HSBC USA Inc 2012 Form 10-K - Part 2

RNS Number : 0965Z

HSBC Holdings PLC

04 March 2013

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

Note		Page		Note		Page
1	Organization			18	Fair Value Option
2	Summary of Significant Accounting Policies and New Accounting Pronouncements			19	Income Taxes
3	Discontinued Operations			20	Preferred Stock
4	Branch Assets and Liabilities Held for Sale			21	Accumulated Other Comprehensive Income (Loss)
5	Exit from Taxpayer Financial Services Loan Program			22	Share-Based Plans
6	Trading Assets and Liabilities			23	Pension and Other Postretirement Benefits
7	Securities			24	Related Party Transactions
8	Loans			25	Business Segments
9	Allowance for Credit Losses			26	Retained Earnings and Regulatory Capital Requirements
10	Loans Held for Sale			27	Variable Interest Entities
11	Properties and Equipment, Net			28	Guarantee Arrangements and Pledged Assets
12	Intangible Assets			29	Fair Value Measurements
13	Goodwill			30	Litigation and Regulatory Matters
14	Deposits			31	Financial Statements of HSBC USA Inc. (Parent)
15	Short-Term Borrowings
16	Long-Term Debt
17	Derivative Financial Instruments

1.     Organization

HSBC USA Inc. ("HSBC USA"), incorporated under the laws of Maryland, is a New York State based bank holding company and an indirect wholly-owned subsidiary of HSBC North America Holdings Inc. ("HSBC North America"), which is an indirect wholly-owned subsidiary of HSBC Holdings plc ("HSBC"). HSBC USA (together with its subsidiaries, "HUSI") may also be referred to in these notes to the consolidated financial statements as "we," "us" or "our."

Through our subsidiaries, we offer a comprehensive range of personal and commercial banking products and related financial services. HSBC Bank USA, National Association ("HSBC Bank USA"), our principal U.S. banking subsidiary, is a national banking association with banking branch offices and/or representative offices in 16 states and the District of Columbia. In addition to our domestic offices, we maintain foreign branch offices, subsidiaries and/or representative offices in Europe, Asia, Latin America, and Canada. Our customers include individuals, including high net worth individuals, small businesses, corporations, institutions and governments. We also engage in mortgage banking and serve as an international dealer in derivative instruments denominated in U.S. dollars and other currencies, focusing on structuring of transactions to meet clients' needs.

2.     Summary of Significant Accounting Policies and New Accounting Pronouncements

Significant Accounting Policies

Basis of Presentation The consolidated financial statements include the accounts of HSBC USA and all subsidiaries in which we hold, directly or indirectly, more than 50 percent of the voting rights, or where we exercise control, including all variable interest entities ("VIEs") in which we are the primary beneficiary. Investments in companies where we have significant influence over operating and financing decisions, which primarily are those where the percentage of ownership is at least 20 percent but not more than 50 percent, are accounted for under the equity method and reported as equity method investments in other assets. All significant intercompany accounts and transactions have been eliminated.

We assess whether an entity is a VIE and, if so, whether we are its primary beneficiary at the time of initial involvement with the entity and on an ongoing basis. A VIE is an entity in which the equity investment at risk is not sufficient to finance the entity's activities, the equity investors lack certain characteristics of a controlling financial interest, or voting rights are not proportionate to the economic interests of equity investors and the entity's activities are conducted primarily on behalf of investors having few voting rights. A VIE must be consolidated by its primary beneficiary, which is the entity with the power to direct the activities of a VIE that most significantly impact its economic performance and the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Certain reclassifications may be made to prior year amounts to conform to the current year presentation. Areas which we consider to be critical accounting estimates and require a high degree of judgment and complexity include allowance for credit losses, goodwill impairment, valuation of financial instruments, derivatives held for hedging, mortgage servicing rights, deferred tax asset valuation allowances and contingent liabilities.

Unless otherwise indicated, information included in these notes to the consolidated financial statements relates to continuing operations for all periods presented. In 2012, we completed the sale of all of our private label cards and substantially all of our credit card receivables to Capital One Financial Corporation.  In 2011, we completed the exit of the wholesale banknotes business operated through our U.S. and Asian entities. As a result, these asset groups are reported as discontinued operations. See Note 3, "Discontinued Operations," for further details.

Cash and Cash Equivalents For the purpose of reporting cash flows, cash and cash equivalents include cash on hand and amounts due from banks.

Resale and Repurchase Agreements We enter into purchases and borrowings of securities under agreements to resell (resale agreements) and sales of securities under agreements to repurchase (repurchase agreements) substantially identical securities. Resale and repurchase agreements are generally accounted for as secured lending and secured borrowing transactions, respectively.

The amounts advanced under resale agreements and the amounts borrowed under repurchase agreements are carried on the consolidated balance sheets at the amount advanced or borrowed, plus accrued interest to date. Interest earned on resale agreements is reported as interest income. Interest paid on repurchase agreements is reported as interest expense. We offset resale and repurchase agreements executed with the same counterparty under legally enforceable netting agreements that meet the applicable netting criteria as permitted by generally accepted accounting principles.

Repurchase agreements may require us to deposit cash or other collateral with the lender. In connection with resale agreements, it is our policy to obtain possession of collateral, which may include the securities purchased, with market value in excess of the principal amount loaned. The market value of the collateral subject to the resale and repurchase agreements is regularly monitored, and additional collateral is obtained or provided when appropriate, to ensure appropriate collateral coverage of these secured financing transactions.

Trading Assets and Liabilities Financial instruments utilized in trading activities are stated at fair value. Fair value is generally based on quoted market prices. If quoted market prices are not available, fair values are estimated based on dealer quotes, pricing models, using observable inputs where available or quoted prices for instruments with similar characteristics. The validity of internal pricing models is regularly substantiated by reference to actual market prices realized upon sale or liquidation of these instruments and such models are periodically validated by a group independent of the front office. Realized and unrealized gains and losses are recognized in trading revenues.

Trading assets and liabilities include precious metals deposited by customers with us in exchange for general claims on our physical unallocated precious metals inventory.  We measure this inventory and related claims at fair value using the spot prices of the respective underlying metals and recognized changes in spot prices in trading revenue. 

Securities Debt securities that we have the ability and intent to hold to maturity are reported at cost, adjusted for amortization of premiums and accretion of discounts, which are recognized as adjustments to yield over the contractual lives of the related securities. Securities acquired principally for the purpose of selling them in the near term are classified as trading assets and reported at fair value. Fair value adjustments to trading securities and gains and losses on the sale of such securities are reported in other revenues (losses) as trading revenues.

Equity securities that are not quoted on a recognized exchange are not considered to have a readily determinable fair value, and are recorded at cost, less any provisions for impairment. Unquoted equity securities, which include Federal Home Loan Bank ("FHLB") stock, Federal Reserve Bank ("FRB") stock and Visa Class B securities, are recorded in other assets.

All other securities are classified as available-for-sale and carried at fair value, with unrealized gains and losses, net of related income taxes, recorded as adjustments to common shareholder's equity as a component of accumulated other comprehensive income.

Realized gains and losses on sales of securities not classified as trading assets are computed on a specific identified cost basis and are reported in other revenues (losses) as security gains, net. When the fair value of a security has declined below its amortized cost basis, we evaluate the decline to assess if it is considered other-than-temporary. For debt securities that we intend to sell or for which it is more likely than not that we will be required to sell before recovering of its amortized cost basis, the decline in fair value below the security's amortized cost is deemed to be other-than-temporary and we recognize an other-than-temporary impairment loss in earnings equal to the difference between the security's amortized cost and its fair value. We measure impairment loss for equity securities that are deemed other-than-temporarily impaired in the same manner. For a debt security that we do not intend to sell and for which it is not more-likely-than-not that we will be required to sell prior to recovery of its amortized cost basis, but for which we nonetheless do not expect to recover the entire amortized cost basis of the security, we recognize the portion of the decline in the security's fair value below its amortized cost that represents a credit loss as an other-than-temporary impairment in earnings and the remaining portion of the decline as an other-than-temporary impairment in other comprehensive income. For these debt securities, a new cost basis is established, which reflects the amount of the other-than-temporary impairment loss recognized in earnings.

Loans Loans are stated at amortized cost, which represents the principal amount outstanding, net of unearned income, charge offs, unamortized purchase premium or discount, unamortized nonrefundable fees and related direct loan origination costs and purchase accounting fair value adjustments. The carrying amount of loans represents their amortized cost reduced by the allowance for credit losses.

Premiums and discounts and purchase accounting fair value adjustments are recognized as adjustments to yield over the expected lives of the related loans. Interest income is recorded based on the interest method.

Troubled debt restructurings are loans for which the original contractual terms have been modified to provide for terms that are less than we would be willing to accept for new loans with comparable risk because of deterioration in the borrower's financial condition. Interest on these loans is recognized when collection is reasonably assured. For commercial loans, the resumption of interest accrual generally occurs when the borrower has complied with the new payment terms and conditions for six months while maintaining a debt service coverage ratio greater than one with the loan balances fully collateralized.  For consumer loans, interest accruals are resumed when the loan becomes current or becomes less than 90 days delinquent and six months of consecutive payments have been made.  Modifications resulting in troubled debt restructurings may include changes to one or more terms of the loan, including but not limited to, a change in interest rate, an extension of the amortization period, a reduction in payment amount and partial forgiveness or deferment of principal or accrued interest.

Nonrefundable fees and related direct costs associated with the origination of loans are deferred and netted against outstanding loan balances. The amortization of net deferred fees, which include points on real estate secured loans and costs, is recognized in interest income, generally by the interest method, based on the estimated or contractual lives of the related loans. Amortization periods are periodically adjusted for loan prepayments and changes in other market assumptions. Annual fees on MasterCard/Visa credit card and home equity lines of credit ("HELOC"), net of direct lending costs, are deferred and amortized on a straight-line basis over one year.

