an
increasing trend in consumer spending, consumer confidence
continues to be low based on historical standards and after
posting five consecutive months of improvement, fell again
during March raising questions about the continued willingness
by consumers to spend in the coming months, particularly if oil
prices continue to rise. U.S. unemployment rates, which
have been a major factor in the deterioration of credit quality
in the U.S., improved but remained high at 8.8 percent in
March 2011, decreasing from a rate of 9.4 percent at
December 2010. 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 23 states are at or above the
U.S. national average and unemployment rates in four states
are at or above 11 percent while in New York, where
approximately 27 percent of our loan portfolio is
concentrated, unemployment remained lower than the national
average at 8 percent. High unemployment rates have
generally
85
HSBC USA Inc.
been most pronounced in the markets which had previously
experienced the highest appreciation in home values.
Unemployment has continued to have an impact on the provision
for credit losses in our loan portfolio and in loan portfolios
across the industry.
Concerns about the future of the U.S. economy, including
the pace and magnitude of recovery from the recent economic
recession, consumer confidence, volatility in energy prices,
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, a sustained recovery of the housing markets
and stabilization in energy prices remain critical components of
a broader U.S. economic recovery. Further weakening in
these components as well as in consumer confidence may result in
additional deterioration in consumer payment patterns and credit
quality. Weak consumer fundamentals including declines in wage
income, 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 the impact of recent regulatory changes,
including the continued implementation of the Dodd-Frank
Wall Street Reform and Consumer Protection Act of 2010
(Dodd-Frank) will continue to impact our results
through 2011 and beyond, the degree of which is largely
dependent upon the nature and extent of the economic recovery.
Due to the significant slow-down in foreclosures, and in some
instances, cessation of all foreclosure processing by numerous
loan servicers, including us, for some period of time during the
remainder of 2011 there may be a reduction in the number of
properties being marketed following foreclosure. The impact of
that decrease may increase demand for properties currently on
the market resulting in a stabilization of home prices but could
also result in a larger number of vacant properties in
communities creating downward pressure on general property
values. As a result, the short term impact of the foreclosure
processing delay is highly uncertain. However, the longer term
impact is even more uncertain as eventually servicers will again
begin to foreclose and market properties in large numbers which
is likely to create a significant over-supply of housing
inventory. This could lead to an increase in loss severity on
owned real estate properties.
Recent Regulatory Developments As previously
reported, HSBC Bank USA and certain of our affiliates were among
the servicers subject to the joint examination by the Federal
Reserve Board (the Federal Reserve) and the Office
of the Comptroller of the Currency (the OCC) as part
of their broad horizontal review of industry foreclosure
practices. As a result of that review, HSBC Bank USA has entered
into a consent cease and desist order with the OCC, (the OCC
Servicing Consent Order) and our affiliate and our common
indirect parent, HSBC Finance Corporation and HSBC North America
Holdings Inc. (HSBC North America), respectively,
have entered into a similar consent order with the Federal
Reserve (together with the OCC Servicing Consent Order, the
Servicing Consent Orders). The OCC Servicing Consent
Order requires HSBC Bank USA to take prescribed actions to
address the deficiencies noted in the joint examination and
described in the consent order. See Note 19,
Litigation and Regulatory Matters in the
accompanying consolidated financial statements for further
discussion of these actions.
The requirements of the Servicing Consent Orders will increase
our operational, reputational and legal risk profiles and
implementation of its provisions will require additional
financial and managerial resources. In addition, the Servicing
Consent Orders do not preclude additional enforcement actions
against HSBC Bank USA or HSBC North America by bank regulatory,
governmental or law enforcement agencies, including the
imposition of fines and actions to recover civil money penalties
and other financial penalties relating to the activities that
were the subject of the Servicing Consent Orders. We may also
see an increase in private litigation concerning our practices.
HSBC Bank USA and its affiliates take these regulatory matters
very seriously, and we have been working closely with our
regulators to address these issues quickly and efficiently.
Additionally, we have already made several key procedural
improvements to enhance our foreclosure processes as a result of
our own internal reviews. We have resumed foreclosures on a
limited basis in certain geographies. It will be a number of
months before we resume foreclosures in all jurisdictions as we
need to ensure we are satisfied that applicable enhanced
processes have been implemented.
HSBC Bank USA remains committed to assisting customers who are
experiencing financial difficulties, and we will continue to
review our policies and processes to make modification and other
account management alternatives for the
86
HSBC USA Inc.
benefit of our customers more easily accessible to those in need
of assistance. Home preservation continues to be a cornerstone
of our business, and foreclosure is viewed as a last resort.
Foreclosure proceedings are only instituted when other
reasonable alternatives have been exhausted and where the
borrower is seriously delinquent. We also offer assistance,
including financial, to those wishing to leave a property
without having to go through the foreclosure process.
Performance, Developments and Trends Income
from continuing operations was $480 million during the
three months ended March 31, 2011 compared to
$544 million during the three months ended March 31,
2010. Income from continuing operations before income tax was
$562 million during the three months ended March 31,
2011 compared to $858 million in the prior year quarter,
driven by lower net interest income, lower other revenues and
higher operating expenses, partially offset by lower provisions
for credit losses. Our results in both periods were impacted by
the change in the fair value of our own debt and the related
derivatives for which we have elected fair value option and
certain other non-recurring items which distort the ability of
investors to compare the underlying performance trends of our
business. The following table summarizes the collective impact
of these items on our income from continuing operations before
income tax for all periods presented:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Income from continuing operations before income tax, as reported
|
|
$
|
562
|
|
|
$
|
858
|
|
Change in value of our own fair value option debt and related
derivatives
|
|
|
15
|
|
|
|
(33
|
)
|
Impairment of software development costs
|
|
|
78
|
|
|
|
-
|
|
Gain relating to resolution of
lawsuit(1)
|
|
|
-
|
|
|
|
(5
|
)
|
Gain on sale of equity interest in Wells Fargo HSBC Trade Bank
|
|
|
-
|
|
|
|
(66
|
)
|
Revenue associated with whole loan purchase
settlement(2)
|
|
|
-
|
|
|
|
(89
|
)
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income tax, excluding
above
items(3)
|
|
$
|
655
|
|
|
$
|
665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The proceeds of the resolution of
this lawsuit were used to in 2009 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.
|
Excluding the collective impact of the items in the table above,
our income from continuing operations before tax for the three
months ended March 31, 2011 was slightly lower compared to
the prior year quarter as lower net interest income was
partially offset by lower provisions for credit losses and lower
operating expenses, while other revenues remained relatively
flat. During the three months ended March 31, 2011, we
continued to reduce legacy and other risk positions as
opportunities arose, including the sale of $474 million and
$71 million in leveraged acquisition finance loans and
subprime residential mortgage loans previously held for sale and
continued reductions in monoline counterparty exposures.
Improved market conditions and reduced outstanding exposure have
resulted in a stabilization of valuation adjustments recorded. A
summary of the significant valuation adjustments that impacted
revenue for the three month periods ended March 31, 2011
and 2010 are presented in the following table.
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Gains (Losses)
|
|
|
|
|
|
|
|
|
Insurance monoline structured credit
products(1)
|
|
$
|
16
|
|
|
$
|
56
|
|
Other structured credit
products(1)
|
|
|
81
|
|
|
|
37
|
|
Mortgage whole loans held for sale including whole loan purchase
settlement (predominantly
subprime)(2)
|
|
|
(5
|
)
|
|
|
77
|
|
Other-than-temporary
impairment on securities
available-for-sale
and
held-to-maturity(3)
|
|
|
-
|
|
|
|
(28
|
)
|
Leverage acquisition finance loans held for
sale(4)
|
|
|
34
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
Total gains (losses)
|
|
$
|
126
|
|
|
$
|
141
|
|
|
|
|
|
|
|
|
|
|
87
HSBC USA Inc.
|
|
|
(1) |
|
Reflected in Trading revenue in the
consolidated statement of income.
|
|
(2) |
|
Reflected in Other income in the
consolidated statement of income.
|
|
(3) |
|
Reflected in Net
other-than-temporary
impairment losses in the consolidated statement of income.
|
|
(4) |
|
Reflected in Gain (loss) on
instruments designated at fair value and related derivatives in
the consolidated statement of income.
|
The market turmoil experienced over the past few 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 manage 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 as of March 31, 2011.
Other revenues in both periods reflect the impact of changes in
value of our own debt and related derivatives for which we
elected fair value option as well as several non-recurring items
as presented in the first table above. Excluding the impact of
all these items, other revenue increased $9 million during
the first quarter of 2011 due primarily to higher trading
revenue, higher securities gains and lower
other-than-temporary
impairment losses, partially offset by lower credit card and
other fees and commissions. The higher trading revenue and
improvement in
other-than-temporary
impairment losses were driven by continuing improvements in
market conditions and as it relates to trading revenue,
continued reductions in counterparty exposure. Securities gains
were higher due to increased security sales for risk management
purposes. Lower credit card fees were due to lower levels of
credit card and private label receivables, changes in customer
behavior, lower delinquency levels and the continuing impact of
certain provisions of the Credit Card Accountability
Responsibility and Disclosure Act of 2009 (the Card
Act) which resulted in lower over limit, late and payment
processing fees. Lower other fees and commissions were driven by
lower refund anticipation loan fees as we did not offer this
product in 2011 as well as lower loan syndication fees. See
Results of Operations for a more detailed discussion
of other revenues.
Net interest income was $1.0 billion during the three
months ended March 31, 2011 compared to $1.2 billion
during the prior year quarter. The decrease reflects the impact
of lower average loan balances and rates earned on these
balances. These reductions were partially offset by a lower cost
of funds, including lower overall average rates on deposits. See
Results of Operations for a more detailed discussion
of net interest income.
Our provision for credit losses decreased $105 million
during the first quarter of 2011 compared to the year-ago
quarter primarily due to declines in loan balances and
improvements in economic and credit conditions, including lower
dollars of delinquency and improvements in early stage consumer
loan delinquency roll rates. These conditions have resulted in
improved outlook on future loss estimates for our consumer loan
portfolio as compared with the prior year quarter. While the
provision for credit losses increased for loans in the
commercial loan portfolio, it remained a net recovery in both
periods as 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 resulted in a higher overall release in loss reserves
during the year-ago quarter. See Results of
Operations for a more detailed discussion of our provision
for credit losses.
Operating expenses totaled $1.1 billion during the first
quarter of 2011, an increase of 4 percent from the year-ago
quarter. The increase was driven by a $78 million
impairment of certain previously capitalized software
development costs which are no longer realizable as a result of
decisions made in March 2011 to cancel certain projects.
Excluding the impact of this impairment, operating expenses fell
$32 million or 3 percent from the year-ago quarter
reflecting lower servicing fees paid to HSBC Finance due to
lower levels of receivables being serviced and lower tax refund
anticipation loan expenses partially offset by increased
salaries associated with the transfer of certain employees of
HSBC Finance to our default mortgage loan servicing department
in July 2010 (which cost is offset in other revenues) and higher
compliance costs. We continue to focus attention on cost
mitigation efforts in order to ensure realization of optimal
cost efficiencies. See Results of Operations for a
more detailed discussion of our operating expenses.
88
HSBC USA Inc.
Our efficiency ratio from continuing operations was
62.22 percent during the there months ended March 31,
2011 compared to 49.66 percent during the year-ago quarter.
The deterioration in the efficiency ratio reflects higher
operating expenses driven by impairment of certain software
development costs, while total net interest income and other
revenues declined. Excluding the impact of the software
development cost impairment, our efficiency ratio for the first
quarter of 2011 was 57.79 percent.
The effective tax rate for the three months ended March 31,
2011 was primarily impacted by a release of valuation allowance
previously established on foreign tax credits, utilization of
low income housing tax credits, state taxes and the change in
state tax rates used to value deferred taxes. During the first
quarter of 2011, HSBC North America identified an additional tax
planning strategy which is expected to generate sufficient
taxable foreign source income to allow us to recognize and
utilize foreign tax credits currently on our balance sheet
before they expire. See Note 12, Income Taxes,
in the accompanying consolidated financial statements for
further discussion.
At December 31, 2010, we consolidated a commercial paper
conduit known as Bryant Park Funding LLC (Bryant
Park) in our financial statements as we were considered to
be the primary beneficiary because we had 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.
During the first quarter of 2011, in order to consolidate and
streamline conduit administration across HSBC to reduce risk and
achieve operational and capital efficiencies, we completed the
assignment of a significant majority of our liquidity asset
purchase agreements to HSBC Bank plc. As a result, we no longer
have a controlling financial interest in Bryant Park and,
beginning in March 2011, we are no longer consolidating Bryant
Park. The deconsolidation of Bryant Park resulted in the removal
of approximately $2.4 billion of assets from our balance
sheet in March 2011 and did not have a significant financial
impact on our results of operations. See Note 17,
Variable Interest Entities for further discussion.
As discussed in our 2010
Form 10-K,
we have been building several new retail banking platforms as
part of an initiative to build common platforms across HSBC.
Certain of these retail banking platforms were rolled out in
2010 and additional platforms continued to be under development.
During the first quarter of 2011, we decided to cancel certain
projects underway that were developing software for these new
platforms as alternative information technology platforms are
being pursued. As a result of this decision, we recorded a
charge of $78 million during the first quarter of 2011
relating to the impairment of certain previously capitalized
software development costs which are now no longer realizable.
While development of other banking platforms continues, further
development of certain platforms is under review. At
March 31, 2011, $32 million of software in the process
of development on projects which have not been put into service
remains capitalized.
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. Our review of strategic options is continuing.
We continue to evaluate our operations as we seek to optimize
our risk profile and cost efficiencies as well as our liquidity,
capital and funding requirements. This could result in further
strategic actions that may include changes to our legal
structure, asset levels, cost structure or product offerings in
support of HSBCs strategic priorities. As part of this
continuing evaluation, a strategic review of HSBCs U.S.
credit card and private label businesses is underway as HSBC
seeks to redistribute resources and reallocate capital to
support core businesses. In addition, we are reviewing the
markets in which we operate in an effort to determine the
optimal size and geographic spread of our branch network as we
concentrate on areas with strong international connectivity,
consistent with HSBCs core strategy.
We also continue to focus on cost optimization efforts to ensure
realization of cost efficiencies. During the first quarter of
2011, in an effort to create a more sustainable cost structure,
we initiated a formal review to identify areas where we may be
able to streamline or redesign operations within certain
functions to reduce or eliminate costs. To
89
HSBC USA Inc.
date, we have identified various opportunities to reduce costs
through organizational structure redesign, vendor spending,
discretionary spending and other general efficiency initiatives.
This review will continue throughout 2011 and, as a result, we
may incur restructuring charges during the remainder of 2011,
the amount of which will depend on the actions that are
ultimately implemented.
The financial information set forth below summarizes selected
financial highlights of HSBC USA Inc. as of March 31, 2011
and December 31, 2010 and for the three month periods ended
March 31, 2011 and 2010.
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Income from continuing operations
|
|
$
|
480
|
|
|
$
|
544
|
|
|
|
|
|
|
|
|
|
|
Rate of return on average :
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
1.02
|
%
|
|
|
1.20
|
%
|
Total common shareholders equity
|
|
|
12.18
|
|
|
|
15.49
|
|
Net interest margin to average earning assets
|
|
|
2.55
|
|
|
|
3.01
|
|
Efficiency ratio
|
|
|
62.22
|
|
|
|
49.66
|
|
Commercial loan net charge-off
ratio(1)
|
|
|
.17
|
|
|
|
1.28
|
|
Consumer loan net charge-off
ratio(1)
|
|
|
4.21
|
|
|
|
6.43
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
$
|
31,057
|
|
|
$
|
30,274
|
|
Consumer loans
|
|
|
40,661
|
|
|
|
42,795
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
71,718
|
|
|
$
|
73,069
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale
|
|
$
|
1,688
|
|
|
$
|
2,390
|
|
|
|
|
|
|
|
|
|
|
Commercial allowance as a percent of
loans(1)
|
|
|
1.55
|
%
|
|
|
1.77
|
%
|
Commercial two-months-and-over contractual delinquency
|
|
|
2.06
|
|
|
|
2.42
|
|
Consumer allowance as a percent of
loans(1)
|
|
|
3.32
|
|
|
|
3.82
|
|
Consumer two-months-and-over contractual delinquency
|
|
|
4.75
|
|
|
|
5.04
|
|
Loan-to-deposits
ratio(2)
|
|
|
75.92
|
|
|
|
80.56
|
|
Total shareholders equity to total assets
|
|
|
8.76
|
|
|
|
9.10
|
|
Total capital to risk weighted assets
|
|
|
18.72
|
|
|
|
18.14
|
|
Tier 1 capital to risk weighted assets
|
|
|
12.40
|
|
|
|
11.80
|
|
|
|
|
(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 less than $100 thousand.
|
Loans Loans, excluding loans held for sale,
were $71.7 billion at March 31, 2011 compared to
$73.1 billion at December 31, 2010. The decrease in
loans as compared to December 31, 2010 reflects the
deconsolidation of the Bryant Park commercial paper conduit
which contributed $1.2 billion to outstanding commercial
loans at December 31, 2010, as well as run-off in all
consumer portfolios with the exception of residential mortgages
which remained relatively flat. We continue to sell the majority
of new residential mortgage loan originations to government
sponsored enterprises. The decline in credit card and private
label receivables reflects fewer active customer accounts, an
increased focus by customers to reduce outstanding credit card
debt and seasonal improvements in our collection activities
during the first quarter of the year as some customers use their
tax refunds to make payments. Excluding the impact to loans from
the deconsolidation of Bryant Park, commercial
90
HSBC USA Inc.
loans increased $2.0 billion since December 31, 2010,
driven by a $1.2 billion increase in affiliate loans,
including loans to HSBC Markets and its subsidiaries as well as
new business activity. These increases were partially offset by
paydowns and managed reductions in certain exposures. See
Balance Sheet Review for a more detailed discussion
of the changes in loan balances.
Credit Quality Our allowance for credit
losses as a percentage of total loans decreased to
2.55 percent at March 31, 2011 as compared to
2.97 percent at December 31, 2010. The decrease in our
allowance ratio reflects a lower allowance on all of our
consumer loan portfolios due to improved credit quality, lower
delinquency levels and continuing improvements in economic
conditions. Our commercial loan allowance for credit losses
ratio also fell as economic conditions continued to stabilize
and related credit quality and future loss estimates improved.
Our consumer two-months-and-over contractual delinquency as a
percentage of loans and loans held for sale (delinquency
ratio) decreased to 4.75 percent at March 31,
2011 as compared to 5.04 percent at December 31, 2010.
Dollars of delinquency decreased across virtually all consumer
portfolios while outstanding loan balances also declined in all
portfolios except residential mortgage loans. The decrease in
the consumer delinquency ratio was primarily in our residential
mortgage, private label card and credit card portfolios. See
Credit Quality for a more detailed discussion of the
increase in our delinquency ratios.
Net charge-offs as a percentage of average loans (net
charge-off ratio) decreased 61 basis points compared
to the quarter ended December 31, 2010 primarily due to
lower commercial, private label card and credit card charge-offs
driven by lower receivable levels and improved credit quality.
As it relates to private label card and credit card receivables,
these favorable trends were partially offset by the impact from
continued high unemployment levels. See Credit
Quality for a more detailed discussion of the increase in
net charge-offs and 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 12.40 percent and
11.80 percent at March 31, 2011 and December 31,
2010, respectively. Our capital levels remain well above levels
established by current banking regulations as well
capitalized. We received no cash capital contributions
from our immediate parent, HSBC North America Inc.
(HNAI) during the first quarter of 2011.
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 a typical 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 HSBC Bank USA. At March 31,
2011, the remaining purchased receivables subject to this
requirement totaled $2.8 billion, of which
$583 million were considered low-quality assets. We have
exceeded the minimum capital ratios required at March 31,
2011 and December 31, 2010.
As discussed in previous filings, HSBC North America is required
to implement Basel II provisions in accordance with current
regulatory timelines. While HSBC USA Inc. will not report
separately under the new rules, HSBC Bank USA will report under
the new rules on a stand-alone basis. Prior to adoption of Basel
II, we are required to successfully complete a parallel run by
measuring regulatory capital under both the new regulatory
capital rules and the existing general risk-based rules for a
period of at least four quarters. Successful completion of the
parallel run period requires the approval of
U.S. regulators. We began the parallel run period in
January 2010 which encompasses enhancements to a number of risk
policies, processes and systems to align HSBC Bank USA with the
Basel II final rule requirements. We are uncertain as to
when we will receive approval from our primary regulator.
