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HSBC Holdings PLC HSBA HSBC USA INC 3Q 2012 Form 10-Q


Attachment:

  HSBC Holdings PLC (HSBA) - HSBC USA INC 3Q 2012 Form 10-Q

RNS Number : 2757Q
HSBC Holdings PLC
05 November 2012
 



                                       

                         UNITED STATES SECURITIES AND

                             EXCHANGE COMMISSION

                            Washington, D.C. 20549

                                       

                                  FORM 10-Q

                                       

(Mark One)

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

              For the quarterly period ended September 30, 2012

                                      OR

¨       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

 For the transition period from                      to                     

                        Commission file number 1-7436

                                       

                                HSBC USA INC.

            (Exact name of registrant as specified in its charter)

 

                Maryland                              13-2764867
        (State of Incorporation)         (I.R.S. Employer Identification No.)
       452 Fifth Avenue, New York                       10018
(Address of principal executive offices)              (Zip Code)

                                (212) 525-5000

              Registrant's 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  ¨ 

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  x  No  ¨ 

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):

 

Large accelerated filer ¨                                                                      
                                                                             Smaller reporting    
                          Accelerated filer      ¨ Non-accelerated filer   x            company  ¨
                                      (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  ¨  No  x 

As of November 2, 2012, there were 712 shares of the registrant's common stock
outstanding, all of which are owned by HSBC North America Inc.

                                       

 

HSBC USA Inc.

FORM 10-Q

TABLE OF CONTENTS

 

Part/Item No.                                                                                                                                                                                Page

                                                                                                                                                                                                
Part I.
Item 1.           Financial Statements (Unaudited):
                  Consolidated Statement of Income (Loss)..........................................................................................                                                  
                  Consolidated Statement of Comprehensive Income (Loss).............................................................                                                                 
                  Consolidated Balance Sheet..................................................................................................................                                       
                  Consolidated Statement of Changes in Shareholders' Equity.........................................................                                                                 
                  Consolidated Statement of Cash Flows...............................................................................................                                                
                  Notes to Consolidated Financial Statements......................................................................................                                                   
Item 2.           Management's Discussion and Analysis of Financial Condition and Results of Operations
                  Forward-Looking Statements................................................................................................................                                         
                  Executive Overview................................................................................................................................                                 
                  Basis of Reporting..................................................................................................................................                               
                  Balance Sheet Review............................................................................................................................                                   
                  Residential Real Estate Owned.............................................................................................................                                         
                  Results of Operations.............................................................................................................................                                 
                  Segment Results - IFRSs Basis..........................................................................................................                                            
                  Credit Quality...........................................................................................................................................                          
                  Liquidity and Capital Resources...........................................................................................................                                         
                  Off-Balance Sheet Arrangements.........................................................................................................                                            
                  Fair Value..................................................................................................................................................                       
                  Risk Management...................................................................................................................................                                 
                  Average Balances and Interest Rates..................................................................................................                                              
Item 3.           Quantitative and Qualitative Disclosures About Market Risk..............................................................                                                           
Item 4.           Controls and Procedures.............................................................................................................................                               
Part II
Item 1.           Legal Proceedings........................................................................................................................................                          
Item 1A.                                                                                                                                                                                             

Item 6.           Risk Factors...................................................................................................................................................          

                  Exhibits...........................................................................................................................................................                
Index....................................................................................................................................................................................            
Signature.............................................................................................................................................................................               

 

PART I. FINANCIAL INFORMATION

Item 1.    Financial Statements

                                       

CONSOLIDATED STATEMENT OF INCOME (LOSS) (UNAUDITED)

 

                                                                                                                           Three Months Ended                  Nine Months Ended
                                                                                                                              September 30,                      September 30,

                                                                                                                                                                        
                                                                                                                         2012              2011             2012             2011
                                                                                                                                               (in millions)
Interest income:
Loans.............................................................................................................  $            472  $            456 $         1,391   $         1,346
Securities........................................................................................................                                                    
                                                                                                                                 252               306             837               929
Trading assets................................................................................................                                                        
                                                                                                                                  27                52              86               156
Short-term investments.................................................................................                                                               
                                                                                                                                  23                35              82               104
Other.............................................................................................................                                                                      
                                                                                                                                  11                10              32                32
                                                                                                                                                                                
Total interest income...........................................................................................                                                      
                                                                                                                                 785               859           2,428             2,567
                                                                                                                                                                                
Interest expense:
Deposits.........................................................................................................                                                     
                                                                                                                                  82                64             243               196
Short-term borrowings...................................................................................                                                                                
                                                                                                                                   9                11              24                32
Long-term debt..............................................................................................                                                          
                                                                                                                                 170               151             502               449
Other.............................................................................................................                                                                      
                                                                                                                                  14                12              27                96
                                                                                                                                                                                
Total interest expense..........................................................................................                                                      
                                                                                                                                 275               238             796               773
                                                                                                                                                                                
Net interest income.............................................................................................                                                      
                                                                                                                                 510               621           1,632             1,794
Provision for credit losses...................................................................................                                                        
                                                                                                                                  84                78             173               171
                                                                                                                                                                                
Net interest income after provision for credit losses..............................................                                                                   
                                                                                                                                 426               543           1,459             1,623
                                                                                                                                                                                
Other revenues:
Credit card fees..............................................................................................                                                                          
                                                                                                                                  18                31              70                95
Other fees and commissions...........................................................................                                                                 
                                                                                                                                 167               222             530               605
Trust income.................................................................................................                                                                           
                                                                                                                                  22                26              72                83
Trading revenue.............................................................................................                                      (107                
                                                                                                                                 113                 )             395               243
Other securities gains, net..............................................................................                                                             
                                                                                                                                  50                49             145               105
Servicing and other fees from HSBC affiliates................................................                                                                         
                                                                                                                                  63                49             165               151
Residential mortgage banking revenue............................................................                                                                                        
                                                                                                                                   4                34              31                48
Gain (loss) on instruments designated at fair value and related derivatives......                                               (187                                  
                                                                                                                                   )               379          (258 )               440
Gain on sale of branches.................................................................................                                                                               
                                                                                                                                 103                 -             433                 -
Other income (loss).......................................................................................                                         (16                                  
                                                                                                                                  44                 )              44                20
                                                                                                                                                                                