Nonrefundable fees related to lending activities other than direct loan origination are recognized as other revenues over the period in which the related service is provided. This includes fees associated with the issuance of loan commitments where the likelihood of the commitment being exercised is considered remote. In the event of the exercise of the commitment, the remaining unamortized fee is recognized in interest income over the loan term using the interest method. Other credit-related fees, such as standby letter of credit fees, loan syndication and agency fees are recognized as other operating income over the period the related service is performed.

Allowance for Credit Losses We maintain an allowance for credit losses that is, in the judgment of management, adequate to absorb estimated probable incurred losses in our commercial and consumer loan portfolios. The adequacy of the allowance for credit losses is assessed in accordance with generally accepted accounting principles and is based, in part, upon an evaluation of various factors including:

•         an analysis of individual exposures where applicable;

•         current and historical loss experience;

•         changes in the overall size and composition of the portfolio; and

•         specific adverse situations and general economic conditions.

We also assess the overall adequacy of the allowance for credit losses by considering key ratios such as reserves to nonperforming loans and reserves as a percentage of net charge offs in developing our loss reserve estimates. Loss estimates are reviewed periodically and adjustments are reported in earnings when they become known. As these estimates are influenced by factors outside of our control, such as consumer payment patterns and economic conditions, there is uncertainty inherent in these estimates, making it reasonably possible they could change.

For individually assessed commercial loans, we conduct a periodic assessment on a loan-by-loan basis of losses we believe to be inherent in the loan portfolio. When it is deemed probable, based upon known facts and circumstances, that full contractual interest and principal on an individual loan will not be collected in accordance with its contractual terms, the loan is considered impaired. An impairment reserve is established based on the present value of expected future cash flows, discounted at the loan's original effective interest rate, or as a practical expedient, the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. Generally, impaired loans include loans in nonaccruing status, loans which have been assigned a specific allowance for credit losses, loans which have been partially charged off, and loans designated as troubled debt restructurings. Problem commercial loans are assigned various obligor grades under the allowance for credit losses methodology. In assigning the obligor ratings of a particular loan, among the risk factors considered are the obligor's debt capacity and financial position, the level of earnings, the amount and sources for repayment, the level of contingencies, management strength and the industry or geography in which the obligor operates.

Formula-based reserves are also established against commercial loans when, based upon an analysis of relevant data, it is probable that a loss has been incurred and the amount of that loss can be reasonably estimated, even though an actual loss has yet to be identified. A separate reserve for credit losses associated with off-balance sheet exposures including unfunded lending commitments such as letters of credit, guarantees to extend credit and financial guarantees is also maintained and included in other liabilities, which incorporates estimates of the probability that customers will actually draw upon off-balance sheet obligations. This methodology uses the probability of default from the customer risk rating assigned to each counterparty. The "Loss Given Default" rating assigned to each transaction or facility is based on the collateral securing the transaction and the measure of exposure based on the transaction. Collateral is the primary driver of Loss Given Default. Specifically, the presence of collateral (secured vs. unsecured), the loan-to-value ratio and the quality of the collateral are the primary drivers of Loss Given Default. These reserves are determined by reference to continuously monitored and updated historical loss rates or factors, derived from a migration analysis which considers net charge off experience by loan and industry type in relation to internal customer credit grading.

Probable incurred losses for pools of homogeneous consumer loans other than troubled debt restructurings are generally estimated using a roll rate migration analysis that estimates the likelihood that a loan will progress through the various stages of delinquency, or buckets, and ultimately charge off. This analysis considers delinquency status, loss experience and severity and takes into account whether loans have filed for bankruptcy, have been restructured, or are subject to forbearance, an external debt management plan, hardship, modification, extension or deferment. The allowance for credit losses on consumer receivables also takes into consideration the loss severity expected based on the underlying collateral, if any, for the loan in the event of default based on historical and recent trends. In addition, loss reserves are maintained on consumer receivables to reflect our judgment of portfolio risk factors which may not be fully reflected in the statistical roll rate calculation or when historical trends are not reflective of current inherent losses in the loan portfolio. Risk factors considered in establishing the allowance for credit losses on consumer receivables include growth, product mix and risk selection, unemployment rates, bankruptcy trends, geographic concentrations, loan product features such as adjustable rate loans, economic conditions such as national and local trends in unemployment, housing markets and interest rates, portfolio seasoning, changes in underwriting practices, current levels of charge-offs and delinquencies, changes in laws and regulations and other items which can affect consumer payment patterns on outstanding receivables such as natural disasters.

Provisions for credit losses on commercial and consumer loans for which we have modified the loan terms as part of a troubled debt restructuring ("TDR Loans") are determined using a discounted cash flow impairment analysis or in the case of certain commercial loans which are solely dependent on the collateral for repayment, the estimated fair value of the collateral less costs to sell. During the third quarter of 2011, we adopted a new Accounting Standards Update which provided additional guidance for determining whether a restructuring of a receivable meets the criteria to be considered a troubled debt restructuring for purposes of the identification and reporting of TDR Loans as well as for recording impairment. Under this new guidance, we have determined that substantially all consumer loans modified as a result of financial difficulty, including all modifications with trial periods regardless of whether the modification was permanent or temporary, should be reported as TDR Loans. For residential mortgage loans purchased from HSBC Finance, we have determined that all re-ages, except first time early stage delinquency re-ages where the customer has not been granted a prior re-age or modification since the first quarter of 2007, should be considered a TDR Loan.   We believe that multiple or later stage delinquency re-ages or a need for a modification to any of the loan terms other than to provide a market rate of interest provides evidence that the borrower is experiencing financial difficulty.  Prior to 2011, substantially all consumer loans that had been granted a modification greater than three months were considered TDR Loans. Modifications may include changes to one or more terms of the loan, including, but not limited to, a change in interest rate, extension of the amortization period, reduction in payment amount and partial forgiveness or deferment of principal or accrued interest. TDR Loans are considered to be impaired loans. Interest income on TDR Loans is recognized when collection is reasonably assured. For consumer loans, once a loan is classified as a TDR Loan, it continues to be reported as such until it is paid off or charged-off. For commercial loans, if a TDR loan subsequently performs in accordance with the new terms and such terms represent current market rates at the time of restructure, such loan will be no longer be reported as a TDR beginning in the year after restructure.

Charge-Off and Nonaccrual Policies and Practices Our charge-off and nonaccrual policies vary by product and are summarized below:

Product		Charge-off Policies and Practices		Nonaccrual Policies and Practices
Commercial Loans Construction and other real estate Business banking and middle market enterprises                                        Global banking                            Other commercial		Commercial loan balances are charged off at the time all or a portion of the balance is deemed uncollectible.		Loans are generally categorized as nonaccruing when contractually delinquent for more than 90 days and in the opinion of management, reasonable doubt exists with respect to the ultimate collectibility of interest or principal based on certain factors including the period of time past due and adequacy of collateral. When classified as nonaccruing, any accrued interest recorded on the loan is generally deemed uncollectible and reversed against income. Interest income is subsequently recognized only to the extent of cash received until the loan is placed on accrual status. In instances where there is doubt as to collectibility of principal, interest payments received are applied to principal. Loans are not reclassified as accruing until interest and principal payments are current and future payments are reasonably assured.
Residential Mortgage Loans		Carrying amounts in excess of fair value less costs to sell are generally charged off at or before the time foreclosure is completed or when settlement is reached with the borrower, but not to exceed the end of the month in which the account becomes six months contractually delinquent. If foreclosure is not pursued and there is no reasonable expectation for recovery, the account is generally charged off no later than the end of the month in which the account becomes six months contractually delinquent.(1)		Loans are generally designated as nonaccruing when contractually delinquent for more than three months. When classified as nonaccruing, any accrued interest on the loan is generally deemed uncollectible and reversed against income. Interest accruals are resumed when the loan either becomes current or becomes less than 90 days delinquent and six months of consecutive payments have been made.
Auto Finance(2)		Carrying amounts in excess of fair value less costs to sell are generally charged off at the earlier of the following: •The collateral has been repossessed and sold, •The collateral has been in our possession for more than 30 days, or •The loan becomes 120 days contractually delinquent.		Interest income accruals are suspended and the portion of previously accrued interest expected to be uncollectible is written off when principal payments are contractually past due for more than two months and resumed when the receivable becomes less than two months contractually delinquent.
Credit Cards		Loan balances are generally charged off by the end of the month in which the account becomes six months contractually delinquent.		Interest generally accrues until charge-off.
Other Consumer Loans		Loan balances are generally charged off by the end of the month in which the account becomes four months contractually delinquent.		Interest generally accrues until charge-off.

⁽¹⁾        Values are determined based upon broker price opinions or appraisals which are updated at least every 180 days. During the quarterly period between updates, real estate price trends are reviewed on a geographic basis and additional downward adjustments are recorded as necessary.  Fair values of foreclosed properties at the time of acquisition are initially determined based upon broker price opinions. Subsequent to acquisition, a more detailed property valuation is performed, reflecting information obtained from a walk-through of the property in the form of a listing agent broker price opinion as well as an independent broker price opinion or appraisal. A valuation is determined from this information within 90 days and any additional write-downs required are recorded through charge-off at that time. In determining the appropriate amounts to charge-off when a property is acquired in exchange for a loan, we do not consider losses on sales of foreclosed properties resulting from deterioration in value during the period the collateral is held because these losses result from future loss events which cannot be considered in determining the fair value of the collateral at the acquisition date in accordance with generally accepted accounting principles.

