HSBC USA Inc 10-Q Part 3

HSBC Holdings PLC 14 November 2007 PART 3 Operating Results The following table summarizes results for the PFS segment. ----------------------------------------------------------------------------------------------------------------- Increase (Decrease) -------------------------- 2007 2006 Amount % ----------------------------------------------------------------------------------------------------------------- ($ in millions) Three months ended September 30: Net interest income ........................... $ 276 $ 305 $ (29) (10) Other revenues ................................ 157 127 30 24 --------- --------- --------- --------- Total revenues ................................ 433 432 1 -- Provision for credit losses ................... 35 15 20 133 --------- --------- --------- --------- 398 417 (19) (5) Operating expenses ............................ 313 296 17 6 --------- --------- --------- --------- Income before income tax expense .............. 85 121 (36) (30) Income tax expense ............................ 26 43 (17) (40) --------- --------- --------- --------- Net income .................................... $ 59 $ 78 $ (19) (24) ========= ========= ========= ========= Nine months ended September 30: Net interest income ........................... $ 838 $ 882 $ (44) (5) Other revenues ................................ 417 369 48 13 --------- --------- --------- --------- Total revenues ................................ 1,255 1,251 4 -- Provision for credit losses ................... 64 39 25 64 --------- --------- --------- --------- 1,191 1,212 (21) (2) Operating expenses ............................ 923 875 48 5 --------- --------- --------- --------- Income before income tax expense .............. 268 337 (69) (20) Income tax expense ............................ 82 115 (33) (29) --------- --------- --------- --------- Net income .................................... $ 186 $ 222 $ (36) (16) ========= ========= ========= ========= Lower net interest income for the third quarter and the first nine months of 2007 was partially due to lower interest earned and lower interest rate spreads on the residential mortgage loan portfolio. Average residential mortgage loans decreased 11.1% for the first nine months of 2007, as compared with the same 2006 period. Net interest income from core banking activities also decreased for the third quarter and first nine months of 2007. Although deposits continued to grow in 2007, driven by the success of the Online Savings product and expansion of the retail branch network, this was offset by a narrowing of deposit spreads as customers continue to migrate to higher yielding deposit products, such as the Online Savings and CDs. Refer to page 35 of this Form 10-Q for commentary regarding HUSI's deposit strategy and growth. Higher other revenues for the first nine months of 2007 were due to $21 million of gains realized on sales of branch premises to unaffiliated third parties. Higher provision for credit losses, which was driven by increased delinquencies within various consumer portfolios, was partially offset by a $13 million reduction in allowance resulting from refinement of the allowance methodology associated with MasterCard/Visa receivables. In addition, provision expense for the first half of 2006 was unusually low due to the impact of bankruptcy legislation enacted in 2005, which resulted in accelerated consumer charge offs in the fourth quarter of 2005. Increased operating expenses are related to higher staff, marketing, occupancy and technology costs and reflect investment in branch expansion, branch automation and in the development of the HSBC Direct online platform. 51 Consumer Finance (CF) Overview The CF segment includes the private label receivable portfolio (the PLRP) and other loans acquired from HSBC Finance Corporation and its correspondents. Results of the CF segment have been positively impacted by lower amortization of premiums paid to HSBC Finance Corporation for those receivables, and by growth of private label credit card receivables, which are 7% higher at September 30, 2007 compared with the prior year. Operating Results The following table summarizes results for the CF segment. ----------------------------------------------------------------------------------------------------------------------- Increase (Decrease) ------------------------- 2007 2006 Amount % ----------------------------------------------------------------------------------------------------------------------- ($ in millions) Three months ended September 30: Net interest income ................................... $ 296 $ 197 $ 99 50 Other revenues (1) .................................... 86 22 64 * --------- --------- --------- --------- Total revenues ........................................ 382 219 163 74 Provision for credit losses ........................... 305 160 145 91 --------- --------- --------- --------- 77 59 18 31 Operating expenses .................................... 8 7 1 14 --------- --------- --------- --------- Income before income tax expense ...................... 69 52 17 33 Income tax expense .................................... 24 19 5 26 --------- --------- --------- --------- Net income ............................................ $ 45 $ 33 $ 12 36 ========= ========= ========= ========= Nine months ended September 30: Net interest income ................................... $ 705 $ 535 $ 170 32 Other revenues (1) .................................... 194 62 132 * --------- --------- --------- --------- Total revenues ........................................ 899 597 302 51 Provision for credit losses ........................... 693 459 234 51 --------- --------- --------- --------- 206 138 68 49 Operating expenses .................................... 26 21 5 24 --------- --------- --------- --------- Income before income tax expense ...................... 180 117 63 54 Income tax expense .................................... 63 41 22 54 --------- --------- --------- --------- Net income ............................................ $ 117 $ 76 $ 41 54 ========= ========= ========= ========= (1) For IFRS reporting purposes, fees charged by HSBC Finance Corporation for servicing various loan and receivable portfolios are netted against other revenues. These fees totaled $104 million and $102 million for the third quarter of 2007 and 2006, respectively, and $311 million and $305 million for the first nine months of 2007 and 2006, respectively. * Not meaningful. Higher net interest income for the third quarter and first nine months of 2007 resulted from: o higher interest income from increased credit card receivable balances, due to the addition of new private label merchant relationships during 2006 and 2007; o higher accrued income as a result of a more robust income recognition methodology on private label credit card promotional transactions; and o lower amortization of premiums paid for purchases of receivables included within the PLRP. Although premiums associated with daily purchases of receivables from HSBC Finance Corporation continue to be recorded and amortized, the premium amortization associated with the initial portfolio acquisition in 2004 was $65 million lower for the first nine months of 2007. Higher other revenues are directly related to increased credit card fees (refer to page 40 of this Form 10-Q). Higher provisions for credit losses resulted from higher allowance for credit losses required for private label credit card receivable growth and from higher delinquencies within the portfolio. 52 HUSI is considering the purchase of a portfolio of General Motors MasterCard and Visa receivables (the "GM Portfolio") from HSBC Finance Corporation in the future in order to maximize the efficient use of capital and liquidity at each entity. The purchase is subject to obtaining the necessary regulatory and other approvals. HSBC Finance Corporation will maintain the customer account relationships. Subsequent to the initial receivable purchase, HUSI will purchase additional volume on a daily basis. Commercial Banking (CMB) Overview Despite expansion of middle market activities in Chicago, Washington D.C. and the west coast of the U.S. and growth in small business lending, which have contributed to higher loan and deposit balances, overall performance within the CMB segment is relatively flat, as business expansion costs and credit quality have offset these benefits. Overall, average commercial loans and deposits are 4% and 20% higher, respectively, for the first nine months of 2007, as compared with the same period in 2006. Commercial real estate lending has been impacted by a slowdown in this sector, which has offset growth in other business areas. Operating Results The following table summarizes results for the CMB segment. ----------------------------------------------------------------------------------------------------------- Increase (Decrease) -------------------------- 2007 2006 Amount % ----------------------------------------------------------------------------------------------------------- ($ in millions) Three months ended September 30: Net interest income ..................... $ 208 $ 201 $ 7 3 Other revenues .......................... 67 82 (15) (18) --------- --------- --------- --------- Total revenues .......................... 275 283 (8) (3) Provision for credit losses ............. 35 31 4 13 --------- --------- --------- --------- 240 252 (12) (5) Operating expenses ...................... 137 136 1 1 --------- --------- --------- --------- Income before income tax expense ........ 103 116 (13) (11) Income tax expense ...................... 27 38 (11) (29) --------- --------- --------- --------- Net income .............................. $ 76 $ 78 $ (2) (3) ========= ========= ========= ========= Nine months ended September 30: Net interest income ..................... $ 606 $ 550 $ 56 10 Other revenues .......................... 196 205 (9) (4) --------- --------- --------- --------- Total revenues .......................... 802 755 47 6 Provision for credit losses ............. 72 62 10 16 --------- --------- --------- --------- 730 693 37 5 Operating expenses ...................... 420 369 51 14 --------- --------- --------- --------- Income before income tax expense ........ 310 324 (14) (4) Income tax expense ...................... 92 110 (18) (16) --------- --------- --------- --------- Net income .............................. $ 218 $ 214 $ 4 2 ========= ========= ========= ========= Pre-tax profit decreased by 11% to $103 million for the third quarter due to lower revenue, and by 4% to $310 million for the first nine months of 2007 due to provisions and expenses rising at a faster rate than revenues. Net interest income grew by 10% to $606 million for the first nine months of 2007, driven by average loan balance growth of 20% in middle market lending and 22% in small business deposits. Offsetting this, net interest income was constrained by lower commercial real estate activity and narrowing spreads, particularly on deposits, as customers migrated to higher yielding products. Other revenues decreased by 4% to $196 million for the first nine months of 2007, mainly due to lower gains on asset disposals for the first nine months of 2007 compared with the same period in 2006. 