Total other revenues............................................................................................                                                      
                                                                                                                                 397               667           1,627             1,790
                                                                                                                                                                                
Operating expenses:
Salaries and employee benefits.......................................................................                                                                 
                                                                                                                                 207               266             733               852
Support services from HSBC affiliates............................................................                                                                     
                                                                                                                                 362               412           1,100             1,092
Occupancy expense, net.................................................................................                                                               
                                                                                                                                  60                73             176               209
Expense accrual related to certain regulatory matters (Note 21)....................                                                                                                     
                                                                                                                                 800                 -           1,500                 -
Other expenses..............................................................................................                                                          
                                                                                                                                 188               170             515               589
                                                                                                                                                                                
Total operating expenses.....................................................................................                                                         
                                                                                                                               1,617               921           4,024             2,742
                                                                                                                                                                                
Income (loss) from continuing operations before income tax expense.................                                             (794                                  
                                                                                                                                   )               289          (938 )               671
Income tax expense (benefit)..............................................................................                       (12                                  
                                                                                                                                   )               117             357               238
                                                                                                                                                                                
Income (loss) from continuing operations...........................................................                             (782                            (1,295
                                                                                                                                   )               172               )               433
                                                                                                                                                                                
Discontinued Operations (Note 2):
Income from discontinued operations before income tax expense.......................                                                                                  
                                                                                                                                   -               218             315               682
Income tax expense............................................................................................                                                        
                                                                                                                                   -                78             112               242
                                                                                                                                                                                
Income from discontinued operations.................................................................                                                                  
                                                                                                                                   -               140             203               440
                                                                                                                                                                                
Net income (loss)................................................................................................                                       $       (1,092
                                                                                                                   $          (782 )  $            312               )  $            873
                                                                                                                                                                                

The accompanying notes are an integral part of the consolidated financial
statements.

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

 

                                                                                                               Three Months Ended                Nine Months Ended
                                                                                                                  September 30,                    September 30,

                                                                                                                                                          
                                                                                                              2012             2011             2012            2011
                                                                                                                                  (in millions)
Net income
(loss).................................................................................................   $       (782 )    $         312     $   (1,092 )   $         873
Net change in unrealized gains (losses), net of tax as applicable on:
Securities available-for-sale, not other-than-temporarily impaired....                                                97              655              218             797
Other-than-temporary impaired debt securities available-for-sale^(1)...                                                                                                   
                                                                                                                       -                -                -               1
Other-than-temporary impaired debt securities held-to-maturity^(1)....                                                                                                    
                                                                                                                       -                -                -              11
Adjustment to reverse other-than-temporary impairment on securities held-to-maturity due to                                                               
deconsolidation of a variable interest entity........                                                                  -                -                -             142
Derivatives designated as cash flow hedges........................................                                                   (124                             (141
                                                                                                                      11                )               11               )
Unrecognized actuarial gains, transition obligation and prior service costs relating to pension and                                                                       
postretirement benefits, net of tax.................                                                                   -                -                1               2
                                                                                                                                                                   
Other comprehensive income, net of tax........................................................                       108              531              230             812
                                                                                                                                                                   
Comprehensive income(loss)............................................................................    $       (674 )    $         843   $       (862 )    $      1,685
                                                                                                                                                                   

 

^(1)  During the three and nine months ended September 30, 2012 and 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 income.

The accompanying notes are an integral part of the consolidated financial
statements.

 

CONSOLIDATED BALANCE SHEET (UNAUDITED)

 

                                                                                                                                                         September 30,                       December 31,

                                                                                                                                                              2012                               2011
                                                                                                                                                                       (in millions, except share data)
Assets^(1)
Cash and due from banks....................................................................................................................            $               1,385 $               1,616                        
Interest bearing deposits with banks......................................................................................................                                                                                
                                                                                                                                                                      15,313                25,454                        
Federal funds sold and securities purchased under agreements to resell.........................................................                                                                                           
                                                                                                                                                                      11,678                 3,109                        
Trading assets...................................................................................................................................                                                                         
                                                                                                                                                                      38,322                38,800                        
Securities available-for-sale..................................................................................................................                                                                           
                                                                                                                                                                      62,532                53,281                        
Securities held-to-maturity (fair value of $2.0 billion and $2.3 billion at September 30, 2012 and December 31, 2011, respectively)                                                                                       
                                                                                                                                                                       1,741                 2,035                        
Loans..............................................................................................................................................                                                                       
                                                                                                                                                                      61,452                51,867                        
Less - allowance for credit losses..........................................................................................................                                                                              
                                                                                                                                                                         637                   743                        
                                                                                                                                                                                                    
Loans, net...................................................................................................................................                                                                             
                                                                                                                                                                      60,815                51,124                        
                                                                                                                                                                                                    
Loans held for sale (includes $424 million and $377 million designated under fair value option at September 30, 2012 and December 31, 2011,                                                                               
respectively)....................................................................................................                                                      1,056                 3,670                        
Properties and equipment, net..............................................................................................................                                                                               
                                                                                                                                                                         281                   458                        
Intangible assets, net..........................................................................................................................                                                                          
                                                                                                                                                                         253                   242                        
Goodwill.........................................................................................................................................                                                                         
                                                                                                                                                                       2,228                 2,228                        
Other assets......................................................................................................................................                                                                        
                                                                                                                                                                       7,528                 6,369                        
Other branch related assets held for sale..................................................................................................                                                                               
                                                                                                                                                                           -                   440                        
Assets of discontinued operations.........................................................................................................                                                                                
                                                                                                                                                                           -                21,454                        
                                                                                                                                                                                                    
Total assets......................................................................................................................................      $            203,132   $           210,280                        
                                                                                                                                                                                                    