⁽²⁾        Substantially all of our Auto Finance loans were sold to Santander Consumer USA in August 2010.

Charge-offs involving a bankruptcy for credit card receivables occurs by the end of the month60 days after notification or 180 days contractually delinquent, whichever comes first.

Delinquency status for loans is determined using the contractual method which is based on the status of payments under the loan. An account is generally considered to be contractually delinquent when payments have not been made in accordance with the loan terms. Delinquency status may be affected by customer account management policies and practices such as the restructure, re-age or modification of accounts.

Payments received on nonaccrual loans are generally applied to reduce the carrying amount of such loans.

Purchased Credit-Impaired Loans Purchased loans with evidence of deterioration in credit quality since origination for which it is probable at acquisition that we will be unable to collect all contractually required payments are considered to be credit impaired. Purchased credit-impaired loans are initially recorded at fair value, which is estimated by discounting the cash flows expected to be collected at the acquisition date. Because the estimate of expected cash flows reflects an estimate of future credit losses expected to be incurred over the life of the loans, an allowance for credit losses is not recorded at the acquisition date.

The excess of cash flows expected at acquisition over the estimated fair value is recognized in interest income over the remaining life of the loans using the interest method. A subsequent decrease in the estimate of cash flows expected to be received on purchased credit-impaired loans generally results in the recognition of an allowance for credit losses and a corresponding charge to provision expense. A subsequent increase in estimated cash flows results in a reversal of a previously recognized allowance for credit losses and/or a positive impact on the amount of interest income subsequently recognized on the loans.

The process of estimating the cash flows expected to be received on purchased credit-impaired loans is subjective and requires management judgment with respect to key assumptions such as default rates, loss severity, and the amount and timing of prepayments. The application of different assumptions could result in different fair value estimates and could also impact the recognition and measurement of impairment losses and/or interest income.

Loans Held for Sale With the exception of certain leveraged loans and commercial loans for which the fair value option has been elected, certain residential mortgage whole loans, consumer receivables and commercial loans are classified as held for sale and are accounted for at the lower of cost or fair value. Where available, we measure held-for-sale residential mortgage whole loans based on transaction prices of similar loan portfolios observed in the whole loan market with adjustments made to reflect differences in collateral location, loan-to-value ratio, FICO scores, vintage year, default rates and other risk characteristics. The fair value estimates of consumer receivables and commercial loans are determined primarily using the discounted cash flow method with estimated inputs in prepayment rates, default rates, loss severity, and market rate of return. Increases in the valuation allowance utilized to adjust held-for-sale loans to fair value, and subsequent recoveries of prior allowances recorded, are recorded in other income in the consolidated statement of income (loss). Receivables are classified as held for sale when management no longer intends, or no longer has the ability, to hold the receivables for the foreseeable future or until maturity or payoff. While receivables are held for sale, the carrying amounts of any unearned income, unamortized deferred fees or costs (on originated receivables), or discounts and premiums (on purchased receivables) are not amortized into earnings.

Transfers of Financial Assets and Securitizations Transfers of financial assets in which we have surrendered control over the transferred assets are accounted for as sales. In assessing whether control has been surrendered, we consider whether the transferee would be a consolidated affiliate, the existence and extent of any continuing involvement in the transferred financial assets and the impact of all arrangements or agreements made contemporaneously with, or in contemplation of, the transfer, even if they were not entered into at the time of transfer. Control is generally considered to have been surrendered when (i) the transferred assets have been legally isolated from us and our consolidated affiliates, even in bankruptcy or other receivership, (ii) the transferee (or, if the transferee is an entity whose sole purpose is to engage in securitization or asset-backed financing that is constrained from pledging or exchanging the assets it receives, each third-party holder of its beneficial interests) has the right to pledge or exchange the assets (or beneficial interests) it received without any constraints that provide more than a trivial benefit to us, and (iii) neither we nor our consolidated affiliates and agents have (a) both the right and obligation under any agreement to repurchase or redeem the transferred assets before their maturity, (b) the unilateral ability to cause the holder to return specific financial assets that also provides us with a more-than-trivial benefit (other than through a cleanup call) and (c) an agreement that permits the transferee to require us to repurchase the transferred assets at a price so favorable that it is probable that it will require us to repurchase them.

If the sale criteria are met, the transferred financial assets are removed from our balance sheet and a gain or loss on sale is recognized. If the sale criteria are not met, the transfer is recorded as a secured borrowing in which the assets remain on our balance sheet and the proceeds from the transaction are recognized as a liability. For the majority of financial asset transfers, it is clear whether or not we have surrendered control. For other transfers, such as in connection with complex transactions or where we have continuing involvement such as servicing responsibilities, we generally obtain a legal opinion as to whether the transfer results in a true sale by law.

Properties and Equipment, Net Properties and equipment are recorded at cost, net of accumulated depreciation. Depreciation is recorded on a straight-line basis over the estimated useful lives of the related assets, which generally range from 3 to 40 years. Leasehold improvements are depreciated over the shorter of the useful life of the improvement or the term of the lease. The costs of maintenance and repairs are expensed as incurred. Impairment testing is performed whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.

Mortgage Servicing Rights Residential mortgage servicing rights ("MSRs") are initially measured at fair value at the time that the related loans are sold and are periodically re-measured using the fair value measurement method. Residential MSRs are measured at fair value at each reporting date with changes in fair value reflected in earnings in the period that the changes occur.

MSRs are subject primarily to interest rate risk, in that their fair value will fluctuate as a result of changes in the interest rate environment. Fair value is determined based upon the application of valuation models and other inputs. The valuation models incorporate assumptions market participants would use in estimating future cash flows. These assumptions include expected prepayments, default rates and market based option adjusted spreads.

We use certain derivative financial instruments, including Treasury and Eurodollar futures, options and interest rate swaps, to protect against a decline in the economic value of MSRs. These instruments have not been designated as qualifying hedges and are therefore recorded as trading assets that are marked-to-market through earnings.

Goodwill Goodwill, representing the excess of purchase price over the fair value of identifiable net assets acquired, results from business combinations. Goodwill is not amortized, but is reviewed for impairment at a minimum on an annual basis at the reporting unit level using a discounted cash flow methodology. This methodology utilizes cash flow estimates based on internal forecasts updated to reflect current economic conditions and discount rates that we believe adequately reflect the risk and uncertainty in our internal forecasts and are appropriate based on the implicit market rates in current comparable transactions. Impairment may be reviewed as of an interim date if circumstances indicate that the carrying amount of a reporting unit is above fair value. The carrying amount of a reporting unit is determined on the basis of capital invested in the unit including attributable goodwill. We determine the invested capital of a reporting unit by applying to the unit's risk-weighted assets a capital charge that is consistent with Basel II requirements. We consider significant and long-term changes in industry and economic conditions to be examples of primary indicators of potential impairment.

Repossessed Collateral Collateral acquired in satisfaction of a loan is initially recognized at the lower of amortized cost or the collateral's fair value less estimated costs to sell and is reported in other assets. Once a property is classified as real estate owned, we do not consider the losses on past sales of foreclosed properties when determining the fair value of any collateral during the period it is held in real estate owned. Any subsequent declines in fair value less estimated costs to sell are recorded through a valuation allowance.  Recoveries in fair value less estimated costs to sell are recognized as a reduction of the valuation allowance but not in excess of cumulative losses previously recognized subsequent to the date of repossession. Adjustments to the valuation allowance, costs of holding repossessed collateral, and any gain or loss on disposition are credited or charged to operating expense.

Collateral We pledge assets as collateral as required for various transactions involving security repurchase agreements, public deposits, Treasury tax and loan notes, derivative financial instruments, short-term borrowings and long-term borrowings. Assets that have been pledged as collateral, including those that can be sold or repledged by the secured party, continue to be reported on our consolidated balance sheet.

We also accept collateral, primarily as part of various transactions involving security resale agreements. Collateral accepted by us, including collateral that we can sell or repledge, is excluded from our consolidated balance sheet. If we resell the collateral, we recognize the proceeds and a liability to return the collateral.

The market value of collateral we have accepted or pledged is regularly monitored and additional collateral is obtained or provided as necessary to ensure appropriate collateral coverage in these transactions.

Derivative Financial Instruments Derivative financial instruments are recognized on the consolidated balance sheet at fair value. On the date a derivative contract is entered into, we designate it as either:

•       a qualifying hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (fair value hedge);

•       a qualifying hedge of the variability of cash flows to be received or paid related to a recognized asset, liability or forecasted transaction (cash flow hedge); or

•       a trading instrument or a non-qualifying (economic) hedge.

Changes in the fair value of a derivative designated as a fair value hedge, along with the changes in the fair value of the hedged asset or liability that is attributable to the hedged risk (including losses or gains on firm commitments), are recorded in current period earnings. Changes in the fair value of a derivative that has been designated as a cash flow hedge, to the extent effective as a hedge, are recorded in accumulated other comprehensive income, net of income taxes, and reclassified into earnings in the period during which the hedged item affects earnings. Ineffectiveness in the hedging relationship is reflected in current period earnings. Changes in the fair value of derivatives held for trading purposes or which do not qualify for hedge accounting are reported in current period earnings.

At the inception of each designated qualifying hedge, we formally document all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions, the nature of the hedged risk, and how hedge effectiveness will be assessed and how ineffectiveness will be measured. This process includes linking all derivatives that are designated as fair value or cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. We also formally assess both at inception and on a quarterly basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items and whether they are expected to continue to be highly effective in future periods. This assessment is conducted using statistical regression analysis.