53 Provisions for credit losses were in line with the third quarter of 2006. However, provisions have increased by 16% for the first nine months of the year. This is due to higher commercial real estate provisions resulting from customer downgrades, as development projects are taking longer to complete. Additional commentary regarding credit quality begins on page 57 of this Form 10-Q. Higher operating expenses of 14% for the first nine months of 2007, over the same period in 2006, reflects organic growth in legacy markets and business expansion in Chicago, Washington D.C. and the west coast. In addition, higher incentive compensation costs and increased community investment activities have also contributed to cost growth. Deposits continue to be a key driver of growth in 2007, driven by expansion initiatives and targeted marketing campaigns. For the CMB segment, average customer deposits are 20% higher for the first nine months of 2007, compared with the same period in 2006. Loan growth is primarily due to strong activity in middle market lending, with growth distributed equally between legacy and expansion markets. However, overall loan growth has been adversely impacted by a slowdown in commercial real estate activity. For the CMB segment, average loans are 4% higher for the first nine months of 2007, compared with the same period in 2006. Corporate, Investment Banking and Markets (CIBM) Overview During the third quarter of 2007, the CIBM segment was affected by reduced market liquidity, widening spreads and higher volatility in the credit and sub-prime lending markets. This impacted trading in mortgage backed securities and credit derivatives and led to asset mark downs being recorded on leveraged buyout activity. The market turmoil has caused a significant fall in revenues in both the third quarter and the first nine months of 2007 as compared with the same 2006 periods. Third quarter precious metals revenue also experienced a decline related to lower price volatility. Partially offsetting this, the foreign exchange business has continued to contribute solid revenues as a result of ongoing market volatility and performance for the first nine months benefited from structured credit and emerging markets derivatives activity in the first half of the year. Revenues from the recently expanded payments and cash management business were significantly higher for the third quarter and first nine months of 2007, as compared with the same 2006 periods, reflecting higher deposit balances and higher associated transaction fee revenues. A relatively flat yield curve has reduced net interest income from balance sheet management activities for the first nine months of 2007 and has continued to limit opportunities to generate additional net funds income within the CIBM business segment. During the first nine months of 2006, successful launches of new products and increased sales of structured products that are tailored to specific customer needs led to strong derivatives trading revenues. Gains in the precious metals business reflected volume growth driven by a surge in demand arising from strong commodities markets. Income streams in the foreign exchange business were robust against the backdrop of a weak U.S. dollar. 54 Operating Results The following table summarizes results for the CIBM segment -------------------------------------------------------------------------------------------------------------------- Increase (Decrease) -------------------------- 2007 2006 Amount % -------------------------------------------------------------------------------------------------------------------- ($ in millions) Three months ended September 30: Net interest income ............................. $ 62 $ 46 $ 16 35 Other revenues .................................. (139) 143 (282) (197) --------- --------- --------- --------- Total revenues .................................. (77) 189 (266) (141) Provision for credit losses ..................... 17 7 10 143 --------- --------- --------- --------- (94) 182 (276) (152) Operating expenses .............................. 197 180 17 9 --------- --------- --------- --------- Income before income tax expense ................ (291) 2 (293) * Income tax expense .............................. (97) 3 (100) * --------- --------- --------- --------- Net loss ........................................ $ (194) $ (1) $ (193) * ========= ========= ========= ========= Nine months ended September 30: Net interest income ............................. $ 199 $ 183 $ 16 9 Other revenues .................................. 436 701 (265) (38) --------- --------- --------- --------- Total revenues .................................. 635 884 (249) (28) Provision for credit losses ..................... 6 (5) 11 * --------- --------- --------- --------- 629 889 (260) (29) Operating expenses .............................. 584 535 49 9 --------- --------- --------- --------- Income before income tax expense ................ 45 354 (309) (87) Income tax expense .............................. 17 126 (109) (87) --------- --------- --------- --------- Net income ...................................... $ 28 $ 228 $ (200) (88) ========= ========= ========= ========= * Not meaningful. Lower revenues primarily resulted from lower balance sheet management income and lower trading related revenues (refer to pages 28 and 45 of this Form 10-Q), which were partially offset by higher gains realized from sales of securities (refer to page 46 of this Form 10-Q). Higher operating expenses for the first nine months of 2007, as compared with the same 2006 period, resulted from higher personnel costs associated with expansion of various businesses that are better positioned to leverage HSBC's global capabilities. Expenses for 2007 also included incremental costs associated with repositioning certain other non-strategic businesses in order to focus on building a financing and emerging markets led wholesale banking business. Private Banking (PB) Overview During 2005 and 2006, additional resources have been allocated to expand products and services provided to high net worth customers served by the PB business segment. As a result, total average loans and deposit balances were 8% and 16% higher, respectively, for the first nine months of 2007, compared with the same 2006 period. Assets under management also increased 25%. However, these increases did not translate into higher net income over the prior year as gains from the sale of equity investments were recognized in 2006. 55 Operating Results The following table summarizes results for the PB segment. ------------------------------------------------------------------------------------------------------------------ Increase (Decrease) -------------------------- 2007 2006 Amount % ------------------------------------------------------------------------------------------------------------------ ($ in millions) Three months ended September 30: Net interest income ........................... $ 50 $ 50 $ -- -- Other revenues ................................ 66 108 (42) (39) --------- --------- --------- --------- Total revenues ................................ 116 158 (42) (27) Provision for credit losses ................... (1) 2 (3) (150) --------- --------- --------- --------- 117 156 (39) (25) Operating expenses ............................ 87 75 12 16 --------- --------- --------- --------- Income before income tax expense .............. 30 81 (51) (63) Income tax expense ............................ 8 28 (20) (71) --------- --------- --------- --------- Net income .................................... $ 22 $ 53 $ (31) (58) ========= ========= ========= ========= Nine months ended September 30: Net interest income ........................... $ 150 $ 146 $ 4 3 Other revenues ................................ 210 245 (35) (14) --------- --------- --------- --------- Total revenues ................................ 360 391 (31) (8) Provision for credit losses ................... 11 32 (21) (66) --------- --------- --------- --------- 349 359 (10) (3) Operating expenses ............................ 255 224 31 14 --------- --------- --------- --------- Income before income tax expense .............. 94 135 (41) (30) Income tax expense ........................... 27 46 (19) (41) --------- --------- --------- --------- Net income .................................... $ 67 $ 89 $ (22) (25) ========= ========= ========= ========= Higher net interest income for the first nine months of 2007 resulted from the mix of higher average loans and deposit balances, offset by lower interest spreads. The PB business segment includes an equity investment in a non-consolidated foreign HSBC affiliate (the foreign equity investment). During the third quarter of 2006, the foreign equity investment sold a portion of its investment in a foreign equity fund to another HSBC affiliate. During the second quarter of 2007, the foreign equity investment sold its remaining investment in the foreign equity fund, resulting in a gain from which HUSI recorded additional equity earnings of $7 million. Excluding the impact of this transaction, the decrease in equity investment holdings resulted in lower equity earnings included in other revenues for the first nine months of 2007, which was offset by higher commission and fee revenues from managed products, derivatives and annuity products. Increased operating expenses for the third quarter and first nine months of 2007 mainly resulted from higher staff costs related to business expansion initiatives. The provision for credit losses for the first nine months of 2007 includes the impact of an $8 million charge off related to a specific commercial customer relationship, for which no allowance was previously recorded. For 2006, the provision includes a $29 million charge for a combination of charge offs and higher allowances related to a specific commercial real estate investment loan relationship for which no specific allowance was previously recorded. 56 Other Overview The Other segment primarily includes an equity investment in HSBC Republic Bank (Suisse) S.A., and adjustments made at the corporate level for fair value option accounting related to certain debt issued. Operating Results The following table summarizes results for the Other segment. --------------------------------------------------------------------------------------------------------------- Increase (Decrease) ------------------------ 2007 2006 Amount % --------------------------------------------------------------------------------------------------------------- ($ in millions) Three months ended September 30: Net interest income ............................. $ (4) $ (9) $ 5 56 Other revenues .................................. 150 (31) 181 * --------- --------- --------- --------- Total revenues .................................. 146 (40) 186 * Provision for credit losses ..................... -- (1) 1 100 --------- --------- --------- --------- 146 (39) 185 * Operating expenses .............................. 4 (9) 13 144 --------- --------- --------- --------- Income before income tax expense ................ 142 (30) 172 * Income tax expense .............................. 51 (20) 71 * --------- --------- --------- --------- Net income (loss) ............................... $ 91 $ (10) $ 101 * ========= ========= ========= ========= Nine months ended September 30: Net interest income ............................. $ (9) $ (19) $ 10 53 Other revenues .................................. 90 (32) 122 * --------- --------- --------- --------- Total revenues .................................. 81 (51) 132 * Provision for credit losses ..................... 1 (1) 2 * --------- --------- --------- --------- 80 (50) 130 * Operating expenses .............................. 5 (4) 9 * --------- --------- --------- --------- Income before income tax expense ................ 75 (46) 121 * Income tax expense .............................. 