Liabilities^(1)
Debt:
Deposits in domestic offices:
Noninterest bearing.................................................................................................................                   $              31,532  $             20,592                        
Interest bearing (includes $9.4 billion and $9.8 billion designated under fair value option at September 30, 2012 and December 31, 2011,                                                                                  
respectively).........................................................................................                                                                61,741                73,474                        
Deposits in foreign offices:
Noninterest bearing.................................................................................................................                                                                                      
                                                                                                                                                                       1,782                 1,912                        
Interest bearing.......................................................................................................................                                                                                   
                                                                                                                                                                      26,280                28,607                        
Deposits held for sale....................................................................................................................                                                                                
                                                                                                                                                                           -                15,144                        
                                                                                                                                                                                                    
Total deposits.............................................................................................................................                          121,335               139,729                        
Short-term borrowings..................................................................................................................                                                                                   
                                                                                                                                                                      14,113                16,009                        
Long-term debt (includes $7.7 billion and $5.0 billion designated under fair value option at September 30, 2012 and December 31, 2011,                                                                                    
respectively)..................................................................................................................                                       20,963                16,709                        
                                                                                                                                                                                                    
Total debt........................................................................................................................................                   156,411               172,447                        
Trading liabilities..............................................................................................................................                                                                         
                                                                                                                                                                      20,875                14,186                        
Interest, taxes and other liabilities.........................................................................................................                                                                            
                                                                                                                                                                       8,277                 4,223                        
Other branch related liabilities held for sale.............................................................................................                                                                               
                                                                                                                                                                           -                    11                        
Liabilities of discontinued operations....................................................................................................                                                                                
                                                                                                                                                                           -                   911                        
                                                                                                                                                                                                    
Total liabilities.................................................................................................................................                   185,563               191,778                        
                                                                                                                                                                                                    
Shareholders' equity
Preferred stock...................................................................................................................................                                                                        
                                                                                                                                                                       1,565                 1,565                        
Common shareholder's equity:
Common stock ($5 par; 150,000,000 shares authorized; 712 shares issued and outstanding at September 30, 2012 and December 31,                                                                                             
2011)...........................................................................................................                                                           -                     -                        
Additional paid-in capital.........................................................................................................                                                                                       
                                                                                                                                                                      13,798                13,814                        
Retained earnings....................................................................................................................                                                                                     
                                                                                                                                                                       1,334                 2,481                        
Accumulated other comprehensive income...................................................................................                                                                                                 
                                                                                                                                                                         872                   642                        
                                                                                                                                                                                                    
Total common shareholder's equity......................................................................................................                                                                                   
                                                                                                                                                                      16,004                16,937                        
                                                                                                                                                                                                    
Total shareholders' equity.................................................................................................................                                                                               
                                                                                                                                                                      17,569                18,502                        
                                                                                                                                                                                                    
Total liabilities and shareholders' equity.............................................................................................                 $            203,132   $           210,280                        
                                                                                                                                                                                                    

 

^(1)  The following table summarizes assets and liabilities related to
variable interest entities ("VIEs") as of September 30, 2012 and December 31,
2011 which are consolidated on our balance sheet. Assets and liabilities
exclude intercompany balances that eliminate in consolidation.

The accompanying notes are an integral part of the consolidated financial
statements.

 

CONSOLIDATED BALANCE SHEET (UNAUDITED) (Continued)

 

                                                                                                                                             September 30,                        December 31,

                                                                                                                                                  2012                                2011
                                                                                                                                                                     (in millions)
Assets
Interest bearing deposits with banks.................................................................................................    $                    83  $                 108                        
Other                                                                                                                                                                                                          
assets.................................................................................................................................                      566                    520                        
                                                                                                                                                                                        
Total
assets.................................................................................................................................   $                  649  $                 628                        
                                                                                                                                                                                        
Liabilities
Long-term
debt............................................................................................................................         $                    55 $                   55                        
Interest, taxes and other                                                                                                                                                                                      
liabilities...................................................................................................                                               181                    166                        
Liabilities of discontinued operations...............................................................................................                                                                          
                                                                                                                                                               -                    541                        
                                                                                                                                                                                        
Total
liabilities............................................................................................................................   $                  236  $                 762                        
                                                                                                                                                                                        

The accompanying notes are an integral part of the consolidated financial
statements.

 

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)

 

Nine Months Ended September 30,                                                                                                                   2012             2011
                                                                                                                                                      (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..............................................................................................................                                  13,814           13,785
Capital contributions from parent.........................................................................................................                                   
                                                                                                                                                           -               21
Employee benefit plans and other.........................................................................................................                (16                 
                                                                                                                                                           )               18
                                                                                                                                                                     
Balance at end of
period.........................................................................................................................                       13,798           13,824
                                                                                                                                                                     
Retained earnings
Balance at beginning of
period..............................................................................................................                                   2,481            1,536
Net income
(loss).....................................................................................................................................         (1,092 )              873
Cash dividends declared on preferred stock.......................................................................................                        (55              (55
                                                                                                                                                           )                )
                                                                                                                                                                     
Balance at end of
period.........................................................................................................................                        1,334            2,354
                                                                                                                                                                     
Accumulated other comprehensive income (loss)
Balance at beginning of                                                                                                                                                  (153
period..............................................................................................................                                     642                )
Other comprehensive income, net of tax..............................................................................................                     230              812
                                                                                                                                                                     
Balance at end of
period.........................................................................................................................                          872              659
                                                                                                                                                                     
Total common shareholders' equity...................................................................................................                  16,004           16,837
                                                                                                                                                                     
Total shareholders'
equity....................................................................................................................                        $   17,569     $     18,402
                                                                                                                                                                     

The accompanying notes are an integral part of the consolidated financial
statements.

