10-Q 1 husi9301710-q.htm 10-Q Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
OR
o
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 001-07436
HSBC USA Inc.
(Exact name of registrant as specified in its charter) 
Maryland
 
13-2764867
(State of incorporation)
 
(I.R.S. Employer Identification No.)
452 Fifth Avenue, New York, New York
 
10018
(Address of principal executive offices)
 
(Zip Code)
(212) 525-5000
Registrant's telephone number, including area code

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý  No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý  No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
ý
Smaller reporting company
o
Emerging growth company
o
 
 
 
 
 
 
(Do not check if a smaller
reporting company)
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o  No  ý

As of October 27, 2017, there were 714 shares of the registrant's common stock outstanding, all of which are owned by HSBC North America Holdings Inc.
 



HSBC USA Inc.

TABLE OF CONTENTS
Part/Item No.
 
 
Part I
 
Page
Item 1.
Financial Statements (Unaudited):
 
 
 
 
 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations:
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 3.
Item 4.
Part II
 
 
Item 1.
Item 5.
Item 6.
 

2


HSBC USA Inc.

PART I
Item 1. Financial Statements
 
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,

2017
 
2016
 
2017
 
2016
 
(in millions)
Interest income:
 
 
 
 
 
 
 
Loans
$
552

 
$
568

 
$
1,673

 
$
1,709

Securities
231

 
234

 
715

 
721

Trading securities
47

 
52

 
163

 
197

Short-term investments
203

 
100

 
515

 
268

Other
14

 
12

 
38

 
31

Total interest income
1,047

 
966

 
3,104

 
2,926

Interest expense:
 
 
 
 
 
 
 
Deposits
188

 
122

 
507

 
344

Short-term borrowings
39

 
22

 
94

 
61

Long-term debt
256

 
213

 
749

 
613

Other
4

 
5

 
15

 
12

Total interest expense
487

 
362

 
1,365

 
1,030

Net interest income
560

 
604

 
1,739

 
1,896

Provision for credit losses
(22
)
 
62

 
(120
)
 
353

Net interest income after provision for credit losses
582

 
542

 
1,859

 
1,543

Other revenues:
 
 
 
 
 
 
 
Credit card fees
12

 
12

 
37

 
39

Trust and investment management fees
39

 
40

 
116

 
118

Other fees and commissions
167

 
215

 
492

 
557

Trading revenue
81

 
120

 
222

 
185

Other securities gains, net
5

 
16

 
29

 
81

Servicing and other fees from HSBC affiliates
52

 
50

 
186

 
155

Residential mortgage banking revenue (expense)
(4
)
 
(3
)
 
(8
)
 
24

Gain (loss) on instruments designated at fair value and related derivatives
7

 
(88
)
 
40

 
90

Other income (loss)
9

 
(42
)
 
344

 
(174
)
Total other revenues
368

 
320

 
1,458

 
1,075

Operating expenses:
 
 
 
 
 
 
 
Salaries and employee benefits
268

 
235

 
789

 
718

Support services from HSBC affiliates
340

 
354

 
1,034

 
1,029

Occupancy expense, net
63

 
57

 
193

 
173

Other expenses
124

 
157

 
386

 
432

Total operating expenses
795

 
803

 
2,402

 
2,352

Income before income tax
155

 
59

 
915

 
266

Income tax expense
61

 
26

 
321

 
100

Net income
$
94

 
$
33

 
$
594

 
$
166


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

3


HSBC USA Inc.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,

2017
 
2016
 
2017
 
2016
 
(in millions)
Net income
$
94

 
$
33

 
$
594

 
$
166

Net change in unrealized gains (losses), net of tax:
 
 
 
 
 
 
 
Investment securities
22

 
(112
)
 
239

 
374

Fair value option liabilities attributable to our own credit spread
(45
)
 

 
(133
)
 

Derivatives designated as cash flow hedges
2

 
9

 

 
(47
)
Total other comprehensive income (loss)
(21
)
 
(103
)
 
106

 
327

Comprehensive income (loss)
$
73

 
$
(70
)
 
$
700

 
$
493


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


4


HSBC USA Inc.