23 (28) 51 182 --------- --------- --------- --------- Net income (loss) ............................... $ 52 $ (18) $ 70 * ========= ========= ========= ========= * Not meaningful. The increase in other revenues for the third quarter and the first nine months of 2007 primarily resulted from decreases in the fair value of certain debt instruments, due to widening credit spreads, as compared with the same 2006 periods. CREDIT QUALITY -------------------------------------------------------------------------------- HUSI enters into a variety of transactions in the normal course of business that involve both on and off-balance sheet credit risk. Principal among these activities is lending to various commercial, institutional, governmental and individual customers. HUSI participates in lending activity throughout the U.S. and, on a limited basis, internationally. HUSI's allowance for credit losses methodology and its accounting policies related to the allowance for credit losses are presented in Critical Accounting Policies beginning on page 25 of its 2006 Form 10-K and in Note 2 of the consolidated financial statements beginning on page 99 of its 2006 Form 10-K. HUSI's approach toward credit risk management is summarized on pages 72-74 of its 2006 Form 10-K. There have been no material revisions to policies or methodologies during the first nine months of 2007, although the company continues to monitor current market conditions and will adjust credit policies as deemed necessary. 57 Overview The allowance for credit losses increased $156 million (17%) and increased $161 million (18%) during the three month and nine month periods ended September 30, 2007, respectively. Higher allowances associated with the private label and MasterCard/Visa credit card receivable were primarily driven by higher delinquencies and charge offs. Allowance for credit losses balances and activity, by loan portfolio, are summarized on page 60 of this Form 10-Q. The provision for credit losses increased $195 million (94%) for the third quarter of 2007, and increased $285 million (49%) for the first nine months of 2007 as compared with the same 2006 periods, primarily due to higher provisions associated with credit card receivable portfolios. The provision for credit losses associated with various loan portfolios is summarized on page 37 of this Form 10-Q. Problem Loan Management Nonaccruing loans by portfolio and impaired loans are summarized in Note 4 of the consolidated financial statements beginning on page 10 of this Form 10-Q. HUSI's policies and practices for placing loans on nonaccruing status are summarized in Note 2 of the consolidated financial statements, beginning on page 99 of its 2006 Form 10-K. Criticized Assets Criticized asset classifications are based on the risk rating standards of HUSI's primary regulator. Problem credit facilities, which include loans and other credit arrangements such as letters of credit, are assigned various criticized facility grades under HUSI's allowance for credit losses methodology. Criticized credit facilities are summarized in the following table. ----------------------------------------------------------------------------------------------------------------------- Increase (Decrease) from --------------------------------------------------------- December 31, 2006 September 30, 2006 September 30, ------------------------- ------------------------- Balance at 2007 Amount % Amount % ----------------------------------------------------------------------------------------------------------------------- ($ in millions) Special mention (1): Commercial loans ................... $ 1,701 $ 450 36 $ 827 95 Substandard (2): Commercial loans ................... 620 (61) (9) 161 35 Consumer loans ..................... 881 280 47 324 58 --------- --------- --------- --------- --------- 1,501 219 17 485 48 --------- --------- --------- --------- --------- Doubtful (3): Commercial loans ................... 27 (5) (16) (23) (46) --------- --------- --------- --------- --------- Total ................................... $ 3,229 $ 664 26 $ 1,289 66 ========= ========= ========= ========= ========= (1) Generally includes credit facilities that are protected by collateral and/or the credit worthiness of the customer, but are potentially weak based upon economic or market circumstances which, if not checked or corrected, could weaken HUSI's credit position at some future date. (2) Includes credit facilities that are inadequately protected by the underlying collateral and/or general credit worthiness of the customer. These credit facilities present a distinct possibility that HUSI will sustain some loss if the deficiencies are not corrected. (3) Includes credit facilities that have all the weaknesses exhibited by substandard credit facilities, with the added characteristic that the weaknesses make collection or liquidation in full of the recorded loan highly improbable. However, although the possibility of loss is extremely high, certain factors exist which may strengthen the credit at some future date, and therefore the decision to charge off the loan is deferred. Loans graded as doubtful are required to be placed in nonaccruing status. 58 Allowance for Credit Losses Changes in the allowance for credit losses by general loan categories are summarized in the following table. ----------------------------------------------------------------------------------------------------------------------- September 30, June 30, March 31, December 31, September 30, Quarter ended 2007 2007 2007 2006 2006 ----------------------------------------------------------------------------------------------------------------------- ($ in millions) Total loans at quarter end ................. $ 92,666 $ 87,409 $ 88,893 $ 90,237 $ 90,020 Average total loans ........................ 88,720 88,477 88,092 89,343 88,739 Allowance balance at beginning of quarter .................................. $ 902 $ 862 $ 897 $ 886 $ 869 Allowance related to disposal of certain credit card receivables .................. -- -- -- (2) -- Charge offs: Commercial ........................ 35 34 36 43 29 Consumer: Residential mortgages .......... 14 12 14 10 9 Credit card receivables ........ 228 221 224 205 188 Other consumer loans ........... 28 26 31 32 27 ---------- ---------- ---------- ---------- ---------- Total consumer loans ........... 270 259 269 247 224 ---------- ---------- ---------- ---------- ---------- Total charge offs ................. 305 293 305 290 253 ---------- ---------- ---------- ---------- ---------- Recoveries on loans charged off: Commercial ........................ 6 8 6 9 8 Consumer: Residential mortgages .......... -- 1 -- 1 1 Credit card receivables ........ 44 50 49 47 49 Other consumer loans ........... 9 10 10 9 5 ---------- ---------- ---------- ---------- ---------- Total consumer loans ........... 53 61 59 57 55 ---------- ---------- ---------- ---------- ---------- Total recoveries .................. 59 69 65 66 63 ---------- ---------- ---------- ---------- ---------- Total net charge offs ................ 246 224 240 224 190 ---------- ---------- ---------- ---------- ---------- Provision charged to income .......... 402 264 205 237 207 ---------- ---------- ---------- ---------- ---------- Allowance balance at end of quarter ........ $ 1,058 $ 902 $ 862 $ 897 $ 886 ========== ========== ========== ========== ========== Allowance ratios: Annualized net charge offs to average loans: Commercial ........................ .36% .35% .43% .47% .29% Consumer: Residential mortgages .......... .15 .11 .15 .09 .08 Credit card receivables ........ 4.09 3.91 4.01 3.62 3.39 Other consumer loans ........... 3.08 2.58 3.20 3.27 2.95 ---------- ---------- ---------- ---------- ---------- Total consumer ................. 1.51 1.35 1.43 1.25 1.12 ---------- ---------- ---------- ---------- ---------- Total loans ....................... 1.10% 1.01% 1.11% 1.00% .85% ========== ========== ========== ========== ========== Quarter-end allowance to: Quarter-end total loans ........ 1.14% 1.03% .97% .99% .98% Quarter-end total nonaccruing loans ............ 163.78% 277.54% 280.78% 314.74% 331.84% 59 Changes in the allowance for credit losses by general loan categories are summarized in the following tables. ----------------------------------------------------------------------------------------------------------------------- Residential Credit Other Three months ended September 30 Commercial Mortgage Card Consumer Unallocated Total ----------------------------------------------------------------------------------------------------------------------- (in millions) 2007 Balance at beginning of period .. $ 212 $ 30 $ 624 $ 25 $ 11 $ 902 ------- ------- ------- ------- ------- ------- Charge offs ..................... 35 14 228 28 -- 305 Recoveries ...................... 6 -- 44 9 -- 59 ------- ------- ------- ------- ------- ------- Net charge offs ........... 29 14 184 19 -- 246 ------- ------- ------- ------- ------- ------- Provision charged to income ..... 54 24 301 20 3 402 ------- ------- ------- ------- ------- ------- Balance at end of period ........ $ 237 $ 40 $ 741 $ 26 $ 14 $ 1,058 ======= ======= ======= ======= ======= ======= 2006 Balance at beginning of period .. $ 192 $ 31 $ 600 $ 29 $ 17 $ 869 ------- ------- ------- ------- ------- ------- Charge offs ..................... 29 9 188 27 -- 253 Recoveries ...................... 8 1 49 5 -- 63 ------- ------- ------- ------- ------- ------- Net charge offs ........... 21 8 139 22 -- 190 ------- ------- ------- ------- ------- ------- Provision charged to income ..... 40 3 150 20 (6) 207 ------- ------- ------- ------- ------- ------- Balance at end of period ........ $ 211 $ 26 $ 611 $ 27 $ 11 $ 886 ======= ======= ======= ======= ======= ======= ----------------------------------------------------------------------------------------------------------------------- Residential Credit Other Nine months ended September 30 Commercial Mortgage Card Consumer Unallocated Total ----------------------------------------------------------------------------------------------------------------------- (in millions) 2007 Balance at beginning of period .. $ 203 $ 31 $ 626 $ 26 $ 11 $ 897 ------- ------- ------- ------- ------- ------- Charge offs ..................... 105 40 673 85 -- 903 Recoveries ...................... 20 1 143 29 -- 193 ------- ------- ------- ------- ------- ------- Net charge offs ........... 85 39 530 56 -- 710 ------- ------- ------- ------- ------- ------- Provision charged to income ..... 119 48 645 56 3 871 ------- ------- ------- ------- ------- ------- Balance at end of period ........ $ 237 $ 40 $ 741 $ 26 $ 14 $ 1,058 ======= ======= ======= ======= ======= ======= 2006 Balance at beginning of period .. $ 162 $ 34 $ 600 $ 36 $ 14 $ 846 ------- ------- ------- ------- ------- ------- Allowance related to disposals .. -- -- (6) -- -- (6) Charge offs ..................... 93 27 523 79 -- 722 Recoveries ...................... 29 1 123 29 -- 182 ------- ------- ------- ------- ------- ------- Net charge offs ........... 64 26 400 50 -- 540 ------- ------- ------- ------- ------- ------- Provision charged to income ..... 113 18 417 41 (3) 586 ------- ------- ------- ------- ------- ------- Balance at end of period ........ $ 211 $ 26 $ 611 $ 27 $ 11 $ 886 ======= ======= ======= ======= ======= ======= Commercial Loan Credit Quality Components of the commercial allowance for credit losses, as well as movements in comparison with prior periods, are summarized in the following table. ----------------------------------------------------------------------------------------------------------------------- Increase (Decrease) from ------------------------------------------------------ December 31, 2006 September 30, 2006 September 30, ------------------------ ------------------------ 2007 Amount % Amount % ----------------------------------------------------------------------------------------------------------------------- ($ in millions) On-balance sheet allowance: Specific .......................... $ 18 $ 4 29 $ 2 13 Collective ........................ 219 30 16 24 12 --------- --------- --------- --------- --------- 237 34 17 26 12 Unallocated ....................... 14 3 27 3 27 --------- --------- --------- --------- --------- Total on-balance sheet allowance... 251 37 17 29 13 --------- --------- --------- --------- --------- Off-balance sheet allowance ............ 