 

CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

 

Nine Months Ended September 30,                                                                                                                                          2012               2011
                                                                                                                                                                              (in millions)
Cash flows from operating activities
Net income (loss)..................................................................................................................................                   $     (1,092 )    $           873
Income from discontinued operations..............................................................................................                                                203                440
                                                                                                                                                                                              
Income (loss) from continuing operations.......................................................................................                                             (1,295 )                433
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization......................................................................................................                                              243                220
Gain on sale of branches................................................................................................................                                                               
                                                                                                                                                                              (433 )                  -
Expense accrual related to certain regulatory matters...............................................................                                                                                   
                                                                                                                                                                               1,500                  -
Impairment of internally developed software.............................................................................                                                            
                                                                                                                                                                                   -                 94
Provision for credit losses.............................................................................................................                                         173                171
Realized gains on securities available-for-sale...........................................................................                                                                         (105
                                                                                                                                                                              (145 )                  )
Net change in other assets and liabilities....................................................................................                                                 2,313           (1,975 )
Change in loans held for sale:
Originations of loans.................................................................................................................                                      (2,678 )           (2,280 )
Sales and collection of loans held for sale.............................................................................                                                       2,795              3,106
Net change in trading assets and liabilities................................................................................                                                   7,576           (5,446 )
Lower of amortized cost or fair value adjustments on loans held for sale.............................                                                                             32                 44
Mark-to-market (gains) losses on financial instruments designated at fair value and related                                                                                                        (440
derivatives......................................................................................................................................................                258                  )
                                                                                                                                                                                              
Cash provided by (used in) operating activities - continuing operations..................................                                                                     10,339           (6,178 )
Cash provided by operating activities - discontinued operations..............................................                                                                     34              1,818
                                                                                                                                                                                              
Net cash provided by (used in) operating activities.......................................................................                                                    10,373           (4,360 )
                                                                                                                                                                                              
Cash flows from investing activities
Net change in interest bearing deposits with banks.......................................................................                                                     10,141          (13,089 )
Net change in federal funds sold and securities purchased under agreements to resell..........                                                                              (8,569 )              3,141
Securities available-for-sale:
Purchases of securities available-for-sale...................................................................................                                              (29,177 )          (23,820 )
Proceeds from sales of securities available-for-sale..................................................................                                                        10,183             17,423
Proceeds from maturities of securities available-for-sale..........................................................                                                            9,601              2,475
Securities held-to-maturity:
Proceeds from maturities of securities held-to-maturity...........................................................                                                               301                470
Change in loans:
Originations, net of collections.....................................................................................................                                       (9,509 )           (4,308 )
Loans sold to third parties.............................................................................................................                                          49                304
Net cash used for acquisitions of properties and equipment........................................................                                                                (6                (18
                                                                                                                                                                                   )                  )
Net outflows related to the sale of branches...................................................................................                                                                        
                                                                                                                                                                           (10,137 )                  -
Other, net...............................................................................................................................................                     (107 )                 75
                                                                                                                                                                                              
Cash used in investing activities - continuing operations...........................................................                                                       (27,230 )          (17,347 )
Cash provided by investing activities - discontinued operations...............................................                                                                20,746              1,215
                                                                                                                                                                                              
Net cash used in investing activities................................................................................................                                       (6,484 )          (16,132 )
                                                                                                                                                                                              

 

CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (Continued)

 

Nine Months Ended September 30,                                                                                                                   2012           2011
                                                                                                                                                      (in millions)
Cash flows from financing activities
Net change in                                                                                                                                        (5,536
deposits...........................................................................................................................                       )          11,966
Debt:
Net change in short-term borrowings..............................................................................................                    (1,896
                                                                                                                                                          )           6,571
Issuance of long-term debt...............................................................................................................             5,354           5,152
Repayment of long-term debt...........................................................................................................               (1,928          (3,099
                                                                                                                                                          )               )
Repayment of debt issued related to the sale and leaseback of 452 Fifth Avenue property..                                                                                  
                                                                                                                                                       (8 )           (21 )
Other decreases in capital surplus........................................................................................................                                 
                                                                                                                                                      (16 )              18
Dividends                                                                                                                                                                  
paid.........................................................................................................................................         (55 )           (55 )
                                                                                                                                                                    
Cash provided by (used in) financing activities - continuing operations......................................                                        (4,085
                                                                                                                                                          )          20,532
Cash used in financing activities - discontinued operations...........................................................                                                 (148
                                                                                                                                                      (35 )               )
                                                                                                                                                                    
Net cash provided by (used in) financing activities................................................................                                  (4,120
                                                                                                                                                          )          20,384
                                                                                                                                                                    
Net change in cash and due from banks..............................................................................................                    (231            (108
                                                                                                                                                          )               )
Cash and due from banks at beginning of period^(1).............................................................................                       1,616           1,693
                                                                                                                                                                    
Cash and due from banks at end of period........................................................................................                 $    1,385   $       1,585
                                                                                                                                                                    
Supplemental disclosure of non-cash flow investing activities
Trading securities pending settlement.................................................................................................        $          20 $            99

 

^(1)  Cash at beginning of period includes $117 million for discontinued
operations as of January 1, 2011.

The accompanying notes are an integral part of the consolidated financial
statements.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note                                                                             Page
1    Organization and Basis of Presentation................                              
2    Discontinued Operations......................................                       
3    Branch Assets and Liabilities Held for Sale...........                              
4    Trading Assets and Liabilities...............................                       
5    Securities..............................................................            
6    Loans...................................................................            
7    Allowance for Credit Losses.................................                        
8    Loans Held for Sale..............................................                   
9    Intangible Assets..................................................                 
10   Goodwill...............................................................             
11   Derivative Financial Instruments.........................                           
12   Fair Value Option.................................................                  
13   Income Taxes......................................................                  
14   Accumulated Other Comprehensive Income.........                                     
15   Pension and Other Postretirement Benefits.........                                  
16   Related Party Transactions..................................                        
17   Regulatory Capital...............................................                   
18   Business Segments................................................                   
19   Variable Interest Entities......................................                    
20   Guarantee Arrangements and Pledged Assets........                                   
21   Litigation and Regulatory Matters........................                           
22   Fair Value Measurements......................................                       
23   New Accounting Pronouncements........................                               

 

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. HUSI 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, 2011 (the "2011 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.