Regulatory approval may not occur until later in 2011 or in
2012. We have integrated Basel II metrics into our
management reporting and decision making process.
91
HSBC USA Inc.
Income Before Income Tax Expense Significant
Trends Income from continuing operations before
income tax expense, and various trends and activity affecting
operations, are summarized in the following table.
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Income (loss) from continuing operations before income tax for
prior year
|
|
$
|
858
|
|
|
$
|
(58
|
)
|
Increase (decrease) in income from continuing operations before
income tax attributable to:
|
|
|
|
|
|
|
|
|
Balance sheet management
activities(1)
|
|
|
65
|
|
|
|
(192
|
)
|
Trading
revenue(2)
|
|
|
45
|
|
|
|
346
|
|
Credit card
fees(3)
|
|
|
(64
|
)
|
|
|
(124
|
)
|
Loans held for
sale(4)
|
|
|
(82
|
)
|
|
|
163
|
|
Residential mortgage banking related revenue
(loss)(5)
|
|
|
2
|
|
|
|
(102
|
)
|
Loss on own debt designated at fair value and related
derivatives(6)
|
|
|
(48
|
)
|
|
|
(16
|
)
|
Gain (loss) on instruments designated at fair value and related
derivatives, excluding own
debt(6)
|
|
|
23
|
|
|
|
(50
|
)
|
Provision for credit
losses(7)
|
|
|
105
|
|
|
|
963
|
|
All other
activity(8)
|
|
|
(342
|
)
|
|
|
(72
|
)
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income tax for current
period
|
|
$
|
562
|
|
|
$
|
858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Balance sheet management activities
are comprised primarily of net interest income and, to a lesser
extent, gains or losses 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 in 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 banking
activities, including the impact of certain non-recurring items
such as the impaired software development costs in 2011 and in
2010, the gain on the sale of Wells Fargo HSBC Trade Bank and
the whole loan repurchase settlement.
|
Basis of
Reporting
Our consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United
States (U.S. GAAP). Unless noted, the
discussion of our financial condition and results of operations
included in MD&A are presented on a continuing operations
basis of reporting. 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
92
HSBC USA Inc.
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 IFRSs basis.
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2011
|
|
|
2010
|
|
|
|
|
Net income (loss) U.S. GAAP basis
|
|
$
|
479
|
|
|
$
|
554
|
|
Adjustments, net of tax:
|
|
|
|
|
|
|
|
|
Reclassification of financial assets
|
|
|
(31
|
)
|
|
|
(10
|
)
|
Securities
|
|
|
11
|
|
|
|
34
|
|
Derivatives
|
|
|
2
|
|
|
|
2
|
|
Loan impairment
|
|
|
7
|
|
|
|
7
|
|
Property
|
|
|
(2
|
)
|
|
|
-
|
|
Pension costs
|
|
|
6
|
|
|
|
57
|
|
Purchased loan portfolios
|
|
|
(20
|
)
|
|
|
(26
|
)
|
Servicing assets
|
|
|
-
|
|
|
|
1
|
|
Return of capital
|
|
|
-
|
|
|
|
(3
|
)
|
Release of tax valuation allowances
|
|
|
39
|
|
|
|
-
|
|
Uncertain tax positions
|
|
|
(160
|
)
|
|
|
-
|
|
Other
|
|
|
3
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) IFRSs basis
|
|
|
334
|
|
|
|
627
|
|
Tax benefit (expense) IFRSs basis
|
|
|
(120
|
)
|
|
|
(356
|
)
|
|
|
|
|
|
|
|
|
|
Profit (loss) before tax IFRSs basis
|
|
$
|
454
|
|
|
$
|
983
|
|
|
|
|
|
|
|
|
|
|
A summary of the significant differences between U.S. GAAP
and IFRSs as they impact our results are presented below:
Reclassification of financial assets Certain
securities were reclassified from trading assets to
loans and receivables under IFRSs as of July 1,
2008 pursuant to an amendment to IAS 39, Financial
Instruments: Recognition and Measurement (IAS
39), and are no longer marked to market under IFRSs. In
November 2008, additional securities were similarly transferred
to loans and receivables. These securities continue to be
classified as trading assets under U.S. GAAP.
Additionally, certain Leverage Acquisition Finance
(LAF) loans were classified as Trading
Assets for IFRSs and to be consistent, an irrevocable fair
value option was elected on these loans under U.S. GAAP on
January 1, 2008. These loans were reclassified to
loans and advances as of July 1, 2008 pursuant
to the IAS 39 amendment discussed above. Under U.S. GAAP,
these loans are classified as held for sale and
carried at fair value due to the irrevocable nature of the fair
value option.
Securities 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 amount 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
93
HSBC USA Inc.
reversed. There is no similar requirement under U.S. GAAP.
During 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. 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 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.
Loan impairment IFRSs requires a discounted
cash flow methodology for estimating impairment on pools of
homogeneous customer loans which requires the discounting of
cash flows including recovery estimates at the original
effective interest rate of the pool of customer loans. The
amount of impairment relating to the discounting of future cash
flows unwinds with the passage of time, and is recognized in
interest income. Also under IFRSs, if the recognition of a
write-down to net realizable value on secure loans decreases
because collateral values have improved and the improvement can
be related objectively to an event occurring after recognition
of the write-down, such write-down can be reversed, which is not
permitted under U.S. GAAP. Additionally under IFRSs, future
recoveries on charged-off loans or loans written down to net
realizable value less cost to obtain title and sell 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. Under IFRSs, interest on impaired loans is recorded
at the effective interest rate on the customer loans balance net
of impairment allowances, and therefore reflects the
collectibility of the loans.
Property 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 exceeded the higher of the
projected benefit obligation or fair value of plan assets 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
U.S. GAAP, purchased loans for which there has been
evidence of credit deterioration at the time of acquisition are
recorded at an amount based on the net cash flows expected to be
collected. This generally results in only a portion of the loans
in the acquired portfolio being recorded at fair value. Under
IFRSs, the entire purchased portfolio is recorded at fair value.
When recording purchased loans at fair value, the difference
between all estimated future cash collections and the purchase
price paid is recognized into income using the effective
interest method. An allowance for loan loss is not established
unless the original estimate of expected future cash collections
declines.
Servicing assets Under IAS 38, servicing
assets are initially recorded on the balance sheet at cost and
amortized over the projected life of the assets. Servicing
assets are periodically tested for impairment with impairment
adjustments charged against current earnings. Under
U.S. GAAP, we generally record servicing assets on the
balance sheet at fair value. Subsequent adjustments to fair
value are generally reflected in current period earnings.
Return of capital Reflects payments to CT
Financial Services, Inc. in connection with the resolution of a
lawsuit which for IFRSs 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.
Release of tax valuation allowances Reflects
differences in the timing of amounts of deferred tax assets that
can be realized between U.S. GAAP and IFRSs.
Uncertain tax positions Under U.S. GAAP,
developments regarding uncertain tax positions that occur after
the balance sheet date but before issuance of the financial
statements are considered to be an unrecognized subsequent
94
HSBC USA Inc.
event for which no impact is recorded in the current period.
Under IFRSs, financial statements are adjusted to reflect a
material event that occurs after the end of the reporting period
but before the financial statements are authorized for issuance
if the event provides additional evidences relating to
conditions that existed at the end of the reporting period.
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, discounting
repurchase liabilities on sold loans, restructuring costs,
depreciation expense and loans held for sale.
Balance
Sheet Review
We utilize deposits and borrowings from various sources to
provide liquidity, fund balance sheet growth, meet cash and
capital needs, and fund investments in subsidiaries. Balance
sheet totals at March 31, 2011 and increases (decreases)
since December 31, 2010, are summarized in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) From
|
|
|
|
March 31,
|
|
|
December 31, 2010
|
|
|
|
2011
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Period end assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
$
|
36,580
|
|
|
$
|
18,566
|
|
|
|
100+
|
%
|
Loans, net
|
|
|
69,886
|
|
|
|
(1,013
|
)
|
|
|
(1.4
|
)
|
Loans held for sale
|
|
|
1,688
|
|
|
|
(702
|
)
|
|
|
(29.4
|
)
|
Trading assets
|
|
|
32,980
|
|
|
|
578
|
|
|
|
1.8
|
|
Securities
|
|
|
42,797
|
|
|
|
(5,916
|
)
|
|
|
(12.1
|
)
|
Other assets
|
|
|
12,656
|
|
|
|
1,261
|
|
|
|
11.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
196,587
|
|
|
$
|
12,774
|
|
|
|
6.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funding sources:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
132,761
|
|
|
$
|
12,110
|
|
|
|
10.0
|
%
|
Trading liabilities
|
|
|
11,165
|
|
|
|
637
|
|
|
|
6.1
|
|
Short-term borrowings
|
|
|
13,820
|
|
|
|
(1,367
|
)
|
|
|
(9.0
|
)
|
All other liabilities
|
|
|
4,634
|
|
|
|
1,150
|
|
|
|
33.0
|
|
Long-term debt
|
|
|
16,986
|
|
|
|
(244
|
)
|
|
|
(1.4
|
)
|
Shareholders equity
|
|
|
17,221
|
|
|
|
488
|
|
|
|
2.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
196,587
|
|
|
$
|
12,774
|
|
|
|
6.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 between periods depending
upon our liquidity position at the time. Increases during the
first quarter of 2011 reflect increased liquidity driven by
higher deposit levels.
95
HSBC USA Inc.
Loans, Net Loan balances at March 31,
2011 and increases (decreases) since December 31, 2010 are
summarized in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) From
|
|
|
|
March 31,
|
|
|
December 31, 2010
|
|
|
|
2011
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Commercial loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and other real estate
|
|
$
|
8,281
|
|
|
$
|
53
|
|
|
|
.6
|
%
|
Business banking and middle market enterprises
|
|
|
8,054
|
|
|
|
109
|
|
|
|
1.4
|
|
Large corporate
|
|
|
11,878
|
|
|
|
1,133
|
|
|
|
10.5
|
|
Other commercial loans
|
|
|
2,844
|
|
|
|
(512
|
)
|
|
|
(15.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial loans
|
|
|
31,057
|
|
|
|
783
|
|
|
|
2.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages, excluding home equity mortgages
|
|
|
13,868
|
|
|
|
171
|
|
|
|
1.2
|
|
Home equity mortgages
|
|
|
3,678
|
|
|
|
(142
|
)
|
|
|
(3.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total residential mortgages
|
|
|
17,546
|
|
|
|
29
|
|
|
|
.2
|
|
Private label
|
|
|
12,014
|
|
|
|
(1,282
|
)
|
|
|
(9.6
|
)
|
Credit Card
|
|
|
10,014
|
|
|
|
(797
|
)
|
|
|
(7.4
|
)
|
Other consumer
|
|
|
1,087
|
|
|
|
(84
|
)
|
|
|
(7.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer loans
|
|
|
40,661
|
|
|
|
(2,134
|
)
|
|
|
(5.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
71,718
|
|
|
|
(1,351
|
)
|
|
|
(1.9
|
)
|
Allowance for credit losses
|
|
|
1,832
|
|
|
|
(338
|
)
|
|
|
(15.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
$
|
69,886
|
|
|
$
|
(1,013
|
)
|
|
|
(1.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loan balances at December 31, 2010 reflect
$1.2 billion of loans relating to the Bryant Park
commercial paper conduit which we no longer consolidate at
March 31, 2011. Excluding the impact of Bryant Park,
commercial loan balances increased $2.0 billion since
December 31, 2010, driven by a $1.2 billion increase
in affiliate loans, including loans to HSBC Markets and its
subsidiaries, as well as new business activity. These increases
were partially offset by paydowns and managed reductions in
certain exposures.
Residential mortgage loans have remained relatively flat since
December 31, 2010. As a result of balance sheet initiatives
to manage interest rate risk and improve the structural
liquidity of HSBC Bank USA, we continue to 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 balances reflect
increases to the portfolio associated with originations targeted
at our Premier customer relationships.
96
HSBC USA Inc.
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 such, the
loan-to-value
(LTV) ratios for our mortgage loan portfolio have
generally deteriorated since origination. Refreshed
loan-to-value
ratios for our mortgage loan portfolio, excluding subprime
residential mortgage loans held for sale, are presented in the
table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refreshed
LTVs(1)(2)
|
|
|
Refreshed
LTVs(1)(2)
|
|
|
|
at March 31, 2011
|
|
|
at December 31, 2010
|
|
|
|
First Lien
|
|
|
Second Lien
|
|
|
First Lien
|
|
|
Second Lien
|
|
|
|
|
LTV < 80%
|
|
|
75.6
|
%
|
|
|
64.2
|
%
|
|
|
75.1
|
%
|
|
|
64.1
|
%
|
80%
£
LTV < 90%
|
|
|
11.5
|
|
|
|
13.4
|
|
|
|
11.9
|
|
|
|
13.5
|
|
90%
£
LTV < 100%
|
|
|
6.7
|
|
|
|
9.8
|
|
|
|
6.8
|
|
|
|
9.8
|
|
LTV
³
100%
|
|
|
6.3
|
|
|
|
12.6
|
|
|
|
6.2
|
|
|
|
12.6
|
|
Average LTV for portfolio
|
|
|
67.1
|
%
|
|
|
73.6
|
%
|
|
|
67.1
|
%
|
|
|
73.6
|
%
|
|
|
|
(1) |
|
Refreshed LTVs for first liens are
calculated using the loan balance as of the reporting date.
Refreshed LTVs for second liens are calculated using the loan
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 loan
origination updated by the change in the Federal Housing Finance
Agencys (formerly known as the Office of Federal Housing
Enterprise Oversight) 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
December 31, 2010 and September 30, 2010, respectively.
|
Credit card and private label receivable balances decreased due
to fewer active customer accounts, an increased focus by
customers to reduce outstanding credit card debt and, as it
relates to the private label portfolio, the continued impact
associated with the exit of certain merchant relationships.
Decreases also reflect seasonal improvements in our collection
activities during the first quarter of the year as some
customers use their tax refunds to make payments. At
March 31, 2011, private label receivables include
$743 million associated with merchants for which we no
longer finance new purchases.
Other consumer loans have decreased primarily due to the
discontinuation of originations of student loans and run-off of
our installment loan portfolio.
Loans Held for Sale Loans held for sale at
March 31, 2011 and increases (decreases) since
December 31, 2010 are summarized in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) From
|
|
|
|
|
|
|
December 31,
|
|
|
|
March 31,
|
|
|
2010
|
|
|
|
2011
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Total commercial loans
|
|
$
|
845
|
|
|
$
|
(511
|
)
|
|
|
(37.7
|
)%
|
Consumer loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
763
|
|
|
|
(191
|
)
|
|
|
(20.0
|
)
|
Other consumer
|
|
|
80
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer loans
|
|
|
843
|
|
|
|
(191
|
)
|
|
|
(18.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans held for sale
|
|
$
|
1,688
|
|
|
$
|
(702
|
)
|
|
|
(29.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We originate commercial loans in connection with our
participation in a number of leveraged acquisition finance
syndicates. A substantial majority of these loans were
originated with the intent of selling them to unaffiliated third
parties and are classified as commercial loans held for sale.
Commercial loans held for sale under this program were
97
HSBC USA Inc.
$542 million and $1.0 billion at March 31, 2011
and December 31, 2010, respectively, all of which are
recorded at fair value as we have elected to designate these
loans under fair value option. Commercial loan balances under
this program decreased during the first quarter of 2011 due to
loan sales. In addition beginning 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 commercial loans
held for sale under this program was $271 million and
$273 million at March 31, 2011 and December 31,
2010, respectively. See Note 11, Fair Value
Option, in the accompanying consolidated financial
statements for further information.
Residential mortgage loans held for sale include subprime
residential mortgage loans of $304 million and
$391 million at March 31, 2011 and December 31,
2010, 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. We retained the servicing rights in relation to the
mortgages upon sale. Balances declined in the first quarter of
2011 due to subprime residential mortgage loan sales.
Other consumer loans held for sale consist of student loans
which we no longer originate.
Consumer loans held for sale are recorded at the lower of cost
or market value. While the book value of loans held for sale
continued to exceed fair value at March 31, 2011, we
experienced a decrease in the valuation allowance during the
first quarter of 2011 primarily due to lower balances driven by
loan sales.
Trading Assets and Liabilities Trading assets and
liabilities balances at March 31, 2011 and increases
(decreases) since December 31, 2010, are summarized in the
table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) From
|
|
|
|
|
|
|
December 31,
|
|
|
|
March 31,
|
|
|
2010
|
|
|
|
2011
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Trading assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities(1)
|
|
$
|
12,854
|
|
|
$
|
3,189
|
|
|
|
33.0
|
%
|
Precious metals
|
|
|
13,594
|
|
|
|
(3,131
|
)
|
|
|
(18.7
|
)
|
Derivatives(2)
|
|
|
6,532
|
|
|
|
520
|
|
|
|
8.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
32,980
|
|
|
$
|
578
|
|
|
|
1.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold, not yet purchased
|
|
$
|
349
|
|
|
$
|
137
|
|
|
|
64.6
|
%
|
Payable for precious metals
|
|
|
5,377
|
|
|
|
51
|
|
|
|
1.0
|
|
Derivatives(3)
|
|
|
5,439
|
|
|
|
449
|
|
|
|
9.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,165
|
|
|
$
|
637
|
|
|
|
6.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes U.S. Treasury securities,
securities issued by U.S. Government agencies and U.S.
Government sponsored enterprises, other asset-backed securities,
corporate bonds and debt securities.
|
|
(2) |
|
At March 31, 2011 and
December 31, 2010, the fair value of derivatives included
in trading assets has been reduced by $3.2 billion and
$3.1 billion, respectively, relating to amounts recognized
for the obligation to return cash collateral received under
master netting agreements with derivative counterparties.
|
|
(3) |
|
At March 31, 2011 and
December 31, 2010, the fair value of derivatives included
in trading liabilities has been reduced by $5.8 billion,
relating to amounts recognized for the right to reclaim cash
collateral paid under master netting agreements with derivative.
|
Securities balances as well as balances of securities sold, not
yet purchased increased at March 31, 2011 due to an
increase in Treasury positions related to hedges for derivative
positions in both the interest rate and emerging market trading
portfolio.
98
HSBC USA Inc.
Precious metals trading assets decreased at March 31, 2011
primarily due to a reduction in gold inventory. The higher
payable for precious metals compared to December 31, 2010
was primarily due to higher metal balances, mainly for price
increases in silver.
Derivative assets and liabilities balances as compared to
December 31, 2010 were impacted by market movements as
valuations of credit derivatives increased from spread widening
and increased value in foreign exchange and interest rate
derivatives. This was partially offset by the continued decrease
in credit derivative positions as a number of transaction
unwinds and commutations reduced the outstanding market value as
management continues to actively reduce exposure.
Deposits Deposit balances by major depositor
categories at March 31, 2011 and increases since
December 31, 2010, are summarized in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) From
|
|
|
|
|
|
|
December 31,
|
|
|
|
March 31,
|
|
|
2010
|
|
|
|
2011
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Individuals, partnerships and corporations
|
|
$
|
112,608
|
|
|
$
|
8,620
|
|
|
|
8.3
|
%
|
Domestic and foreign banks
|
|
|
14,018
|
|
|
|
2,106
|
|
|
|
17.7
|
|
U.S. government, states and political subdivisions
|
|
|
5,047
|
|
|
|
754
|
|
|
|
17.6
|
|
Foreign governments and official institutions
|
|
|
1,088
|
|
|
|
630
|
|
|
|
100+
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
132,761
|
|
|
$
|
12,110
|
|
|
|
10.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total core
deposits(1)
|
|
$
|
94,276
|
|
|
$
|
3,305
|
|
|
|
3.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
We monitor core
deposits as a key measure for assessing results of our
core banking network. 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 significant source of funding during
the first quarter of 2011. Deposits at March 31, 2011 have
increased since December 31, 2010 as higher deposits from
affiliates, increases in foreign placed deposits, growth in
branch-based deposit products driven primarily by our Premier
and branch expansion strategies as well as seasonal increases in
deposits was partially offset by 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 a
substantial source of our core liquidity, increased during the
first quarter of 2011 driven by continuing growth in our Premier
balances and increases in institutional transaction account
balances.