CONSOLIDATED BALANCE SHEET (UNAUDITED)

September 30, 2017
 
December 31, 2016
 
(in millions, except share data)
Assets(1)
 
 
 
Cash and due from banks
$
986

 
$
1,235

Interest bearing deposits with banks
23,103

 
20,238

Federal funds sold and securities purchased under agreements to resell (includes $1.3 billion and $770 million designated under fair value option at September 30, 2017 and December 31, 2016, respectively)
17,136

 
30,023

Trading assets
33,520

 
16,850

Securities available-for-sale
31,693

 
36,910

Securities held-to-maturity (fair value of $14.4 billion and $12.8 billion at September 30, 2017 and December 31, 2016, respectively)
14,361

 
12,809

Loans
67,593

 
73,875

Less – allowance for credit losses
799

 
1,017

Loans, net
66,794

 
72,858

Loans held for sale (includes $375 million and $725 million designated under fair value option at September 30, 2017 and December 31, 2016, respectively)
507

 
1,809

Properties and equipment, net
175

 
202

Goodwill
1,607

 
1,612

Other assets
8,004

 
6,755

Total assets
$
197,886

 
$
201,301

Liabilities(1)
 
 
 
Debt:
 
 
 
Domestic deposits:
 
 
 
Noninterest bearing
$
27,423

 
$
26,932

Interest bearing (includes $7.6 billion and $7.5 billion designated under fair value option at September 30, 2017 and December 31, 2016, respectively)
85,898

 
86,389

Foreign deposits:
 
 
 
Noninterest bearing
563

 
741

Interest bearing
6,926

 
15,186

Deposits held for sale
1,030

 

Total deposits
121,840

 
129,248

Short-term borrowings (includes $3.6 billion and $2.7 billion designated under fair value option at September 30, 2017 and December 31, 2016, respectively)
7,973

 
5,101

Long-term debt (includes $12.4 billion and $10.4 billion designated under fair value option at September 30, 2017 and December 31, 2016, respectively)
37,376

 
37,739

Total debt
167,189

 
172,088

Trading liabilities
4,084

 
4,908

Interest, taxes and other liabilities
5,615

 
3,950

Total liabilities
176,888

 
180,946

Equity
 
 
 
Preferred stock (no par value; 40,999,000 shares authorized; 1,265 shares issued and outstanding at both September 30, 2017 and December 31, 2016)
1,265

 
1,265

Common equity:
 
 
 
Common stock ($5 par; 150,000,000 shares authorized; 714 shares issued and outstanding at both September 30, 2017 and December 31, 2016)

 

Additional paid-in capital
18,129

 
18,148

Retained earnings
1,942

 
1,560

Accumulated other comprehensive loss
(338
)
 
(618
)
Total common equity
19,733

 
19,090

Total equity
20,998

 
20,355

Total liabilities and equity
$
197,886

 
$
201,301

 
(1) 
The following table summarizes assets and liabilities related to our consolidated variable interest entities ("VIEs") at September 30, 2017 and December 31, 2016 which are consolidated on our balance sheet. Assets and liabilities exclude intercompany balances that eliminate in consolidation. See Note 16, "Variable Interest Entities," for additional information.


5


HSBC USA Inc.



September 30, 2017
 
December 31, 2016
 
(in millions)
Assets
 
 
 
Other assets
$
208

 
$
231

Total assets
$
208

 
$
231

Liabilities
 
 
 
Long-term debt
$
73

 
$
79

Interest, taxes and other liabilities
58

 
60

Total liabilities
$
131

 
$
139


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


6


HSBC USA Inc.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED)
Nine Months Ended September 30,
2017
 
2016
 
(in millions)
Preferred stock
 
 
 
Balance at beginning of period
$
1,265

 
$
1,265

Preferred stock issuance

 
1,265

Preferred stock redemption

 
(1,265
)
Balance at end of period
1,265

 
1,265

Common stock
 
 
 
Balance at beginning and end of period

 

Additional paid-in capital
 
 
 
Balance at beginning of period
18,148

 
18,169

Employee benefit plans
(19
)
 
(12
)
Balance at end of period
18,129

 
18,157

Retained earnings
 
 
 
Balance at beginning of period, as previously reported
1,560

 
1,498

Reclassification to accumulated other comprehensive loss of cumulative effect adjustment to initially apply new accounting guidance for financial liabilities measured under the fair value option, net of tax
(174
)
 

Balance at beginning of period, adjusted
1,386

 
1,498

Net income 
594

 
166

Cash dividends declared on preferred stock
(38
)
 
(29
)
Balance at end of period
1,942

 
1,635

Accumulated other comprehensive income (loss)
 
 
 
Balance at beginning of period, as previously reported
(618
)
 
(407
)
Reclassification from retained earnings of cumulative effect adjustment to initially apply new accounting guidance for financial liabilities measured under the fair value option, net of tax
174

 

Balance at beginning of period, adjusted
(444
)
 
(407
)
Other comprehensive income, net of tax
106

 
327

Balance at end of period
(338
)
 
(80
)
Total common equity
19,733

 
19,712

Total equity
$
20,998

 
$
20,977


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


7


HSBC USA Inc.

CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30,
2017
 
2016
 
(in millions)
Cash flows from operating activities
 
 
 
Net income
$
594

 
$
166

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
(75
)
 
(29
)
Provision for credit losses
(120
)
 
353

Net realized gains on securities available-for-sale
(29
)
 
(81
)
Net change in other assets and liabilities
504

 
1,010

Net change in loans held for sale:
 
 
 
Originations and purchases of loans held for sale
(1,664
)
 
(1,733
)
Sales and collections of loans held for sale
2,025

 
2,051

Net change in trading assets and liabilities
(17,494
)
 
(2,419
)
Lower of amortized cost or fair value adjustments on loans held for sale
(17
)
 
82

Gain on instruments designated at fair value and related derivatives
(40
)
 
(90
)
Net cash provided by (used in) operating activities
(16,316
)
 
(690
)
Cash flows from investing activities
 
 
 
Net change in interest bearing deposits with banks
(2,865
)
 
(9,661
)
Net change in federal funds sold and securities purchased under agreements to resell
12,893

 
(10,866
)
Securities available-for-sale:
 
 
 
Purchases of securities available-for-sale
(7,973
)
 
(18,364
)
Proceeds from sales of securities available-for-sale
12,620

 
13,697

Proceeds from maturities of securities available-for-sale
1,168

 
1,315

Securities held-to-maturity:
 
 
 
Purchases of securities held-to-maturity
(3,455
)
 
(1,311
)
Proceeds from maturities of securities held-to-maturity
1,872

 
1,871

Change in loans:
 
 
 
Collections, net of originations
5,125

 
3,697

Loans sold to third parties
2,088

 
1,458

Net cash used for acquisitions of properties and equipment
(14
)
 
(17
)
Other, net
463

 
(60
)
Net cash provided by (used in) investing activities
21,922

 
(18,241
)
Cash flows from financing activities
 
 
 
Net change in deposits
(7,461
)
 
12,285

Debt:
 
 
 
Net change in short-term borrowings
2,875

 
1,069

Issuance of long-term debt
3,886

 
7,675

Repayment of long-term debt
(5,098
)
 
(2,122
)
Preferred stock issuance

 
1,265

Preferred stock redemption

 
(1,265
)
Other increases (decreases) in capital surplus
(19
)
 
(12
)
Dividends paid
(38
)
 
(29
)
Net cash provided by (used in) financing activities
(5,855
)
 
18,866

Net change in cash and due from banks
(249
)
 
(65
)
Cash and due from banks at beginning of period
1,235

 
968

Cash and due from banks at end of period
$
986

 
$
903


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

8


HSBC USA Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Organization and Presentation
 
HSBC USA Inc. ("HSBC USA"), incorporated under the laws of Maryland, is a New York State based bank holding company and a wholly-owned subsidiary of HSBC North America Holdings Inc. ("HSBC North America"), which is an indirect wholly-owned subsidiary of HSBC Holdings plc ("HSBC" and, together with its subsidiaries, "HSBC Group"). The accompanying unaudited interim consolidated financial statements of HSBC USA and its subsidiaries (collectively "HUSI") have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X, as well as in accordance with predominant practices within the banking industry. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all normal and recurring adjustments considered necessary for a fair presentation of financial position, results of operations and cash flows for the interim periods have been made. HUSI may also be referred to in these notes to the consolidated financial statements as "we," "us" or "our." These unaudited interim consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2016 (the "2016 Form 10-K"). Certain reclassifications have been made to prior period amounts to conform to the current period presentation.
The preparation of financial statements in conformity with U.S. GAAP requires the use of estimates and assumptions that affect reported amounts and disclosures. Actual results could differ from those estimates. Interim results should not be considered indicative of results in future periods. During the three and nine months ended September 30, 2017, our results were impacted by an out of period adjustment to our estimated liability associated with certain medical benefits provided to employees on long-term disability which increased salaries and employee benefits expense by $7 million. In addition, for the nine months ended September 30, 2017, our income tax expense was impacted by an out of period adjustment to our deferred tax asset balance which decreased tax expense by $9 million.

9


HSBC USA Inc.

2.    Trading Assets and Liabilities
 
 
Trading assets and liabilities consisted of the following:

September 30, 2017
 
December 31, 2016
 
(in millions)
Trading assets:
 
 
 
U.S. Treasury
$
4,250

 
$
3,560

U.S. Government agency issued or guaranteed
125

 
24

U.S. Government sponsored enterprises
213

 
222

Asset-backed securities
288

 
365

Corporate and foreign bonds
6,130

 
6,481

Other securities
12

 
15

Precious metals
19,124

 
1,772

Derivatives, net
3,378

 
4,411

Total trading assets
$
33,520

 
$
16,850

Trading liabilities:
 
 
 
Securities sold, not yet purchased
$
1,474

 
$
1,060

Payables for precious metals

 
62

Derivatives, net
2,610

 
3,786

Total trading liabilities
$
4,084

 
$
4,908

At September 30, 2017 and December 31, 2016, the fair value of derivatives included in trading assets is net of $3,628 million and $4,462 million, respectively, relating to amounts recognized for the obligation to return cash collateral received under master netting agreements with derivative counterparties.
At September 30, 2017 and December 31, 2016, the fair value of derivatives included in trading liabilities is net of $3,195 million and $3,826 million, respectively, relating to amounts recognized for the right to reclaim cash collateral paid under master netting agreements with derivative counterparties.
See Note 9, "Derivative Financial Instruments," for further information on our trading derivatives and related collateral.