2.    Discontinued Operations

                                       

Sale of Certain Credit Card Operations to Capital One  On August 10, 2011,
HSBC, through its wholly-owned subsidiaries HSBC Finance Corporation ("HSBC
Finance"), HSBC USA Inc. and other wholly-owned affiliates entered into an
agreement to sell its Card and Retail Services business to Capital One
Financial Corporation ("Capital One"). This transaction was completed on
May 1, 2012. The sale included our General Motors ("GM") and Union Plus ("UP")
credit card receivables as well as our private label credit card and
closed-end receivables, all of which were purchased from HSBC Finance. Prior
to completing the transaction, we recorded cumulative lower of amortized cost
or fair value adjustments on these receivables which were classified as held
for sale on our balance sheet as a component of assets of discontinued
operations totaling $1.0 billion, of which $440 million was recorded in the
nine months ended September 30, 2012 and $159 million was recorded in the
three and nine months ended September 30, 2011 and is reflected in net
interest income and other revenues in the table below. These fair value
adjustments were largely offset by held for sale accounting adjustments in
which loan impairment charges and premium amortization are no longer recorded.
The total final cash consideration allocated to us was approximately
$19.2 billion, which did not result in the recognition of a gain or loss upon
completion of the sale as the receivables were recorded at fair value.

The sale to Capital One did not include credit card receivables associated
with HSBC Bank USA's legacy credit card program and, therefore, are excluded
from the table below. However a portion of these receivables were included as
part of the sale to First Niagara Bank, N.A. and HSBC Bank USA will continue
to offer credit cards to HSBC Bank USA's customers. No significant one-time
closure costs have been incurred as a result of exiting these portfolios. In
connection with the sale of our credit card portfolio to Capital One, we have
entered into an outsourcing arrangement with Capital One with respect to the
servicing of our remaining credit card portfolio.

Because the credit card and private label receivables sold were classified as
held for sale prior to disposition and the operations and cash flows from
these receivables will be eliminated from our ongoing operations
post-disposition without any significant continuing involvement, we have
determined we have met the requirements to report the results of these credit
card and private label card receivables being sold as discontinued operations
and have included these receivables in Assets of discontinued operations on
our balance sheet for all periods presented.

The following summarizes the results of operations of our discontinued credit
card operations for the periods presented.

 

                                                                          Three Months  Ended         Nine Months  Ended
                                                                             September 30,               September 30,

                                                                                                                
                                                                           2012           2011         2012         2011    
                                                                                          (in millions)
Net interest income and other                                         $                $              $             $       
revenues^(1)(2).....................................................                -          492          541        1,598
Income from discontinued operations before income                                                                           
tax.............................                                                    -          218          315          683

 

^(1)  Interest expense was allocated to discontinued operations in accordance
with our existing internal transfer pricing policy. This policy uses match
funding based on the expected lives of the assets and liabilities of the
business at the time of origination, subject to periodic review, as
demonstrated by the expected cash flows and re-pricing characteristics of the
underlying assets.

^(2 ^)            Included in other revenues for the nine months ended
September 30, 2012 was a $440 million lower of amortized cost or fair value
adjustment. Included in other revenues for the three and nine months ended
September 30, 2011 was a $159 million lower of amortized cost or fair value
adjustment.

The following summarizes the assets and liabilities of our discontinued credit
card operations at September 30, 2012 and December 31, 2011 which are reported
as a component of Assets of discontinued operations and Liabilities of
discontinued operations in our consolidated balance sheet.

 

                                                                                                                                            September 30,               December 31,

                                                                                                                                                2012                        2011
                                                                                                                                                           (in millions)
Loans, net^(1)                                                                                                                          $                                        $           
................................................................................................................................                             - 21,185                        
Other                                                                                                                                                                                        
assets................................................................................................................................                       -    269                        
                                                                                                                                                                              
Assets of discontinued operations........................................................................................               $                                        $           
                                                                                                                                                             - 21,454                        
                                                                                                                                                                              
Deposits in domestic offices - noninterest bearing.............................................................                         $                                 $                  
                                                                                                                                                             -     35                        
Other                                                                                                                                                                                        
liabilities...........................................................................................................................                       -    876                        
                                                                                                                                                                              
Liabilities of discontinued operations....................................................................................              $                                   $                
                                                                                                                                                             -    911                        
                                                                                                                                                                              

 

^(1)  At December 31, 2011, the receivables are carried at the lower of
amortized cost or fair value.

 

Banknotes Business  In June 2010, we decided that the wholesale banknotes
business ("Banknotes Business") within our Global Banking and Markets segment
did not fit with our core strategy in the 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.

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 amount of the assets being sold exceeded the
agreed-upon sales price, we recorded a lower of amortized cost or fair value
adjustment of $12 million in the third quarter of 2010. As the exit of our
Banknotes Business, including the sale of our Asian Banknotes Operations, was
substantially completed in the fourth quarter of 2010, we began to report the
results of our Banknotes Business as discontinued operations at that time.

The exit of our Banknotes Business was completed in the second quarter of 2011
with the sale of our European Banknotes Business to HSBC Bank plc. The table
below summarizes the operating results of our Banknotes Business for the
periods presented.

 

                                                                              Three Months  Ended               Nine Months  Ended
                                                                                 September 30,                     September 30,

                                                                                                                          
                                                                            2012               2011             2012           2011
                                                                                                (in millions)
Net interest income and other                                           $                  $                $                $          
revenues............................................................ -                  -                                -            19
Income (loss) from discontinued operations before income tax                                                                            
(benefit) expense                                                    -                  -                                -          (1 )

At September 30, 2012 and December 31, 2011 there were no remaining assets and
liabilities of our Banknotes Business reported as assets of discontinued
operations and liabilities of discontinued operations in our consolidated
balance sheet.