93 (5) (5) (5) (5) --------- --------- --------- --------- --------- Total commercial allowances ............ $ 344 $ 32 10 $ 24 8 ========= ========= ========= ========= ========= 60 Overall, commercial loan credit quality remains stable and well-controlled. Higher criticized loan balances from September 30, 2006 to September 30, 2007 (refer to page 58 of this Form 10-Q) resulted mainly from downgrades in real estate and middle market exposures. The downgrades resulted in part from changes in the credit metrics for specific credits within these portfolios. Total nonaccruing commercial loans remain low as a percentage of total commercial loans. Based upon evaluation of the repayment capacity of the obligors, including support from adequately margined collateral, performance on guarantees, and other mitigating factors, impairment is modestly higher in 2007 as compared with prior reporting periods, and is adequately reflected in the allowances for specific and collective impairment. HUSI management continues to monitor the following factors that could affect portfolio risk: o recent growth initiatives which have resulted in growth in the size and complexity of the commercial loan portfolio; o HUSI's continued geographic expansion; o borrower concentrations; o increased number and complexity of products offered; and o continuing signs of stress within certain segments of the economy. HUSI management continues to monitor and reduce exposures to those industries considered to be higher risk. During 2006, HUSI management began to make more extensive use of available tools to more actively manage net exposure within its corporate loan portfolios with an increased syndication capacity as well as increased use of credit default swaps to economically hedge and reduce certain exposures. Any sudden and/or unexpected adverse economic events or trends could significantly affect credit quality and increase provisions for credit losses. For example, HUSI management is monitoring the U.S. housing market, rising interest rates and high energy prices, which could potentially lead to a deceleration of U.S. economic activity. Credit Card Receivable Credit Quality Credit card receivables are primarily private label receivables, including closed and open ended contracts, acquired from HSBC Finance Corporation. Receivables included in the private label credit card portfolio are generally maintained in accruing status until being charged off six months after delinquency. Selected credit quality data for credit card receivables is summarized in the following table. ----------------------------------------------------------------------------------------------------------------------- September 30, December 31, September 30, 2007 2006 2006 ----------------------------------------------------------------------------------------------------------------------- ($ in millions) Accruing balances contractually past due 90 days or more: Balance at end of quarter .......................................... $ 357 $ 339 $ 314 As a percent of total credit card receivables ...................... 1.98% 1.86% 1.87% Allowance for credit losses associated with credit card receivables: Balance at end of quarter .......................................... $ 741 $ 626 $ 611 As a percent of total credit card receivables ...................... 4.11% 3.43% 3.64% Net charge offs of credit card receivables: Total for the quarter ended ........................................ $ 184 $ 158 $ 139 Annualized net charge offs as a percent of average credit card receivables .......................................... 4.09% 3.62% 3.39% The allowance for credit losses associated with credit card receivables increased $117 million (19%) during the third quarter and $115 million (18%) for the first nine months of 2007. Net charge off and provision activity was higher during the third quarter and the first nine months of 2007 as compared to 2006 due to increased private label and MasterCard/Visa credit card receivable balances and to higher delinquencies within these portfolios, which have resulted in a higher collective allowance balance. Underwriting criteria is continually being reviewed and will be modified as necessary based on the current economic environment. 61 Residential Mortgage Loan Credit Quality The increase in the allowance for credit losses related to residential mortgage loans in the third quarter of 2007 was primarily related to Home Equity Lines of Credit (HELOC). The remainder of HUSI's residential mortgage portfolio is primarily comprised of prime mortgage loans, which are experiencing some deterioration, but have remained relatively stable. Additional disclosures regarding certain risk concentrations inherent within the residential mortgage loan portfolio are provided beginning on page 66 of this Form 10-Q. Reserve for Off-Balance Sheet Exposures HUSI maintains a separate reserve for credit risk associated with certain off-balance sheet exposures including letters of credit, unused commitments to extend credit and financial guarantees. This reserve, included in other liabilities, was $93 million, $98 million and $98 million at September 30, 2007, December 31, 2006 and September 30, 2006, respectively. Off-balance sheet exposures are summarized on page 64 of this Form 10-Q. Credit and Market Risks Associated with Derivative Contracts Credit (or repayment) risk in derivative instruments is minimized by entering into transactions with high quality counterparties, including other HSBC entities. Counterparties include financial institutions, government agencies, both foreign and domestic, corporations, funds (mutual funds, hedge funds, etc.), insurance companies and private clients. These counterparties are subject to regular credit review by the credit risk management department. Most derivative contracts are governed by an International Swaps and Derivatives Association Master Agreement. Depending on the type of counterparty and the level of expected activity, bilateral collateral arrangements may also be required. The total risk in a derivative contract is a function of a number of variables, such as: o the existence of a master netting agreement among the counterparties; o volatility of interest rates, currencies, equity or corporate reference entity used as the basis for determining contract payments; o maturity and liquidity of contracts; o credit worthiness of the counterparties in the transaction; and o existence and value of collateral received from counterparties to secure exposures. The following table presents credit risk exposure and net fair value associated with derivative contracts. In the table, current credit risk exposure is the recorded fair value of derivative receivables, which represents revaluation gains from the marking to market of derivative contracts held for trading purposes, for all counterparties with an International Swaps and Derivatives Association Master Agreement in place. Future credit risk exposure in the following table is measured using rules contained in the risk-based capital guidelines published by U.S. banking regulatory agencies. The risk exposure calculated in accordance with the risk-based capital guidelines potentially overstates actual credit exposure, because: o the risk-based capital guidelines ignore collateral that may have been received from counterparties to secure exposures; and o the risk-based capital guidelines compute exposures over the life of derivative contracts. However, many contracts contain provisions that allow a bank to close out the transaction if the counterparty fails to post required collateral. As a result, these contracts have potential future exposures that are often much smaller than the future exposures derived from the risk-based capital guidelines. 62 The net credit risk exposure amount in the following table does not reflect the impact of bilateral netting (i.e., netting with a single counterparty when a bilateral netting agreement is in place). However, the risk-based capital guidelines recognize that bilateral netting agreements reduce credit risk and therefore allow for reductions of risk-weighted assets when netting requirements have been met. Therefore, risk-weighted amounts for regulatory capital purposes are a fraction of the original gross exposures. --------------------------------------------------------------------------------------------------------------- September 30, December 31, 2007 2006 --------------------------------------------------------------------------------------------------------------- (in millions) Risk associated with derivative contracts: Current credit risk exposure .................................... $ 13,209 $ 11,398 Future credit risk exposure ..................................... 74,728 72,447 ----------- ----------- Total risk exposure ............................................. 87,937 83,845 Less: collateral held against exposure .......................... (5,368) (3,989) ----------- ----------- Net credit risk exposure ........................................ $ 82,569 $ 79,856 =========== =========== HUSI's Asset and Liability Policy Committee is responsible for monitoring and defining the scope and nature of various strategies utilized to manage interest rate risk that are developed through its analysis of data from financial simulation models and other internal and industry sources. The resulting hedge strategies are then incorporated into HUSI's overall interest rate risk management and trading strategies. Market risk is the adverse effect that a change in interest rates, currency, or implied volatility rates has on the value of a financial instrument. HUSI manages the market risk associated with interest rate and foreign exchange contracts by establishing and monitoring limits as to the types and degree of risk that may be undertaken. HUSI also manages the market risk associated with trading derivatives through hedging strategies that correlate the rates, price and spread movements. HUSI measures this risk daily by using Value at Risk (VAR) and other methodologies (refer to pages 68-70 of this Form 10-Q). Notional values of derivative contracts are summarized in the following table. --------------------------------------------------------------------------------------------------------------- September 30, December 31, 2007 2006 --------------------------------------------------------------------------------------------------------------- (in millions) Interest rate: Futures and forwards ...................................... $ 125,252 $ 94,204 Swaps ..................................................... 1,967,158 1,906,688 Options written ........................................... 225,977 510,023 Options purchased ......................................... 236,364 544,026 ----------- ----------- 2,554,751 3,054,941 ----------- ----------- Foreign exchange: Swaps, futures and forwards ............................... 500,568 394,621 Options written ........................................... 75,570 61,406 Options purchased ......................................... 76,451 63,795 Spot ...................................................... 58,571 32,654 ----------- ----------- 711,160 552,476 ----------- ----------- Commodities, equities and precious metals: Swaps, futures and forwards ............................... 48,879 43,620 Options written ........................................... 20,953 12,263 Options purchased ......................................... 20,241 16,115 ----------- ----------- 90,073 71,998 ----------- ----------- Credit derivatives .............................................. 1,139,480 816,422 ----------- ----------- Total ........................................................... $ 4,495,464 $ 4,495,837 =========== =========== The total notional amounts in the table above relate primarily to HUSI's trading activities. Notional amounts included in the table related to non-trading fair value, cash flow and economic hedging activities were $21 billion and $27 billion at September 30, 2007 and December 31, 2006, respectively. 