10


HSBC USA Inc.

3. Securities
 
 
Our securities available-for-sale and securities held-to-maturity portfolios consisted of the following:
September 30, 2017
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
(in millions)
Securities available-for-sale:
 
 
 
 
 
 
 
U.S. Treasury
$
16,069

 
$
147

 
$
(331
)
 
$
15,885

U.S. Government sponsored enterprises:
 
 
 
 
 
 
 
Mortgage-backed securities
3,384

 
5

 
(64
)
 
3,325

Collateralized mortgage obligations
648

 

 
(24
)
 
624

Direct agency obligations
3,356

 
99

 
(1
)
 
3,454

U.S. Government agency issued or guaranteed:
 
 
 
 
 
 
 
Mortgage-backed securities
5,430

 
9

 
(64
)
 
5,375

Collateralized mortgage obligations
999

 
2

 
(12
)
 
989

Direct agency obligations
423

 
11

 

 
434

Asset-backed securities collateralized by:
 
 
 
 
 
 
 
Home equity
58

 

 
(3
)
 
55

Other
507

 
2

 

 
509

Foreign debt securities(1)
890

 

 
(1
)
 
889

Equity securities
159

 

 
(5
)
 
154

Total available-for-sale securities
$
31,923

 
$
275

 
$
(505
)
 
$
31,693

Securities held-to-maturity:
 
 
 
 
 
 
 
U.S. Government sponsored enterprises:
 
 
 
 
 
 
 
Mortgage-backed securities
$
2,186

 
$
17

 
$
(4
)
 
$
2,199

Collateralized mortgage obligations
1,351

 
49

 
(10
)
 
1,390

U.S. Government agency issued or guaranteed:
 
 
 
 
 
 
 
Mortgage-backed securities
2,603

 
11

 
(6
)
 
2,608

Collateralized mortgage obligations
8,203

 
31

 
(49
)
 
8,185

Obligations of U.S. states and political subdivisions
14

 
1

 

 
15

Asset-backed securities collateralized by residential mortgages
4

 

 

 
4

Total held-to-maturity securities
$
14,361

 
$
109

 
$
(69
)
 
$
14,401


11


HSBC USA Inc.

December 31, 2016
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
(in millions)
Securities available-for-sale:
 
 
 
 
 
 
 
U.S. Treasury
$
21,366

 
$
102

 
$
(559
)
 
$
20,909

U.S. Government sponsored enterprises:
 
 
 
 
 
 
 
Mortgage-backed securities
4,535

 
4

 
(122
)
 
4,417

Collateralized mortgage obligations
2,139

 

 
(36
)
 
2,103

Direct agency obligations
3,709

 
118

 
(10
)
 
3,817

U.S. Government agency issued or guaranteed:
 
 
 
 
 
 
 
Mortgage-backed securities
3,102

 
2

 
(58
)
 
3,046

Collateralized mortgage obligations
1,370

 
2

 
(15
)
 
1,357

Direct agency obligations
423

 
1

 
(4
)
 
420

Asset-backed securities collateralized by:
 
 
 
 
 
 
 
Home equity
69

 

 
(8
)
 
61

Other
108

 

 
(3
)
 
105

Foreign debt securities(1)
522

 

 
(1
)
 
521

Equity securities
159

 

 
(5
)
 
154

Total available-for-sale securities
$
37,502

 
$
229

 
$
(821
)
 
$
36,910

Securities held-to-maturity:
 
 
 
 
 
 
 
U.S. Government sponsored enterprises:
 
 
 
 
 
 
 
Mortgage-backed securities
$
2,465

 
$
11

 
$
(9
)
 
$
2,467

Collateralized mortgage obligations
1,591

 
59

 
(12
)
 
1,638

U.S. Government agency issued or guaranteed:
 
 
 
 
 
 
 
Mortgage-backed securities
2,557

 
11

 
(10
)
 
2,558

Collateralized mortgage obligations
6,176

 
34

 
(56
)
 
6,154

Obligations of U.S. states and political subdivisions
15

 
1

 

 
16

Asset-backed securities collateralized by residential mortgages
5

 

 

 
5

Total held-to-maturity securities
$
12,809

 
$
116

 
$
(87
)
 
$
12,838

 
(1) 
Foreign debt securities represent public sector entity, bank or corporate debt.
Net unrealized losses decreased within the available-for-sale portfolio in the nine months ended September 30, 2017 due primarily to decreasing yields as well as favorable movements associated with fair value hedged U.S. Treasury securities.