3.    Branch Assets and Liabilities Held for Sale

                                       

On July 31, 2011, we announced that we had reached an agreement with First
Niagara Bank, N.A. ("First Niagara") to sell 195 non-strategic retail
branches, including certain loans, deposits and related branch premises
primarily located in upstate New York. The agreement included the transfer of
certain deposits and loans, as well as related branch premises, for a premium
of 6.67 percent of the deposits, subject to certain agreed-upon adjustments.
In May 2012, we completed the sale of 138 branches to First Niagara and
recognized an after-tax gain, net of allocated non-deductible goodwill, of $71
million. Since the premium received of $886 million was calculated based on
the total amount of outstanding deposit balances for all branches being sold,
a pro-rata portion of the premium related to the deposit balances associated
with the branches that were not sold in the amount of $209 million was
deferred as unearned revenue and was recognized in the third quarter when the
remaining branches and related deposit amounts were sold. In the third quarter
of 2012, we completed the sale of the remaining 57 branches and recognized an
after-tax gain, net of allocated non-deductible goodwill, of $23 million.
Included in the sale of the 195 non-strategic retail branches were
approximately $13.2 billion in deposits and $2.1 billion in loans. Branch
premises were sold for fair value and loans and other transferred assets were
sold at their carrying values.

 

The following summarizes the assets and liabilities classified as held for
sale at September 30, 2012 and December 31, 2011 in our consolidated balance
sheet related to the agreement to sell certain retail branches.

 

                                                                                                                                September 30,               December 31,

                                                                                                                                    2012                        2011
                                                                                                                                               (in millions)
Loans held for                                                                                                              $                                      $             
sale^(1)..................................................................................................................                       -  2,495                        
Other branch assets held for sale:
Properties and equipment, net ...........................................................................................                                                        
                                                                                                                                                 -     42                        
Goodwill allocated to retail branch disposal group ........................................................                                                                      
                                                                                                                                                 -    398                        
                                                                                                                                                                  
Total other branch assets held for sale..................................................................................                                                        
                                                                                                                                                 -    440                        
                                                                                                                                                                  
Total branch assets held for                                                                                                $                                      $             
sale............................................................................................                                                 -  2,935                        
                                                                                                                                                                  
Deposits held for                                                                                                           $                                        $           
sale...............................................................................................................                              - 15,144                        
Other branch liabilities held for                                                                                                                                                
sale.......................................................................................                                                      -     11                        
                                                                                                                                                                  
Total branch liabilities held for                                                                                           $                                        $           
sale........................................................................................                                                     - 15,155                        
                                                                                                                                                                  

 

^(1)  Loans held for sale includes $521 million of commercial loans,
$1.4 billion of residential mortgages, $416 million of credit card loans and
$161 million in other consumer loans at December 31, 2011.

4.    Trading Assets and Liabilities

                                       

Trading assets and liabilities are summarized in the following table.

 

                                                                                                                                    September 30,              December 31,

                                                                                                                                         2012                      2011
                                                                                                                                                    (in millions)
Trading assets:
U.S.                                                                                                                                                               $                
Treasury........................................................................................................................  $             2,283    259                        
U.S. Government agency issued or guaranteed..............................................................                                                                           
                                                                                                                                                  292     14                        
U.S. Government sponsored enterprises^(1)........................................................................                                                                   
                                                                                                                                                  231     24                        
Asset-backed securities......................................................................................................                                                       
                                                                                                                                                  987  1,032                        
Corporate and foreign bonds^(2)...........................................................................................                                                          
                                                                                                                                                9,636 11,577                        
Other                                                                                                                                                                               
securities.....................................................................................................................                    37     40                        
Precious                                                                                                                                                                            
metals.....................................................................................................................                    15,777 17,082                        
Fair value of derivatives, net..............................................................................................                                                        
                                                                                                                                                9,079  8,772                        
                                                                                                                                                                     
                                                                                                                                                                        $           
                                                                                                                                   $           38,322 38,800                        
                                                                                                                                                                     
Trading liabilities:
Securities sold, not yet purchased....................................................................................                                             $                
                                                                                                                                 $                361    343                        
Payables for precious metals..............................................................................................                                                          
                                                                                                                                                6,853  6,999                        
Fair value of derivatives, net..............................................................................................                                                        
                                                                                                                                               13,661  6,844                        
                                                                                                                                                                     
                                                                                                                                                                        $           
                                                                                                                                   $           20,875 14,186                        
                                                                                                                                                                     

 

^(1)  Includes mortgage-backed securities of $13 million and $10 million
issued or guaranteed by the Federal National Mortgage Association ("FNMA") at
September 30, 2012 and December 31, 2011, respectively, and $218 million and
$14 million issued or guaranteed by the Federal Home Loan Mortgage Corporation
("FHLMC") at September 30, 2012 and December 31, 2011, respectively.

^(2)   We did not hold any foreign bonds issued by the governments of Greece,
Ireland, Italy, Portugal or Spain at either September 30, 2012 or December 31,
2011.

At September 30, 2012 and December 31, 2011, the fair value of derivatives
included in trading assets has been reduced by $5.9 billion and $4.8 billion,
respectively, relating to amounts recognized for the obligation to return cash
collateral received under master netting agreements with derivative
counterparties.

 

At September 30, 2012 and December 31, 2011, the fair value of derivatives
included in trading liabilities has been reduced by $2.3 billion and
$6.3 billion, respectively, relating to amounts recognized for the right to
reclaim cash collateral paid under master netting agreements with derivative
counterparties.

5.    Securities

                                       

The amortized cost and fair value of the securities available-for-sale and
securities held-to-maturity are summarized in the following tables.