Our strategy for our core retail banking business, 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 $30.9 billion at March 31, 2011 as
compared to $29.5 billion at December 31, 2010;
|
|
|
|
Deepening our existing customer relationships by needs-based
sales of wealth, banking and mortgage products.
|
Short-Term Borrowings Balances at March 31,
2011 decreased as compared to December 31, 2010 as a result
of the deconsolidation of the Bryant Park commercial paper
conduit during the first quarter of 2011 which held
$3.0 billion of commercial paper at December 31, 2010,
partially offset by increased levels of securities sold under
agreements to repurchase.
99
HSBC USA Inc.
Long-Term Debt Long-term debt at March 31,
2011 decreased as compared to December 31, 2010 due to an
increased mix of lower rate short-term funding (excluding the
impact of Bryant Park), the impact of long-term debt retirements
and continued focus on deposit gathering activities.
Incremental issuances from the $40.0 billion HSBC Bank USA
Global Bank Note Program totaled $236 million and
$176 million during the three months ended March 31,
2011 and 2010, respectively. Total debt outstanding under this
program was $5.1 billion and $4.9 billion at
March 31, 2011 and December 31, 2010, respectively.
Incremental long-term debt issuances from our shelf registration
statement with the Securities and Exchange Commission totaled
$540 million and $502 million during the three months
ended March 31, 2011 and 2010, respectively. Total
long-term debt outstanding under this shelf was
$6.5 billion and $6.5 billion at both March 31,
2011 and December 31, 2010.
Borrowings from the Federal Home Loan Bank of New York
(FHLB) totaled $1.0 billion at March 31,
2011 and December 31, 2010. At March 31, 2011, we had
the ability to access further borrowings of up to
$3.1 billion based on the amount pledged as collateral with
the FHLB.
We have entered into 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. Debt obligations of VIEs
totaling $55 million were included in long-term debt at
March 31, 2011. Debt obligations of VIEs totaling
$3.0 billion and $205 million were included in
short-term borrowings and long-term debt, respectively, at
December 31, 2010. The decrease in short-term borrowings
during the first quarter of 2011 reflects the deconsolidation in
the first quarter of 2011 of Bryant Park. See Note 17,
Variable Interest Entities, in the accompanying
consolidated financial statements for additional information
regarding VIE arrangements.
Real
Estate Owned
We obtain real estate by taking possession of the collateral
pledged as security for residential mortgage loans. REO
properties are made available for sale in an orderly fashion
with the proceeds used to reduce or repay the outstanding
receivable balance. The following table provides quarterly
information regarding our REO properties:
|
|
|
|
|
|
|
March 31,
|
|
Three Months Ended
|
|
2011
|
|
|
|
|
Number of REO properties at end of period
|
|
|
607
|
|
Number of properties added to REO inventory in the period
|
|
|
265
|
|
Average loss on sale of REO
properties(1)
|
|
|
9.1
|
%
|
Average total loss on foreclosed
properties(2)
|
|
|
45.9
|
%
|
Average time to sell REO properties (in days)
|
|
|
213
|
|
|
|
|
(1) |
|
Property acquired through
foreclosure is initially recognized at its fair value less
estimated costs to sell (Initial REO Carrying
Value). The average loss on sale of REO properties is
calculated as cash proceeds less the Initial REO Carrying Value
divided by the Initial REO Carrying Value. At March 31,
2011, the fair value of our residential mortgage REO totaled
$73 million.
|
|
(2) |
|
The average total loss on
foreclosed properties sold each quarter includes both the loss
on sale of the REO property as discussed above and the
cumulative write-downs recognized on the loans up to the time we
took title to the property. This calculation of the average
total loss on foreclosed properties uses the unpaid loan
principal balance prior to write-down plus any other ancillary
amounts owed (e.g., real estate tax advances) which were
incurred prior to our taking title to the property.
|
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
100
HSBC USA Inc.
consolidated average balances and interest rates on a taxable
equivalent basis is presented in this MD&A under the
caption Consolidated Average Balances and Interest
Rates.
The significant components of net interest margin are summarized
in the following table:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2011
|
|
|
2010
|
|
|
|
|
Yield on total earning assets
|
|
|
3.26
|
%
|
|
|
3.82
|
%
|
Rate paid on interest bearing liabilities
|
|
|
.87
|
|
|
|
.97
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread
|
|
|
2.39
|
|
|
|
2.85
|
|
Benefit from net non-interest earning or paying funds
|
|
|
.16
|
|
|
|
.16
|
|
|
|
|
|
|
|
|
|
|
Net interest margin
|
|
|
2.55
|
%
|
|
|
3.01
|
%
|
|
|
|
|
|
|
|
|
|
Significant trends affecting the comparability of net interest
income and interest rate spread for the three months ended
March 31, 2011 are summarized in the following table. Net
interest income in the table is presented on a taxable
equivalent basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate
|
|
Three Months Ended March 31,
|
|
Amount
|
|
|
Spread
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net interest income/interest rate spread from prior year period
|
|
$
|
1,205
|
|
|
|
2.85
|
%
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in net interest income associated with:
|
|
|
|
|
|
|
|
|
Trading related activities
|
|
|
15
|
|
|
|
|
|
Balance sheet management
activities(1)
|
|
|
23
|
|
|
|
|
|
Private label card portfolio
|
|
|
(41
|
)
|
|
|
|
|
Credit card portfolio
|
|
|
(122
|
)
|
|
|
|
|
Commercial loans
|
|
|
(17
|
)
|
|
|
|
|
Deposits
|
|
|
41
|
|
|
|
|
|
Residential mortgage banking
|
|
|
4
|
|
|
|
|
|
Other activity
|
|
|
(60
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/interest rate spread for current year period
|
|
$
|
1,048
|
|
|
|
2.39
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 increased during the first quarter of
2011 primarily due to higher balances on interest earning
trading assets, such as trading bonds, which was partially
offset by lower rates earned on these assets.
Balance sheet management activities Higher net
interest income from balance sheet management activities during
the first quarter of 2011 reflects positions taken in
expectation of continued low short-term rates including
additional purchases of U.S. Treasuries and Government
National Mortgage Association mortgage-backed securities.
Private label card portfolio Net interest income on
private label credit card receivables was lower during the first
quarter of 2011 as a result of higher premiums, lower average
balances outstanding and lower receivable levels at penalty
pricing, partially offset by lower funding costs.
Credit card portfolio Net interest income on credit
card receivables decreased during the first quarter of 2011
primarily reflecting lower average balances outstanding, lower
loan levels at penalty pricing and higher premiums, partially
offset by lower funding costs.
101
HSBC USA Inc.
Commercial loans Net interest income on commercial
loans decreased during the first quarter of 2011 primarily due
to lower average loan balances, partially offset by lower levels
of nonperforming loans and lower funding costs.
Deposits Higher net interest income during the first
quarter of 2011 reflects improved spreads in the Personal
Financial Services (PFS) and Commercial Banking
business (CMB) segments as deposit pricing has been
adjusted to reflect the on-going low interest rate environment.
Both segments continue to be impacted however, relative to
historical trends, by the current rate environment and the
growth in higher yielding deposit products such as on-line
savings and Premier investor accounts.
Residential mortgage banking Higher net interest
income during the first quarter of 2011 resulted from lower
funding costs, partially offset by lower average residential
loans outstanding.
Other activity Net interest income on other activity
was lower during the first quarter of 2011, largely driven by
lower net interest income from the sale of auto finance
receivables during 2010.
Provision for Credit Losses The provision for
credit losses associated with various loan portfolios is
summarized in the following table.
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
Construction and other real estate
|
|
$
|
(28
|
)
|
|
$
|
2
|
|
Business banking and middle market enterprises
|
|
|
(2
|
)
|
|
|
3
|
|
Large corporate
|
|
|
(5
|
)
|
|
|
(77
|
)
|
Other commercial
|
|
|
(6
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
(41
|
)
|
|
|
(73
|
)
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
Residential mortgages, excluding home equity mortgages
|
|
|
21
|
|
|
|
(19
|
)
|
Home equity mortgages
|
|
|
10
|
|
|
|
(21
|
)
|
Private label card receivables
|
|
|
51
|
|
|
|
109
|
|
Credit card receivables
|
|
|
61
|
|
|
|
190
|
|
Auto finance
|
|
|
-
|
|
|
|
25
|
|
Other consumer
|
|
|
4
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
147
|
|
|
|
284
|
|
|
|
|
|
|
|
|
|
|
Total provision for credit losses
|
|
$
|
106
|
|
|
$
|
211
|
|
|
|
|
|
|
|
|
|
|
During the first quarter of 2011, we decreased our credit loss
reserves as the provision for credit losses was
$339 million lower than net charge-offs reflecting lower
loss estimates in our commercial and consumer loan portfolios.
The provision as a percentage of average receivables was
.15 percent at March 31, 2011 compared to
.27 percent at March 31, 2010.
We experienced a lower net recovery in commercial loan loss
provision in the first quarter of 2011 as compared to the prior
year quarter. While we experienced reserve reductions on
troubled debt restructures in commercial real estate and middle
market enterprises as well as lower nonperforming loans and
criticized asset levels in the quarter, reductions in higher
risk rated loan balances and stabilization in credit downgrades,
including managed reductions in certain exposures and
improvements in the financial circumstances of certain customer
relationships in both periods resulted in a higher overall
release in loss reserves during the year-ago period. Given the
nature of the factors driving the reduction in commercial loan
provision during the quarter, provision levels recognized in the
first quarter of 2011 should not be considered indicative of
provision levels in the future.
The provision for credit losses on residential mortgages
including home equity mortgages increased $71 million
during the first quarter of 2011 as compared to the prior year
quarter. While residential mortgage loan credit quality
102
HSBC USA Inc.
continues to improve as delinquency and charge-off levels
continue to decline, the prior year quarter reflects a reduction
in loss reserves associated with certain portfolio risk factors
that did not re-occur in 2011.
Provision expense associated with our private label card
portfolio decreased $58 million during the first quarter of
2011 compared to the year-ago quarter due to lower receivable
levels, improved economic and credit conditions, including lower
dollars of delinquency, improvements in early stage delinquency
roll rates and higher recovery rates. Lower receivable levels
reflect fewer active customer accounts and an increased focus by
consumers to pay down card debt. The impact on private label
card receivable losses from the current economic environment,
including high unemployment levels, has not been as severe as
originally expected due in part to improved customer payment
behavior.
The provision for credit losses associated with credit card
receivables decreased $129 million during the first quarter
of 2011 compared to the year-ago quarter reflecting lower
receivable levels, improved economic and credit conditions,
including lower dollars of delinquency, improvements in early
stage delinquency roll rates and higher recovery rates. Lower
receivable levels reflect fewer active customer accounts and an
increased focus by consumers to pay down credit card debt. The
impact on credit card receivable losses from the current
economic environment, including high unemployment levels, has
not been as severe as originally expected due in part to
improved customer payment behavior.
Provision expense associated with our auto finance portfolio
decreased during the first quarter of 2011 as a result of the
sale in August 2010 of the remaining auto loans purchased from
HSBC Finance 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 2010
Form 10-K.
See Credit Quality in this MD&A for additional
discussion on the allowance for credit losses associated with
our various loan portfolios.
Other Revenues The components of other
revenues are summarized in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
Three Months Ended March 31,
|
|
2011
|
|
|
2010
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Credit card fees
|
|
$
|
169
|
|
|
$
|
233
|
|
|
$
|
(64
|
)
|
|
|
(27.5
|
)%
|
Other fees and commissions
|
|
|
198
|
|
|
|
285
|
|
|
|
(87
|
)
|
|
|
(30.5
|
)
|
Trust income
|
|
|
28
|
|
|
|
26
|
|
|
|
2
|
|
|
|
7.7
|
|
Trading revenue
|
|
|
224
|
|
|
|
186
|
|
|
|
38
|
|
|
|
20.4
|
|
Net
other-than-temporary
impairment losses
|
|
|
-
|
|
|
|
(28
|
)
|
|
|
28
|
|
|
|
100.0
|
|
Other securities gains, net
|
|
|
44
|
|
|
|
21
|
|
|
|
23
|
|
|
|
100+
|
|
HSBC affiliate income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees and commissions
|
|
|
24
|
|
|
|
27
|
|
|
|
(3
|
)
|
|
|
(11.1
|
)
|
Other affiliate income
|
|
|
22
|
|
|
|
6
|
|
|
|
16
|
|
|
|
100+
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total HSBC affiliate income
|
|
|
46
|
|
|
|
33
|
|
|
|
13
|
|
|
|
39.4
|
|
Residential mortgage banking revenue
(loss)(1)
|
|
|
(35
|
)
|
|
|
(37
|
)
|
|
|
2
|
|
|
|
5.4
|
|
Gain (loss) on instruments at fair value and related derivatives
|
|
|
21
|
|
|
|
46
|
|
|
|
(25
|
)
|
|
|
(54.3
|
)
|
Other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation of loans held for sale
|
|
|
(5
|
)
|
|
|
77
|
|
|
|
(82
|
)
|
|
|
(100+
|
)
|
Insurance
|
|
|
3
|
|
|
|
5
|
|
|
|
(2
|
)
|
|
|
(40.0
|
)
|
Earnings from equity investments
|
|
|
10
|
|
|
|
3
|
|
|
|
7
|
|
|
|
100+
|
|
Miscellaneous income
|
|
|
21
|
|
|
|
73
|
|
|
|
(52
|
)
|
|
|
(71.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
29
|
|
|
|
158
|
|
|
|
(129
|
)
|
|
|
(81.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other revenues
|
|
$
|
724
|
|
|
$
|
923
|
|
|
$
|
(199
|
)
|
|
|
(21.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes servicing fees received
from HSBC Finance of $2 million during the three months
ended March 31, 2011 and 2010.
|
103
HSBC USA Inc.
Credit Card Fees Lower credit card fees during the
first quarter of 2011 was due primarily to lower receivable
levels as a result of fewer active customer accounts, changes in
customer behavior, improved delinquency levels and the
implementation of certain provisions of the Card Act subsequent
to January 2010. 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 lower late fees due to limits on fees
that can be assessed all of which are considered in determining
the purchase price of the receivables purchased daily from HSBC
Finance. Also contributing to the decrease were higher revenue
share payments due to improved cash flows and renegotiation of
certain merchant agreements since March 2010.
Other fees and commissions Other fee-based income
decreased during the first quarter of 2011 largely due to lower
refund anticipation loan fees as we did not offer these products
during the 2011 tax season. Also contributing to the decline
were lower loan syndication fees.
Trust income Trust income increased in the first
quarter of 2011 due to an increase in fee income associated with
our management of fixed income assets, partially offset by
reduced fee income associated with the continued decline in
money market assets under management.
Trading revenue is generated by participation in the
foreign exchange, rates, credit and precious metals markets. The
following table presents trading related revenue 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. Trading
revenues related to the mortgage banking business are included
in residential mortgage banking revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
Three Months Ended March 31,
|
|
2011
|
|
|
2010
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Trading revenue
|
|
$
|
224
|
|
|
$
|
186
|
|
|
$
|
38
|
|
|
|
20.4
|
%
|
Net interest income
|
|
|
11
|
|
|
|
3
|
|
|
|
8
|
|
|
|
100+
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading related revenue
|
|
$
|
235
|
|
|
$
|
189
|
|
|
$
|
46
|
|
|
|
24.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$
|
164
|
|
|
$
|
107
|
|
|
$
|
57
|
|
|
|
53.3
|
%
|
Balance sheet management
|
|
|
5
|
|
|
|
21
|
|
|
|
(16
|
)
|
|
|
(76.2
|
)
|
Foreign exchange
|
|
|
42
|
|
|
|
36
|
|
|
|
6
|
|
|
|
16.7
|
|
Precious metals
|
|
|
20
|
|
|
|
20
|
|
|
|
-
|
|
|
|
-
|
|
Global banking
|
|
|
-
|
|
|
|
(5
|
)
|
|
|
5
|
|
|
|
100.0
|
|
Other trading
|
|
|
4
|
|
|
|
10
|
|
|
|
(6
|
)
|
|
|
(60.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading related revenue
|
|
$
|
235
|
|
|
$
|
189
|
|
|
$
|
46
|
|
|
|
24.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading revenue increased during the first quarter of 2011
reflecting continuing improvements in market conditions during
the quarter and continued reductions in counterparty exposure.
Trading revenue related to derivatives improved during the first
quarter of 2011 largely due to increased new deal activity in
interest rate swaps as higher demand for the product was related
to the strong corporate debt issuance market. Demand for
Emerging Markets focused products, especially cross currency
swaps, also led to higher revenue. The performance of credit
derivatives also increased during the first quarter of 2011 as
credit spread volatility and the outlook for corporate defaults
has stabilized.
Trading income related to balance sheet management activities
declined during the first quarter of 2011 primarily due to lower
net interest income as holdings of certain collateralized
mortgage obligations were sold for risk management purposes.
104
HSBC USA Inc.
Foreign exchange trading revenue increased during the first
quarter of 2011 due to increased trading volumes and market
volatility.
Precious metals volumes remained flat during the three months
ended March 31, 2011 as customer demand for metals as a
perceived safe haven investment remained stable.
Global banking trading revenue improved during the first quarter
of 2011 as the business continued to reduce its risk exposure.
Other trading revenue decreased during the first quarter of 2011
as the prior year period benefitted from a one time settlement
of a counterparty receivable.
Net
Other-Than-Temporary
Impairment Losses During the three months ended
March 31, 2011 there were no
other-than-temporary
impairment losses recognized. During the three months ended
March 31, 2010, 19 debt securities were determined to have
either initial
other-than-temporary
impairment or changes to previous
other-than-temporary
impairment estimates with only the credit component of such
other-than-temporary
impairment recognized in earnings. The following table presents
the
other-than-temporary
impairment recognized in earnings.
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Other-than-temporary
impairment losses recognized in the consolidated statement of
income
|
|
$
|
-
|
|
|
$
|
(28
|
)
|
|
|
|
|
|
|
|
|
|
Other Securities Gains, Net We maintain various
securities portfolios as part of our balance sheet
diversification and risk management strategies. During the first
quarter of 2011, we sold $8.5 billion of
U.S. Treasury, 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 $82 million and losses of
$38 million, which is included as a component of other
security gains, net above. During the first quarter of 2010, we
sold $4.0 billion of these securities and recognized gains
of $32 million and losses of $11 million. Gross
realized gains and losses from sales of securities are
summarized in Note 4, Securities, in the
accompanying consolidated financial statements.
HSBC affiliate income Affiliate income increased
during the first quarter of 2011 due to higher fees and
commissions earned from HSBC Finance affiliates as compared to
the year-ago quarter driven by the transfer in July 2010 of
certain real estate default servicing employees from HSBC
Finance, partially offset by lower fees and commissions earned
from HSBC Markets USA (HMUS) and other HSBC
affiliates and lower fees on tax refund anticipation loans as we
did not offer this loan program during the 2011 tax season.
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
105
HSBC USA Inc.
in the consolidated statement of income and reflects actual
interest earned, net of interest expense and corporate transfer
pricing.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
Three Months Ended March 31,
|
|
2011
|
|
|
2010
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net interest income
|
|
$
|
60
|
|
|
$
|
56
|
|
|
$
|
4
|
|
|
|
7.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing related income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing fee income
|
|
|
28
|
|
|
|
32
|
|
|
|
(4
|
)
|
|
|
(12.5
|
)
|
Changes in fair value of MSRs due to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in valuation inputs or assumptions used in valuation
model
|
|
|
5
|
|
|
|
5
|
|
|
|
-
|
|
|
|
-
|
|
Realization of cash flows
|
|
|
(19
|
)
|
|
|
(27
|
)
|
|
|
8
|
|
|
|
29.6
|
|
Trading Derivative instruments used to offset
changes in value of MSRs
|
|
|
(16
|
)
|
|
|
11
|
|
|
|
(27
|
)
|
|
|
(100+
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total servicing related income
|
|
|
(2
|
)
|
|
|
21
|
|
|
|
(23
|
)
|
|
|
(100+
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Originations and sales related income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains on sales of residential mortgages
|
|
|
16
|
|
|
|
13
|
|
|
|
3
|
|
|
|
23.1
|
|
Provision for repurchase obligations
|
|
|
(44
|
)
|
|
|
(73
|
)
|
|
|
29
|
|
|
|
39.7
|
|
Trading and hedging activity
|
|
|
(12
|
)
|
|
|
(5
|
)
|
|
|
(7
|
)
|
|
|
(100+
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total originations and sales related income (loss)
|
|
|
(40
|
)
|
|
|
(65
|
)
|
|
|
25
|
|
|
|
38.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other mortgage income
|
|
|
7
|
|
|
|
7
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total residential mortgage banking revenue included in other
revenues
|
|
|
(35
|
)
|
|
|
(37
|
)
|
|
|
2
|
|
|
|
5.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total residential mortgage banking related revenue
|
|
$
|
25
|
|
|
$
|
19
|
|
|
$
|
6
|
|
|
|
31.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Higher net interest income during the first quarter of 2011
reflects wider spreads on flat average outstanding balances
offset by increased deferred cost amortization. We continue to
sell the majority of new loan originations to government
sponsored enterprises. Consistent with our Premier strategy,
additions to the portfolio are comprised largely of Premier
relationship products.