Earnings volatility may result from the on-going mark to market of certain economically viable derivative contracts that do not satisfy the hedging requirements under U.S. GAAP, as well as from the hedge ineffectiveness associated with the qualifying hedges.

Embedded Derivatives We may acquire or originate a financial instrument that contains a derivative instrument "embedded" within it. Upon origination or acquisition of any such instrument, we assess whether the economic characteristics of the embedded derivative are clearly and closely related to the economic characteristics of the principal component of the financial instrument (i.e., the host contract) and whether a separate instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument.

When we determine that: (1) the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract; and (2) a separate instrument with the same terms would qualify as a derivative instrument, the embedded derivative is either separated from the host contract (bifurcated), carried at fair value, and designated as a trading instrument or the entire financial instrument is carried at fair value with all changes in fair value recorded to current period earnings. If bifurcation is elected, the consideration for the hybrid financial instrument that is allocated to the bifurcated derivative reduces the consideration that is allocated to the host contract with the difference being recognized over the life of the financial instrument.

Hedge Discontinuation We discontinue hedge accounting prospectively when:

•       the derivative is no longer effective or expected to be effective in offsetting changes in the fair value or cash flows of a hedged item (including firm commitments or forecasted transactions);

•       the derivative expires or is sold, terminated, or exercised;

•       it is unlikely that a forecasted transaction will occur;

•       the hedged firm commitment no longer meets the definition of a firm commitment; or

•       the designation of the derivative as a hedging instrument is no longer appropriate.

When hedge accounting is discontinued because it is determined that the derivative no longer qualifies as an effective fair value or cash flow hedge, the hedging relationship will cease. The hedging instrument will continue to be carried on the balance sheet at fair value.

In the case of a discontinued fair value hedge of a recognized asset or liability, as long as the hedged item continues to exist on the balance sheet, the hedged item will no longer be adjusted for changes in fair value attributable to the hedged risk. The basis adjustment that had previously been recorded to the hedged item during the period from the hedge designation date to the hedge discontinuation date is recognized as an adjustment to the yield of the hedged item over the remaining life of the hedged item.

In the case of a discontinued cash flow hedge of a recognized asset or liability, as long as the hedged item continues to exist on the balance sheet, further changes in fair value of the hedging derivative will no longer be recorded in other comprehensive income. The balance applicable to the discontinued hedging relationship will be recognized in earnings over the remaining life of the hedged item as an adjustment to yield. If the discontinued hedged item was a forecasted transaction where it is probable the forecasted transaction will not occur at the end of the original specified time period, any amounts recorded in accumulated other comprehensive income, are immediately reclassified to current period earnings.

In the case of a cash flow hedge, if the previously hedged item is sold or extinguished, the basis adjustment to the underlying asset or liability or any remaining unamortized other comprehensive income balance will be reclassified to current period earnings.

In all other situations in which hedge accounting is discontinued, the derivative will be carried at fair value on the consolidated balance sheet, with changes in its fair value recognized in current period earnings unless redesignated in a qualifying cash flow hedge.

Interest Rate Lock and Purchase Agreements We enter into commitments to originate residential mortgage loans whereby the interest rate on the loan is set prior to funding (rate lock commitments). We also enter into commitments to purchase residential mortgage loans through correspondent channels (purchase commitments). Both rate lock and purchase commitments on residential mortgage loans that are classified as held for sale are considered to be derivatives and are recorded at fair value in other assets or other liabilities in the consolidated balance sheet. Changes in fair value are recorded in other income in the consolidated statements of income (loss).

Foreign Currency Translation We have foreign operations in several countries. The accounts of our foreign operations are measured using the local currency as the functional currency, which is primarily the U.S. dollar. To the extent the functional currency is not the U.S. dollar, assets and liabilities are translated into U.S. dollars at the rate of exchange in effect on the balance sheet date. Income and expenses are translated at average monthly exchange rates. Net exchange gains or losses resulting from such translation are included in common shareholder's equity as a component of accumulated other comprehensive income. Foreign currency denominated transactions in other than the local functional currency are translated using the actual or period-average exchange rate with any foreign currency transaction gain or loss recognized currently in income.

Share-Based Compensation We use the fair value based method of accounting for awards of HSBC stock granted to employees under various stock options, restricted share and employee stock purchase plans. Stock compensation costs are recognized prospectively for all new awards granted under these plans. Compensation expense relating to restricted stock rights ("RSRs") is based upon the fair value of the RSRs on the date of grant and is charged to earnings over the requisite service period (e.g., vesting period) of the RSRs. Compensation expense relating to share options is calculated using a methodology that is based on the underlying assumptions of the Black-Scholes option pricing model and is charged to expense over the requisite service period (e.g., vesting period), generally one to five years. When modeling awards with vesting that is dependent on performance targets, these performance targets are incorporated into the model using Monte Carlo simulation. The expected life of these awards depends on the behavior of the award holders, which is incorporated into the model consistent with historical observable data.

Pension and Other Postretirement Benefits We recognize the funded status of the postretirement benefit plans on the consolidated balance sheet. Net postretirement benefit cost charged to current earnings related to these plans is based on various actuarial assumptions regarding expected future experience.

Certain employees are participants in various defined contribution, defined benefit or other non-qualified supplemental retirement plans sponsored by HSBC North America. Our contributions to these plans are charged to current earnings.

We maintain various 401(k) plans covering substantially all employees. Employer contributions to the plan, which are charged to current earnings, are based on employee contributions.

Income Taxes HSBC USA is included in HSBC North America's consolidated federal income tax return and various combined state income tax returns. As such, we have entered into a tax allocation agreement with HSBC North America and its subsidiary entities ("the HNAH Group") included in the consolidated return which governs the current amount of taxes to be paid or received by the various entities included in the consolidated return filings. Generally, such agreements allocate taxes to members of the HNAH Group based on the calculation of tax on a separate return basis, adjusted for the utilization or limitation of credits of the consolidated group. To the extent all the tax attributes available cannot be currently utilized by the consolidated group, the proportionate share of the utilized attribute is allocated based on each affiliate's percentage of the available attribute computed in a manner that is consistent with the taxing jurisdiction's laws and regulations regarding the ordering of utilization. In addition, we file some unconsolidated state tax returns.

We recognize deferred tax assets and liabilities for the future tax consequences related to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for tax credits and state net operating losses. Deferred tax assets and liabilities are measured using the enacted tax rates and laws that will be in effect when the deferred tax items are expected to be realized. If applicable, valuation allowances are recorded to reduce deferred tax assets to the amounts we conclude are more likely than not to be realized. Since we are included in HSBC North America's consolidated federal tax return and various combined state tax returns, the related evaluation of the recoverability of the deferred tax assets is performed at the HSBC North America legal entity level. We consider the HNAH Group's consolidated deferred tax assets and various sources of taxable income, including the impact of HSBC and HNAH Group tax planning strategies, in reaching conclusions on recoverability of deferred tax assets. The HNAH Group evaluates deferred tax assets for recoverability using a consistent approach which considers the relative impact of negative and positive evidence, including historical financial performance, projections of future taxable income, future reversals of existing taxable temporary differences, tax planning strategies and any available carryback capacity. In evaluating the need for a valuation allowance, the HNAH Group estimates future taxable income based on management approved business plans, future capital requirements and ongoing tax planning strategies, including capital support from HSBC necessary as part of such plans and strategies. This process involves significant management judgment about assumptions that are subject to change from period to period. Only those tax planning strategies that are both prudent and feasible, and for which management has the ability and intent to implement, are incorporated into our analysis and assessment.

Where a valuation allowance is determined to be necessary at the HNAH consolidated level, such allowance is allocated to principal subsidiaries within the HNAH Group in a manner that is systematic, rational and consistent with the broad principles of accounting for income taxes. The methodology allocates the valuation allowance to the principal subsidiaries based primarily on the entity's relative contribution to the growth of the HNAH consolidated deferred tax asset against which the valuation allowance is being recorded.

Further evaluation is performed at the HSBC USA legal entity level to evaluate the need for a valuation allowance where we file separate company state income tax returns. Foreign taxes paid are applied as credits to reduce federal income taxes payable, to the extent that such credits can be utilized.

Transactions with Related Parties In the normal course of business, we enter into transactions with HSBC and its subsidiaries. These transactions occur at prevailing market rates and terms and include funding arrangements, derivative transactions, purchases of receivables, information technology services, administrative and operational support, and other miscellaneous services.

New Accounting Pronouncements Adopted

Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts In October 2010, the FASB issued a new Accounting Standards Update that amended the accounting rules that define which costs associated with acquiring or renewing insurance contracts qualify as deferrable acquisition costs by insurance entities. We adopted the new guidance effective January 1, 2012. The adoption of this guidance did not have a material impact on our financial position or results of operations.

Repurchase Agreements In April 2011, the FASB issued a new Accounting Standards Update related to repurchase agreements. The new guidance removed the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and the related collateral maintenance guidance from the assessment of effective control. As a result, an entity is no longer required to consider the sufficiency of the collateral exchanged but will evaluate the transferor's contractual rights and obligations to determine whether it maintains effective control over the transferred assets. The new guidance was required to be applied prospectively for all transactions that occurred on or after January 1, 2012. The adoption of this guidance did not have a material impact on our financial position or results of operations.

Fair Value Measurements and Disclosures In May 2011, the FASB issued an Accounting Standards Update to converge with newly issued IFRS 13, Fair Value Measurement. The new guidance clarifies that the application of the highest and best use and valuation premise concepts are not relevant when measuring the fair value of financial assets or liabilities. This Accounting Standards Update also requires new and enhanced disclosures on the quantification and valuation processes for significant unobservable inputs, transfers between Levels 1 and 2, and the categorization of all fair value measurements into the fair value hierarchy, even where those measurements are only for disclosure purposes. We adopted the new disclosure requirements effective January 1, 2012. See Note 29, "Fair Value Measurements," in these consolidated financial statements.