63 OFF-BALANCE SHEET ARRANGEMENTS -------------------------------------------------------------------------------- The following table provides maturity information related to off-balance sheet arrangements. Descriptions of these arrangements are found on pages 68-69 of HUSI's 2006 Form 10-K. ----------------------------------------------------------------------------------------------------------------------- Balance at September 30, 2007 ------------------------------------------------------- One Over One Over Balance at Year Through Five December 31, or Less Five Years Years Total 2006 ----------------------------------------------------------------------------------------------------------------------- (in millions) Standby letters of credit, net of participations (1) ....................... $ 5,798 $ 2,565 $ 115 $ 8,478 $ 7,259 Commercial letters of credit ............... 796 214 -- 1,010 795 Loan sales with recourse ................... -- 1 5 6 8 Credit derivative contracts (2) ............ 18,028 343,047 231,125 592,200 431,631 Commitments to extend credit: Commercial ........................... 28,189 29,113 4,471 61,773 55,862 Consumer ............................. 9,805 -- -- 9,805 9,627 ---------- ---------- ---------- ---------- ---------- Total ...................................... $ 62,616 $ 374,940 $ 235,716 $ 673,272 $ 505,182 ========== ========== ========== ========== ========== (1) Includes $596 million and $542 million issued for the benefit of HSBC affiliates at September 30, 2007 and December 31, 2006, respectively. (2) Includes $90,599 million and $71,908 million issued for the benefit of HSBC affiliates at September 30, 2007 and December 31, 2006, respectively. Letters of Credit Fees are charged for issuing letters of credit commensurate with the customer's credit evaluation and the nature of any collateral. Included in other liabilities are deferred fees on standby letters of credit, representing the fair value of the "stand ready obligation to perform" under these guarantees, amounting to $23 million and $21 million at September 30, 2007 and December 31, 2006, respectively. Also included in other liabilities is an allowance for credit losses on unfunded standby letters of credit of $24 million and $25 million at September 30, 2007 and December 31, 2006, respectively. Credit Derivatives HUSI enters into credit derivative contracts primarily to satisfy the needs of its customers and, in certain cases, for its own benefit. Credit derivatives are arrangements that provide for one party (the "protection buyer") to transfer the credit risk of a "reference asset" to another party (the "protection seller"). Under this arrangement, the protection seller assumes the credit risk associated with the reference asset without directly purchasing it. The protection buyer agrees to pay a specified fee to the protection seller. In return, the protection seller agrees to pay the protection buyer an agreed upon amount if there is a default during the term of the contract. In accordance with its policy, HUSI offsets most of the risk it assumes in selling credit protection through a credit derivative contract with another counterparty. Credit derivatives are recorded at fair value. The commitment amount included in the table is the maximum amount that HUSI could be required to pay, without consideration of the approximately equal amount receivable from third parties and any associated collateral. Commitments to Extend Credit - Commercial Lending Commitments HUSI extends commercial lending commitments primarily in connection with its participation in leveraged acquisition finance syndicates. Substantially all of HUSI's leveraged acquisition finance commitments resulted in the origination of loans during the third quarter of 2007. At September 30, 2007, HUSI's exposure to unfunded leveraged acquisition finance commitments was $268 million. 64 Securitizations and Secured Financings On December 29, 2004, HUSI acquired a domestic private label loan portfolio from HSBC Finance Corporation, without recourse, which included securitized private label credit card receivables, and retained interest assets related to these securitizations. These credit card securitization transactions were structured to receive sale treatment under Statement of Financial Accounting Standards No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a replacement of FASB Statement No. 125 (SFAS 140). In the third quarter of 2006, the last remaining securitization trust agreement related to the private label portfolio acquired from HSBC Finance Corporation in 2004 was amended. As a result, the securitization trust no longer qualifies for sale treatment in accordance with U.S. GAAP, and the transaction is now recorded as a secured financing transaction. At the agreement amendment date, all outstanding investments, credit card receivables and liabilities related to the trust were recorded on HUSI's consolidated balance sheet. Under IFRS, HUSI's securitizations are treated as secured financings. In order to align its accounting treatment with that of HSBC, all of HUSI's collateralized funding transactions have been structured as secured financings under U.S. GAAP since the third quarter of 2004. In a secured financing, a designated pool of receivables is conveyed to a wholly owned limited purpose subsidiary, which in turn transfers the receivables to a trust that sells interests to investors. Repayment of the debt issued by the trust is secured by the receivables transferred. The transactions are structured as secured financings under SFAS 140. Therefore, the receivables and the underlying debt of the trust remain on HUSI's balance sheet. HUSI does not recognize a gain in a secured financing transaction. Because the receivables and debt remain on the balance sheet, revenues and expenses are reported consistent with the owned balance sheet portfolio. There have been no new secured financing transactions in the first nine months of 2007. HUSI's secured financings and securitized receivables are summarized in the following table. ----------------------------------------------------------------------------------------------------------------------- September 30, December 31, 2007 2006 ----------------------------------------------------------------------------------------------------------------------- (in millions) Secured financings included in long-term debt ............................................ $ 1,550 $ 2,134 ========= ========= Private label credit card receivables collateralizing secured financings at period end ... $ 1,885 $ 2,439 ========= ========= RISK MANAGEMENT -------------------------------------------------------------------------------- Overview Some degree of risk is inherent in virtually all of HUSI's activities. For the principal activities undertaken by HUSI, the most important types of risks are considered to be credit, interest rate, market, liquidity, operational, fiduciary and reputational. Market risk broadly refers to price risk inherent in mark to market positions taken on trading and non-trading instruments. Operational risk technically includes legal and compliance risk. However, since compliance risk, including anti-money laundering (AML) risk, has such broad scope within HUSI's businesses, it is addressed as a separate functional discipline. During the first nine months of 2007, there have been no significant changes in policies or approach for managing various types of risk, although the company continues to monitor current market conditions and will adjust risk management policies and procedures if deemed necessary. 65 Liquidity Management HUSI's approach to address liquidity risk is summarized on pages 75-76 of HUSI's 2006 Form 10-K. There have been no material changes in HUSI's approach toward liquidity risk management during 2007. HUSI's ability to regularly attract wholesale funds at a competitive cost is enhanced by strong ratings from the major credit rating agencies. At September 30, 2007, HUSI and HBUS maintained the following debt ratings. ------------------------------------------------------------------------------ At September 30, 2007 Moody's S&P Fitch ------------------------------------------------------------------------------ HUSI: Short-term borrowings .................... P-1 A-1+ F1+ Long-term debt ........................... Aa3 AA- AA HBUS: Short-term borrowings .................... P-1 A-1+ F1+ Long-term debt ........................... Aa2 AA AA HUSI periodically issues capital instruments to fund balance sheet growth, to meet cash and capital needs, or to fund investments in subsidiaries. In December 2005, the United States Securities and Exchange Commission (SEC) amended its rules regarding registration, communications and offerings under the Securities Act of 1933. The amended rules facilitate access to capital markets by well-established public companies, provide more flexibility regarding restrictions on corporate communications during a securities offering and further integrate disclosures under the Securities Act of 1933 and the Securities Exchange Act of 1934. The amended rules provide the most flexibility to "well-known seasoned issuers", including the option of automatic effectiveness upon filing of shelf registration statements and relief under the liberalized communications rules. HUSI currently satisfies the eligibility requirements for designation as a "well-known seasoned issuer", and has an effective shelf registration statement with the SEC under which it may issue debt securities, preferred stock, either separately or represented by depositary shares, warrants, purchase contracts and units. Concentrations of Risk Inherent in Loan Portfolios Certain risk concentrations are inherent within the prime residential mortgage loan portfolio, as well as the subprime residential mortgage whole loans held for sale portfolio, including concentrations that result in credit risk. A concentration of risk is defined as a significant exposure with an individual or group engaged in similar activities or affected similarly by economic conditions. As is true for all loan portfolios, HUSI utilizes high underwriting standards and prices loans in a manner that is appropriate to compensate for the higher risk associated with these concentrations. HUSI holds certain residential mortgage loans that have high loan-to-value (LTV) ratios and no mortgage insurance, which could result in potential inability to recover the entire investment in loans involving foreclosed or damaged properties. At September 30, 2007 and December 31, 2006, high LTV loans were mainly loans on primary residences with LTV ratios equal to or exceeding 90%. HUSI also holds interest-only residential mortgage loans that allow borrowers to pay only the accruing interest for a period of time, which results in lower payments during the initial loan period. Depending on a customer's financial situation, the subsequent increase in the required payment attributable to loan principal could affect a customer's ability to repay the loan at some future date when the interest rate resets and/or principal payments are required. Outstanding balances of high LTV and interest-only residential mortgage loans are summarized in the following table. ----------------------------------------------------------------------------------------------------------------- September 30, December 31, 2007 2006 ----------------------------------------------------------------------------------------------------------------- (in millions) Residential mortgage loans with high LTV and no mortgage insurance ......... $ 2,067 $ 2,717 Interest-only residential mortgage loans ................................... 