Total servicing related income decreased during the first
quarter of 2011 due to deterioration in net hedged MSR
performance and lower servicing fee income as the average
serviced loan portfolio declined as new originations sold were
more than offset by prepayments, partially offset by decreased
realization of cash flows.
Originations and sales related income (loss) improved during the
first quarter of 2011, driven largely by lower loss provisions
for loan repurchase obligations associated with loans previously
sold. During the three months ended March 31, 2011, we
recorded a charge of $44 million due to an increase in our
estimated exposure associated with repurchase obligations on
loans previously sold compared to a charge of $73 million
recorded in the year-ago quarter for such exposure.
Gain (loss) on instruments designated at fair value and
related derivatives We have elected to apply fair value
option accounting to commercial leveraged acquisition finance
loans, unfunded commitments, certain own fixed-rate debt
issuances and all structured notes and structured deposits
issued after January 1, 2006 that contain embedded
derivatives. We also use derivatives to economically hedge the
interest rate risk associated with certain financial instruments
for which fair value has been elected. See Note 11,
Fair Value Option, in the accompanying consolidated
financial statements for additional information including a
breakout of these amounts by individual component.
Valuation of loans held for sale Valuation
adjustments on loans held for sale in the prior year quarter
includes an $89 million settlement relating to certain
whole loans previously purchased for re-sale from a third party.
Excluding
106
HSBC USA Inc.
the impact of this item, valuation adjustments on loans held for
sale improved in 2011 due to lower balances and reduced
volatility. 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
$304 million and $391 million as of March 31,
2011 and December 31, 2010, 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.
Other Income Excluding the valuation of loans held
for sale as discussed above, other income decreased during the
three months ended March 31, 2011 as the year-ago quarter
included a gain of $66 million relating to the sale of our
equity investment in Wells Fargo HSBC Trade Bank
(WHTB) as well as a $5 million payment as a
final payment from a judgment related to our purchase of a
community bank from CT Financial Services.
Operating Expenses The components of
operating expenses are summarized in the following tables.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
Three Months Ended March
|
|
2011
|
|
|
2010
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Salaries and employee benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
|
|
$
|
162
|
|
|
$
|
138
|
|
|
$
|
24
|
|
|
|
17.4
|
%
|
Employee benefits
|
|
|
131
|
|
|
|
126
|
|
|
|
5
|
|
|
|
4.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total salaries and employee benefits
|
|
|
293
|
|
|
|
264
|
|
|
|
29
|
|
|
|
11.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Occupancy expense, net
|
|
|
68
|
|
|
|
71
|
|
|
|
(3
|
)
|
|
|
(4.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Support services from HSBC affiliates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees paid to HSBC Finance for loan servicing and other
administrative support
|
|
|
154
|
|
|
|
224
|
|
|
|
(70
|
)
|
|
|
(31.3
|
)
|
Fees paid to HMUS
|
|
|
59
|
|
|
|
83
|
|
|
|
(24
|
)
|
|
|
(28.9
|
)
|
Fees paid to HTSU
|
|
|
206
|
|
|
|
172
|
|
|
|
34
|
|
|
|
19.8
|
|
Fees paid to other HSBC affiliates
|
|
|
42
|
|
|
|
31
|
|
|
|
11
|
|
|
|
35.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total support services from HSBC affiliates
|
|
|
461
|
|
|
|
510
|
|
|
|
(49
|
)
|
|
|
(9.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment and software
|
|
|
90
|
|
|
|
10
|
|
|
|
80
|
|
|
|
100+
|
|
Marketing
|
|
|
18
|
|
|
|
28
|
|
|
|
(10
|
)
|
|
|
(35.7
|
)
|
Outside services
|
|
|
26
|
|
|
|
22
|
|
|
|
4
|
|
|
|
18.2
|
|
Professional fees
|
|
|
38
|
|
|
|
12
|
|
|
|
26
|
|
|
|
100+
|
|
Postage, printing and office supplies
|
|
|
4
|
|
|
|
4
|
|
|
|
-
|
|
|
|
-
|
|
Off-balance sheet credit reserves
|
|
|
(12
|
)
|
|
|
(8
|
)
|
|
|
(4
|
)
|
|
|
(50.0
|
)
|
FDIC assessment fee
|
|
|
35
|
|
|
|
36
|
|
|
|
(1
|
)
|
|
|
(2.8
|
)
|
Insurance business
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
Miscellaneous
|
|
|
80
|
|
|
|
106
|
|
|
|
(26
|
)
|
|
|
(24.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses
|
|
|
278
|
|
|
|
209
|
|
|
|
69
|
|
|
|
33.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
1,100
|
|
|
$
|
1,054
|
|
|
$
|
46
|
|
|
|
4.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel average number
|
|
|
10,361
|
|
|
|
9,029
|
|
|
|
|
|
|
|
|
|
Efficiency ratio
|
|
|
62.22
|
%
|
|
|
49.66
|
%
|
|
|
|
|
|
|
|
|
107
HSBC USA Inc.
Salaries and employee benefits Salaries and employee
benefits expense increased during the first quarter of 2011
driven by increased costs associated with the transfer in July
2010 of certain employees from HSBC Finance to the default
mortgage loan servicing department of a subsidiary of HSBC Bank
USA, partially offset by continued cost management efforts.
Occupancy expense, net Occupancy expense decreased
during the first quarter of 2011, as amounts in 2010 include
$8 million in lease abandonment costs associated with the
closure of several non-strategic branches. Excluding the impact
of this item, occupancy expense increased during the three
months ended March 31, 2011, reflecting higher costs
associated with the expansion of our core banking network within
the PFS segment 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,
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, risk
management, collection and accounting functions as well as
servicing fees paid to HSBC Finance for servicing nonconforming
residential mortgage loans, private label card receivables,
credit card receivables and auto finance receivables until the
auto finance portfolio was sold in August 2010.
Lower support services from HSBC affiliates during the first
quarter of 2011 reflects lower charges from HSBC Finance due to
lower levels of receivables being serviced, including lower
levels of credit card loans and the impact of the sale in 2010
of all remaining auto loans purchased from HSBC Finance and
lower expenses for servicing and assuming the credit risk
associated with refund anticipation loans originated as we did
not offer this loan program during the 2011 tax season. These
decreases were partially offset by higher compliance costs.
Marketing expenses Lower marketing and promotional
expenses resulted from continued optimization of marketing spend
as a result of general cost saving initiatives, partially offset
by a continuing investment in HSBC brand activities, primarily
within the PFS and CMB business segments.
Other expenses Other expenses (excluding marketing
expenses) increased during the first quarter of 2011 primarily
due to a charge of $78 million included within equipment
and software relating to the impairment of certain previously
capitalized software development costs which are no longer
realizable, as well as higher professional fees driven by
increased compliance costs.
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 62.22 percent during the three months ended
March 31, 2011 compared to 49.66 percent during the
prior year quarter. The deterioration during the first quarter
of 2011 reflects higher operating expenses driven by an
impairment of certain software development costs while the total
of net interest income and other revenues declined. Excluding
the impact of the software development cost impairment, our
efficiency ratio for the first quarter of 2011 was
57.81 percent.
Segment
Results IFRSs Basis
As discussed in our 2010
Form 10-K,
we initiated a process in late 2010 to re-evaluate the financial
information used to manage our business including the scope and
content of the financial data being reported to our management
and Board of Directors. During the first quarter of 2011, we
completed our evaluation and decided we would no longer manage
and evaluate the performance of the receivables purchased from
HSBC Finance as a separate operating segment. Rather, we would
manage and evaluate the performance of these assets as a
component of our Personal Financial Services operating segment,
consistent with HSBCs globally defined business segments.
As a result, beginning in the first quarter of 2011, our
management reporting was changed to reflect this decision and
going forward we will now report our financial results under
four reportable segments: Personal Financial Services,
Commercial Banking, Global Banking and Markets and Private
Banking. Segment financial information has been restated for all
periods presented to reflect this new segmentation. There have
been no other changes in the basis of
108
HSBC USA Inc.
our segmentation or measurement of segment profit as compared
with the presentation in our 2010
Form 10-K.
Our segment results are reported on a continuing operations
basis.
HSBC previously announced that with effect from March 1,
2011, Retail Banking and Wealth Management would be managed as a
single global business. This business is the existing Personal
Financial Services with Asset Management moving from Global
Banking and Markets to this new single business. Therefore, to
coincide with the change in our management reporting effective
beginning in the second quarter of 2011, we will change the name
of our Personal Financial Services segment to Retail Banking and
Wealth Management and will include the results of Asset
Management in this segment for all periods presented.
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 this MD&A.
Personal Financial Services
(PFS) Our PFS segment provides
banking and wealth products and services, including personal
loans, private label and credit card loans, deposits, branch
services and financial planning products and services such as
mutual funds, investments and insurance. All of our private
label card receivables and a substantial majority of our credit
card receivables are purchased daily from HSBC Finance.
During the first quarter of 2011, we continue to direct
resources towards the expansion of the core retail banking
business and in particular the growth of wealth services and
HSBC Premier, HSBCs global banking service that offers
customers a seamless international service. Premier customers
increased to approximately 503,000 at March 31, 2011, a
3 percent increase from December 31, 2010 and a
31 percent increase from March 31, 2010. 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 our strategy, additions to our portfolio are
primarily comprised of Premier relationship products. In
addition to normal sales activity, at times we have historically
sold prime adjustable and fixed rate mortgage loan portfolios to
third parties, however no such sales occurred during 2011 or
2010. We retain the servicing rights in relation to the
mortgages upon sale. As a result, average residential mortgage
loans outstanding have continued to decline during the first
quarter of 2011.
The following table summarizes the IFRSs Basis results for our
PFS segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
Three Months Ended March 31,
|
|
2011
|
|
|
2010
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net interest income
|
|
$
|
656
|
|
|
$
|
764
|
|
|
$
|
(108
|
)
|
|
|
(14.1
|
)%
|
Other operating income
|
|
|
27
|
|
|
|
66
|
|
|
|
(39
|
)
|
|
|
(59.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
|
683
|
|
|
|
830
|
|
|
|
(147
|
)
|
|
|
(17.7
|
)
|
Loan impairment charges
|
|
|
151
|
|
|
|
207
|
|
|
|
(56
|
)
|
|
|
(27.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
532
|
|
|
|
623
|
|
|
|
(91
|
)
|
|
|
(14.6
|
)
|
Operating expenses
|
|
|
458
|
|
|
|
300
|
|
|
|
158
|
|
|
|
52.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit before tax
|
|
$
|
74
|
|
|
$
|
323
|
|
|
$
|
(249
|
)
|
|
|
(77.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109
HSBC USA Inc.
Our PFS segment reported a lower profit before tax during the
first quarter of 2011 than during the prior year quarter
reflecting lower net interest income, lower other operating
income and higher operating expenses, partially offset by lower
loan impairment charges.
Net interest income was lower during the first quarter of 2011
driven by lower outstanding private label card and credit card
loans as well as lower auto loan receivables as a result of the
sale of the auto loan portfolio in August 2010. The decrease
also reflected lower credit card and private label card yields
due to higher premium amortization and the implementation of
certain provisions of the Card Act including restrictions
impacting repricing of delinquent accounts and periodic
re-evaluation of rate increases. These decreases were partially
offset by lower charge-offs of credit card and private label
credit card interest driven by lower outstanding balances and
improved delinquencies, higher finance charges from the GM and
UP portfolios previously recorded at fair value, which continue
to decline and be replaced with new volume and a lower cost of
funds on cards due to a lower short-term interest rate
environment as well as rate reductions on customer deposits.
Other operating income decreased during the first quarter of
2011, primarily due to lower fee income resulting from lower
levels of credit card and private label card receivables
outstanding including lower late and over limit fees on these
portfolios driven by changes in customer behavior and the impact
of the Card Act, lower delinquency levels and higher revenue
share payments. The decrease also reflects changes in the
ability to charge overdraft fees implemented on July 1,
2010 which resulted in lower deposit fee income as compared to
the prior year quarter. 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 and
a lower provision for loan repurchase obligations in the first
quarter of 2011 associated with previously sold loans.
Loan impairment charges continued to decline during the first
quarter of 2011, driven largely by lower loan balances and
improvements in private label credit card and credit card credit
quality as dollars of delinquency continued to decline leading
to continued improvements in our future loss estimates. Loan
impairment charges associated with credit card receivables,
including private label credit card receivables, also reflect
fewer active customer accounts and higher customer payment
rates. The improvement in credit quality reflects improved
economic conditions, including improvements in early stage
delinquency roll rates and, as it relates to credit cards and
private label credit cards, changes in customer payment behavior
and higher recovery rates. These factors were partially offset
by continued high levels of unemployment and, as it relates to
residential mortgage loans, continued weakness in the housing
market including depressed property values.
Operating expenses increased during the first quarter of 2011
driven primarily by the impairment of certain previously
capitalized software development costs. In addition, there were
higher costs from compliance and technology, branch expansion,
and fraud expenses. There were also higher pension costs as the
prior year quarter includes a $48 million pension
curtailment gain as a result of the decision in February 2010 to
cease all future benefit accruals for legacy participants under
the final average pay formula components of the HSBC North
America defined benefit pension plan effective January 1,
2011.
Commercial Banking (CMB) Our
Commercial Banking segment serves three client groups, notably
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. We continue to
focus on building our core proposition to mid size international
companies, including expansion opportunities on the west coast
and in Texas and Florida.
During the first quarter of 2011, interest rate spreads
continued to be pressured from a low interest rate environment
while loan impairment charges improved. An increase in demand
for loans which began towards the end of 2010 and continued
during the first quarter of 2011 has resulted in a
16 percent increase in loans outstanding to middle-market
customers since March 31, 2010. The business banking loan
portfolio has seen a 4 percent decrease in loans
outstanding since March 31, 2010 resulting from an increase
in paydowns and a decline in the demand for new
110
HSBC USA Inc.
credit facilities. The commercial real estate business continues
to focus on deal quality and portfolio management rather than
volume, which resulted in a 7 percent decline in
outstanding receivables for this portfolio since March 31,
2010. Average customer deposit balances across all CMB business
lines during the first quarter of 2011 increased 6 percent
as compared to the year-ago quarter and average loans increased
2 percent as compared to the year-ago quarter.
The following table summarizes the IFRSs Basis results for our
CMB segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
Three Months Ended March 31,
|
|
2011
|
|
|
2010
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net interest income
|
|
$
|
175
|
|
|
$
|
188
|
|
|
$
|
(13
|
)
|
|
|
(6.9
|
)%
|
Other operating income
|
|
|
105
|
|
|
|
154
|
|
|
|
(49
|
)
|
|
|
(31.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
|
280
|
|
|
|
342
|
|
|
|
(62
|
)
|
|
|
(18.1
|
)
|
Loan impairment charges (recoveries)
|
|
|
(30
|
)
|
|
|
1
|
|
|
|
(31
|
)
|
|
|
(100+
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
310
|
|
|
|
341
|
|
|
|
(31
|
)
|
|
|
(9.1
|
)
|
Operating expenses
|
|
|
176
|
|
|
|
150
|
|
|
|
26
|
|
|
|
17.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit before tax
|
|
$
|
134
|
|
|
$
|
191
|
|
|
$
|
(57
|
)
|
|
|
(29.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our CMB segment reported a lower profit before tax during the
first quarter of 2011 as lower net interest income, lower other
operating income and higher operating expenses were partially
offset by lower loan impairment charges.
Net interest income decreased during the first quarter of 2011
as lower deposit spreads resulting from changing product mix
which was partially offset by higher loan balances.
Other operating income decreased during the first quarter of
2011 as higher fee income and higher gains on the sale of
certain commercial real estate assets were more than offset by
the impact of a $66 million gain recorded during the first
quarter of 2010 on the sale of our equity investment in WHTB.
Loan impairment charges decreased in the first quarter of 2011
largely driven by lower reserves required on troubled debt
restructures in commercial real estate and middle market
enterprises as well as lower charge-offs in business banking due
to improved credit quality and lower delinquency levels.
Operating expenses increased during the three months ended
March 31, 2011 due to higher expenses relating to
infrastructure costs such as compliance, partially offset by
lower technology costs. Additionally, the first quarter of 2010
includes a $16 million pension curtailment gain 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 developed and
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.
111
HSBC USA Inc.
The Global Banking and Markets segment results during the first
quarter of 2011 continued to benefit from improved credit market
conditions, which when combined with our risk management
efforts, led to an increase in the credit quality of our
corporate lending relationships, lower securities impairment
charges, and improved performance in certain legacy positions.
The improved credit quality of the portfolio and improved market
conditions resulted in a tightening of the net interest margin
in the Global Banking and Markets portfolio. As credit markets
continued to remain stable during the first quarter of 2011,
results from legacy positions including credit derivatives and
subprime mortgage loans contributed to higher other operating
income.
The following table summarizes IFRSs Basis results for the
Global Banking and Markets segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
Three Months Ended March 31,
|
|
2011
|
|
|
2010
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net interest income
|
|
$
|
132
|
|
|
$
|
142
|
|
|
$
|
(10
|
)
|
|
|
(7.0
|
)%
|
Other operating income
|
|
|
429
|
|
|
|
412
|
|
|
|
17
|
|
|
|
4.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
|
561
|
|
|
|
554
|
|
|
|
7
|
|
|
|
1.3
|
|
Loan impairment charges (recoveries)
|
|
|
(17
|
)
|
|
|
(76
|
)
|
|
|
59
|
|
|
|
77.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
578
|
|
|
|
630
|
|
|
|
(52
|
)
|
|
|
(8.3
|
)
|
Operating expenses
|
|
|
242
|
|
|
|
200
|
|
|
|
42
|
|
|
|
21.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit before tax
|
|
$
|
336
|
|
|
$
|
430
|
|
|
$
|
(94
|
)
|
|
|
(21.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our Global Banking and Markets segment reported a lower profit
before tax during the first quarter of 2011 driven by lower net
interest income, lower recoveries of loan impairment charges and
higher operating expenses, which was partially offset by higher
other operating income.
Net interest income decreased during the first quarter of 2011
due to lower yields on our
available-for-sale
securities portfolio, as the proceeds from maturing securities
and securities sales were reinvested in the prevailing low
interest rate environment and in securities with a lower risk
profile. Also contributing to lower net interest income were
lower loan balances as the business continues to manage risk
exposures.
Other operating income increased during the first quarter of
2011 due to higher realized gains on the sale of
available-for-sale
securities made for risk management purposes. Also contributing
to the increase were improved trading results in interest rate
derivatives and emerging markets derivatives from increased deal
volumes. Revenues from structured credit products also improved
from a continued decrease in monoline exposure and favorable
credit spread movements. Foreign exchange and precious metals
trading increased as a result of higher volumes and market
volatility. Partially offsetting these increases in the current
period comparative results was a gain of $89 million
associated with a settlement relating to certain loans
previously purchased for resale from a third party included in
the prior year period.
Other operating income reflects gains on structured credit
products of $80 million during the three months ended
March 31, 2011 compared to gains of $59 million during
the year-ago quarter. Exposure to insurance monolines continued
to impact revenues resulting in gains of $16 million during
the three months ended March 31, 2011 compared to
$56 million during the year-ago quarter. Valuation losses
of $2 million during the first quarter of 2011 were
recorded against the fair values of
sub-prime
residential mortgage loans held for sale as compared to
valuation losses of $11 million during the prior year
period.