Presentation of Comprehensive IncomeIn June 2011, the FASB issued a new Accounting Standards Update on the presentation of other comprehensive income. This Update requires entities to present net income and other comprehensive income in either a single continuous statement or in two separate, but consecutive, statements of net income and other comprehensive income. The option to present items of other comprehensive income in the statement of changes in equity is eliminated. We adopted the new guidance effective January 1, 2012. See the Consolidated Statement of Comprehensive Income and Note 21, "Accumulated Other Comprehensive Income (Loss)," in these consolidated financial statements.

Goodwill In September 2011, the FASB issued an Accounting Standards Update that simplifies goodwill impairment testing. The new guidance provides entities with the option to first assess goodwill qualitatively to determine whether it is necessary to perform the required two-step quantitative goodwill impairment test. If it is determined that it is not more-likely-than-not that the fair value of the reporting unit is less than its carrying amount, then the two-step quantitative impairment test would not be required. An entity may, however, choose to bypass the qualitative assessment for any reporting unit in any period and move directly to the two-step impairment test. The new guidance is effective for annual and interim goodwill impairment tests performed after January 1, 2012. We adopted the new guidance but decided not to elect the option to apply a qualitative assessment to our goodwill impairment test in 2012.

3.     Discontinued Operations

Sale of Certain Credit Card Operations to Capital One  On August 10, 2011, HSBC, through its wholly-owned subsidiaries HSBC Finance Corporation ("HSBC Finance"), HSBC USA Inc. and other wholly-owned affiliates entered into an agreement to sell its Card and Retail Services business to Capital One Financial Corporation ("Capital One"). This transaction was completed on May 1, 2012. The sale included our General Motors ("GM") and Union Plus ("UP") credit card receivables as well as our private label credit card and closed-end receivables, all of which were purchased from HSBC Finance. Prior to completing the transaction, we recorded cumulative lower of amortized cost or fair value adjustments on these receivables which, beginning in the third quarter of 2011, were classified as held for sale on our balance sheet as a component of assets of discontinued operations totaling $1.0 billion, of which $440 million was recorded in 2012 and $604 million was recorded 2011 and is reflected in net interest income and other revenues in the table below. These fair value adjustments were largely offset by held for sale accounting adjustments in which loan impairment charges and premium amortization are no longer recorded. The total final cash consideration allocated to us was approximately $19.2 billion, which did not result in the recognition of a gain or loss upon completion of the sale as the receivables were recorded at fair value. The sale to Capital One did not include credit card receivables associated with HSBC Bank USA's legacy credit card program and, therefore, are excluded from the table below. However a portion of these receivables were included as part of the sale to First Niagara Bank, N.A. and HSBC Bank USA continues to offer credit cards to its customers. No significant one-time closure costs have been incurred as a result of exiting these portfolios. In connection with the sale of our credit card portfolio to Capital One, we have entered into an outsourcing arrangement with Capital One with respect to the servicing of our remaining credit card portfolio.

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

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

Year Ended December 31,	2012				2011				2010
	(in millions)
Net interest income and other revenues (1) (2)	$	541			$	1,936			$	2,673
Income from discontinued operations before income tax	315				871				855

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

⁽²⁾        Included in other revenues in the year ended December 31, 2012 and 2011 was $440 million and $604 million, respectively, of lower of amortized cost or fair value adjustments.

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

At December 31,	2012				2011
	(in millions)
Loans, net(1)	$	-			$	21,185
Other assets	-				269
Assets of discontinued operations	$	-			$	21,454
Deposits in domestic offices - noninterest bearing	$	-			$	35
Other liabilities	-				876
Liabilities of discontinued operations	$	-			$	911

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

Banknotes Business  In June 2010, we decided that the wholesale banknotes business ("Banknotes Business") within our Global Banking and Markets segment did not fit with our core strategy in the U.S. and, therefore, made the decision to exit this business. This business, which was managed out of the United States with operations in key locations worldwide, arranged for the physical distribution of banknotes globally to central banks, large commercial banks and currency exchanges. As a result of this decision, we recorded closure costs of $14 million during 2010, primarily relating to termination and other employee benefits. No significant additional closure costs are expected to be incurred.

As part of the decision to exit the Banknotes Business, in October 2010 we sold the assets of our Asian banknotes operations ("Asian Banknotes Operations") to an unaffiliated third party for total consideration of approximately $11 million in cash. As a result, during the third quarter of 2010 we classified the assets of the Asian Banknotes Operations of $23 million, including an allocation of goodwill of $21 million, as held for sale. Because the carrying amount of the assets being sold exceeded the agreed-upon sales price, we recorded a lower of amortized cost or fair value adjustment of $12 million in the third quarter of 2010. As the exit of our Banknotes Business, including the sale of our Asian Banknotes Operations, was substantially completed in the fourth quarter of 2010, we began to report the results of our Banknotes Business as discontinued operations at that time. The exit of our Banknotes Business was completed in the second quarter of 2011 with the sale of our European Banknotes Business to HSBC Bank plc in April. The table below summarizes the operating results of our Banknotes Business for the periods presented.

Year Ended December 31,	2012				2011				2010
	(in millions)
Net interest income and other revenues	$	-			$	19			$	102
Income from discontinued operations before income tax benefit	-				-				23

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

4.     Branch Assets and Liabilities Held for Sale

On July 31, 2011, we announced that we had reached an agreement with First Niagara Bank, N.A. ("First Niagara") to sell 195 non-strategic retail branches, including certain loans, deposits and related branch premises primarily located in upstate New York. The agreement included the transfer of certain deposits and loans, as well as related branch premises, for a premium of 6.67 percent of the deposits, subject to certain agreed-upon adjustments. In 2012, we completed the sale of these branches to First Niagara and recognized an after-tax gain, net of allocated non-deductible goodwill, of $94 million, receiving a premium of $886 million. Included in the sale of the 195 non-strategic retail branches were approximately $13.2 billion in deposits and $2.1 billion in loans. Branch premises were sold for fair value and loans and other transferred assets were sold at their carrying values.

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

At December 31,	2012				2011
	(in millions)
Loans held for sale(1)	$	-			$	2,495
Other branch assets held for sale:
Properties and equipment, net	-				42
Goodwill allocated to retail branch disposal group	-				398
Total other branch assets held for sale	-				440
Total branch assets held for sale	$	-			$	2,935
Deposits held for sale	$	-			$	15,144
Other branch liabilities held for sale	-				11
Total branch liabilities held for sale	$	-			$	15,155

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

5.     Exit from Taxpayer Financial Services Loan Program

During the third quarter of 2010, the Internal Revenue Service ("IRS") announced it would stop providing information regarding certain unpaid obligations of a taxpayer (the "Debt Indicator"), which has historically served as a significant part of the underwriting process for the Taxpayer Financial Services ("TFS") loan program. It was determined that, without use of the Debt Indicator, tax refund anticipation loans, which have historically accounted for the substantial majority of the loan production in the TFS loan program, could no longer be offered in a safe and sound manner. As a result, in December 2010, it was determined that we would no longer offer any tax refund anticipation loans or related products going forward, beginning with the 2011 tax season and we exited the TFS loan program. The TFS loan program has not been presented within discontinued operations as its impact is not material to our results of operations.

The following summarizes the operating results of our TFS loan program for the periods presented:

Year Ended December 31,	2012				2011				2010
	(in millions)
Total revenues	$	-			$	-			$	69
Income before income tax expense	-				-				11

6.    Trading Assets and Liabilities

Trading assets and liabilities are summarized in the following table.

At December 31,	2012				2011
	(in millions)
Trading assets:
U.S. Treasury	$	2,484			$	259
U.S. Government agency	337				14
U.S. Government sponsored enterprises(1)	32				24
Asset backed securities	687				1,032
Corporate and foreign bonds(2)	9,583				11,577
Other securities	36				40
Precious metals	12,332				17,082
Derivatives	10,504				8,772
	$	35,995			$	38,800
Trading liabilities:
Securities sold, not yet purchased	$	207			$	343
Payables for precious metals	5,767				6,999
Derivatives	13,846				6,844
	$	19,820			$	14,186

⁽¹⁾        Includes mortgage backed securities of $16 million and $10 million issued or guaranteed by the Federal National Mortgage Association ("FNMA") and $16 million and $14 million issued or guaranteed by the Federal Home Loan Mortgage Corporation ("FHLMC") at December 31, 2012 and 2011, respectively.

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

At December 31, 2012 and 2011, the fair value of derivatives included in trading assets has been reduced by $5.1 billion and $4.8 billion, respectively, relating to amounts recognized for the obligation to return cash collateral received under master netting agreements with derivative counterparties.

At December 31, 2012 and 2011, the fair value of derivatives included in trading liabilities has been reduced by $1.3 billion and $6.3 billion, respectively, relating to amounts recognized for the right to reclaim cash collateral paid under master netting agreements with derivative counterparties.