12


HSBC USA Inc.

The following table summarizes gross unrealized losses and related fair values at September 30, 2017 and December 31, 2016 classified as to the length of time the losses have existed:
 
One Year or Less
 
Greater Than One Year
September 30, 2017
Number
of
Securities
 
Gross
Unrealized
Losses
 
Aggregate
Fair Value
of Investment
 
Number
of
Securities
 
Gross
Unrealized
Losses
 
Aggregate
Fair Value
of Investment
 
(dollars are in millions)
Securities available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
28

 
$
(214
)
 
$
7,433

 
29

 
$
(117
)
 
$
3,675

U.S. Government sponsored enterprises
84

 
(80
)
 
3,291

 
15

 
(9
)
 
259

U.S. Government agency issued or guaranteed
42

 
(70
)
 
1,858

 
6

 
(6
)
 
73

Asset-backed securities

 

 

 
5

 
(3
)
 
54

Foreign debt securities
8

 

 
672

 
1

 
(1
)
 
168

Equity securities

 

 

 
1

 
(5
)
 
154

Securities available-for-sale
162

 
$
(364
)
 
$
13,254

 
57

 
$
(141
)
 
$
4,383

Securities held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
U.S. Government sponsored enterprises
253

 
$
(13
)
 
$
1,156

 
51

 
$
(1
)
 
$
16

U.S. Government agency issued or guaranteed
125

 
(43
)
 
5,052

 
467

 
(12
)
 
776

Obligations of U.S. states and political subdivisions

 

 

 
2

 

 

Securities held-to-maturity
378

 
$
(56
)
 
$
6,208

 
520

 
$
(13
)

$
792

 
One Year or Less
 
Greater Than One Year
December 31, 2016
Number
of
Securities
 
Gross
Unrealized
Losses
 
Aggregate
Fair Value
of Investment
 
Number
of
Securities
 
Gross
Unrealized
Losses
 
Aggregate
Fair Value
of Investment
 
(dollars are in millions)
Securities available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
40

 
$
(378
)
 
$
13,707

 
32

 
$
(181
)
 
$
3,908

U.S. Government sponsored enterprises
316

 
(155
)
 
6,474

 
18

 
(13
)
 
427

U.S. Government agency issued or guaranteed
57

 
(66
)
 
3,941

 
7

 
(11
)
 
252

Asset-backed securities

 

 

 
8

 
(11
)
 
166

Foreign debt securities
7

 

 
343

 
1

 
(1
)
 
178

Equity securities
1

 
(5
)
 
154

 

 

 

Securities available-for-sale
421

 
$
(604
)
 
$
24,619

 
66

 
$
(217
)

$
4,931

Securities held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
U.S. Government sponsored enterprises
434

 
$
(21
)
 
$
2,013

 
45

 
$

 
$
21

U.S. Government agency issued or guaranteed
179

 
(65
)
 
4,734

 
503

 
(1
)
 
112

Obligations of U.S. states and political subdivisions
1

 

 

 
3

 

 

Securities held-to-maturity
614

 
$
(86
)
 
$
6,747

 
551

 
$
(1
)
 
$
133

Although the fair value of a particular security may be below its amortized cost, it does not necessarily result in a credit loss and hence an other-than-temporary impairment. The decline in fair value may be caused by, among other things, the illiquidity of the market. We have reviewed the securities for which there is an unrealized loss for other-than-temporary impairment in accordance with our accounting policies, discussed further below. At September 30, 2017 and December 31, 2016, we do not consider any of our debt securities to be other-than-temporarily impaired as we expect to recover their amortized cost basis 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

13


HSBC USA Inc.

maturities. However, other-than-temporary impairments may occur in future periods if the credit quality of the securities deteriorates.
Other-Than-Temporary Impairment  On a quarterly basis, we perform an assessment to determine whether there have been any events or economic circumstances to indicate that a security with an unrealized loss has suffered other-than-temporary impairment. A debt security is considered impaired if its fair value is less than its amortized cost at the reporting date. If impaired, we assess whether the impairment is other-than-temporary.
If we intend to sell the debt security or if it is more-likely-than-not that we will be required to sell the debt security before the recovery of its amortized cost basis, the impairment is considered other-than-temporary and the unrealized loss is recorded in earnings. An impairment is also considered other-than-temporary if a credit loss exists (i.e., the present value of the expected future cash flows is less than the amortized cost basis of the debt security). In the event a credit loss exists, the credit loss component of an other-than-temporary impairment is recorded in earnings while the remaining portion of the impairment loss attributable to factors other than credit loss is recognized, net of tax, in other comprehensive income (loss).
For all securities held in the available-for-sale or held-to-maturity portfolios for which unrealized losses attributed to factors other than credit existed, 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. For a complete description of the factors considered when analyzing debt securities for impairments, see Note 4, "Securities," in our 2016 Form 10-K. There have been no material changes in our process for assessing impairment during 2017.
During the three and nine months ended September 30, 2017 and 2016, 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, as such, there were no other-than-temporary impairment losses recognized related to credit loss.
Other securities gains, net  The following table summarizes realized gains and losses on investment securities transactions attributable to available-for-sale securities:

Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(in millions)
Gross realized gains
$
9

 
$
25

 
$
42

 
$
112

Gross realized losses
(4
)
 
(9
)
 
(13
)
 
(31
)
Net realized gains
$
5

 
$
16

 
$
29

 
$
81


14


HSBC USA Inc.

Contractual Maturities and Yields  The following table summarizes the amortized cost and fair values of securities available-for-sale and securities held-to-maturity at September 30, 2017 by contractual maturity. Expected maturities differ from contractual maturities because borrowers have the right to prepay obligations without prepayment penalties in certain cases. Securities available-for-sale amounts exclude equity securities as they do not have stated maturities. The table below also reflects the distribution of maturities of debt securities held at September 30, 2017, together with the approximate taxable equivalent yield of the portfolio. The yields shown are calculated by dividing annualized interest income, including the accretion of discounts and the amortization of premiums, by the amortized cost of securities outstanding at September 30, 2017. Yields on tax-exempt obligations have been computed on a taxable equivalent basis using applicable statutory tax rates.
 
Within
One Year
 
After One
But Within
Five Years
 
After Five
But Within
Ten Years
 
After Ten
Years
Taxable Equivalent Basis
Amount
 
Yield
 
Amount
 
Yield
 
Amount
 
Yield
 
Amount
 
Yield
 
(dollars are in millions)
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
$

 
%
 
$
3,215

 
2.12
%
 
$
8,893

 
1.97
%
 
$
3,961

 
2.84
%
U.S. Government sponsored enterprises
99

 
3.26

 
2,921

 
3.00

 
1,502

 
2.52

 
2,866

 
2.70

U.S. Government agency issued or guaranteed
1

 
3.49

 
183

 
2.56

 
20

 
3.91

 
6,648

 
2.57

Asset-backed securities
400

 
2.56

 

 

 

 

 
165

 
3.85

Foreign debt securities
602

 
.00

 
288

 
1.18

 

 

 

 

Total amortized cost
$
1,102

 
1.23
%
 
$
6,607

 
2.48
%
 
$
10,415

 
2.06
%
 
$
13,640

 
2.69
%
Total fair value
$
1,103

 
 
 
$
6,727

 
 
 
$
10,233

 
 
 
$
13,476

 
 
Held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government sponsored enterprises
$

 
%
 
$
310

 
2.36
%
 
$
339

 
2.77
%
 
$
2,888

 
2.86
%
U.S. Government agency issued or guaranteed

 

 
26

 
3.78

 
29

 
2.47

 
10,751

 
2.35

Obligations of U.S. states and political subdivisions
2

 
4.17

 
4

 
3.51

 
6

 
4.15

 
2

 
4.16

Asset-backed securities

 

 

 

 

 

 
4

 
7.11

Total amortized cost
$
2

 
4.17
%
 
$
340

 
2.48
%
 
$
374

 
2.77
%
 
$
13,645

 
2.46
%
Total fair value
$
2

 
 
 
$
342

 
 
 
$
379

 
 
 
$
13,678

 
 

Investments in Federal Home Loan Bank stock and Federal Reserve Bank stock of $282 million and $631 million, respectively, at September 30, 2017 and $338 million and $631 million, respectively, at December 31, 2016 were included in other assets.



15


HSBC USA Inc.

4. Loans
 
 
Loans consisted of the following:
 
September 30, 2017
 
December 31, 2016
 
(in millions)
Commercial loans:
 
 
 
Real estate, including construction
$
10,442

 
$
10,890

Business and corporate banking
13,328

 
14,080

Global banking(1)(2)
19,950

 
23,481

Other commercial(2)
4,408

 
5,765

Total commercial
48,128

 
54,216

Consumer loans:
 
 
 