 

                                                                                                             Amortized            Unrealized             Unrealized           Fair

September 30, 2012                                                                                             Cost                  Gains                 Losses             Value
Securities available-for-sale:
U.S. Treasury..........................................................................................                                 $           
                                                                                                              $     30,612   557                     $             (30 )     $    31,139
U.S. Government sponsored enterprises:^(1)
Mortgage-backed securities............................................................                                                                                  
                                                                                                                       168     2                                       -             170
Direct agency obligations................................................................                                                                             (2
                                                                                                                     3,568   376                                       )           3,942
U.S. Government agency issued or guaranteed:
Mortgage-backed securities............................................................                                                                                (4
                                                                                                                    15,289   871                                       )          16,156
Collateralized mortgage obligations...............................................                                                                                      
                                                                                                                     3,875   175                                       -           4,050
Direct agency obligations................................................................                                                                                               
                                                                                                                         1     -                                       -               1
Obligations of U.S. states and political subdivisions.......................                                                                                            
                                                                                                                       775    40                                       -             815
Asset backed securities collateralized by:
Residential mortgages......................................................................                                                                                             
                                                                                                                         2     -                                       -               2
Commercial mortgages.....................................................................                                                                               
                                                                                                                       257     7                                       -             264
Home equity.......................................................................................                                                                   (80
                                                                                                                       322     -                                       )             242
Other...................................................................................................                                                             (17                
                                                                                                                       102     -                                       )              85
Corporate and other domestic debt securities^(2).................................                                                                                                       
                                                                                                                        40     3                                       -              43
Foreign debt securities^(3)(6  ^)....................................................................                                                                (57
                                                                                                                     5,488    17                                       )           5,448
Equity securities.....................................................................................                                                                  
                                                                                                                       167     8                                       -             175
                                                                                                                                                                                 
Total available-for-sale securities.............................................................                                            $       
                                                                                                              $     60,666 2,056                       $          (190 )     $    62,532
                                                                                                                                                                                 
Securities held-to-maturity:
U.S. Government sponsored enterprises:^(5)
Mortgage-backed securities............................................................                                                  $           
                                                                                                            $        1,212   167                     $                 -    $      1,379
U.S. Government agency issued or guaranteed:
Mortgage-backed securities............................................................                                                                                                  
                                                                                                                        68    13                                       -              81
Collateralized mortgage obligations...............................................                                                                                      
                                                                                                                       289    46                                       -             335
Obligations of U.S. states and political subdivisions.......................                                                                                                            
                                                                                                                        44     3                                       -              47
Asset backed securities collateralized by residential mortgages....                                                                                                     
                                                                                                                       128     7                                       -             135
                                                                                                                                                                                 
Total held-to-maturity securities...............................................................                                        $           
                                                                                                            $        1,741   236                     $                 -    $      1,977
                                                                                                                                                                                 

 

 

 

                                                                                                             Amortized            Unrealized             Unrealized            Fair

December 31, 2011                                                                                              Cost                  Gains                 Losses             Value
Securities available-for-sale:
U.S. Treasury..........................................................................................                                $            
                                                                                                            $       18,199   498                     $            (121 )    $      18,576
U.S. Government sponsored enterprises:^(1)
Mortgage-backed securities............................................................                                                                                                   
                                                                                                                        40     1                                       -               41
Direct agency obligations................................................................                                                                               
                                                                                                                     2,501   352                                       -            2,853
U.S. Government agency issued or guaranteed:
Mortgage-backed securities............................................................                                                                                  
                                                                                                                    15,357   728                                    (3 )           16,082
Collateralized mortgage obligations...............................................                                                                                      
                                                                                                                     6,881   177                                    (3 )            7,055
Direct agency obligations................................................................                                                                                                
                                                                                                                         2     -                                       -                2
Obligations of U.S. states and political subdivisions.......................                                                                                            
                                                                                                                       566    35                                    (1 )              600
Asset backed securities collateralized by:
Residential mortgages......................................................................                                                                                              
                                                                                                                         6     -                                    (1 )                5
Commercial mortgages.....................................................................                                                                               
                                                                                                                       444     9                                    (2 )              451
Home equity.......................................................................................                                                                   (99
                                                                                                                       369     -                                       )              270
Student loans.....................................................................................                                                                                       
                                                                                                                        13     -                                    (1 )               12
Other...................................................................................................                                                             (22                 
                                                                                                                       102     -                                       )               80
Corporate and other domestic debt securities^(2).................................                                                                                       
                                                                                                                       541     3                                       -              544
Foreign debt securities^(3)(6  ^)....................................................................                                                                (97
                                                                                                                     6,640    27                                       )            6,570
Equity securities^(4)...................................................................................                                                                
                                                                                                                       130    10                                       -              140
                                                                                                                                                                                 
Total available-for-sale securities.............................................................                                          $         
                                                                                                            $       51,791 1,840                     $            (350 )    $      53,281
                                                                                                                                                                                 
Securities held-to-maturity:
U.S. Government sponsored enterprises:^(5)
Mortgage-backed securities............................................................                                                 $              $                 
                                                                                                           $         1,421   195                                       -   $        1,616
U.S. Government agency issued or guaranteed:
Mortgage-backed securities............................................................                                                                                                   
                                                                                                                        79    13                                       -               92
Collateralized mortgage obligations...............................................                                                                                      
                                                                                                                       308    44                                       -              352
Obligations of U.S. states and political subdivisions.......................                                                                                                             
                                                                                                                        61     3                                       -               64
Asset backed securities collateralized by residential mortgages....                                                                                                     
                                                                                                                       166     9                                    (1 )              174
                                                                                                                                                                                 
Total held-to-maturity securities...............................................................                                       $             $                (1
                                                                                                           $         2,035   264                                       )   $        2,298
                                                                                                                                                                                 

 

^(1)  Includes securities at amortized cost of $155 million and $27 million
issued or guaranteed by FNMA at September 30, 2012 and December 31, 2011,
respectively, and $13 million issued or guaranteed by FHLMC at both
September 30, 2012 and December 31, 2011, respectively.

^(2)   At September 30, 2012 and December 31, 2011, other domestic debt
securities included $16 million and $516 million, respectively, of securities
at amortized cost fully backed by the Federal Deposit Insurance Corporation
("FDIC").

^(3)  At September 30, 2012 and December 31, 2011, foreign debt securities
included of $1.5 billion and $2.7 billion, respectively, of securities fully
backed by foreign governments.

^(4)   Includes preferred equity securities at amortized cost issued by FNMA
of $2 million at December 31, 2011. Balance at December 31, 2011 reflects a
cumulative other-than-temporary impairment charge of $173 million.