7.     Securities

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

December 31, 2012	Amortized Cost				Unrealized Gains				Unrealized Losses				Fair Value
	(in millions)
Securities available-for-sale:
U.S. Treasury	$	34,800			$	566			$	(24	)		$	35,342
U.S. Government sponsored enterprises:(1)
Mortgage-backed securities	166				1				(1		)		166
Direct agency obligations	4,039				364				(2		)		4,401
U.S. Government agency issued or guaranteed:
Mortgage-backed securities	15,646				674				(6		)		16,314
Collateralized mortgage obligations	4,315				156				-				4,471
Direct agency obligations	1				-				-				1
Obligations of U.S. states and political subdivisions	877				37				(2		)		912
Asset backed securities collateralized by:
Residential mortgages	1				-				-				1
Commercial mortgages	208				6				-				214
Home equity	310				-				(52		)		258
Student loans	-				-				-				-
Other	102				-				(18		)		84
Corporate and other domestic debt securities	24				2				-				26
Foreign debt securities(3)(6)	5,385				16				(48		)		5,353
Equity securities	167				6				-				173
Total available-for-sale securities	$	66,041			$	1,828			$	(153	)		$	67,716
Securities held-to-maturity:
U.S. Government sponsored enterprises:(5)
Mortgage-backed securities	$	1,121			$	148			$	-			$	1,269
U.S. Government agency issued or guaranteed:
Mortgage-backed securities	66				12				-				78
Collateralized mortgage obligations	277				42				-				319
Obligations of U.S. states and political subdivisions	38				3				-				41
Asset backed securities collateralized by:
Residential mortgages	118				6				-				124
Total held-to-maturity securities	$	1,620			$	211			$	-			$	1,831

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

⁽¹⁾        Includes securities at amortized cost of $153 million and $27 million issued or guaranteed by FNMA at December 31, 2012 and 2011, respectively, and $13 million and $13 million issued or guaranteed by FHLMC at December 31, 2012 and 2011, respectively.

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

⁽³⁾        At December 31, 2012 and 2011, foreign debt securities consisted of $1.5 billion and $2.7 billion, respectively, of securities fully backed by foreign governments. The remainder of foreign debt securities represents foreign bank or corporate debt.

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

⁽⁵⁾        Includes securities at amortized cost of $507 million and $591 million issued or guaranteed by FNMA at December 31, 2012 and 2011, respectively, and $614 million and $830 million issued and guaranteed by FHLMC at December 31, 2012 and 2011, respectively.

⁽⁶⁾        We did not hold any foreign debt securities issued by the governments of Greece, Ireland, Italy, Portugal or Spain at December 31, 2012 and 2011.

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

	One Year or Less											Greater Than One Year
December 31, 2012	Number of Securities			Gross Unrealized Losses				Aggregate Fair Value of Investment				Number of Securities			Gross Unrealized Losses				Aggregate Fair Value of Investment
	(dollars are in millions)
Securities available-for-sale:
U.S. Treasury	6			$	(3	)		$	3,344			6			$	(21	)		$	587
U.S. Government sponsored enterprises	9			(3		)		431				14			-				7
U.S. Government agency issued or guaranteed	18			(6		)		1,059				-			-				-
Obligations of U.S. states and political subdivisions	14			(2		)		168				1			-				7
Asset backed securities	3			-				20				13			(70		)		354
Corporate and other domestic debt securities	-			-				-				-			-				-
Foreign debt securities	-			-				-				9			(48		)		3,787
Securities available-for-sale	50			$	(14	)		$	5,022			43			$	(139	)		$	4,742
Securities held-to-maturity:
U.S. Government sponsored enterprises	24			$	-			$	-			52			$	-			$	-
U.S. Government agency issued or guaranteed	75			-				-				947			-				2
Obligations of U.S. states and political subdivisions	2			-				1				1			-				-
Asset backed securities	1			-				4				2			-				7
Securities held-to-maturity	102			$	-			$	5			1,002			$	-			$	9

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

Net unrealized gains decreased within the available-for-sale portfolio in 2012 primarily due to decreases in interest rates on U.S. Treasury securities since December 31, 2011. We have reviewed the securities for which there is an unrealized loss for other-than-temporary impairment in accordance with our accounting policies.  During 2012 and 2011, none of our debt securities were determined to have either initial other-than-temporary impairment or changes to previous other-than-temporary impairment estimates relating to the credit component and changes in the non-credit portion for 2011 represent a reversal of a portion of previously recorded impairment losses that were recognized in other comprehensive income.

We do not consider any debt securities to be other-than-temporarily impaired at December 31, 2012 as we expect to recover the amortized cost basis of these securities and we neither intend nor expect to be required to sell these securities prior to recovery, even if that equates to holding securities until their individual maturities. However, additional other-than-temporary impairments may occur in future periods if the credit quality of the securities deteriorates.

On-going Assessment for Other-Than-Temporary Impairment  On a quarterly basis, we perform an assessment to determine whether there have been any events or economic circumstances to indicate that a security with an unrealized loss has suffered other-than-temporary impairment. A debt security is considered impaired if its fair value is less than its amortized cost at the reporting date. If impaired, we assess whether the unrealized loss is other-than-temporary.

An unrealized loss is generally deemed to be other-than-temporary and a credit loss is deemed to exist if the present value of the expected future cash flows is less than the amortized cost basis of the debt security. As a result, the credit loss component of an other-than-temporary impairment write-down for debt securities is recorded in earnings while the remaining portion of the impairment loss attributable to factors other than credit loss is recognized, net of tax, in other comprehensive income provided we do not intend to sell the underlying debt security and it is more likely than not that we would not have to sell the debt security prior to recovery.

For all securities held in the available-for-sale or held-to-maturity portfolio for which unrealized losses attributed to factors other than credit loss have existed for a period of time, we do not have the intention to sell and believe we will not be required to sell the securities for contractual, regulatory or liquidity reasons as of the reporting date. As debt securities issued by U.S. Treasury, U.S. Government agencies and government sponsored entities accounted for 90 percent and 84 percent of total available-for-sale and held-to-maturity securities as of December 31, 2012 and 2011, respectively, our assessment for credit loss was concentrated on private label asset-backed securities and foreign securities. Substantially all of the private label asset-backed securities are supported by residential mortgages, home equity loans or commercial mortgages. Our assessment for credit loss was concentrated on this particular asset class because of the following inherent risk factors:

•       The recovery of the U.S. economy has been slow;

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

•       A lack of significant traction in government sponsored programs in loan modifications;

•       A lack of refinancing activities within certain segments of the mortgage market, even at the current low interest rate environment, and the re-default rate for refinanced loans;

•       The unemployment rate although improving remains high compared to historical levels;

•       The decline in the occupancy rate in commercial properties; and

•       The severity and duration of unrealized loss.

In determining whether a credit loss exists and the period over which the debt security is expected to recover, we considered the following factors:

•       The length of time and the extent to which the fair value has been less than the amortized cost basis;

•       The level of credit enhancement provided by the structure, which includes but is not limited to credit subordination positions, over collateralization, protective triggers and financial guarantees provided by monoline wraps;

•       Changes in the near term prospects of the issuer or underlying collateral of a security such as changes in default rates, loss severities given default and significant changes in prepayment assumptions;

•       The level of excess cash flows generated from the underlying collateral supporting the principal and interest payments of the debt securities; and

•       Any adverse change to the credit conditions of the issuer, the monoline insurer or the security such as credit downgrades by the rating agencies.

We use a standard valuation model to measure the credit loss for available-for-sale and held-to-maturity securities. The valuation model captures the composition of the underlying collateral and the cash flow structure of the security. Management develops inputs to the model based on external analyst reports and forecasts and internal credit assessments. Significant inputs to the model include delinquencies, collateral types and related contractual features, estimated rates of default, loss given default and prepayment assumptions. Using the inputs, the model estimates cash flows generated from the underlying collateral and distributes those cash flows to respective tranches of securities considering credit subordination and other credit enhancement features. The projected future cash flows attributable to the debt security held are discounted using the effective interest rates determined at the original acquisition date if the security bears a fixed rate of return. The discount rate is adjusted for the floating index rate for securities which bear a variable rate of return, such as LIBOR-based instruments.

The amortized cost and fair value of those asset-backed securities with unrealized loss of more than 12 months for which no other-than-temporary-impairment has been recognized at December 31, 2012 and 2011 are as follows:

	Balance as of December 31, 2012
	Amortized Cost				Unrealized Losses for More Than 12 Months				Fair Value
	(in millions)
Available-for-sale:
Asset-backed securities:
Residential mortgages	$	-			$	-			$	-
Commercial mortgages	11				-				11
Home equity loans	311				(52		)		259
Student loans	-				-				-
Other	102				(18		)		84
Subtotal	424				(70		)		354
Held-to-maturity classification:
Asset-backed securities:
Residential mortgages	7				-				7
Total	$	431			$	(70	)		$	361

	Balance as of December 31, 2011
	Amortized Cost				Unrealized Losses for More Than 12 Months				Fair Value
	(in millions)
Available-for-sale:
Asset-backed securities:
Residential mortgages	$	5			$	-			$	5
Commercial mortgages	23				(2		)		21
Home equity loans	369				(100		)		269
Student loans	13				(1		)		12
Other	102				(22		)		80
Subtotal	512				(125		)		387
Held-to-maturity classification:
Asset-backed securities:
Residential mortgages	15				(1		)		14
Total	$	527			$	(126	)		$	401

Although the fair value of a particular security is below its amortized cost for more than 12 months, it does not necessarily result in a credit loss and hence other-than-temporary impairment. The decline in fair value may be caused by, among other things, the illiquidity of the market. To the extent we do not intend to sell the debt security and it is more-likely-than-not we will not be required to sell the security before the recovery of the amortized cost basis, no other-than-temporary impairment is deemed to have occurred.

For 2012 and 2011 there were no other-than-temporary impairment losses recognized related to credit loss. At December 31, 2012 and 2011, there are no remaining non-credit component unrealized loss amounts recognized. The excess of amortized cost over the present value of expected future cash flows recognized during 2010 on our other-than-temporarily impaired debt securities, which represents the credit loss associated with these securities, was $79 million.