Residential mortgages
17,196

 
17,181

Home equity mortgages
1,234

 
1,408

Credit cards
656

 
688

Other consumer
379

 
382

Total consumer
19,465

 
19,659

Total loans
$
67,593

 
$
73,875

 
(1) 
Represents large multinational firms including globally focused U.S. corporate and financial institutions, U.S. dollar lending to multinational banking clients managed by HSBC on a global basis and complex large business clients supported by Global Banking and Markets relationship managers.
(2)
During the first quarter of 2017, in conjunction with the creation of the new Corporate Center segment as discussed further in Note 14, "Business Segments," we reclassified loans to HSBC affiliates from global banking to other commercial and revised the prior period to conform with the current year presentation. As a result, other commercial includes loans to HSBC affiliates which totaled $1,820 million and $3,274 million at September 30, 2017 and December 31, 2016, respectively. All tables below have been restated to reflect this reclassification, as applicable. See Note 13, "Related Party Transactions," for additional information regarding loans to HSBC affiliates.
Net deferred origination fees totaled $23 million and $48 million at September 30, 2017 and December 31, 2016, respectively. At September 30, 2017 and December 31, 2016, we had a net unamortized premium (discount) on our loans of $6 million and $(5) million, respectively.

16


HSBC USA Inc.

Aging Analysis of Past Due Loans  The following table summarizes the past due status of our loans, excluding loans held for sale, at September 30, 2017 and December 31, 2016. The aging of past due amounts is determined based on the contractual delinquency status of payments under the loan. An account is generally considered to be contractually delinquent when payments have not been made in accordance with the loan terms. Delinquency status is affected by customer account management policies and practices such as re-age, which results in the re-setting of the contractual delinquency status to current.
 
Past Due
 
Total Past Due 30 Days or More
 
 
 
 
At September 30, 2017
30 - 89 Days
 
90+ Days
 
 
Current(1)
 
Total Loans
 
(in millions)
Commercial loans:
 
 
 
 
 
 
 
 
 
Real estate, including construction
$
7

 
$
12

 
$
19

 
$
10,423

 
$
10,442

Business and corporate banking
94

 
2

 
96

 
13,232

 
13,328

Global banking

 
56

 
56

 
19,894

 
19,950

Other commercial
1

 

 
1

 
4,407

 
4,408

Total commercial
102

 
70

 
172

 
47,956

 
48,128

Consumer loans:
 
 
 
 
 
 
 
 
 
Residential mortgages
368

 
331

 
699

 
16,497

 
17,196

Home equity mortgages
10

 
34

 
44

 
1,190

 
1,234

Credit cards
8

 
8

 
16

 
640

 
656

Other consumer
6

 
6

 
12

 
367

 
379

Total consumer
392

 
379

 
771

 
18,694

 
19,465

Total loans
$
494

 
$
449

 
$
943

 
$
66,650

 
$
67,593

 
Past Due
 
Total Past Due 30 Days or More
 
 
 
 
At December 31, 2016
30 - 89 Days
 
90+ Days
 
 
Current(1)
 
Total Loans
 
(in millions)
Commercial loans:
 
 
 
 
 
 
 
 
 
Real estate, including construction
$
17

 
$
6

 
$
23

 
$
10,867

 
$
10,890

Business and corporate banking
35

 
9

 
44

 
14,036

 
14,080

Global banking
1

 
64

 
65

 
23,416

 
23,481

Other commercial
4

 
7

 
11

 
5,754

 
5,765

Total commercial
57

 
86

 
143

 
54,073

 
54,216

Consumer loans:
 
 
 
 
 
 
 
 
 
Residential mortgages
402

 
317

 
719

 
16,462

 
17,181

Home equity mortgages
10

 
43

 
53

 
1,355

 
1,408

Credit cards
9

 
10

 
19

 
669

 
688

Other consumer
7

 
7

 
14

 
368

 
382

Total consumer
428

 
377

 
805

 
18,854

 
19,659

Total loans
$
485

 
$
463

 
$
948

 
$
72,927

 
$
73,875

 
(1) 
Loans less than 30 days past due are presented as current.

17


HSBC USA Inc.

Nonaccrual Loans  Nonaccrual loans, including nonaccrual loans held for sale, and accruing loans 90 days or more delinquent consisted of the following:
 
September 30, 2017
 
December 31, 2016
 
(in millions)
Nonaccrual loans:
 
 
 
Commercial:
 
 
 
Real estate, including construction
$
18

 
$
56

Business and corporate banking
244

 
187

Global banking
469

 
546

Other commercial

 
1

Commercial nonaccrual loans held for sale

 
11

Total commercial
731

 
801

Consumer:
 
 
 
Residential mortgages(1)(2)(3)
435

 
435

Home equity mortgages(1)(2)
69

 
75

Consumer nonaccrual loans held for sale
3

 
369

Total consumer
507

 
879

Total nonaccruing loans
1,238

 
1,680

Accruing loans contractually past due 90 days or more:
 
 
 
Commercial:
 
 
 
Business and corporate banking
5

 
1

Total commercial
5

 
1

Consumer:
 
 
 
