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

  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

                                      

                                  FORM10-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 September30, 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.)
       452Fifth 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 Section13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12months (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 90days.YesxNo¨

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 Rule405 of RegulationS-T during the
preceding 12months (or for such shorter period that the registrant was
required to submit and post such files).YesxNo¨

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 Rule12b-2 of the Exchange Act. (Check one):



Largeacceleratedfiler ¨                                                                 
                                                               Smallerreporting 
                          Acceleratedfiler      ¨ Non-acceleratedfiler   x            company  ¨
                                      (Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined
in Rule12b-2 of the Exchange Act).Yes¨Nox

As of November2, 2012, there were 712shares of the registrant's common stock
outstanding, all of which are owned by HSBC North America Inc.

                                      



HSBC USA Inc.

FORM10-Q

TABLE OF CONTENTS



Part/ItemNo.                                                                                                                                                                                Page

                                                                                                                                                                                              
PartI.
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.............................................................................................................................                    
PartII
Item 1.           Legal Proceedings........................................................................................................................................               
Item 1A.                                                                                                                                                                                  

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

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



PARTI. FINANCIAL INFORMATION

Item1.Financial Statements

                                      

CONSOLIDATED STATEMENT OF INCOME (LOSS) (UNAUDITED)



                                                                                                                           Three Months Ended                  Nine Months Ended
                                                                                                                              September30,                      September30,

                                                                                                                                                                      
                                                                                                                         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 (Note2):
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
                                                                                                                  September30,                    September30,

                                                                                                                                                        
                                                                                                              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 September30, 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)



                                                                                                                                                         September30,                       December31,

                                                                                                                                                              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 $2.0billion and $2.3billion at September30, 2012 and December31, 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 $424million and $377 million designated under fair value option at September30, 2012 and December31, 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 $9.8billion designated under fair value option at September30, 2012 and December31, 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 $7.7billion and $5.0 billion designated under fair value option at September30, 2012 and December31, 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 ($5par; 150,000,000shares authorized; 712shares issued and outstanding at September30, 2012 and December31,                                              
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 September30, 2012 and December31,
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)



                                                                                                                                             September30,                        December31,

                                                                                                                                                  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 September30,                                                                                                                   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 September30,                                                                                                                                          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 September30,                                                                                                                   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 452Fifth 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 $117million for discontinued
operations as of January1, 2011.

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



NOTESTO 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 Form10-Q and
Article10 of RegulationS-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
Form10-Q as "we," "us" or "our." These unaudited interim consolidated
financial statements should be read in conjunction with our Annual Report on
Form10-K for the year ended December31, 2011 (the "2011 Form10-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 Note2, "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 OneOn August10, 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
May1, 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 September30, 2012 and $159 million was recorded in the
three and nine months ended September30, 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
$19.2billion, 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.



                                                                          ThreeMonths Ended         NineMonths Ended
                                                                             September30,               September30,

                                                                                                              
                                                                       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
September30, 2012 was a $440 million lower of amortized cost or fair value
adjustment. Included in other revenues for the three and nine months ended
September30, 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 September30, 2012 and December31, 2011 which are reported
as a component of Assets of discontinued operations and Liabilities of
discontinued operations in our consolidated balance sheet.



                                                                                                                                            September30,               December31,

                                                                                                                                                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 December31, 2011, the receivables are carried at the lower of
amortized cost or fair value.



Banknotes BusinessIn 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 $14million 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 $11million in cash. As a result, during the third quarter of
2010 we classified the assets of the Asian Banknotes Operations of
$23million, including an allocation of goodwill of $21million, 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 $12million 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.



                                                                              ThreeMonths Ended               NineMonths Ended
                                                                                 September30,                     September30,

                                                                                                                        
                                                                            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 September30, 2012 and December31, 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 July31, 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 6.67percent 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 $13.2billion in deposits and $2.1billion 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 September30, 2012 and December31, 2011 in our consolidated balance
sheet related to the agreement to sell certain retail branches.



                                                                                                                                September30,               December31,

                                                                                                                                    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 $521million of commercial loans,
$1.4billion of residential mortgages, $416million of credit card loans and
$161million in other consumer loans at December31, 2011.

4.Trading Assets and Liabilities

                                      

Trading assets and liabilities are summarized in the following table.



                                                                                                                                    September30,              December31,

                                                                                                                                         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 $10million
issued or guaranteed by the Federal National Mortgage Association ("FNMA") at
September30, 2012 and December31, 2011, respectively, and $218 million and
$14million issued or guaranteed by the Federal Home Loan Mortgage Corporation
("FHLMC") at September30, 2012 and December31, 2011, respectively.

^(2) We did not hold any foreign bonds issued by the governments of Greece,
Ireland, Italy, Portugal or Spain at either September30, 2012 or December31,
2011.

At September30, 2012 and December31, 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 September30, 2012 and December31, 2011, the fair value of derivatives
included in trading liabilities has been reduced by $2.3 billion and
$6.3billion, 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

September30, 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

December31, 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 $155million and $27million
issued or guaranteed by FNMA at September30, 2012 and December31, 2011,
respectively, and $13 million issued or guaranteed by FHLMC at both
September30, 2012 and December31, 2011, respectively.

^(2) At September30, 2012 and December31, 2011, other domestic debt
securities included $16million and $516 million, respectively, of securities
at amortized cost fully backed by the Federal Deposit Insurance Corporation
("FDIC").

^(3) At September30, 2012 and December31, 2011, foreign debt securities
included of $1.5billion 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 December31, 2011. Balance at December31, 2011 reflects a
cumulative other-than-temporary impairment charge of $173 million.

^(5) Includes securities at amortized cost of $532million and $591million
issued or guaranteed by FNMA at September30, 2012 and December31, 2011,
respectively, and $680million and $830million issued and guaranteed by FHLMC
at September30, 2012 and December31, 2011, respectively.

^(6^)  There were no foreign debt securities issued by the
governments of Greece, Ireland, Italy, Portugal or Spain at either
September30, 2012 or December31, 2011.



A summary of gross unrealized losses and related fair values as of
September30, 2012 and December31, 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

September30, 2012                                    Securities           Losses                ofInvestment            Securities           Losses                ofInvestment
                                                                                                          (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

December31, 2011                                     Securities           Losses                ofInvestment             Securities           Losses                ofInvestment
                                                                                                          (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 December31, 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 September30, 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 September30, 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 ImpairmentOn 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 89percent and
84percent of total available-for-sale and held-to-maturity securities as of
September30, 2012 and December31, 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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