The following table summarizes the changes in the credit loss component of other-than-temporarily impaired debt securities which would have been recognized in income.

Year Ended December 31,	2012				2011
	(in millions)
Credit losses at the beginning of the period	$	-			$	36
Reduction of credit losses previously recognized on sold securities	-				(5		)
Reduction of credit losses previously recognized on held to maturity securities due to deconsolidation of VIE	-				(31		)
Ending balance of credit losses on debt securities held for which a portion of an other-than-temporary impairment may have been recognized in other comprehensive income (loss)	$	-			$	-

At December 31, 2012, we held 27 individual asset-backed securities in the available-for-sale portfolio, of which 8 were also wrapped by a monoline insurance company. The asset-backed securities backed by a monoline wrap comprised $343 million of the total aggregate fair value of asset-backed securities of $557 million at December 31, 2012. The gross unrealized losses on these monoline securities were $69 million at December 31, 2012. We did not take into consideration the value of the monoline wrap of any non-investment grade monoline insurers as of December 31, 2012 and, therefore, we only considered the financial guarantee of monoline insurers on securities for purposes of evaluating other-than-temporary impairment with a fair value of $110 million. No security wrapped by a below investment grade monoline insurance company was deemed to be other-than-temporarily impaired at December 31, 2012.

At December 31, 2011, we held 45 individual asset-backed securities in the available-for-sale portfolio, of which 9 were also wrapped by a monoline insurance company. The asset-backed securities backed by a monoline wrap comprised $349 million of the total aggregate fair value of asset-backed securities of $818 million at December 31, 2011. The gross unrealized losses on these monoline securities were $121 million at December 31, 2011. We did not take into consideration the value of the monoline wrap of any non-investment grade monoline insurers as of December 31, 2011 and, therefore, we only considered the financial guarantee of monoline insurers on securities with a fair value of $154 million for purposes of evaluating other-than-temporary impairment. One security wrapped by a below investment grade monoline insurance company with an aggregate fair value of less than $1 million was deemed to be other-than-temporarily impaired at December 31, 2011.

As discussed above, certain asset-backed securities have an embedded financial guarantee provided by monoline insurers. Because the financial guarantee is not a separate and distinct contract from the asset-backed security, they are considered as a single unit of account for fair value measurement and impairment assessment purposes. The monoline insurers are regulated by the insurance commissioners of the relevant states and certain monoline insurers that write the financial guarantee contracts are public companies. As discussed above, we do not consider the value of the monoline wrap of any non-investment grade monoline insurer at December 31, 2012 and 2011. In evaluating the extent of our reliance on investment grade monoline insurance companies, consideration is given to our assessment of the creditworthiness of the monoline and other market factors. We perform both a credit as well as a liquidity analysis on the monoline insurers each quarter. Our analysis also compares market-based credit default spreads, when available, to assess the appropriateness of our monoline insurer's creditworthiness. Based on the public information available, including the regulatory reviews and actions undertaken by the state insurance commissions and the published financial results, we determine the degree of reliance to be placed on the financial guarantee policy in estimating the cash flows to be collected for the purpose of recognizing and measuring impairment loss.

A credit downgrade to non-investment grade is a key but not the only factor in determining the credit risk or the monoline insurer's ability to fulfill its contractual obligation under the financial guarantee arrangement. Although a monoline may have been down-graded by the credit rating agencies or have been ordered to commute its operations by the insurance commissioners, it may retain the ability and the obligation to continue to pay claims in the near term. We evaluate the short-term liquidity of and the ability to pay claims by the monoline insurers in estimating the amounts of cash flows expected to be collected from specific asset-backed securities for the purpose of assessing and measuring credit loss.

The following table summarizes realized gains and losses on investment securities transactions attributable to available-for-sale securities.

Year Ended December 31,	2012				2011				2010
	(in millions)
Gross realized gains	$	260			$	276			$	177
Gross realized losses	(115		)		(147		)		(151		)
Net realized gains	$	145			$	129			$	26

The following table summarizes realized gains and losses on investment securities transactions attributable to held-to-maturity securities as a result of maturities, calls and mandatory redemptions.

Year Ended December 31,	2012				2011				2010
	(in millions)
Gross realized gains	$	-			$	-			$	-
Gross realized losses	-				-				(31		)
Net realized gains (losses)	$	-			$	-			$	(31	)

The amortized cost and fair values of securities available-for-sale and securities held-to-maturity at December 31, 2012, are summarized in the table below by contractual maturity. Expected maturities differ from contractual maturities because borrowers have the right to prepay obligations without prepayment penalties in certain cases. Securities available-for-sale amounts exclude equity securities as they do not have stated maturities. The table below also reflects the distribution of maturities of debt securities held at December 31, 2012, together with the approximate taxable equivalent yield of the portfolio. The yields shown are calculated by dividing annual interest income, including the accretion of discounts and the amortization of premiums, by the amortized cost of securities outstanding at December 31, 2012. Yields on tax-exempt obligations have been computed on a taxable equivalent basis using applicable statutory tax rates.

	Within One Year							After One But Within Five Years							After Five But Within Ten Years							After Ten Years
Taxable Equivalent Basis	Amount				Yield			Amount				Yield			Amount				Yield			Amount				Yield
	(dollars are in millions)
Available-for-sale:
U.S. Treasury	$	6,505			.30	%		$	22,173			.49	%		$	3,526			2.07	%		$	2,596			3.04	%
U.S. Government sponsored enterprises	-				-			296				2.78			3,053				3.06			856				3.51
U.S. Government agency issued or guaranteed	-				-			6				4.66			92				1.87			19,864				3.06
Obligations of U.S. states and political subdivisions	-				-			45				4.15			414				3.63			418				3.67
Asset backed securities	-				-			1				1.95			11				.38			609				2.83
Other domestic debt securities	-				-			-				-			-				-			24				3.90
Foreign debt securities	613				4.15			4,772				1.84			-				-			-				-
Total amortized cost	$	7,118			.63	%		$	27,293			.76	%		$	7,096			2.58	%		$	24,367			3.08	%
Total fair value	$	7,125						$	27,344						$	7,689						$	25,385
Held-to-maturity:
U.S. Government sponsored enterprises	$	1			8.00	%		$	6			7.75	%		$	1			7.87	%		$	1,113			6.16	%
U.S. Government agency issued or guaranteed	-				-			1				7.58			3				7.68			339				6.49
Obligations of U.S. states and political subdivisions	3				5.37			15				5.08			9				4.31			11				5.00
Asset backed securities	-				-			-				-			-				-			118				6.27
Total amortized cost	$	4			5.82	%		$	22			5.96	%		$	13			5.34	%		$	1,581			6.23	%
Total fair value	$	4						$	23						$	14						$	1,790

Investments in Federal Home Loan Bank ("FHLB") stock and Federal Reserve Bank ("FRB") stock of $143 million and $483 million, respectively, were included in other assets at December 31, 2012. Investments in FHLB stock and FRB stock of $133 million and $483 million, respectively, were included in other assets at December 31, 2011.

8.     Loans

Loans consisted of the following:

At December 31,	2012				2011
	(in millions)
Commercial loans:
Construction and other real estate	$	8,457			$	7,860
Business banking and middle market enterprises	12,608				10,225
Global banking(1)	20,009				12,658
Other commercial	3,076				2,906
Total commercial	44,150				33,649
Consumer loans:
Home equity mortgages	2,324				2,563
Residential mortgages, excluding home equity mortgages	15,371				14,113
Credit cards	815				828
Other consumer	598				714
Total consumer	19,108				18,218
Total loans	$	63,258			$	51,867

⁽¹⁾        Represents large multinational firms including globally focused U.S. corporate and financial institutions and USD lending to select high quality Latin American and other multinational customers managed by HSBC on a global basis.

We have loans outstanding to certain executive officers and directors. The loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and do not involve more than normal risk of collectibility. The aggregate amount of such loans did not exceed 5% of shareholders' equity at either December 31, 2012 or 2011.

Net deferred origination costs totaled $30 million and $48 million at December 31, 2012 and 2011, respectively.

At December 31, 2012 and 2011, we had net unamortized premium on our loans of $25 million and $28 million, respectively. We amortized net premiums of $23 million, $35 million and $20 million on our loans in 2012, 2011 and 2010, respectively.

Age Analysis of Past Due Loans  The following table summarizes the past due status of our loans at December 31, 2012 and 2011. The aging of past due amounts are determined based on the contractual delinquency status of payments under the loan. An account is generally considered to be contractually delinquent when payments have not been made in accordance with the loan terms. Delinquency status may be affected by customer account management policies and practices such as re-age or modification.