Recoveries of loan impairment charges were lower during the
first quarter of 2011 as reductions in higher risk rated loan
balances and stabilization of credit downgrades in both periods
resulted in an overall higher release in loss reserves during
the year-ago quarter.
Operating expenses increased during the first quarter of 2011
driven by higher staff and compliance costs, partially offset by
continuing decreases in legal and professional costs due to the
curtailment of the
sub-prime
residential
112
HSBC USA Inc.
mortgage securitization and structured credit product
activities. The prior year quarter also included 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
the first quarter of 2011, 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 decreased 1 percent compared
to the prior year quarter as withdrawals in deposits from
international core clients was partially offset by increased
deposits from domestic clients. Total average loans decreased
6 percent compared to the prior year quarter from pay offs
and reductions of commercial loan borrowings partially offset by
growth in the tailored mortgage product. Overall client assets
remained flat at $45.0 billion compared to the prior year
quarter as increases in assets from core domestic and
international clients was offset by withdrawals from
institutional clients.
The following table summarizes IFRSs Basis results for the PB
segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
Three Months Ended March 31,
|
|
2011
|
|
|
2010
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net interest income
|
|
$
|
46
|
|
|
$
|
46
|
|
|
$
|
-
|
|
|
|
-
|
%
|
Other operating income
|
|
|
36
|
|
|
|
35
|
|
|
|
1
|
|
|
|
2.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
|
82
|
|
|
|
81
|
|
|
|
1
|
|
|
|
1.2
|
|
Loan impairment charges (recoveries)
|
|
|
(9
|
)
|
|
|
(11
|
)
|
|
|
2
|
|
|
|
18.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91
|
|
|
|
92
|
|
|
|
(1
|
)
|
|
|
(1.1
|
)
|
Operating expenses
|
|
|
64
|
|
|
|
55
|
|
|
|
9
|
|
|
|
16.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit before tax
|
|
$
|
27
|
|
|
$
|
37
|
|
|
$
|
(10
|
)
|
|
|
(27.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our PB segment reported a lower profit before tax during the
first quarter of 2011 driven by higher operating expenses
including the impact of a pension gain in the prior year quarter
and lower recoveries of loan impairment charges.
Net interest income remained flat during the first quarter of
2011 due to improvement of lending and banking spreads, offset
by lower corporate allocated revenues.
Other operating income increased slightly during the first
quarter of 2011 primarily due to higher fees on managed
products, structured products, insurance products and recurring
fund fees.
Recoveries on loan impairment charges during the first quarter
of 2011 decreased as reserve releases relating to certain
exposures due to improved credit conditions and client credit
ratings were lower as compared to the corresponding releases in
the first quarter of 2010.
Operating expenses increased during the first quarter of 2011
due to higher costs for shared services. Additionally, the
year-ago quarter included a $5 million pension curtailment
gain as previously discussed.
Other The other segment primarily includes
adjustments made at the corporate level for fair value option
accounting related to certain debt issued, the offset to funding
credits provided to CMB for holding certain investments, income
and expense associated with certain affiliate transactions,
adjustments to the fair value on HSBC shares held for stock
plans, and in 2010, gains on the sale of various owned
properties and the impact of the resolution of a lawsuit as
discussed below.
113
HSBC USA Inc.
The following table summarizes IFRSs Basis results for the Other
segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
Three Months Ended March 31,
|
|
2011
|
|
|
2010
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net interest income
|
|
$
|
(64
|
)
|
|
$
|
(9
|
)
|
|
$
|
(55
|
)
|
|
|
(100+
|
)%
|
Gain (loss) on own debt designated at fair value and related
derivatives
|
|
|
(32
|
)
|
|
|
12
|
|
|
|
(44
|
)
|
|
|
(100+
|
)
|
Other operating income
|
|
|
(4
|
)
|
|
|
-
|
|
|
|
(4
|
)
|
|
|
(100+
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
|
(100
|
)
|
|
|
3
|
|
|
|
(103
|
)
|
|
|
(100+
|
)
|
Loan impairment charges
|
|
|
-
|
|
|
|
2
|
|
|
|
(2
|
)
|
|
|
(100+
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(100
|
)
|
|
|
1
|
|
|
|
(101
|
)
|
|
|
(100+
|
)
|
Operating expenses
|
|
|
17
|
|
|
|
15
|
|
|
|
2
|
|
|
|
13.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before tax
|
|
$
|
(117
|
)
|
|
$
|
(14
|
)
|
|
$
|
(103
|
)
|
|
|
(100+
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before tax increased $103 million in the first quarter
of 2011, driven largely by lower net interest income due to
increased interest expense associated with changes in estimated
tax exposure as well as credit and interest rate related changes
in the fair value of certain owned debt instruments for which
fair value option was elected. Along with the related fair value
option derivatives, we recorded total losses of $32 million
compared to gains of $12 million for the three months ended
March 31, 2011 and 2010, respectively relating to these
instruments.
Reconciliation of Segment Results As
previously discussed, segment results are reported on an IFRS
Basis. See Note 16, Business Segments, in the
accompanying consolidated financial statements for a discussion
of the differences between IFRSs and U.S. GAAP. For segment
reporting purposes, intersegment transactions have not been
eliminated. We generally account for transactions between
segments as if they were with third parties. Also see
Note 16, Business Segments, in the accompanying
consolidated financial statements for a reconciliation of our
IFRS Basis segment results to U.S. GAAP consolidated totals.
Credit
Quality
In the normal course of business, we enter into a variety of
transactions that involve both on and off-balance sheet credit
risk. Principal among these activities is lending to various
commercial, institutional, governmental and individual
customers. We participate in lending activity throughout the
U.S. and, on a limited basis, internationally.
Allowance for Credit Losses For commercial
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 credit 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 is generally ordered
when the loan is classified as Substandard as defined by the
Office of the Comptroller of the Currency. On average, it is
approximately four weeks from the time the appraisal is ordered
until
114
HSBC USA Inc.
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 in which the appraisal is received.
In situations where an external appraisal is not used to
determine the 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 re-aged 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. Contractual 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 under the caption Critical
Accounting Policies and Estimates and in Note 2,
Summary of Significant Accounting Policies and New
Accounting Pronouncements, in our 2010
Form 10-K.
Our approach toward credit risk management is summarized under
the caption Risk Management in our 2010
Form 10-K.
There have been no material revisions to our policies or
methodologies during the first quarter of 2011, although we
continue to monitor current market conditions and will adjust
credit policies as deemed necessary.
115
HSBC USA Inc.
The following table sets forth the allowance for credit losses
for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Allowance for credit losses
|
|
$
|
1,832
|
|
|
$
|
2,170
|
|
|
|
|
|
|
|
|
|
|
Ratio of Allowance for credit losses to:
|
|
|
|
|
|
|
|
|
Loans:(1)
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
1.55
|
%
|
|
|
1.77
|
%
|
Consumer:
|
|
|
|
|
|
|
|
|
Residential mortgages, excluding home equity mortgages
|
|
|
1.18
|
|
|
|
1.22
|
|
Home equity mortgages
|
|
|
1.82
|
|
|
|
2.02
|
|
Private label card receivables
|
|
|
5.19
|
|
|
|
5.66
|
|
Credit card receivables
|
|
|
4.69
|
|
|
|
5.60
|
|
Other consumer loans
|
|
|
2.39
|
|
|
|
2.73
|
|
|
|
|
|
|
|
|
|
|
Total consumer loans
|
|
|
3.32
|
|
|
|
3.82
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2.55
|
%
|
|
|
2.97
|
%
|
|
|
|
|
|
|
|
|
|
Net
charge-offs(1)(2):
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
909.43
|
%
|
|
|
158.58
|
%
|
Consumer
|
|
|
77.05
|
|
|
|
66.34
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
101.50
|
%
|
|
|
77.47
|
%
|
|
|
|
|
|
|
|
|
|
Nonperforming
loans(1):
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
52.74
|
%
|
|
|
53.76
|
%
|
Consumer
|
|
|
98.11
|
|
|
|
103.94
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
80.00
|
%
|
|
|
84.47
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Ratios exclude loans held for sale
as these loans are carried at the lower of cost or fair value.
|
|
(2) |
|
Quarter-to-date
net charge-offs, annualized.
|
116
HSBC USA Inc.
Changes in the allowance for credit losses by general loan
categories for the three months ended March 31, 2011 and
2010 are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business
|
|
|
|
|
|
|
|
|
Mortgage,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
Banking and
|
|
|
|
|
|
|
|
|
Excl Home
|
|
|
Home
|
|
|
Private
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and Other
|
|
|
Middle Market
|
|
|
Large
|
|
|
Other
|
|
|
Equity
|
|
|
Equity
|
|
|
Label
|
|
|
Credit
|
|
|
Auto
|
|
|
Other
|
|
|
|
|
|
|
Real Estate
|
|
|
Enterprises
|
|
|
Corporate
|
|
|
Comml
|
|
|
Mortgages
|
|
|
Mortgages
|
|
|
Card
|
|
|
Card
|
|
|
Finance(1)
|
|
|
Consumer
|
|
|
Total
|
|
|
|
|
|
(in millions)
|
|
|
Three months ended March 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses beginning of period
|
|
$
|
243
|
|
|
$
|
132
|
|
|
$
|
116
|
|
|
$
|
45
|
|
|
$
|
167
|
|
|
$
|
77
|
|
|
$
|
752
|
|
|
$
|
606
|
|
|
$
|
-
|
|
|
$
|
32
|
|
|
$
|
2,170
|
|
Provision charged to income
|
|
|
(28
|
)
|
|
|
(2
|
)
|
|
|
(5
|
)
|
|
|
(6
|
)
|
|
|
21
|
|
|
|
10
|
|
|
|
51
|
|
|
|
61
|
|
|
|
-
|
|
|
|
4
|
|
|
|
106
|
|
Charge offs
|
|
|
(4
|
)
|
|
|
(13
|
)
|
|
|
-
|
|
|
|
(5
|
)
|
|
|
(26
|
)
|
|
|
(20
|
)
|
|
|
(225
|
)
|
|
|
(229
|
)
|
|
|
-
|
|
|
|
(13
|
)
|
|
|
(535
|
)
|
Recoveries
|
|
|
6
|
|
|
|
2
|
|
|
|
-
|
|
|
|
1
|
|
|
|
1
|
|
|
|
-
|
|
|
|
46
|
|
|
|
31
|
|
|
|
-
|
|
|
|
3
|
|
|
|
90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge offs
|
|
|
2
|
|
|
|
(11
|
)
|
|
|
-
|
|
|
|
(4
|
)
|
|
|
(25
|
)
|
|
|
(20
|
)
|
|
|
(179
|
)
|
|
|
(198
|
)
|
|
|
-
|
|
|
|
(10
|
)
|
|
|
(445
|
)
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses end of period
|
|
$
|
217
|
|
|
$
|
119
|
|
|
$
|
111
|
|
|
$
|
35
|
|
|
$
|
163
|
|
|
$
|
67
|
|
|
$
|
624
|
|
|
$
|
470
|
|
|
$
|
-
|
|
|
$
|
26
|
|
|
$
|
1,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at beginning of period
|
|
$
|
303
|
|
|
$
|
184
|
|
|
$
|
301
|
|
|
$
|
150
|
|
|
$
|
347
|
|
|
$
|
185
|
|
|
$
|
1,184
|
|
|
$
|
1,106
|
|
|
$
|
36
|
|
|
$
|
65
|
|
|
$
|
3,861
|
|
Provision charged to income
|
|
|
2
|
|
|
|
3
|
|
|
|
(77
|
)
|
|
|
(1
|
)
|
|
|
(19
|
)
|
|
|
(21
|
)
|
|
|
109
|
|
|
|
190
|
|
|
|
25
|
|
|
|
-
|
|
|
|
211
|
|
Charge offs
|
|
|
(16
|
)
|
|
|
(28
|
)
|
|
|
(4
|
)
|
|
|
(61
|
)
|
|
|
(49
|
)
|
|
|
(36
|
)
|
|
|
(335
|
)
|
|
|
(360
|
)
|
|
|
(24
|
)
|
|
|
(21
|
)
|
|
|
(934
|
)
|
Recoveries
|
|
|
3
|
|
|
|
6
|
|
|
|
-
|
|
|
|
1
|
|
|
|
1
|
|
|
|
-
|
|
|
|
42
|
|
|
|
25
|
|
|
|
-
|
|
|
|
4
|
|
|
|
82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge offs
|
|
|
(13
|
)
|
|
|
(22
|
)
|
|
|
(4
|
)
|
|
|
(60
|
)
|
|
|
(48
|
)
|
|
|
(36
|
)
|
|
|
(293
|
)
|
|
|
(335
|
)
|
|
|
(24
|
)
|
|
|
(17
|
)
|
|
|
(852
|
)
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
292
|
|
|
$
|
165
|
|
|
$
|
220
|
|
|
$
|
90
|
|
|
$
|
280
|
|
|
$
|
128
|
|
|
$
|
1,000
|
|
|
$
|
964
|
|
|
$
|
37
|
|
|
$
|
48
|
|
|
$
|
3,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In August 2010, we sold all the
remaining auto loans previously purchased from HSBC Finance.
|
The allowance for credit losses at March 31, 2011 decreased
$338 million, or 15.58 percent, since
December 31, 2010 reflecting lower loss estimates in all of
our consumer and commercial loan portfolios. The lower allowance
on our private label credit card and credit card portfolio was
due to lower receivable levels and 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 continued to improve. The decrease in the
allowance for our residential mortgage loan portfolio and home
equity line of credit (HELOC) and home equity loan
portfolios reflects lower dollars of delinquency and an improved
outlook for incurred future losses. Reserve levels for all
consumer loan categories however remain elevated due to ongoing
weakness in the U.S. economy, including elevated
unemployment rates and as it relates to residential mortgage
loans, continued weakness in the housing market. Reserve
requirements in our commercial loan portfolio have also declined
due to pay-offs, 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 criticized assets.
The allowance for credit losses as a percentage of total loans
at March 31, 2011 decreased as compared to
December 31, 2010 for the reasons discussed above.
The allowance for credit losses as a percentage of net
charge-offs improved in the first quarter of 2011, as the
decline in dollars of net charge-off outpaced the decline in
reserves. Net charge-off levels continued to decline in the
first quarter of 2011 due to improved economic conditions and
lower outstanding receivable balances as delinquency levels,
including early stage delinquency roll rates continued to
improve.
117
HSBC USA Inc.
The allowance for credit losses by major loan categories,
excluding loans held for sale, is presented in the following
table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011
|
|
|
December 31, 2010
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
Loans to
|
|
|
|
|
|
Loans to
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
Total
|
|
|
|
Amount
|
|
|
Loans(1)
|
|
|
Amount
|
|
|
Loans(1)
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Commercial(2)
|
|
$
|
482
|
|
|
|
43.30
|
%
|
|
$
|
536
|
|
|
|
41.43
|
%
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages, excluding home equity mortgages
|
|
|
163
|
|
|
|
19.34
|
|
|
|
167
|
|
|
|
18.75
|
|
Home equity mortgages
|
|
|
67
|
|
|
|
5.13
|
|
|
|
77
|
|
|
|
5.23
|
|
Private label card receivables
|
|
|
624
|
|
|
|
16.75
|
|
|
|
752
|
|
|
|
18.20
|
|
Credit card receivables
|
|
|
470
|
|
|
|
13.96
|
|
|
|
606
|
|
|
|
14.80
|
|
Other consumer
|
|
|
26
|
|
|
|
1.52
|
|
|
|
32
|
|
|
|
1.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
1,350
|
|
|
|
56.70
|
|
|
|
1,634
|
|
|
|
58.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,832
|
|
|
|
100.00
|
%
|
|
$
|
2,170
|
|
|
|
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)
since December 31, 2010, are summarized in the following
table:
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
On-balance sheet allowance:
|
|
|
|
|
|
|
|
|
Specific
|
|
$
|
183
|
|
|
$
|
178
|
|
Collective
|
|
|
274
|
|
|
|
335
|
|
Transfer risk
|
|
|
-
|
|
|
|
-
|
|
Unallocated
|
|
|
25
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
Total on-balance sheet allowance
|
|
|
482
|
|
|
|
536
|
|
|
|
|
|
|
|
|
|
|
Off-balance sheet allowance
|
|
|
176
|
|
|
|
94
|
|
|
|
|
|
|
|
|
|
|
Total commercial allowances
|
|
$
|
658
|
|
|
$
|
630
|
|
|
|
|
|
|
|
|
|
|
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
$176 million and $94 million at March 31, 2011
and December 31, 2010, respectively. The related provision
is recorded as a miscellaneous expense and is a component of
operating expenses. The increase in off-balance sheet reserves
at March 31, 2011 as compared to December 31, 2010
reflects the deconsolidation of the Bryant Park commercial paper
conduit in the first quarter of 2011 which resulted in the
establishment of a $94 million liability for our credit
exposure related to our commitments to this entity. The increase
was partially offset by improved credit conditions and lower
outstanding exposure on other commitments. Off-balance sheet
exposures are summarized under the caption Off-Balance
Sheet Arrangements and Contractual Obligations in this
MD&A.
118
HSBC USA Inc.
Delinquency The following table summarizes
dollars of two-months-and-over contractual delinquency and
two-months-and-over contractual delinquency as a percent of
total loans and loans held for sale (delinquency
ratio):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Dollars of Delinquency:
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
658
|
|
|
$
|
765
|
|
Consumer:
|
|
|
|
|
|
|
|
|
Residential mortgage, excluding home equity
mortgages(2)
|
|
|
1,164
|
|
|
|
1,248
|
|
Home equity mortgages
|
|
|
168
|
|
|
|
182
|
|
|
|
|
|
|
|
|
|
|
Total residential
mortgages(1)
|
|
|
1,332
|
|
|
|
1,430
|
|
Private label card receivables
|
|
|
336
|
|
|
|
403
|
|
Credit card receivables
|
|
|
267
|
|
|
|
339
|
|
Other consumer
|
|
|
36
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
1,971
|
|
|
|
2,208
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,629
|
|
|
$
|
2,973
|
|
|
|
|
|
|
|
|
|
|
Delinquency Ratio:
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
2.06
|
%
|
|
|
2.42
|
%
|
Consumer:
|
|
|
|
|
|
|
|
|
Residential mortgage, excluding home equity mortgages
|
|
|
7.96
|
|
|
|
8.52
|
|
Home equity mortgages
|
|
|
4.57
|
|
|
|
4.76
|
|
|
|
|
|
|
|
|
|
|
Total residential
mortgages(1)
|
|
|
7.28
|
|
|
|
7.74
|
|
Private label card receivables
|
|
|
2.80
|
|
|
|
3.03
|
|
Credit card receivables
|
|
|
2.67
|
|
|
|
3.13
|
|
Other consumer
|
|
|
3.08
|
|
|
|
2.88
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
4.75
|
|
|
|
5.04
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3.58
|
%
|
|
|
3.93
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The following reflects dollars of
contractual delinquency and delinquency ratios for interest-only
loans and ARM loans:
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Dollars of Delinquency:
|
|
|
|
|
|
|
|
|
Interest-only loans
|
|
$
|
127
|
|
|
$
|
150
|
|
ARM loans
|
|
|
407
|
|
|
|
454
|
|
Delinquency Ratio:
|
|
|
|
|
|
|
|
|
Interest-only loans
|
|
|
4.56
|
%
|
|
|
5.41
|
%
|
ARM loans
|
|
|
5.03
|
|
|
|
5.67
|
|
|
|
|
(2) |
|
At March 31, 2011 and
December 31, 2010, residential mortgage loan delinquency
includes $710 million and $852 million, respectively,
of loans that are carried at the lower of cost or net realizable
value.
|
119
HSBC USA Inc.