Credit cards
8

 
10

Other consumer
6

 
7

Total consumer
14

 
17

Total accruing loans contractually past due 90 days or more
19

 
18

Total nonperforming loans
$
1,257

 
$
1,698

 
(1) 
At September 30, 2017 and December 31, 2016, nonaccrual consumer mortgage loans held for investment include $378 million and $382 million, respectively, of loans that are carried at the lower of amortized cost or fair value of the collateral less cost to sell.
(2) 
Nonaccrual consumer mortgage loans held for investment include all loans which are 90 or more days contractually delinquent as well as loans discharged under Chapter 7 bankruptcy and not re-affirmed and second lien loans where the first lien loan that we own or service is 90 or more days contractually delinquent.
(3) 
Nonaccrual consumer mortgage loans for all periods does not include guaranteed loans purchased from the Government National Mortgage Association. Repayment of these loans are predominantly insured by the Federal Housing Administration and as such, these loans have different risk characteristics from the rest of our consumer loan portfolio.
The following table provides additional information on our nonaccrual loans:    
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(in millions)
Interest income that would have been recorded if the nonaccrual loans had been current in accordance with contractual terms during the period
$
15

 
$
23

 
$
53

 
$
67

Interest income that was recorded on nonaccrual loans and included in interest income during the period
3

 
5

 
16

 
14


18


HSBC USA Inc.

Impaired Loans  A loan is considered to be impaired when it is deemed probable that not all principal and interest amounts due according to the contractual terms of the loan agreement will be collected. Probable losses from impaired loans are quantified and recorded as a component of the overall allowance for credit losses. Commercial and consumer loans for which we have modified the loan terms as part of a troubled debt restructuring are considered to be impaired loans. Additionally, commercial loans in nonaccrual status, or that have been partially charged-off or assigned a specific allowance for credit losses are also considered impaired loans.
Troubled debt restructurings  TDR Loans represent loans for which the original contractual terms have been modified to provide for terms that are less than what we would be willing to accept for new loans with comparable risk because of deterioration in the borrower's financial condition.
Modifications for consumer or commercial loans may include changes to one or more terms of the loan, including, but not limited to, a change in interest rate, extension of the amortization period, reduction in payment amount and partial forgiveness or deferment of principal, accrued interest or other loan covenants. A substantial amount of our modifications involve interest rate reductions on consumer loans which lower the amount of interest income we are contractually entitled to receive in future periods. Through lowering the interest rate and other loan term changes, we believe we are able to increase the amount of cash flow that will ultimately be collected from the loan, given the borrower's financial condition. TDR Loans are reserved for either based on the present value of expected future cash flows discounted at the loans' original effective interest rates which generally results in a higher reserve requirement for these loans or in the case of certain secured loans, the estimated fair value of the underlying collateral. Once a consumer loan is classified as a TDR Loan, it continues to be reported as such until it is paid off or charged-off. For commercial loans, if subsequent performance is in accordance with the new terms and such terms reflect current market rates at the time of restructure, they will no longer be reported as a TDR Loan beginning in the year after restructuring. During the three and nine months ended September 30, 2017 and 2016 there were no commercial loans that met this criteria and were removed from TDR Loan classification.
The following table presents information about loans which were modified during the three and nine months ended September 30, 2017 and 2016 and as a result of this action became classified as TDR Loans:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(in millions)
Commercial loans:
 
 
 
 
 
 
 
Business and corporate banking
$

 
$

 
$
24

 
$
304

Global banking

 

 
86

 

Total commercial

 

 
110

 
304

Consumer loans:
 
 
 
 
 
 
 
Residential mortgages
11

 
12

 
27

 
55

Home equity mortgages
2

 
2

 
6

 
7

Credit cards
1

 
1

 
3

 
3

Total consumer
14

 
15

 
36

 
65

Total
$
14

 
$
15

 
$
146

 
$
369

The weighted-average contractual rate reduction for consumer loans which became classified as TDR Loans during the three and nine months ended September 30, 2017 was 2.41 percent and 1.98 percent, respectively, compared with 1.41 percent and 1.61 percent during the three and nine months ended September 30, 2016, respectively. The weighted-average contractual rate reduction for commercial loans was not significant in either the number of loans or rate.


19


HSBC USA Inc.

The following table presents information about our TDR Loans and the related allowance for credit losses for TDR Loans:
 
September 30, 2017
 
December 31, 2016
 
Carrying Value
 
Unpaid Principal Balance
 
Carrying Value
 
Unpaid Principal Balance
 
(in millions)
TDR Loans:(1)(2)
 
 
 
 
 
 
 
Commercial loans:
 
 
 
 
 
 
 
Real estate, including construction
$

 
$

 
$
32

 
$
33

Business and corporate banking
244

 
320

 
300

 
363

Global banking
119

 
123

 
150

 
152

Total commercial(3)
363

 
443

 
482

 
548

Consumer loans:
 
 
 
 
 
 
 
Residential mortgages(4)
693

 
789