6,514 7,537 ---------- ---------- Total ...................................................................... $ 8,581 $ 10,254 ========== ========== 66 Concentrations of first and second liens within the residential mortgage loan portfolio are summarized in the following table. Amounts in the table exclude loans held for sale. -------------------------------------------------------------------------------- September 30, December 31, 2007 2006 -------------------------------------------------------------------------------- (in millions) Closed end: First lien ................................. $ 29,327 $ 31,876 Second lien ................................ 731 474 Revolving: Second lien ................................ 3,019 3,231 --------- --------- Total ............................................ $ 33,077 $ 35,581 ========= ========= HUSI also offers adjustable rate residential mortgage loans which allow it to adjust pricing on the loan in line with market movements. As interest rates have risen over the last three years, many adjustable rate loans are expected to require a significantly higher monthly payment following their first adjustment. A customer's financial situation at the time of the interest rate reset could affect their ability to repay the loan after the adjustment, or may cause the customer to prepay or refinance the loan. At September 30, 2007, HUSI had approximately $18.6 billion in adjustable rate residential mortgage loans. For the remainder of 2007, approximately $.4 billion of adjustable rate residential mortgage loans will experience their first interest rate reset. In 2008, approximately $3.1 billion of adjustable rate residential mortgage loans will experience their first interest rate reset. Interest Rate Risk Management Various techniques are utilized to quantify and monitor risks associated with the repricing characteristics of HUSI's assets, liabilities, and derivative contracts. The approach toward managing interest rate risk is summarized on pages 77-79 of HUSI's 2006 Form 10-K. During the first nine months of 2007, there were no significant changes in policies or approach for managing interest rate risk. Present Value of a Basis Point (PVBP) Analysis PVBP is the change in value of the balance sheet for a one basis point upward movement in all interest rates. HUSI's PVBP position is summarized in the following table. ------------------------------------------------------------------------------------------------------------ September 30, 2007 Values ------------------------------------------------------------------------------------------------------------ (in millions) Institutional PVBP movement limit ............................................................ $ 6.5 PVBP position at period end .................................................................. 1.1 Economic Value of Equity Economic value of equity is the change in value of the assets and liabilities (excluding capital and goodwill) for either a 200 basis point gradual rate increase or decrease. HUSI's economic value of equity position is summarized in the following table. ------------------------------------------------------------------------------------------------------------ September 30, 2007 Values (%) ------------------------------------------------------------------------------------------------------------ Institutional economic value of equity limit ................................................. +/- 20 Projected change in value (reflects projected rate movements on October 1, 2007): Change resulting from a gradual 200 basis point increase in interest rates ............. (5) Change resulting from a gradual 200 basis point decrease in interest rates ............. (7) The loss in value for a 200 basis point increase or decrease in rates is a result of the negative convexity of the residential whole loan and mortgage backed securities portfolios. If rates decrease, the projected prepayments related to these portfolios will accelerate, causing less appreciation than a comparable term, non-convex instrument. If rates increase, projected prepayments will slow, which will cause the average lives of these positions to extend and result in a greater loss in market value. 67 Dynamic Simulation Modeling Various modeling techniques are utilized to monitor a number of interest rate scenarios for their impact on net interest income. These techniques include both rate shock scenarios which assume immediate market rate movements by as much as 200 basis points, as well as scenarios in which rates rise or fall by as much as 200 basis points over a twelve month period. The following table reflects the impact on net interest income of the scenarios utilized by these modeling techniques. ----------------------------------------------------------------------------------------------------------------------- September 30, 2007 Values ------------------------- Amount % ----------------------------------------------------------------------------------------------------------------------- ($ in millions) Projected change in net interest income for scenarios subject to a formal institutional movement limit (reflects projected rate movements on October 1, 2007): Institutional base earnings movement limit ........................................... (10) Change resulting from a gradual 200 basis point increase in the yield curve .......... $ (164) (5) Change resulting from a gradual 200 basis point decrease in the yield curve .......... 132 4 Change resulting from a gradual 100 basis point increase in the yield curve .......... (80) (2) Change resulting from a gradual 100 basis point decrease in the yield curve .......... 68 2 Other significant scenarios monitored for internal purposes, not subject to a formal institutional movement limit (reflects projected rate movements on October 1, 2007): Change resulting from an immediate 100 basis point increase in the yield curve ....... (128) (4) Change resulting from an immediate 100 basis point decrease in the yield curve ....... 104 3 Change resulting from an immediate 200 basis point increase in the yield curve ....... (268) (7) Change resulting from an immediate 200 basis point decrease in the yield curve ....... 102 3 The projections do not take into consideration possible complicating factors such as the effect of changes in interest rates on the credit quality, size and composition of the balance sheet. Therefore, although this provides a reasonable estimate of interest rate sensitivity, actual results will vary from these estimates, possibly by significant amounts. Capital Risk/Sensitivity of Other Comprehensive Income Large movements of interest rates could directly affect some reported capital and capital ratios. The mark to market valuation of available for sale securities is adjusted on a tax effective basis through other comprehensive income in the consolidated statement of changes in shareholders' equity. Although this valuation mark is excluded from Tier 1 and Tier 2 capital ratios, it is included in two important accounting based capital ratios: the tangible common equity to tangible assets and the tangible common equity to risk weighted assets. As of September 30, 2007, HUSI had an available for sale securities portfolio of approximately $22 billion with a net negative mark to market of $443 million included in tangible common equity of $8 billion. An increase of 25 basis points in interest rates of all maturities would lower the mark to market by approximately $120 million to a net loss of $563 million with the following results on the tangible capital ratios. ------------------------------------------------------------------------------------------------------------------- Proforma - Reflecting 25 Basis Points September 30, 2007 Actual Increase in Rates ------------------------------------------------------------------------------------------------------------------- Tangible common equity to tangible assets .................................. 4.33% 4.30% Tangible common equity to risk weighted assets ............................. 6.01 5.95 Market Risk Management Value at Risk (VAR) VAR analysis is used to estimate the potential losses that could occur on risk positions as a result of movements in market rates and prices over a specified time horizon and to a given level of confidence. VAR calculations are performed for all material trading activities and as a tool for managing interest rate risk inherent in non-trading activities. HUSI calculates VAR daily for a one-day holding period to a 99% confidence level. At a 99% confidence level for a two-year observation period, HUSI is setting as its limit the fifth worst loss performance in the last 500 business days. 68 VAR - Trading Activities HUSI's management of market risk is based on restricting individual operations to trading within a list of permissible instruments, and enforcing rigorous approval procedures for new products. In particular, trading in the more complex derivative products is restricted to offices with appropriate levels of product expertise and robust control systems. In addition, at both portfolio and position levels, market risk in trading portfolios is monitored and controlled using a complementary set of techniques, including VAR and various techniques for monitoring interest rate risk (beginning on page 67 of this Form 10-Q). These techniques quantify the impact on capital of defined market movements. Trading portfolios reside primarily within the Markets unit of the CIBM business segment, which include warehoused residential mortgage loans purchased for securitizations and within the mortgage banking subsidiary included within the PFS business segment. Portfolios include foreign exchange, derivatives, precious metals (gold, silver, platinum), equities, money market instruments and securities. Trading occurs as a result of customer facilitation, proprietary position taking, and economic hedging. In this context, economic hedging may include, for example, forward contracts to sell residential mortgages and derivative contracts which, while economically viable, may not satisfy the hedge requirements of Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133). The trading portfolios have defined limits pertaining to items such as permissible investments, risk exposures, loss review, balance sheet size and product concentrations. "Loss review" refers to the maximum amount of loss that may be incurred before senior management intervention is required. Trading VAR for 2007 is summarized in the following table. ----------------------------------------------------------------------------------------------------------------------- Nine months ended September 30, 2007 September 30, ------------------------------------ December 31, 2007 Minimum Maximum Average 2006 ----------------------------------------------------------------------------------------------------------------------- (in millions) Total trading .................................. $ 31 $ 9 $ 41 $ 17 $ 9 Precious metals ................................ 1 --(1) 4 1 2 Equities ....................................... --(1) --(1) 4 --(1) -- (1) Foreign exchange ............................... 1 --(1) 3 1 2 Interest rate directional and credit spread .... 26 5 38 15 13 (1) Less than $500 thousand. The frequency distribution of daily market risk-related revenues for trading activities during 2007 is summarized in the following table. Market risk-related trading revenues include realized and unrealized gains (losses) related to trading activities, but exclude the related net interest income. Analysis of the gain (loss) data for the three months ended September 30, 2007 shows that the largest daily gain was $20 million and the largest daily loss was $65 million. Analysis of the gain (loss) data for the nine months ended September 30, 2007 shows that the largest daily gain was $25 million and the largest daily loss was $65 million. ----------------------------------------------------------------------------------------------------------------------- Ranges of daily Treasury trading revenue earned Below $(10) to $(5) to $0 to Over from market risk-related activities (in millions) $(10) $(5) $0 $5 $5 ----------------------------------------------------------------------------------------------------------------------- Three months ended September 30, 2007: Number of trading days market risk-related revenue was within the stated range ................................... 