Our total two-months-and-over contractual delinquency ratio
decreased 35 basis points since December 31, 2010. Our
two-months-and-over contractual delinquency ratio for consumer
loans decreased to 4.75 percent at March 31, 2011 as
compared to 5.04 percent at December 31, 2010, driven
by declines in residential mortgage loan, private label card and
credit card delinquency. Dollars of delinquency fell in almost
all consumer portfolios. The decrease in dollars of delinquency
in our private label card and credit card receivable portfolios
reflect improving credit quality due to improved delinquency
roll rates including early stage delinquency roll rates and the
continued increased focus by consumers to make payments as well
as seasonal improvements in collections activities during the
first quarter of the year as some customers use their tax
refunds to make payments. The decrease in our residential
mortgage loan delinquency since December 31, 2010 reflects
improved credit quality and seasonal improvements in collections
during the first quarter of the year. Overall delinquency
levels, however, continue to be impacted by elevated
unemployment levels and, as it relates to residential mortgages,
continued weakness in the housing market.
Our commercial two-months-and-over contractual delinquency ratio
decreased 36 basis points since December 31, 2010
driven by lower dollars of commercial real estate delinquency
while loans outstanding increased.
120
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2010
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Net Charge-off Dollars:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and other real estate
|
|
$
|
(2
|
)
|
|
$
|
77
|
|
|
$
|
13
|
|
Business banking and middle market enterprises
|
|
|
11
|
|
|
|
13
|
|
|
|
21
|
|
Large corporate
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
4
|
|
Other commercial
|
|
|
4
|
|
|
|
7
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
13
|
|
|
|
96
|
|
|
|
99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage, excluding home equity mortgages
|
|
|
25
|
|
|
|
27
|
|
|
|
48
|
|
Home equity mortgages
|
|
|
20
|
|
|
|
23
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total residential mortgages
|
|
|
45
|
|
|
|
50
|
|
|
|
84
|
|
Private label card receivables
|
|
|
179
|
|
|
|
189
|
|
|
|
293
|
|
Credit card receivables
|
|
|
198
|
|
|
|
221
|
|
|
|
335
|
|
Auto
finance(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
24
|
|
Other consumer
|
|
|
10
|
|
|
|
9
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
432
|
|
|
|
469
|
|
|
|
753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
445
|
|
|
$
|
565
|
|
|
$
|
852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Charge-off Ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and other real estate
|
|
|
(.10
|
)%
|
|
|
3.63
|
%
|
|
|
.60
|
%
|
Business banking and middle market enterprises
|
|
|
.56
|
|
|
|
.66
|
|
|
|
1.22
|
|
Large corporate
|
|
|
-
|
|
|
|
(.04
|
)
|
|
|
.14
|
|
Other commercial
|
|
|
.55
|
|
|
|
.98
|
|
|
|
6.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
.17
|
|
|
|
1.27
|
|
|
|
1.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage, excluding home equity mortgages
|
|
|
.73
|
|
|
|
.78
|
|
|
|
1.43
|
|
Home equity mortgages
|
|
|
2.16
|
|
|
|
2.37
|
|
|
|
3.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total residential mortgages
|
|
|
1.04
|
|
|
|
1.13
|
|
|
|
1.92
|
|
Private label card receivables
|
|
|
5.74
|
|
|
|
5.92
|
|
|
|
8.29
|
|
Credit card receivables
|
|
|
7.77
|
|
|
|
8.18
|
|
|
|
10.94
|
|
Auto
finance(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
6.11
|
|
Other consumer
|
|
|
3.63
|
|
|
|
2.85
|
|
|
|
4.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
4.21
|
|
|
|
4.41
|
|
|
|
6.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2.50
|
%
|
|
|
3.11
|
%
|
|
|
4.40
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In August 2010, we sold all the
remaining auto loans previously purchased from HSBC Finance.
|
121
HSBC USA Inc.
Our net charge-off ratio as a percentage of average loans
decreased 61 basis points compared to the quarter ended
December 31, 2010 primarily due to lower commercial,
private label card and credit card charge-offs driven by lower
receivable levels and improved credit quality. As it relates to
private label card and credit card receivables, these favorable
trends were partially offset by the impact from continued high
unemployment levels.
Commercial charge-off dollars and ratios decreased compared to
the prior quarter driven by lower charge-offs in construction
and other real estate based on improving trends in portfolio
quality.
Charge-off dollars and ratios in the residential mortgage loan
portfolio improved modestly compared to the prior quarter
reflecting improved credit quality including the impact of the
lower delinquency levels we first began to experience in the
second quarter of 2010. Charge-off dollars and ratios for
private label card and credit card receivables declined compared
to the prior quarter due to lower delinquency levels as a result
of lower receivable balances including an increased focus by
consumers to paydown debt, lower levels of personal bankruptcy
filings and higher recoveries, partially offset by the impact of
higher unemployment levels.
Compared to the year-ago quarter, our charge-off ratio decreased
190 basis points, driven by lower charge-offs across all
products due to improved economic conditions.
122
HSBC USA Inc.
Nonperforming Assets Nonperforming assets are
summarized in the following table.
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Nonaccrual loans:
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
Construction and land loans
|
|
$
|
70
|
|
|
$
|
70
|
|
Other real estate
|
|
|
553
|
|
|
|
529
|
|
Business banking and middle market enterprises
|
|
|
107
|
|
|
|
116
|
|
Large corporate
|
|
|
74
|
|
|
|
74
|
|
Other commercial
|
|
|
12
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
816
|
|
|
|
801
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
Residential mortgages, excluding home equity mortgages
|
|
|
812
|
|
|
|
900
|
|
Home equity mortgages
|
|
|
93
|
|
|
|
93
|
|
|
|
|
|
|
|
|
|
|
Total residential
mortgages(2)
|
|
|
905
|
|
|
|
993
|
|
Credit card receivables
|
|
|
-
|
|
|
|
-
|
|
Others
|
|
|
9
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
Total consumer loans
|
|
|
914
|
|
|
|
1,002
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual loans held for sale
|
|
|
169
|
|
|
|
186
|
|
|
|
|
|
|
|
|
|
|
Total nonaccruing loans
|
|
|
1,899
|
|
|
|
1,989
|
|
|
|
|
|
|
|
|
|
|
Accruing loans contractually past due 90 days or
more:
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
Construction and land loans
|
|
$
|
-
|
|
|
$
|
-
|
|
Other real estate
|
|
|
48
|
|
|
|
137
|
|
Business banking and middle market enterprises
|
|
|
37
|
|
|
|
47
|
|
Large corporate
|
|
|
-
|
|
|
|
-
|
|
Other commercial
|
|
|
13
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
98
|
|
|
|
196
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
Private label card receivables
|
|
|
243
|
|
|
|
295
|
|
Credit card receivables
|
|
|
194
|
|
|
|
250
|
|
Other consumer
|
|
|
25
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
Total consumer loans
|
|
|
462
|
|
|
|
570
|
|
|
|
|
|
|
|
|
|
|
Total accruing loans contractually past due 90 days or
more
|
|
|
560
|
|
|
|
766
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans
|
|
|
2,459
|
|
|
|
2,755
|
|
Other real estate owned
|
|
|
169
|
|
|
|
159
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets
|
|
$
|
2,628
|
|
|
$
|
2,914
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses as a percent of nonperforming
loans(1):
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
52.74
|
%
|
|
|
53.76
|
%
|
Consumer
|
|
|
98.11
|
|
|
|
103.94
|
|
123
HSBC USA Inc.
|
|
|
(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.
|
|
(2) |
|
At March 31, 2011 and
December 31, 2010, residential mortgage loan nonaccrual
balances include $685 million and $826 million,
respectively, of loans that are carried at the lower of cost or
net realizable value.
|
Nonperforming loans at March 31, 2011 decreased as compared
to December 31, 2010, driven largely by lower levels of
residential mortgage nonaccrual loans due to improved credit
quality including lower delinquency levels. Decreases in
accruing loans past due 90 days or more since
December 31, 2010 were driven by credit card and private
label card receivables reflecting lower outstanding balances and
improvements in credit quality including lower dollars of
delinquency at March 31, 2011. Commercial real estate
secured loans accruing past due 90 days or more also fell,
driven by reductions in outstanding balances.
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.
Our policies and practices for problem loan management and
placing loans on nonaccrual status are summarized in
Note 2, Summary of Significant Accounting Policies
and New Accounting Pronouncements, in our 2010
Form 10-K.
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 charged off and loans
designated as troubled debt restructurings. Impaired commercial
loan statistics are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Impaired commercial loans:
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
1,163
|
|
|
$
|
1,127
|
|
Amount with impairment reserve
|
|
|
607
|
|
|
|
620
|
|
Impairment reserve
|
|
|
191
|
|
|
|
188
|
|
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
124
HSBC USA Inc.
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
|
|
|
|
March 31,
|
|
|
December 31, 2010
|
|
|
|
2011
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Special mention:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
$
|
2,279
|
|
|
$
|
(5
|
)
|
|
|
(.2
|
)%
|
Substandard:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
|
2,036
|
|
|
|
(224
|
)
|
|
|
(9.9
|
)
|
Consumer loans
|
|
|
1,682
|
|
|
|
(92
|
)
|
|
|
(5.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total substandard
|
|
|
3,718
|
|
|
|
(316
|
)
|
|
|
(7.8
|
)
|
Doubtful:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
|
257
|
|
|
|
55
|
|
|
|
27.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,254
|
|
|
$
|
(266
|
)
|
|
|
(4.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The overall decreases in criticized commercial loans in the
first quarter of 2011 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.
Geographic Concentrations Regional exposure
at March 31, 2011 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
|
|
|
47.7
|
%
|
|
|
38.7
|
%
|
|
|
11.1
|
%
|
North Central United States
|
|
|
4.1
|
|
|
|
7.7
|
|
|
|
27.3
|
|
North Eastern United States
|
|
|
10.1
|
|
|
|
9.0
|
|
|
|
14.9
|
|
Southern United States
|
|
|
20.4
|
|
|
|
17.3
|
|
|
|
26.8
|
|
Western United States
|
|
|
17.7
|
|
|
|
27.3
|
|
|
|
19.5
|
|
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 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.
During the first quarter of 2011, marketplace liquidity
continues to remain ample and companies in the financial sector
continue to be able to issue debt with credit spreads
approaching levels historically seen prior to the financial
125
HSBC USA Inc.
crisis. The prolonged period of low Federal funds rates
continues to put pressure on spreads earned on our deposit base.
Interest Bearing Deposits with Banks totaled
$27.8 billion and $8.2 billion at March 31, 2011
and December 31, 2010, respectively. Balances will
fluctuate from year to year depending upon our liquidity
position at the time and our strategy for deploying such
liquidity. The balances increased during the first quarter of
2011 as we redeployed surplus liquidity, driven by higher
deposit levels.
Securities Purchased under Agreements to
Resell totaled $6.8 billion and
$8.2 billion at March 31, 2011 and December 31,
2010, respectively. Balances will fluctuate from year to year
depending upon our liquidity position at the time and our
strategy for deploying such liquidity.
Short-Term Borrowings totaled
$13.8 billion and $15.2 billion at March 31, 2011
and December 31, 2010, respectively. See Balance
Sheet Review in this MD&A for further analysis and
discussion on short-term borrowing trends.
Deposits totaled $132.8 billion and
$120.7 billion at March 31, 2011 and December 31,
2010, respectively. See Balance Sheet Review in this
MD&A for further analysis and discussion on deposit trends.
Long-Term Debt decreased to
$17.0 billion at March 31, 2011 from
$17.2 billion at December 31, 2010. The following
table summarizes issuances and retirements of long-term debt
during the three months ended March 31, 2011 and 2010:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Long-term debt issued
|
|
$
|
776
|
|
|
$
|
678
|
|
Long-term debt retired
|
|
|
(986
|
)
|
|
|
(1,171
|
)
|
|
|
|
|
|
|
|
|
|
Net long-term debt retired
|
|
$
|
(210
|
)
|
|
$
|
(493
|
)
|
|
|
|
|
|
|
|
|
|
Issuances of long-term debt during the first quarter of 2011
included $776 million of medium term notes, of which
$236 million was issued by HSBC Bank USA.
Under our shelf registration statement on file with the
Securities and Exchange Commission, we may issue debt securities
or preferred stock. The shelf has no dollar limit, but the
ability to issue debt is limited by the issuance authority
granted by the Board of Directors. At March 31, 2011, we
were authorized to issue up to $21.0 billion, of which
$8.5 billion was available. HSBC Bank USA also has a
$40.0 billion Global Bank Note Program of which
$17.7 billion was available at March 31, 2011.
As a member of the New York Federal Home Loan Bank
(FHLB), we have a secured borrowing facility which
is collateralized by real estate loans and investment
securities. At March 31, 2011 and December 31, 2010,
long-term debt included $1.0 billion, under this facility.
The facility also allows access to further borrowings of up to
$3.1 billion based upon the amount pledged as collateral
with the FHLB.
At March 31, 2011 and December 31, 2010, we had a
$2.5 billion unused line of credit with HSBC Bank plc, a
U.K. based HSBC subsidiary to support issuances of commercial
paper.
At March 31, 2011, we did not have any outstanding
securities backed with private label credit card and credit card
receivables issued under conduit credit facilities with
commercial and investment banks. At December 31, 2010,
credit card and private label card receivables of
$233 million were used to collateralize $150 million
of funding transactions structured as secured financings under
these funding programs. The facilities were terminated in April
2011 as such facilities were no longer considered to be a
cost-effective source of funding.
Preferred Equity See Note 19,
Preferred Stock, in our 2010
Form 10-K
for information regarding all outstanding preferred share issues.
Common Equity During the first quarter 2011,
we did not receive any cash capital contributions from HNAI.
126
HSBC USA Inc.
Selected Capital Ratios Capital amounts and
ratios are calculated in accordance with current banking
regulations. In managing capital, we develop targets for
Tier 1 capital to risk weighted assets, Total capital to
risk weighted assets and Tier 1 capital to average assets.
Our targets may change from time to time to accommodate changes
in the operating environment or other considerations such as
those listed above. Selected capital ratios are summarized in
the following table:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
Tier 1 capital to risk weighted assets
|
|
|
12.40
|
%
|
|
|
11.80
|
%
|
Total capital to risk weighted assets
|
|
|
18.72
|
|
|
|
18.14
|
|
Tier 1 capital to average assets
|
|
|
8.03
|
|
|
|
7.87
|
|
Total equity to total assets
|
|
|
8.76
|
|
|
|
9.10
|
|
HSBC USA 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 various stress scenarios. Our initial
approach is to meet our capital needs for these stress scenarios
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.
As discussed in previous filings, HSBC North America is required
to implement Basel II provisions in accordance with current
regulatory timelines. While HSBC USA Inc. will not report
separately under the new rules, HSBC Bank USA will report under
the new rules on a stand-alone basis. Prior to adoption of Basel
II, we are required to successfully complete a parallel run by
measuring regulatory capital under both the new regulatory
capital rules and the existing general risk-based rules for a
period of at least four quarters. Successful completion of the
parallel run period requires the approval of
U.S. regulators. We began the parallel run period in
January 2010 which encompasses enhancements to a number of risk
policies, processes and systems to align HSBC Bank USA with the
Basel II final rule requirements. We are uncertain as to
when we will receive approval from the Federal Reserve Board,
our primary regulator. Regulatory approval may not occur until
later in 2011 or in 2012. We have integrated Basel II
metrics into our management reporting and decision making
process.
HSBC Bank USA is subject to restrictions that limit the transfer
of funds to its affiliates, including HSBC USA, and its nonbank
subsidiaries 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 percent of the subsidiary banks capital and
surplus and, with respect to all covered transactions with
affiliates in the aggregate, to 20 percent of the
subsidiary banks capital and surplus. Also, loans and
extensions of credit to affiliates generally are required to be
secured in specified amounts. Where cash collateral is provided
for an extension of credit to an affiliate, that loan is
excluded from the 10 and 20 percent limitations. A
banks transactions with its nonbank affiliates are also
required to be on arms length terms.
We and HSBC Bank USA are required to meet minimum capital
requirements by our principal regulators. Risk-based capital
amounts and ratios are presented in Note 15,
Regulatory Capital, in the accompanying consolidated
financial statements.
127
HSBC USA Inc.
2011 Funding Strategy Our current range of
estimates for funding needs and sources for 2011 are summarized
in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
|
Estimated
|
|
|
|
|
|
|
January 1
|
|
|
April 1
|
|
|
|
|
|
|
through
|
|
|
through
|
|
|
Estimated
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
Full Year
|
|
|
|
2011
|
|
|
2011
|
|
|
2011
|
|
|
|
|
|
(in billions)
|
|
|
Funding needs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loan growth (attrition), excluding asset transfers
|
|
$
|
-
|
|
|
$
|
5
|
|
|
$
|
5
|
|
Long-term debt maturities
|
|
|
(1
|
)
|
|
|
5
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total funding needs
|
|
$
|
(1
|
)
|
|
$
|
10
|
|
|
$
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funding sources:
|
|
|
|
|
|
|
|
|
|
|
|
|
Core deposit growth
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
2
|
|
Other deposit growth
|
|
|
11
|
|
|
|
(1
|
)
|
|
|
10
|
|
Long-term debt issuance
|
|
|
1
|
|
|
|
6
|
|
|
|
7
|
|
Short-term funding/investments
|
|
|
(11
|
)
|
|
|
4
|
|
|
|
(7
|
)
|
Other, including capital infusions
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total funding sources
|
|
$
|
(1
|
)
|
|
$
|
10
|
|
|
$
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The above table reflects a long-term funding strategy. Daily
balances fluctuate as we accommodate customer needs, 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 our ability to
attract and retain deposits and, to a lesser extent, access to
the global capital markets. 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.
We will continue to sell a majority of new mortgage loan
originations to government sponsored enterprises and private
investors.
For further discussion relating to our sources of liquidity and
contingency funding plan, see the caption Risk
Management in this MD&A.
Off-Balance
Sheet Arrangements
As part of our normal operations, we enter into 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 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
128
HSBC USA Inc.
requirements. Descriptions of these arrangements are found in
our 2010
Form 10-K
under the caption Off-Balance Sheet Arrangements and
Contractual Obligations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2011
|
|
|
|
|
|
|
One
|
|
|
Over One
|
|
|
Over
|
|
|
|
|
|
Balance at
|
|
|
|
Year
|
|
|
through
|
|
|
Five
|
|
|
|
|
|
December 31,
|
|
|
|
or Less
|
|
|
Five Years
|
|
|
Years
|
|
|
Total
|
|
|
2010
|
|
|
|
|
|
(in billions)
|
|
|
Standby letters of credit, net of
participations(1)
|
|
$
|
4.8
|
|
|
$
|
2.6
|
|
|
$
|
.5
|
|
|
$
|
7.9
|
|
|
$
|
7.2
|
|
Commercial letters of credit
|
|
|
.9
|
|
|
|
-
|
|
|
|
-
|
|
|
|
.9
|
|
|
|
.8
|
|
Credit
derivatives(2)
|
|
|
47.8
|
|
|
|
263.9
|
|
|
|
47.9
|
|
|
|
359.6
|
|
|
|
354.8
|
|
Other commitments to extend credit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
13.8
|
|
|
|
29.9
|
|
|
|
2.1
|
|
|
|
45.8
|
|
|
|
45.6
|
|
Consumer
|
|
|
7.1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7.1
|
|
|
|
7.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
74.4
|
|
|
$
|
296.4
|
|
|
$
|
50.5
|
|
|
$
|
421.3
|
|
|
$
|
415.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes $582 million and
$486 million issued for the benefit of HSBC affiliates at
March 31, 2011 and December 31, 2010, respectively.
|
|
(2) |
|
Includes $52.3 billion and
$49.4 billion issued for the benefit of HSBC affiliates at
March 31, 2011 and December 31, 2010, respectively.
|
We provide liquidity support to a number of multi-seller and
single seller asset-backed commercial paper conduits (ABCP
conduits). The tables below present information on our
liquidity facilities with ABCP conduits at March 31, 2011.