^(5)   Includes securities at amortized cost of $532 million and $591 million
issued or guaranteed by FNMA at September 30, 2012 and December 31, 2011,
respectively, and $680 million and $830 million issued and guaranteed by FHLMC
at September 30, 2012 and December 31, 2011, respectively.

^(6 ^)            There were no foreign debt securities issued by the
governments of Greece, Ireland, Italy, Portugal or Spain at either
September 30, 2012 or December 31, 2011.

 

A summary of gross unrealized losses and related fair values as of
September 30, 2012 and December 31, 2011, classified as to the length of time
the losses have existed as follows:

 

                                                                            One Year or Less                                                  Greater Than One Year

                                                                                                                                                         
                                                                            Gross                  Aggregate                                    Gross                  Aggregate
                                                        Number                                                              Number
                                                          of             Unrealized               Fair Value                  of             Unrealized               Fair Value

September 30, 2012                                    Securities           Losses                of Investment            Securities           Losses                of Investment
                                                                                                          (dollars are in millions)
Securities available-for-sale:
U.S.                                                                  $               (2                  $                                                               $               
Treasury.........................................                  3                   ) 2,595                                         6 $             (28 )   591                        
U.S. Government sponsored enterprises                                                 (2                                                                                                  
                                                                   2                   )   231                                        12                   -     8                        
U.S. Government agency issued or                                                      (4                                                                                                  
guaranteed........................................                19                   )   116                                         -                   -     -                        
Obligations of U.S. states and political                                                                                                                                                  
subdivisions.....................................                  4                   -    29                                         1                   -     7                        
Asset backed securities.......................                                                                                                           (97                              
                                                                   4                   -    54                                        13                   )   339                        
Foreign debt securities.........................                                      (8                                                                 (49                              
                                                                   5                   ) 1,455                                         8                   ) 2,979                        
Equity                                                                                                                                                                                    
securities....................................                     -                   -     -                                         -                   -     -                        
                                                                                                                                                                            
Securities                                                                                                $                                                                   $           
available-for-sale......................                          37 $             (16 ) 4,480                                        40   $          (174 ) 3,924                        
                                                                                                                                                                            
Securities held-to-maturity:
U.S. Government sponsored enterprises                                                            $                                                                   $                    
                                                                  12 $                 -     -                                        52 $                 -     -                        
U.S. Government agency issued or                                                                                                                                                          
guaranteed........................................                56                   -     -                                       969                   -     3                        
Obligations of U.S. states and political                                                                                                                                                  
subdivisions.....................................                  2                   -     -                                         2                   -     1                        
Asset backed securities.......................                                                                                                                                            
                                                                   1                   -     4                                         2                   -     7                        
                                                                                                                                                                            
Securities held-to-maturity..................                                                     $                                                                     $                 
                                                                  71 $                 -     4                                     1,025 $                 -    11                        
                                                                                                                                                                            

 

 

                                                                             One Year or Less                                                  Greater Than One Year

                                                                                                                                                          
                                                        Number              Gross                  Aggregate                 Number              Gross                  Aggregate

                                                          of             Unrealized                Fair Value                  of             Unrealized               Fair Value

December 31, 2011                                     Securities           Losses                of Investment             Securities           Losses                of Investment
                                                                                                          (dollars are in millions)
Securities available-for-sale:
U.S.                                                                 $                (1                 $                                                                   $             
Treasury.........................................                  5                   )  4,978                                        12 $            (120 ) 2,592                        
U.S. Government sponsored enterprises                                                                                                                                                      
                                                                   6                   -      8                                        15                   -     9                        
U.S. Government agency issued or                                                                                                                                                           
guaranteed........................................                14                (6 )    833                                         2                   -     4                        
Obligations of U.S. states and political                                                                                                                                                   
subdivisions.....................................                  3                (1 )     20                                         3                   -    25                        
Asset backed securities.......................                                                                                                           (125                              
                                                                   2                   -     45                                        22                   )   387                        
Foreign debt securities.........................                                     (97                                                                                                   
                                                                  15                   )  4,223                                         -                   -     -                        
                                                                                                                                                                             
Securities                                                                                                 $                                                                 $             
available-for-sale......................                          45 $            (105 ) 10,107                                        54 $            (245 ) 3,017                        
                                                                                                                                                                             
Securities held-to-maturity:
U.S. Government sponsored enterprises                                 $                          $                                         $                         $                     
                                                                  47                   -      -                                        11                   -     -                        
U.S. Government agency issued or                                                                                                                                                           
guaranteed........................................               629                   -      2                                       463                   -     1                        
Obligations of U.S. states and political                                                                                                                                                   
subdivisions.....................................                  2                   -      -                                         4                   -     2                        
Asset backed securities.......................                                                                                                                                             
                                                                   -                   -      -                                         4                (1 )    14                        
                                                                                                                                                                             
Securities                                                            $                           $                                       $                (1           $                  
held-to-maturity........................                         678                   -      2                                       482                   )    17                        
                                                                                                                                                                             

Net unrealized gains increased within the available-for-sale portfolio in the
first nine months of 2012 largely due to a decrease in interest rates on
U.S. Treasury securities since December 31, 2011. We have reviewed the
securities for which there is an unrealized loss for other-than-temporary
impairment in accordance with our accounting policies. During the three and
nine months ended September 30, 2012 and 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. Changes in the non-credit portion during 2011 represented a
reversal of a portion of previously recorded impairment losses that were
recognized in other comprehensive income.

We do not consider any debt securities to be other-than-temporarily impaired
at September 30, 2012 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, other-than-temporary impairments may
occur in future periods if the credit quality of the securities deteriorates.

On-going Assessment for Other-Than-Temporary Impairment  On a quarterly basis,
we perform an assessment to determine whether there have been any events or
economic circumstances to indicate that a security with an unrealized loss has
suffered other-than-temporary impairment. A debt security is considered
impaired if 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 89 percent and
84 percent of total available-for-sale and held-to-maturity securities as of
September 30, 2012 and December 31, 2011 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 has been slow;

• The continued uncertainty in the U.S. housing markets with high levels of
pending foreclosure volume;

• 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;

•  

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