11 13 15 12 12 Nine months ended September 30, 2007: Number of trading days market risk-related revenue was within the stated range ................................... 13 25 53 62 35 69 VAR - Non-trading Activities The principal objective of market risk management of non-trading portfolios is to optimize net interest income. Market risk in non-trading portfolios arises principally from mismatches between the future yield on assets and their funding cost, as a result of interest rate changes. Analysis of this risk is complicated by having to make assumptions on optionality in certain product areas, for example, mortgage prepayments, and from behavioral assumptions regarding the economic duration of liabilities which are contractually repayable on demand. The prospective change in future net interest income from non-trading portfolios will be reflected in the current realizable value of these positions, should they be sold or closed prior to maturity. In order to manage this risk optimally, market risk in non-trading portfolios is transferred to global markets or to separate books managed under the supervision of ALCO. Once market risk has been consolidated in global markets or ALCO-managed books, the net exposure is typically managed through the use of interest rate swaps within agreed-upon limits. Non-trading VAR for 2007, assuming a 99% confidence level for a two-year observation period and a one-day "holding period", is summarized in the following table. -------------------------------------------------------------------------------------------------------------------- Nine months ended September 30, 2007 September 30, -------------------------------------- December 31, 2007 Minimum Maximum Average 2006 -------------------------------------------------------------------------------------------------------------------- (in millions) Interest rate ........................ $ 39 $ 18 $ 55 $ 30 $ 24 Trading Activities - HSBC Mortgage Corporation (USA) HSBC Mortgage Corporation (USA) is HUSI's mortgage banking subsidiary. Trading occurs in mortgage banking operations as a result of an economic hedging program intended to offset changes in value of mortgage servicing rights and the salable loan pipeline. Economic hedging may include, for example, forward contracts to sell residential mortgages and derivative contracts used to protect the value of MSRs. MSRs are assets that represent the present value of net servicing income (servicing fees, ancillary income, escrow and deposit float, net of servicing costs). MSRs are recognized upon the sale of the underlying loans or at the time that servicing rights are purchased. MSRs are subject to interest rate risk, in that their value will fluctuate as a result of a changing interest rate environment. Interest rate risk is mitigated through an active hedging program that uses trading securities and derivative instruments to offset changes in value of MSRs. Since the hedging program involves trading activity, risk is quantified and managed using a number of risk assessment techniques. Rate Shock Analysis Modeling techniques are used to monitor certain interest rate scenarios for their impact on the economic value of net hedged MSRs, as reflected in the following table. ------------------------------------------------------------------------------------------------------------------- September 30, 2007 Values ------------------------------------------------------------------------------------------------------------------- (in millions) Projected change in net market value of hedged MSRs portfolio (reflects projected rate movements on October 1, 2007): Value of hedged MSRs portfolio ............................................................... $ 537 Change resulting from an immediate 50 basis point decrease in the yield curve: Change limit (no worse than) .............................................................. (16) Calculated change in net market value ..................................................... 2 Change resulting from an immediate 50 basis point increase in the yield curve: Change limit (no worse than) .............................................................. (8) Calculated change in net market value ..................................................... 1 Change resulting from an immediate 100 basis point increase in the yield curve: Change limit (no worse than) .............................................................. (12) Calculated change in net market value ..................................................... 3 70 Economic Value of MSRs The economic value of the net, hedged MSRs portfolio is monitored on a daily basis for interest rate sensitivity. If the economic value declines by more than established limits for one day or one month, various levels of management review, intervention and/or corrective actions are required. Hedge Volatility The frequency distribution of the weekly economic value of MSR assets during 2007 is summarized in the following table. This includes the change in the market value of the MSR asset net of changes in the market value of the underlying hedging positions used to hedge the asset. The changes in economic value are adjusted for changes in MSR valuation assumptions that were made during the course of the quarter, if applicable. -------------------------------------------------------------------------------------------------------------------- Ranges of mortgage economic value from market risk- Below $(2) to $0 to $2 to Over related activities (in millions) $(2) $0 $2 $4 $4 -------------------------------------------------------------------------------------------------------------------- Three months ended September 30, 2007: Number of trading weeks market risk-related revenue was within the stated range ........................... 3 5 5 -- -- Nine months ended September 30, 2007: Number of trading weeks market risk-related revenue was within the stated range ........................... 7 11 15 4 2 71 HSBC USA Inc. Consolidated Average Balances and Interest Rates -------------------------------------------------------------------------------- The following table shows the quarter to date average balances of the principal components of assets, liabilities and shareholders' equity together with their respective interest amounts and rates earned or paid, presented on a taxable equivalent basis. Three months ended September 30, ------------------------------------------------------------------ 2007 2006 ------------------------------ ------------------------------- Balance Interest Rate* Balance Interest Rate* ------------------------------ ------------------------ ------ Assets (in millions) Interest bearing deposits with banks ............ $ 6,508 $ 98 6.01% $ 3,865 $ 57 5.84% Federal funds sold and securities purchased under resale agreements .......... 10,772 143 5.26 11,292 152 5.36 Trading assets .................................. 11,712 167 5.66 11,439 107 3.70 Securities ...................................... 24,151 324 5.32 22,515 295 5.19 Loans Commercial .................................. 31,606 518 6.50 28,838 472 6.49 Consumer: Residential mortgages .................. 36,848 497 5.35 40,717 542 5.28 Credit cards ........................... 17,828 508 11.31 16,231 361 8.82 Other consumer ......................... 2,438 63 10.18 2,953 69 9.33 --------- --------- ------ --------- --------- ------ Total consumer ............................ 57,114 1,068 7.42 59,901 972 6.44 --------- --------- ------ --------- --------- ------ Total loans ............................... 88,720 1,586 7.09 88,739 1,444 6.46 --------- --------- ------ --------- --------- ------ Other ........................................... 3,938 60 5.98 1,916 27 5.57 --------- --------- ------ --------- --------- ------ Total earning assets ............................ 145,801 $ 2,378 6.47% 139,766 $ 2,082 5.91% --------- ========= ------ --------- ========= ------ Allowance for credit losses ..................... (994) (937) Cash and due from banks ......................... 3,065 4,100 Other assets .................................... 24,992 22,157 --------- --------- Total assets .................................... $ 172,864 $ 165,086 ========= ========= Liabilities and Shareholders' Equity Deposits in domestic offices Savings deposits .............................. $ 44,284 $ 361 3.23% $ 37,187 $ 288 3.08% Other time deposits ........................... 20,895 303 5.75 22,694 289 5.05 Deposits in foreign offices Foreign banks deposits ........................ 9,723 107 4.35 7,280 87 4.74 Other time and savings ........................ 16,578 222 5.32 13,697 164 4.74 --------- --------- ------ --------- --------- ------ Total interest bearing deposits ................. 91,480 993 4.31 80,858 828 4.06 --------- --------- ------ --------- --------- ------ Short-term borrowings ........................... 9,698 90 3.66 10,645 91 3.39 Long-term debt .................................. 28,920 365 5.01 30,332 380 4.97 --------- --------- ------ --------- --------- ------ Total interest bearing liabilities .............. 130,098 1,448 4.41 121,835 1,299 4.23 --------- --------- ------ --------- --------- ------ Net interest income / Interest rate spread ...... $ 930 2.06% $ 783 1.68% ========= ------ ========= ------ Noninterest bearing deposits .................... 13,940 13,155 Other liabilities ............................... 16,736 17,922 Total shareholders' equity ...................... 12,090 12,174 --------- --------- Total liabilities and shareholders' equity ...... $ 172,864 $ 165,086 ========= ========= Net interest margin on average earning assets ... 2.53% 2.22% ------ ------ Net interest margin on average total assets ..... 2.14% 1.88% ====== ====== * Rates are calculated on unrounded numbers. Total weighted average rate earned on earning assets is interest and fee earnings divided by daily average amounts of total interest earning assets, including the daily average amount on nonperforming loans. Loan interest for the three months ended September 30, 2007 and 2006 included fees of $9 million and $12 million, respectively. 72 HSBC USA Inc. Consolidated Average Balances and Interest Rates -------------------------------------------------------------------------------- The following table shows the year to date average balances of the principal components of assets, liabilities and shareholders' equity together with their respective interest amounts and rates earned or paid, presented on a taxable equivalent basis. Nine months ended September 30, ----------------------------------------------------------------------- 2007 2006 ------------------------------ ------------------------------------ Balance Interest Rate* Balance Interest Rate* ------------------------------ ------------------------------------ Assets (in millions) Interest bearing deposits with banks ..... $ 5,412 $ 236 5.83% $ 4,234 $ 183 5.79% Federal funds sold and securities purchased under resale agreements ... 11,896 483 5.42 9,249 345 4.98 Trading assets ........................... 11,689 476 5.44 10,844 317 3.91 Securities ............................... 22,866 900 5.26 21,922 845 5.15 Loans Commercial ........................... 29,947 1,458 6.51 27,777 1,288 6.20 Consumer: Residential mortgages ........... 