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 our 2010
Form 10-K
under the caption Off-Balance Sheet Arrangements and
Contractual Obligations in MD&A 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)
|
|
$
|
357
|
|
|
$
|
350
|
|
|
|
60
|
|
|
$
|
350
|
|
|
|
15
|
|
Third-party sponsored:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-seller
|
|
|
554
|
|
|
|
7,088
|
|
|
|
39
|
|
|
|
6,768
|
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
911
|
|
|
$
|
7,438
|
|
|
|
|
|
|
$
|
7,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
129
HSBC USA Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
|
|
|
Average Credit
Quality(1)
|
|
Asset Class
|
|
Mix
|
|
|
AAA
|
|
|
AA+/AA
|
|
|
A
|
|
|
A−
|
|
|
BB/BB−
|
|
|
B−
|
|
|
|
|
Multi-seller conduits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities backed by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auto loans and leases
|
|
|
100
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
100
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
100
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-seller conduits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities backed by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auto loans and leases
|
|
|
100
|
%
|
|
|
98
|
%
|
|
|
2
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
98
|
%
|
|
|
2
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Credit quality is based on Standard
and Poors ratings at March 31, 2011 except for loans
and trade receivables held by single-seller conduits, which are
based on our internal ratings. For the single-seller conduits,
external ratings are not available; however, our internal credit
ratings were developed using similar methodologies and rating
scales equivalent to the external credit ratings.
|
We receive fees for providing these liquidity facilities. Credit
risk on these obligations is managed by subjecting them to our
normal underwriting and risk management processes.
During the first quarter of 2011, U.S. asset-backed
commercial paper volumes continued to be stable as most major
bank conduit sponsors continue to extend new financing to
clients but at a slow pace. Credit spreads in the multi-seller
conduit market have generally remained consistent with year-end
spreads. The low supply of ABCP has led to continued investor
demand for the ABCP issued by large bank-sponsored ABCP
programs. The improved demand for higher quality ABCP programs
has led to less volatility in issuance spreads.
The preceding tables do not include information on liquidity
facilities that we previously provided to certain Canadian
multi-seller ABCP conduits that have been subject to
restructuring agreements. As a result of specific difficulties
in the Canadian asset backed commercial paper markets, we
entered into various agreements during 2007 modifying
obligations with respect to these facilities. Under one of these
agreements, known as the Montreal Accord, a restructuring
proposal to convert outstanding commercial paper into longer
term securities was approved by ABCP noteholders and endorsed by
the Canadian justice system in 2008. The restructuring plan was
formally executed during the first quarter of 2009. As part of
the enhanced collateral pool established for the restructuring,
we have provided a $409 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 the 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 CAD $300 million and
provide a CAD $100 million credit facility. As of
March 31, 2011 this credit facility was undrawn and
approximately $103 million of long-term securities were
held. As of December 31, 2010 this credit facility was
undrawn and approximately $301 million of long-term
securities were held.
As of March 31, 2011 and December 31, 2010, 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
130
HSBC USA Inc.
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
$14 million in the fair value of financial liabilities
during the three months ended March 31, 2011 compared to a
decrease of $34 million during the prior year quarter.
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 gain on debt designated at fair value and
related derivatives during the three months ended March 31,
2011 should not be considered indicative of the results for any
future period.
Control Over Valuation Process and
Procedures A control framework has been established
which is designed to ensure that fair values are either
determined or validated by a function independent of the
risk-taker. To that end, the ultimate responsibility for the
determination of fair values rests with Finance. Finance
establishes policies and procedures to ensure appropriate
valuations. For fair values determined by reference to external
quotations on the identical or similar assets or liabilities, an
independent price validation process is utilized. For price
validation purposes, quotations from at least two independent
pricing sources are obtained for each financial instrument,
where possible. We consider the following factors in determining
fair values:
|
|
|
|
|
similarities between the asset or the liability under
consideration and the asset or liability for which quotation is
received;
|
|
|
|
consistency among different pricing sources;
|
|
|
|
the valuation approach and the methodologies used by the
independent pricing sources in determining fair value;
|
|
|
|
the elapsed time between the date to which the market data
relates and the measurement date; and
|
|
|
|
the source of the fair value information.
|
Greater weight is given to quotations of instruments with recent
market transactions, pricing quotes from dealers who stand ready
to transact, quotations provided by market-makers who originally
structured such instruments, and market consensus pricing based
on inputs from a large number of participants. Any significant
discrepancies among the external quotations are reviewed by
management and adjustments to fair values are recorded where
appropriate.
For fair values determined by using internal valuation
techniques, valuation models and inputs are developed by the
business and are reviewed, validated and approved by the
Quantitative Risk and Valuation Group (QRVG) or
other independent valuation control teams within Finance. Any
subsequent material changes are reviewed and approved by the
Valuation Committee which is comprised of representatives from
the business and various control groups. Where available, we
also participate in pricing surveys administered by external
pricing services to validate our valuation models and the model
inputs. The fair values of the majority of financial assets and
liabilities are determined using well developed valuation models
based on observable market inputs. The fair value measurements
of these assets and liabilities require less judgment. However,
certain assets and liabilities are valued based on 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
131
HSBC USA Inc.
Framework distinguishes between inputs that are based on
observed market data and unobservable inputs that reflect market
participants assumptions. It emphasizes the use of
valuation methodologies that maximize observable market inputs.
For financial instruments carried at fair value, the best
evidence of fair value is a quoted price in an actively traded
market (Level 1). Where the market for a financial
instrument is not active, valuation techniques are used. The
majority of our valuation techniques use market inputs that are
either observable or indirectly derived from and corroborated by
observable market data for substantially the full term of the
financial instrument (Level 2). Because Level 1 and
Level 2 instruments are determined by observable inputs,
less judgment is applied in determining their fair values. In
the absence of observable market inputs, the financial
instrument is valued based on valuation techniques that feature
one or more significant unobservable inputs (Level 3). The
determination of the level of fair value hierarchy within which
the fair value measurement of an asset or a liability is
classified often requires judgment and may change over time as
market conditions evolve. We consider the following factors in
developing the fair value hierarchy:
|
|
|
|
|
whether the asset or liability is transacted in an active market
with a quoted market price;
|
|
|
|
the level of bid-ask spreads;
|
|
|
|
a lack of pricing transparency due to, among other things,
complexity of the product and market liquidity;
|
|
|
|
whether only a few transactions are observed over a significant
period of time;
|
|
|
|
whether the pricing quotations vary substantially among
independent pricing services;
|
|
|
|
whether inputs to the valuation techniques can be derived from
or corroborated with market data; and
|
|
|
|
whether significant adjustments are made to the observed pricing
information or model output to determine the fair value.
|
Level 1 inputs are unadjusted quoted prices in active
markets that the reporting entity has the ability to access for
identical assets or liabilities. A financial instrument is
classified as a Level 1 measurement if it is listed on an
exchange or is an instrument actively traded in the
over-the-counter
(OTC) market where transactions occur with
sufficient frequency and volume. We regard financial instruments
such as equity securities and derivative contracts listed on the
primary exchanges of a country to be actively traded.
Non-exchange-traded instruments classified as Level 1
assets include securities issued by the U.S. Treasury or by
other foreign governments, to-be-announced (TBA)
securities and non-callable securities issued by
U.S. government sponsored entities.
Level 2 inputs are inputs that are observable either
directly or indirectly but do not qualify as Level 1
inputs. We classify mortgage pass-through securities, agency and
certain non-agency mortgage collateralized obligations, certain
derivative contracts, asset-backed securities, corporate debt,
preferred securities and leveraged loans as Level 2
measurements. Where possible, at least two quotations from
independent sources are obtained based on transactions involving
comparable assets and liabilities to validate the fair value of
these instruments. Where significant differences arise among the
independent pricing quotes and the internally determined fair
value, we investigate and reconcile the differences. If the
investigation results in a significant adjustment to the fair
value, the instrument will be classified as Level 3 within
the fair value hierarchy. In general, we have observed that
there is a correlation between the credit standing and the
market liquidity of a non-derivative instrument.
Level 2 derivative instruments are generally valued based
on discounted future cash flows or an option pricing model
adjusted for counterparty credit risk and market liquidity. The
fair value of certain structured derivative products is
determined using valuation techniques based on inputs derived
from observable benchmark index tranches traded in the OTC
market. Appropriate control processes and procedures have been
applied to ensure that the derived inputs are applied to value
only those instruments that share similar risks to the relevant
benchmark indices and therefore demonstrate a similar response
to market factors. In addition, a validation process has been
established, which includes participation in peer group
consensus pricing surveys, to ensure that valuation inputs
incorporate market participants risk expectations and risk
premium.
132
HSBC USA Inc.
Level 3 inputs are unobservable estimates that management
expects market participants would use to determine the fair
value of the asset or liability. That is, Level 3 inputs
incorporate market participants assumptions about risk and
the risk premium required by market participants in order to
bear that risk. We develop Level 3 inputs based on the best
information available in the circumstances. As of March 31,
2011 and December 31, 2010, 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 Between Level 1 and Level 2
Measurements During the three months ended
March 31, 2011 and 2010, there were no material transfers
between Level 1 and Level 2 measurements.
Level 3 Measurements The following table
provides information about Level 3 assets/liabilities in
relation to total assets/liabilities measured at fair value as
of March 31, 2011 and December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
2011
|
|
2010
|
|
|
|
(dollars are in millions)
|
|
Level 3
assets(1)(2)
|
|
$
|
5,398
|
|
|
$
|
5,776
|
|
Total assets measured at fair
value(3)
|
|
|
128,476
|
|
|
|
139,139
|
|
Level 3 liabilities
|
|
|
5,402
|
|
|
|
5,197
|
|
Total liabilities measured at fair
value(1)
|
|
|
79,524
|
|
|
|
83,444
|
|
Level 3 assets as a percent of total assets measured at
fair value
|
|
|
4.2
|
%
|
|
|
4.2
|
%
|
Level 3 liabilities as a percent of total liabilities
measured at fair value
|
|
|
6.8
|
%
|
|
|
6.2
|
%
|
|
|
|
(1) |
|
Presented without netting which
allow the offsetting of amounts relating to certain contracts if
certain conditions are met.
|
|
(2) |
|
Includes $4.5 billion of
recurring Level 3 assets and $878 million of
non-recurring Level 3 assets at March 31, 2011 and
$4.8 billion of recurring Level 3 assets and
$992 million of non-recurring Level 3 assets at
December 31, 2010.
|
|
(3) |
|
Includes $127.3 billion of
assets measured on a recurring basis and $1.2 billion of
assets measured on a non-recurring basis at March 31, 2011.
Includes $137.6 billion of assets measured on a recurring
basis and $1.5 billion of assets measured on a
non-recurring basis at December 31, 2010.
|
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 the second half of 2009 and
continuing through 2010 and into the first quarter of 2011, the
credit condition of some insurers began to improve. As a result,
we made $16 million and $56 million positive credit
risk adjustments to the fair value of our credit default swap
contracts during the three months ended March 31, 2011 and
2010, respectively, which is reflected in trading revenue. We
have recorded a cumulative credit adjustment reserve of
$345 million and $361 million against our monoline
exposure at March 31, 2011 and December 31, 2010,
respectively. The decrease in the first quarter of 2011 reflects
both reductions in our outstanding positions and improvements in
exposure estimates.
133
HSBC USA Inc.
Loans As of March 31, 2011 and
December 31, 2010, we have classified $328 million and
$413 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 for such mortgage loans during the first quarter
of 2011 compared to a gain of $77 million during the prior
year quarter. The changes in fair value are recorded as other
revenues in the consolidated statement of income.
Material Additions to and Transfers Into (Out of)
Level 3 Measurements During the three months
ended March 31, 2011, we transferred $62 million of
credit derivatives from Level 3 to Level 2 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 three months ended March 31, 2010, we
transferred $218 million of credit derivatives from
Level 2 to Level 3 as a result of a qualitative
analysis of the foreign exchange and credit correlation
attributes of our model used for certain credit default swaps.
In addition, we transferred $109 million of mortgage and
other asset-backed securities from Level 2 to Level 3
as the availability of observable inputs declined and the
discrepancy in valuation per independent pricing services
increased. 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.
See Note 20, Fair Value Measurements, in the
accompanying consolidated financial statements for information
on additions to and transfers into (out of) Level 3
measurements during the three months ended March 31, 2011
and 2010 as well as for further details including the
classification hierarchy associated with assets and liabilities
measured at fair value.
Credit Quality of Assets Underlying Asset-backed
Securities The following tables summarize the types
and credit quality of the assets underlying our asset-backed
securities as well as certain collateralized debt obligations
and collateralized loan obligations held as of March 31,
2011:
134
HSBC USA Inc.
Asset-backed
securities backed by consumer finance collateral:
Credit
Quality of Collateral:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgages
|
|
|
Prime
|
|
|
Alt-A
|
|
|
Sub-prime
|
|
|
|
|
|
|
|
|
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
|
|
$
|
150
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2
|
|
|
$
|
146
|
|
|
$
|
2
|
|
|
$
|
-
|
|
|
|
Student loans
|
|
|
28
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
28
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Residential mortgages
|
|
|
441
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
|
|
-
|
|
|
|
265
|
|
|
|
-
|
|
|
|
173
|
|
|
|
-
|
|
|
|
Commercial mortgages
|
|
|
514
|
|
|
|
52
|
|
|
|
462
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Other
|
|
|
103
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
103
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total AAA
|
|
|
1,236
|
|
|
|
52
|
|
|
|
462
|
|
|
|
3
|
|
|
|
-
|
|
|
|
398
|
|
|
|
146
|
|
|
|
175
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AA
|
|
Home equity loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Residential mortgages
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Student loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total AA
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A
|
|
Home equity loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Residential mortgages
|
|
|
63
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
63
|
|
|
|
-
|
|
|
|
Commercial mortgages
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total A
|
|
|
63
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
63
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BBB
|
|
Home equity loans
|
|
|
102
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
99
|
|
|
|
1
|
|
|
|
-
|
|
|
|
Residential mortgages
|
|
|
4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total BBB
|
|
|
106
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6
|
|
|
|
99
|
|
|
|
1
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BB
|
|
Home equity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Residential mortgages
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total BB
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
B
|
|
Auto loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Residential mortgages
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total B
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CCC
|
|
Home equity loans
|
|
|
84
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
83
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Residential mortgages
|
|
|
8
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total CCC
|
|
|
92
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5
|
|
|
|
83
|
|
|
|
-
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CC
|
|
Residential mortgages
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D
|
|
Home equity loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Residential mortgages
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total D
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrated
|
|
Home equity loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Residential mortgages
|
|
|
9
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Unrated
|
|
|
9
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,506
|
|
|
$
|
52
|
|
|
$
|
462
|
|
|
$
|
3
|
|
|
$
|
-
|
|
|
$
|
418
|
|
|
$
|
328
|
|
|
$
|
239
|
|
|
$
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
135
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
|
|
$
|
315
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
315
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
Residential mortgages
|
|
|
9
|
|
|
|
9
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Commercial mortgages
|
|
|
260
|
|
|
|
-
|
|
|
|
-
|
|
|
|
195
|
|
|
|
65
|
|
|
|
-
|
|
|
|
Trust preferred
|
|
|
153
|
|
|
|
-
|
|
|
|
153
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Aircraft leasing
|
|
|
63
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
63
|
|
|
|
Others
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
800
|
|
|
$
|
9
|
|
|
$
|
153
|
|
|
$
|
510
|
|
|
$
|
65
|
|
|
$
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total asset-backed securities
|
|
$
|
2,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $185 million or a decrease of the overall
fair value measurement of approximately $149 million as of
March 31, 2011. 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.
|
136
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
2010
Form 10-K,
although we continue to monitor market conditions and will
adjust risk management policies and procedures as deemed
necessary. See Risk Management in MD&A in our
2010
Form 10-K
for a more complete discussion of the objectives of our risk
management system as well as our risk management policies and
practices. Our risk management process involves the use of
various simulation models. We believe that the assumptions used
in these models are reasonable, but actual events may unfold
differently than what is assumed in the models. Consequently,
model results may be considered reasonable estimates, with the
understanding that actual results may vary significantly from
model projections.
Credit Risk Management Credit risk is the
potential that a borrower or counterparty will default on a
credit obligation, as well as the impact on the value of credit
instruments due to changes in the probability of borrower
default.
Credit risk is inherent in various on- and off-balance sheet
instruments and arrangements, such as:
|
|
|
|
|
loan portfolios;
|
|
|
|
investment portfolios;
|
|
|
|
unfunded commitments such as letters of credit and lines of
credit that customers can draw upon; and
|
|
|
|
treasury instruments, such as interest rate swaps which, if more
valuable today than when originally contracted, may represent an
exposure to the counterparty to the contract.
|
While credit risk exists widely in our operations,
diversification among various commercial and consumer portfolios
helps to lessen risk exposure.
Day-to-day
management of credit and market risk is performed by the Chief
Credit Officer, the HSBC North America Chief Retail Credit
Officer and the Head of Market Risk, who report directly to the
HSBC North America Chief Risk Officer and maintain independent
risk functions. The credit risk associated with commercial
portfolios is managed by the Chief Credit Officer, while credit
risk associated with retail consumer loan portfolios, such as
credit cards, installment loans and residential mortgages, is
managed by the HSBC North America Chief Retail Credit Officer.
Further discussion of credit risk can be found under the
Credit Quality caption in this MD&A.
Credit risk associated with derivatives is measured as the net
replacement cost in the event the counterparties with contracts
in a gain position to us fail to perform under the terms of
those contracts. In managing derivative credit risk, both the
current exposure, which is the replacement cost of contracts on
the measurement date, as well as an estimate of the potential
change in value of contracts over their remaining lives are
considered. Counterparties to our derivative activities include
financial institutions, foreign and domestic government
agencies, corporations, funds (mutual funds, hedge funds, etc.),
insurance companies and private clients as well as other HSBC
entities. These counterparties are subject to regular credit
review by the credit risk management department. To minimize
credit risk, we enter into legally enforceable master netting
agreements which reduce risk by permitting the closeout and
netting of transactions with the same counterparty upon
occurrence of certain events. In addition, we reduce credit risk
by obtaining collateral from counterparties. The determination
of the need for and the levels of collateral will vary based on
an assessment of the credit risk of the counterparty.
The total risk in a derivative contract is a function of a
number of variables, such as:
|
|
|
|
|
volatility of interest rates, currencies, equity or corporate
reference entity used as the basis for determining contract
payments;
|
137
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.
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Risk associated with derivative contracts:
|
|
|
|
|
|
|
|
|
Total credit risk exposure
|
|
$
|
41,759
|
|
|
$
|
39,652
|
|
Less: collateral held against exposure
|
|
|
4,658
|
|
|
|
4,577
|
|
|
|
|
|
|
|
|
|
|
Net credit risk exposure
|
|
$
|
37,101
|
|
|
$
|
35,075
|
|
|
|
|
|
|
|
|
|
|
Liquidity Risk Management There have been no
material changes to our approach towards liquidity risk
management since December 31, 2010. See Risk
Management in MD&A in our 2010
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
recent 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 those
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
and potential sales (e.g. residential mortgage loans) in
liquidity contingency plans. Total deposits increased
$12.1 billion during the first quarter of 2011.
138
HSBC USA Inc.
Our ability to regularly attract wholesale funds at a
competitive cost is enhanced by strong ratings from the major
credit ratings agencies. At March 31, 2011, 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.
|
As of March 31, 2011, 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 MD&A in our 2010
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, 2010.
Present Value of a Basis Point (PVBP) is
the change in value of the balance sheet for a one basis point
upward movement in all interest rates. The following table
reflects the PVBP position at March 31, 2011 and
December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Institutional PVBP movement limit
|
|
$
|
8.0
|
|
|
$
|
8.0
|
|
PVBP position at period end
|
|
|
1.5
|
|
|
|
3.9
|
|
Economic value of equity is the change in value of
the assets and liabilities (excluding capital and goodwill) for
either a 200 basis point immediate rate increase or
decrease. The following table reflects the economic value of
equity position at March 31, 2011 and December 31,
2010.