38,270 1,554 5.43 42,350 1,671 5.27 Credit cards .................... 17,690 1,305 9.86 15,539 952 8.19 Other consumer .................. 2,525 188 9.99 3,021 201 8.92 --------- --------- ----- --------- --------- ------ Total consumer ..................... 58,485 3,047 6.97 60,910 2,824 6.20 --------- --------- ----- --------- --------- ------ Total loans ........................ 88,432 4,505 6.81 88,687 4,112 6.20 --------- --------- ----- --------- --------- ------ Other .................................... 3,088 135 5.84 1,478 64 5.80 --------- --------- ----- --------- --------- ------ Total earning assets ..................... 143,383 6,735 6.28% 136,414 $ 5,866 5.75% --------- ========= ----- --------- ========= ------ Allowance for credit losses .............. (950) (931) Cash and due from banks .................. 3,015 4,019 Other assets ............................. 22,708 22,433 --------- --------- Total assets ............................. $ 168,156 $ 161,935 ========= ========= Liabilities and Shareholders' Equity Deposits in domestic offices Savings deposits ....................... $ 42,729 $ 1,038 3.25% $ 33,873 $ 680 2.69% Other time deposits .................... 22,157 915 5.52 24,521 851 4.64 Deposits in foreign offices Foreign banks deposits ................. 9,079 328 4.82 7,105 259 4.87 Other time and savings ................. 15,315 560 4.89 14,760 456 4.13 --------- --------- ----- --------- --------- ------ Total interest bearing deposits .......... 89,280 2,841 4.25 80,259 2,246 3.74 --------- --------- ----- --------- --------- ------ Short-term borrowings .................... 9,121 266 3.90 10,505 237 3.01 Long-term debt ........................... 28,971 1,087 5.02 29,394 1,077 4.90 --------- --------- ----- --------- --------- ------ Total interest bearing liabilities ....... 127,372 4,194 4.40 120,158 3,560 3.96 --------- --------- ----- --------- --------- ------ Net interest income / Interest rate spread 2,541 1.88% $ 2,306 1.79% ========= ===== ========= ====== Noninterest bearing deposits ............. 13,687 12,627 Other liabilities ........................ 14,924 17,176 Total shareholders' equity ............... 12,173 11,974 --------- --------- Total liabilities and shareholders' equity $ 168,156 $ 161,935 ========= ========= Net interest margin on average earning assets 2.37 2.26% ----- ------ Net interest margin on average total assets 2.02 1.90% ===== ====== * Rates are calculated on unrounded numbers. Total weighted average rate earned on earning assets is interest and fee earnings divided by daily average amounts of total interest earning assets, including the daily average amount on nonperforming loans. Loan interest for the nine months ended September 30, 2007 and 2006 included fees of $32 million and $41 million, respectively. 73 Item 3. Quantitative and Qualitative Disclosures About Market Risk -------------------------------------------------------------------------------- Refer to Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, under the captions "Interest Rate Risk Management" and "Trading Activities", beginning on page 65 of this Form 10-Q. Item 4. Controls and Procedures -------------------------------------------------------------------------------- HUSI maintains a system of internal and disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934, as amended, (the Exchange Act), is recorded, processed, summarized and reported on a timely basis. HUSI's Board of Directors, operating through its Audit Committee, which is composed entirely of independent outside directors, provides oversight to the financial reporting process. An evaluation was conducted, with the participation of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of HUSI's disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that HUSI's disclosure controls and procedures were effective as of the end of the period covered by this report so as to alert them in a timely fashion to material information required to be disclosed in reports filed under the Exchange Act. There have been no changes in HUSI's internal controls or in other factors that could significantly affect internal and disclosure controls subsequent to the date that the evaluation was carried out, although the company continues to monitor current market conditions and will adjust policies and procedures if deemed necessary. HUSI continues the process to complete a thorough review of its internal controls as part of its preparation for compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (Section 404). Section 404 requires management to report on, and external auditors to attest to, the effectiveness of HUSI's internal control structure and procedures for financial reporting. As a non-accelerated filer under Rule 12b-2 of the Exchange Act, HUSI's first report under Section 404 will be contained in its Form 10-K for the period ended December 31, 2007. 74 Part II - OTHER INFORMATION -------------------------------------------------------------------------------- Item 1A. Risk Factors -------------------------------------------------------------------------------- Risk factors were set forth in HUSI's Form 10-K for the period ended December 31, 2006. There have been no material changes from the risk factors disclosed in that Form 10-K. Item 6. Exhibits -------------------------------------------------------------------------------- 12 Computation of Ratio of Earnings to Fixed Charges and Earnings to Combined Fixed Charges and Preferred Stock Dividends. 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.0 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 75 SIGNATURE -------------------------------------------------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HSBC USA Inc. ------------- (Registrant) Date: November 14, 2007 /s/ Joseph R. Simpson ----------------------------------------- Joseph R. Simpson Executive Vice President and Controller (On behalf of Registrant) 76 Exhibit 12 HSBC USA Inc. Computation of Ratio of Earnings to Fixed Charges and Earnings to Combined Fixed Charges and Preferred Stock Dividends (in millions, except ratios) ----------------------------------------------------------------------------------------------------------------------- Nine months ended September 30 2007 2006 ----------------------------------------------------------------------------------------------------------------------- Ratios excluding interest on deposits: Net income ......................................................................... $ 585 $ 838 Income tax expense ................................................................. 237 429 Less: Undistributed equity earnings ................................................ 5 19 Fixed charges: Interest on: Borrowed funds ............................................................... 266 237 Long-term debt ............................................................... 1,087 1,077 One third of rents, net of income from subleases ................................ 21 18 --------- --------- Total fixed charges, excluding interest on deposits ................................ 1,374 1,332 Earnings before taxes and fixed charges, net of undistributed equity earnings ...... $ 2,191 $ 2,580 ========= ========= Ratio of earnings to fixed charges ................................................. 1.59 1.94 ========= ========= Total preferred stock dividend factor (1) .......................................... $ 105 $ 95 --------- --------- Fixed charges, including the preferred stock dividend factor ....................... $ 1,479 $ 1,427 ========= ========= Ratio of earnings to combined fixed charges and preferred stock dividends .......... 1.48 1.81 ========= ========= Ratios including interest on deposits: Total fixed charges, excluding interest on deposits ................................ $ 1,374 $ 1,332 Add: Interest on deposits .......................................................... 2,841 2,246 --------- --------- Total fixed charges, including interest on deposits ................................ $ 4,215 $ 3,578 ========= ========= Earnings before taxes and fixed charges, net of undistributed equity earnings ...... $ 2,191 $ 2,580 Add: Interest on deposits .......................................................... 2,841 2,246 --------- --------- Total .............................................................................. $ 5,032 $ 4,826 ========= ========= Ratio of earnings to fixed charges ................................................. 1.19 1.35 ========= ========= Fixed charges, including the preferred stock dividend factor ....................... $ 1,479 $ 1,427 Add: Interest on deposits .......................................................... 2,841 2,246 --------- --------- Fixed charges, including the preferred stock dividend factor and interest on deposits $ 4,320 $ 3,673 ========= ========= Ratio of earnings to combined fixed charges and preferred stock dividends .......... 1.16 1.31 ========= ========= (1) Preferred stock dividends grossed up to their pretax equivalents. 77 Exhibit 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. -------------------------------------------------------------------------------- I, Paul J. Lawrence, certify that: 1. I have reviewed this report on Form 10-Q for the quarterly period ended September 30, 2007 of HSBC USA Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal controls over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal controls over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: November 14, 2007 /s/ Paul J. Lawrence ----------------------------------------- Paul J. Lawrence President and Chief Executive Officer 78 Exhibit 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. -------------------------------------------------------------------------------- I, Gerard Mattia, certify that: 1. I have reviewed this report on Form 10-Q for the quarterly period ended September 30, 2007 of HSBC USA Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal controls over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal controls over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: November 14 , 2007 /s/ Gerard Mattia ------------------------------------- Gerard Mattia Senior Executive Vice President and Chief Financial Officer 79 Exhibit 32.0 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. -------------------------------------------------------------------------------- Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), each of the undersigned officers of HSBC USA Inc., a Maryland corporation (HUSI), does hereby certify, to such officer's knowledge, that: The Quarterly Report on Form 10-Q for the quarter ended September 30, 2007 (the Form 10-Q) of HUSI fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of HUSI. Date: November 14, 2007 /s/ Paul J. Lawrence --------------------------------------- Paul J. Lawrence President and Chief Executive Officer Date: November 14, 2007 /s/ Gerard Mattia --------------------------------------- Gerard Mattia Senior Executive Vice President and Chief Financial Officer The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code) and is not being filed as part of the Form 10-Q or as a separate disclosure document. A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to HSBC USA Inc. and will be retained by HSBC USA Inc. and furnished to the United States Securities and Exchange Commission or its staff upon request. 80 This information is provided by RNS The company news service from the London Stock Exchange

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Thursday, 23rd May 2024

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HL. QQ. AJB

Another day and another round of takeover talk with Hargreaves Lansdown being eyed by private equity suitors. AJ Bell also advances on upbeat earnings news whilst QinetiQ upgrades its profit guidance, too.

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