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(values as a
|
|
|
|
percentage)
|
|
|
Institutional economic value of equity limit
|
|
|
+/−15
|
|
|
|
+/−20
|
|
Projected change in value (reflects projected rate movements on
January 1):
|
|
|
|
|
|
|
|
|
Change resulting from an immediate 200 basis point increase
in interest rates
|
|
|
(5
|
)
|
|
|
(7
|
)
|
Change resulting from an immediate 200 basis point decrease
in interest rates
|
|
|
(8
|
)
|
|
|
(4
|
)
|
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 movements by as
much as 200 basis points, as well as scenarios in which
rates rise or fall by as much as 200 basis
139
HSBC USA Inc.
points over a twelve month period. The following table reflects
the impact on net interest income of the scenarios utilized by
these modeling techniques.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
2011
|
|
2010
|
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
|
|
(dollars are in millions)
|
|
Projected change in net interest income (reflects projected rate
movements on January 1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Institutional base earnings movement limit
|
|
|
|
|
|
|
(8
|
)%
|
|
|
|
|
|
|
(10
|
)%
|
Change resulting from a gradual 100 basis point increase in
the yield curve
|
|
$
|
77
|
|
|
|
2
|
|
|
$
|
43
|
|
|
|
1
|
|
Change resulting from a gradual 100 basis point decrease in
the yield curve
|
|
|
(238
|
)
|
|
|
(5
|
)
|
|
|
(205
|
)
|
|
|
(4
|
)
|
Change resulting from a gradual 200 basis point increase in
the yield curve
|
|
|
110
|
|
|
|
2
|
|
|
|
20
|
|
|
|
-
|
|
Change resulting from a gradual 200 basis point decrease in
the yield curve
|
|
|
(398
|
)
|
|
|
(9
|
)
|
|
|
(374
|
)
|
|
|
(8
|
)
|
Other significant scenarios monitored (reflects projected rate
movements on January 1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change resulting from an immediate 100 basis point increase
in the yield curve
|
|
|
93
|
|
|
|
2
|
|
|
|
43
|
|
|
|
1
|
|
Change resulting from an immediate 100 basis point decrease
in the yield curve
|
|
|
(334
|
)
|
|
|
(7
|
)
|
|
|
(335
|
)
|
|
|
(7
|
)
|
Change resulting from an immediate 200 basis point increase
in the yield curve
|
|
|
98
|
|
|
|
2
|
|
|
|
(20
|
)
|
|
|
-
|
|
Change resulting from an immediate 200 basis point decrease
in the yield curve
|
|
|
(535
|
)
|
|
|
(12
|
)
|
|
|
(531
|
)
|
|
|
(11
|
)
|
The projections do not take into consideration possible
complicating factors such as the effect of changes in interest
rates on the credit quality, size and composition of the balance
sheet. Therefore, although this provides a reasonable estimate
of interest rate sensitivity, actual results will vary from
these estimates, possibly by significant amounts.
Capital Risk/Sensitivity of Other Comprehensive
Income Large movements of interest rates could directly
affect some reported capital balances and ratios. The
mark-to-market
valuation of
available-for-sale
securities is credited on a tax effective basis to accumulated
other comprehensive income. Although this valuation mark is
excluded from Tier 1 and Tier 2 capital ratios, it is
included in two important accounting based capital ratios: the
tangible common equity to tangible assets and the tangible
common equity to risk weighted assets. As of March 31,
2011, we had an
available-for-sale
securities portfolio of approximately $40.6 billion with a
negative
mark-to-market
of $125 million included in tangible common equity of
$13.2 billion. An increase of 25 basis points in
interest rates of all maturities would lower the
mark-to-market
by approximately $258 million to a net loss of
$383 million with the following results on our tangible
capital ratios. As of December 31, 2010, we had an
available-for-sale
securities portfolio of approximately $45.5 billion with a
positive
mark-to-market
of $187 million included in tangible common equity of
$12.5 billion. An increase of 25 basis points in
interest rates of all maturities would lower the
mark-to-market
by approximately $328 million to a net loss of
$141 million with the following results on our tangible
capital ratios.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011
|
|
December 31, 2010
|
|
|
Actual
|
|
Proforma(1)
|
|
Actual
|
|
Proforma(1)
|
|
|
Tangible common equity to tangible assets
|
|
|
6.78
|
%
|
|
|
6.68
|
%
|
|
|
6.91
|
%
|
|
|
6.80
|
%
|
Tangible common equity to risk weighted assets
|
|
|
10.76
|
|
|
|
10.58
|
|
|
|
10.29
|
|
|
|
10.10
|
|
|
|
|
(1) |
|
Proforma percentages reflect a
25 basis point increase in interest rates.
|
140
HSBC USA Inc.
Market Risk Management There have been no
material changes to our approach towards market risk management
since December 31, 2010. See Risk Management in
MD&A in our 2010
Form 10-K
for a more complete discussion of our approach to market risk.
Value at Risk (VAR) is a technique used to estimate
the maximum 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. VAR is calculated daily for
a one-day
holding period to a 99 percent confidence level.
VAR Trading Activities Our management of
market risk is based on a policy of restricting individual
operations to trading within an authorized list of permissible
instruments, enforcing 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 trading is undertaken within
Global Banking and Markets.
In addition, at both portfolio and position levels, market risk
in trading portfolios is monitored and managed using a
complementary set of techniques, including VAR and a variety of
interest rate risk monitoring techniques 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, and within the mortgage banking subsidiary
included within the PFS business segment. Portfolios include
foreign exchange, interest rate swaps and credit 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 forward contracts to sell
residential mortgages and derivative contracts which, while
economically viable, may not satisfy the hedge accounting
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 three months
ended March 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
Three Months Ended March 31, 2011
|
|
December 31,
|
|
|
2011
|
|
Minimum
|
|
Maximum
|
|
Average
|
|
2010
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
Total trading
|
|
$
|
22
|
|
|
$
|
15
|
|
|
$
|
26
|
|
|
$
|
18
|
|
|
$
|
21
|
|
Equities
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
Foreign exchange
|
|
|
2
|
|
|
|
1
|
|
|
|
4
|
|
|
|
2
|
|
|
|
1
|
|
Interest rate directional and credit spread
|
|
|
21
|
|
|
|
13
|
|
|
|
22
|
|
|
|
16
|
|
|
|
18
|
|
The following table summarizes the frequency distribution of
daily market risk-related revenues for trading activities during
the three months ended March 31, 2011. Market risk-related
trading revenues include realized and unrealized gains (losses)
related to trading activities, but exclude the related net
interest income. Analysis of the gain (loss) data for the three
months ended March 31, 2011 shows that the largest daily
gain was $14 million and the largest daily loss was
$6 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
|
|
|
|
(dollars are in millions)
|
|
Number of trading days market risk-related revenue was within
the stated range
|
|
|
1
|
|
|
|
14
|
|
|
|
36
|
|
|
|
9
|
|
|
|
2
|
|
141
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 if they were to 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 upon limits.
The following table summarizes non-trading VAR for the three
months ended March 31, 2011, assuming a 99% confidence
level for a two-year observation period and a
one-day
holding period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
Three Months Ended March 31, 2011
|
|
|
December 31,
|
|
|
|
2011
|
|
|
Minimum
|
|
|
Maximum
|
|
|
Average
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Interest rate
|
|
$
|
110
|
|
|
$
|
109
|
|
|
$
|
146
|
|
|
$
|
135
|
|
|
$
|
138
|
|
Trading Activities HSBC Mortgage
Corporation (USA) (HSBC Mortgage Corp) HSBC
Mortgage Corp 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 MSRs, as reflected in the following
table.
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
(in millions)
|
|
|
Projected change in net market value of hedged MSRs portfolio
(reflects projected rate movements on April 1 and
January 1, respectively):
|
|
|
|
|
|
|
|
|
Value of hedged MSRs portfolio
|
|
$
|
396
|
|
|
$
|
394
|
|
Change resulting from an immediate 50 basis point decrease
in the yield curve:
|
|
|
|
|
|
|
|
|
Change limit (no worse than)
|
|
|
(10
|
)
|
|
|
(10
|
)
|
Calculated change in net market value
|
|
|
(8
|
)
|
|
|
(2
|
)
|
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
|
|
|
8
|
|
|
|
5
|
|
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
|
|
|
13
|
|
|
|
12
|
|
142
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 three months
ended March 31, 2011. 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
|
|
|
|
(dollars are in millions)
|
|
Number of trading weeks market risk-related revenue was within
the stated range
|
|
|
1
|
|
|
|
6
|
|
|
|
3
|
|
|
|
2
|
|
|
|
1
|
|
Operational Risk There have been no material
changes to our approach toward operational risk since
December 31, 2010.
Compliance Risk There have been no material
changes to our approach toward compliance risk since
December 31, 2010.
Fiduciary Risk There have been no material
changes to our approach toward fiduciary risk since
December 31, 2010.
Reputational Risk There have been no material
changes to our approach toward reputational risk since
December 31, 2010.
Strategic Risk There have been no material
changes to our approach toward strategic risk since
December 31, 2010.
143
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
Three Months Ended March 31,
|
|
Balance
|
|
|
Interest
|
|
|
Rate(1)
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate(1)
|
|
|
|
|
|
(dollars are in millions)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits with banks
|
|
$
|
20,345
|
|
|
$
|
16
|
|
|
|
.32
|
%
|
|
$
|
33,867
|
|
|
$
|
22
|
|
|
|
.26
|
%
|
Federal funds sold and securities purchased under resale
agreements
|
|
|
6,676
|
|
|
|
15
|
|
|
|
.94
|
|
|
|
2,495
|
|
|
|
6
|
|
|
|
1.01
|
|
Trading securities
|
|
|
12,762
|
|
|
|
51
|
|
|
|
1.62
|
|
|
|
5,399
|
|
|
|
32
|
|
|
|
2.37
|
|
Securities
|
|
|
46,437
|
|
|
|
323
|
|
|
|
2.82
|
|
|
|
32,569
|
|
|
|
247
|
|
|
|
3.08
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
31,660
|
|
|
|
233
|
|
|
|
2.98
|
|
|
|
32,398
|
|
|
|
245
|
|
|
|
3.06
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
14,710
|
|
|
|
162
|
|
|
|
4.47
|
|
|
|
14,820
|
|
|
|
176
|
|
|
|
4.82
|
|
HELOCs and home equity mortgages
|
|
|
3,743
|
|
|
|
29
|
|
|
|
3.14
|
|
|
|
4,103
|
|
|
|
33
|
|
|
|
3.29
|
|
Private label card receivables
|
|
|
12,638
|
|
|
|
292
|
|
|
|
9.38
|
|
|
|
14,326
|
|
|
|
362
|
|
|
|
10.24
|
|
Credit cards
|
|
|
10,331
|
|
|
|
185
|
|
|
|
7.27
|
|
|
|
12,428
|
|
|
|
288
|
|
|
|
9.38
|
|
Auto finance
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,865
|
|
|
|
82
|
|
|
|
17.96
|
|
Other consumer
|
|
|
1,211
|
|
|
|
22
|
|
|
|
7.35
|
|
|
|
1,450
|
|
|
|
25
|
|
|
|
7.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
42,633
|
|
|
|
690
|
|
|
|
6.57
|
|
|
|
48,992
|
|
|
|
966
|
|
|
|
8.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
74,293
|
|
|
|
923
|
|
|
|
5.04
|
|
|
|
81,390
|
|
|
|
1,211
|
|
|
|
6.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
6,096
|
|
|
|
12
|
|
|
|
.78
|
|
|
|
6,802
|
|
|
|
11
|
|
|
|
.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets
|
|
|
166,609
|
|
|
$
|
1,340
|
|
|
|
3.26
|
%
|
|
|
162,522
|
|
|
$
|
1,529
|
|
|
|
3.82
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses
|
|
|
(2,093
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,776
|
)
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
1,633
|
|
|
|
|
|
|
|
|
|
|
|
1,560
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
25,276
|
|
|
|
|
|
|
|
|
|
|
|
23,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
191,425
|
|
|
|
|
|
|
|
|
|
|
$
|
183,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits in domestic offices:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings deposits
|
|
$
|
57,262
|
|
|
$
|
76
|
|
|
|
.54
|
%
|
|
$
|
52,961
|
|
|
$
|
105
|
|
|
|
.81
|
%
|
Other time deposits
|
|
|
16,852
|
|
|
|
31
|
|
|
|
.75
|
|
|
|
17,625
|
|
|
|
48
|
|
|
|
1.10
|
|
Deposits in foreign offices:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign banks deposits
|
|
|
6,539
|
|
|
|
3
|
|
|
|
.21
|
|
|
|
9,500
|
|
|
|
5
|
|
|
|
.20
|
|
Other interest bearing deposits
|
|
|
16,980
|
|
|
|
6
|
|
|
|
.13
|
|
|
|
20,348
|
|
|
|
5
|
|
|
|
.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing deposits
|
|
|
97,633
|
|
|
|
116
|
|
|
|
.48
|
|
|
|
100,434
|
|
|
|
163
|
|
|
|
.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
|
22,005
|
|
|
|
13
|
|
|
|
.23
|
|
|
|
16,847
|
|
|
|
21
|
|
|
|
.51
|
|
Long-term debt
|
|
|
17,127
|
|
|
|
163
|
|
|
|
3.87
|
|
|
|
17,627
|
|
|
|
140
|
|
|
|
3.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities
|
|
|
136,765
|
|
|
|
292
|
|
|
|
.87
|
|
|
|
134,908
|
|
|
|
324
|
|
|
|
.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/Interest rate spread
|
|
|
|
|
|
$
|
1,048
|
|
|
|
2.39
|
%
|
|
|
|
|
|
$
|
1,205
|
|
|
|
2.85
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing deposits
|
|
|
24,254
|
|
|
|
|
|
|
|
|
|
|
|
21,285
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
13,459
|
|
|
|
|
|
|
|
|
|
|
|
12,108
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
16,947
|
|
|
|
|
|
|
|
|
|
|
|
15,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
191,425
|
|
|
|
|
|
|
|
|
|
|
$
|
183,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin on average earning assets
|
|
|
|
|
|
|
|
|
|
|
2.55
|
%
|
|
|
|
|
|
|
|
|
|
|
3.01
|
%
|
Net interest margin on average total assets
|
|
|
|
|
|
|
|
|
|
|
2.22
|
%
|
|
|
|
|
|
|
|
|
|
|
2.66
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Rates are calculated on unrounded
numbers.
|
144
HSBC USA Inc.
Total weighted average rate earned on earning assets is interest
and fee earnings divided by daily average amounts of total
interest earning assets, including the daily average amount on
nonperforming loans. Loan interest for the three months ended
March 31, 2011 and 2010 included fees of $21 million
and $14 million, respectively.
Item 3.
Quantitative and Qualitative Disclosures About Market
Risk
Refer to Item 2, Managements Discussion and Analysis
of Financial Condition and Results of Operations, under the
captions Interest Rate Risk Management and
Trading Activities of this
Form 10-Q.
Item 4.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures We
maintain a system of internal and disclosure controls and
procedures designed to ensure that information required to be
disclosed by HSBC USA in the reports we file or submit under the
Securities Exchange Act of 1934, as amended (the Exchange
Act), is recorded, processed, summarized and reported on a
timely basis. Our Board of Directors, operating through its
audit committee, which is composed entirely of independent
outside directors, provides oversight to our financial reporting
process.
We conducted an evaluation, with the participation of the Chief
Executive Officer and Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures as of
the end of the period covered by this report. Based upon that
evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures
were effective as of the end of the period covered by this
report so as to alert them in a timely fashion to material
information required to be disclosed in reports we file under
the Exchange Act.
Changes in Internal Control over Financial
Reporting There has been no change in our internal
control over financial reporting that occurred during the
quarter ended March 31, 2011 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
See Note 19, Litigation and Regulatory Matters,
in the accompanying consolidated financial statements beginning
on page 67 for our legal proceedings disclosure, which is
incorporated herein by reference.
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.
|
145
HSBC USA Inc.
Index
Assets:
by business
segment 54
consolidated average
balances 144
fair value
measurements 71
nonperforming 29,
30, 123
trading 11,
98
Asset-backed commercial paper conduits 58
Asset-backed securities 12, 135
Balance sheet:
consolidated 4
consolidated average
balances 144
review 95
Basel II 91, 127
Basis of reporting 92
Business:
consolidated
performance review 87
Capital:
2011 funding
strategy 128
common equity
movements 126
consolidated statement
of changes 6
regulatory
capital 52
selected capital
ratios 52, 90
Cash flow (consolidated) 7
Cautionary statement regarding forward-looking
statements 85
Collateral pledged assets 67
Collateralized debt obligations 136
Commercial banking segment results
(IFRSs) 54,
110
Compliance risk 143
Controls and procedures 145
Credit card fees 104
Credit quality 28, 30, 91, 114
Credit risk:
adjustment 83
component of fair
value option 44
concentration 31
exposure 138
management 137
related contingent
features 41
related
arrangements 62
Current environment 85
Deferred tax assets 45
Deposits 99, 126
Derivatives:
cash flow
hedges 38
fair value
hedges 37
notional
value 42
trading and
other 39
Discontinued operations 9
Equity:
consolidated statement
of changes 6
ratios 52,
90
Equity securities
available-for-sale 12
Estimates and assumptions 9
Executive overview 85
Fair value measurements:
assets and liabilities
recorded at fair value on a
recurring
basis 73
assets and liabilities
recorded at fair value on a
non-recurring
basis 77
control over valuation
process 131
financial
instruments 71
hierarchy 131
transfers into/out of
level one and
two 75,
133
transfers into/out of
level two and
three 76,
133
valuation
techniques 78
Fiduciary risk 143
Financial assets:
designated at fair
value 43
Financial highlights metrics 90
Financial liabilities:
designated at fair
value 43
fair value of
financial liabilities 72, 73
Forward looking statements 85
Funding 128
Gain on instruments designated at fair value and related
derivatives 44
Gains less losses from securities 18, 105
Global Banking and Markets:
balance sheet data
(IFRSs) 54
segment results
(IFRSs) 54, 111
Geographic concentration of receivables 125
Goodwill 36
Guarantee arrangements 61
Impairment:
available-for-sale
securities 15
credit
losses 32, 102, 116
nonperforming
loans 123
impaired
loans 124
Intangible assets 35
Income tax expense 44
Internal control 145
Interest rate risk 139
Key performance indicators 90
Legal proceedings 145
Leveraged finance transactions 43
146
HSBC USA Inc.
Liabilities:
commitments, lines of
credit 128
deposits 99,
126
financial liabilities
designated at
fair
value 43
long-term
debt 100
short-term
borrowings 99
trading 11,
98
Liquidity and capital resources 125
Liquidity risk 138
Litigation and regulatory matters 67
Loans:
by
category 20, 96
by charge-off
(net) 33, 117
by
delinquency 30, 119
criticized
assets 28, 124
geographic
concentration 125
held for
sale 34, 97
impaired 24,
124
nonperforming 23,
123
overall
review 96
purchases from HSBC
Finance 20, 48
risk
concentration 31
troubled debt
restructures 24
Loan impairment charges see Provision for
credit losses
Loan-to-deposits ratio 90
Market risk 141
Market turmoil:
exposures 138
impact on liquidity
risk 125
Monoline insurers 17, 87, 112
Mortgage lending products 20, 96
Mortgage servicing rights 35, 82
Net interest income 100
New accounting pronouncements 83
Off balance sheet arrangements 128
Operating expenses 107
Operational risk 143
Other revenue 103
Other segment results (IFRSs) 54, 113
Pension and other postretirement benefits 46
Performance, developments and trends 87
Personal financial services segment
results
(IFRSs) 54, 109
Pledged assets 67
Private banking segment results (IFRSs) 54, 113
Profit (loss) before tax:
by segment
IFRSs 54
consolidated 3
Provision for credit losses 102
Ratios:
capital 52,
90
charge-off
(net) 121
credit loss reserve
related 116
earnings to fixed
charges Exhibit 12
efficiency 89,
108
financial 90
loans-to-deposits 90
Real estate owned 100
Reconciliation of U.S. GAAP results to IFRSs 93
Refreshed
loan-to-value 97
Related party transactions 47
Reputational risk 143
Results of operations 100
Risk elements in the loan portfolio 31
Risk management:
credit 137
compliance 143
fiduciary 143
interest
rate 139
liquidity 138
market 141
operational 143
reputational 143
strategic 143
Securities:
fair
value 12, 71
impairment 14
maturity
analysis 19
Segment results IFRSs basis:
personal financial
services 54, 109
commercial
banking 54, 110
global banking and
markets 54, 111
private
banking 54, 113
other 54,
113
overall
summary 53, 108
Selected financial data 90
Sensitivity:
projected net interest
income 140
Statement of changes in shareholders equity 6
Statement of changes in comprehensive income 6
Statement of income 3
Strategic risk 143
Table of contents 2
Tax expense 44
Trading:
assets 11,
98
derivatives 11,
98
liabilities 11,
98
portfolios 11
Trading revenue (net) 104
Troubled debt restructures 24
Value at risk 141
Variable interest entities 57
147
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: May 11, 2011
HSBC USA Inc.
(Registrant)
John T. McGinnis
Executive Vice President and
Chief Financial Officer
148
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.
|