	Days Past Due
At December 31, 2012	1 - 29 days				30 - 89 days				90+ days				Total Past Due				Current				Total Loans
	(in millions)
Commercial loans:
Construction and other real estate	$	27			$	89			$	152			$	268			$	8,189			$	8,457
Business banking and middle market enterprises	558				73				70				701				11,907				12,608
Global banking	777				30				8				815				19,194				20,009
Other commercial	37				16				31				84				2,992				3,076
Total commercial	1,399				208				261				1,868				42,282				44,150
Consumer loans:
Home equity mortgages	348				40				82				470				1,854				2,324
Residential mortgages, excluding home equity mortgages	100				493				976				1,569				13,802				15,371
Credit cards	28				14				15				57				758				815
Other consumer	7				5				33				45				553				598
Total consumer	483				552				1,106				2,141				16,967				19,108
Total loans	$	1,882			$	760			$	1,367			$	4,009			$	59,249			63,258

	Days Past Due
At December 31, 2011	1 - 29 days				30 - 89 days				90+ days				Total Past Due				Current				Total Loans
	(in millions)
Commercial loans:
Construction and other real estate	$	72			$	31			$	231			$	334			$	7,526			$	7,860
Business banking and middle market enterprises	615				58				71				744				9,481				10,225
Global banking	898				34				74				1,006				11,652				12,658
Other commercial	350				84				21				455				2,451				2,906
Total commercial	1,935				207				397				2,539				31,110				33,649
Consumer loans:
Home equity mortgages	181				54				89				324				2,239				2,563
Residential mortgages, excluding home equity mortgages	109				526				815				1,450				12,663				14,113
Credit cards	37				20				20				77				751				828
Other consumer	11				6				35				52				662				714
Total consumer	338				606				959				1,903				16,315				18,218
Total loans	$	2,273			$	813			$	1,356			$	4,442			$	47,425			$	51,867

Contractual Maturities Contractual maturities of loans were as follows:

	At December 31,
	2013				2014				2015				2016				2017				Thereafter				Total
	(in millions)
Commercial Loans:
Construction and other real estate	$	3,564			$	869			$	768			$	993			$	1,041			$	1,222			$	8,457
Business banking and middle market enterprises	5,108				1,346				1,184				1,559				1,603				1,808				12,608
Global banking	10,025				1,670				1,514				1,743				2,070				2,987				20,009
Other commercial	1,251				327				288				379				390				441				3,076
Consumer Loans:
Home equity mortgages(1)	870				432				265				166				107				484				2,324
Residential mortgages, excluding home equity mortgages	909				361				378				393				402				12,928				15,371
Credit card receivables(2)	-				815				-				-				-				-				815
Other consumer	549				28				13				6				2				-				598
Total	$	22,276			$	5,848			$	4,410			$	5,239			$	5,615			$	19,870			$	63,258

⁽¹⁾        Home equity mortgages maturities reflect estimates based on historical payment patterns.

⁽²⁾        As credit card receivables do not have stated maturities, the table reflects estimates based on historical payment patterns.

As a substantial portion of consumer loans, based on our experience, will be renewed or repaid prior to contractual maturity, the above maturity schedule should not be regarded as a forecast of future cash collections. The following table summarizes contractual maturities of loans due after one year by repricing characteristic:

	At December 31, 2012
	Over 1 But Within 5 Years				Over 5 Years
	(in millions)
Receivables at predetermined interest rates	$	2,921			$	6,371
Receivables at floating or adjustable rates	18,191				13,499
Total	$	21,112			$	19,870

Nonaccrual Loans Nonaccrual loans totaled $1.6 billion and $1.8 billion at December 31, 2012 and 2011, respectively. Interest income that would have been recorded if such nonaccrual loans had been current and in accordance with contractual terms was approximately $125 million in 2012 and $117 million in 2011. Interest income that was included in finance and other interest income on these loans was approximately $17 million in 2012 and $19 million in 2011. For an analysis of reserves for credit losses, see Note 9, "Allowance for Credit Losses."

Nonaccrual loans and accruing receivables 90 days or more delinquent are summarized in the following table:

At December 31,	2012				2011
	(in millions)
Nonaccrual loans:
Commercial:
Real Estate:
Construction and land loans	$	104			$	103
Other real estate	281				512
Business banking and middle markets enterprises	47				58
Global banking	18				137
Other commercial	13				15
Total commercial	463				825
Consumer:
Residential mortgages, excluding home equity mortgages	1,038				815
Home equity mortgages	86				89
Total residential mortgages(1)(2)	1,124				904
Other consumer loans	5				8
Total consumer loans	1,129				912
Nonaccrual loans held for sale	37				91
Total nonaccruing loans	1,629				1,828
Accruing loans contractually past due 90 days or more:
Commercial:
Real Estate:
Construction and land loans	-				-
Other real estate	8				1
Business banking and middle market enterprises	28				11
Other commercial	1				2
Total commercial	37				14
Consumer:
Credit card receivables	15				20
Other consumer	28				27
Total consumer loans	43				47
Total accruing loans contractually past due 90 days or more	80				61
Total nonperforming loans	$	1,709			$	1,889

⁽¹⁾    Nonaccrual residential mortgages includes all receivables which are 90 or more days contractually delinquent as well as second lien loans where the first lien loan that we own or service is 90 or more days contractually delinquent.

⁽²⁾    In  2012 we reclassified $66 million of residential mortgage loans discharged under Chapter 7 bankruptcy and not re-affirmed to nonaccrual, consistent with recently issued regulatory guidance. Interest income reversed on these loans was not material.

Impaired Loans   A loan is considered to be impaired when it is deemed probable that not all principal and interest amounts due according to the contractual terms of the loan agreement will be collected. Probable losses from impaired loans are quantified and recorded as a component of the overall allowance for credit losses. Commercial and consumer loans for which we have modified the loan terms as part of a troubled debt restructuring are considered to be impaired loans. Additionally, commercial loans in nonaccrual status, or that have been partially charged-off or assigned a specific allowance for credit losses are also considered impaired loans.

Troubled debt restructurings  Troubled debt restructurings represent loans for which the original contractual terms have been modified to provide for terms that are less than what we would be willing to accept for new loans with comparable risk because of deterioration in the borrower's financial condition.

During the third quarter of 2011, we adopted a new Accounting Standards Update which provided additional guidance for determining whether a restructuring of a receivable meets the criteria to be reported as a TDR Loan. Under this new guidance, we have determined that substantially all consumer loans modified as a result of a financial difficulty, including all modifications with trial periods regardless of whether the modification was permanent or temporary, should be reported as TDR Loans. For residential mortgage loans purchased from HSBC Finance, we have determined that all re-ages, except first-time early stage delinquency re-ages where the customer has not been granted a prior re-age or modification since the first quarter of 2007, should be considered a TDR Loan.  We believe that multiple or later stage delinquency re-ages or a need for a modification to any of the loan terms other than to provide a market rate of interest provides evidence that the borrower is experiencing financial difficulty.  Exclusion of these first-time early stage delinquency re-ages from our reported TDR Loans was not material. As required, the new guidance was applied retrospectively to restructurings occurring on or after January 1, 2011 and resulted in the reporting of an additional $51 million of residential mortgage loans as TDR Loans at September 30, 2011 with credit loss reserves of $10 million associated with these loans. The incremental loan loss provision recorded for these loans during the third quarter using a discounted cash flow analysis was $7 million. For our HSBC Bank USA credit card portfolio, we reported an additional $1 million of credit card loans as TDR Loans at September 30, 2011 with credit loss reserves of less than $1 million associated with these loans. The incremental loan loss provision recorded for these loans during the third quarter using a discounted cash flow analysis was not material. The TDR Loan balances and related credit loss reserves for consumer loans reported as of December 31, 2010 use our previous definition of TDR Loans and, as such, are not comparable to balances in subsequent periods. The new guidance did not impact our reporting of TDR Loans for commercial loans.

Modifications for consumer and commercial loans may include changes to one or more terms of the loan, including, but not limited to, a change in interest rate, extension of the amortization period, reduction in payment amount and partial forgiveness or deferment of principal. A substantial amount of our modifications involve interest rate reductions which lower the amount of interest income we are contractually entitled to receive in future periods. Through lowering the interest rate and other loan term changes, we believe we are able to increase the amount of cash flow that will ultimately be collected from the loan, given the borrower's financial condition. TDR Loans are reserved for either based on the present value of expected future cash flows discounted at the loans' original effective interest rate which generally results in a higher reserve requirement for these loans or in the case of certain secured commercial loans, the estimated fair value of the underlying collateral. Once a consumer loan is classified as a TDR Loan, it continues to be reported as such until it is paid off or charged-off. For commercial loans, if subsequent performance is in accordance with the new terms and such terms reflect current market rates at the time of restructure, they will no longer be reported as a TDR loan beginning in the year after restructuring.  During the last three years, approximately $11 million of commercial loans have met the criteria and have been removed from TDR classification. 

The following table presents information about receivables which were modified during the twelve months ended December 31, 2012 and 2011 and as a result of this action became classified as TDR Loans.

Year Ended December 31,	2012				2011
	(in millions)
Commercial loans:
Construction and other real estate	$	78			$	70
Business banking and middle market enterprises	21				5
Total commercial	99				75
Consumer loans:
Residential mortgages	452				235
Credit cards	4				5
Total consumer	456				240
Total	$	555			$	315

The weighted-average contractual rate reduction for loans which became classified as TDR Loans during the twelve months ended December 31, 2012 and 2011 was 2.60 percent and 1.85 percent, respectively, for consumer loans.  Weighted-average contractual rate reduction for commercial loans was not significant in both number of loans and rate.

The following tables present information about our TDR Loans and the related credit loss reserves for TDR Loans:

At December 31,	2012				2011
	(in millions)
TDR Loans(1)(2):
Commercial loans:
Construction and other real estate	$	343			$	342
Business banking and middle market enterprises	86				94
Other commercial	31				37
Total commercial	460				473
Consumer loans:
Residential mortgages (3)(4)	960				608
Credit cards	14				21
Total consumer	974				629
Total TDR Loans(5)	$	1,434			$	1,102

At December 31,	2012				2011
	(in millions)
Allowance for credit losses for TDR Loans(6):
Commercial loans:
Construction and other real estate	$	23			$	17
Business banking and middle market enterprises	3				3
Other commercial	-				-
Total commercial	26				20
Consumer loans:
Residential mortgages	109				94
Credit cards	5				7
Total consumer	114				101
Total allowance for credit losses for TDR Loans	$	140			$	121

⁽¹⁾        TDR Loans are considered to be impaired loans. For consumer loans, all such loans are considered impaired loans regardless of accrual status. For commercial loans, impaired loans include other loans in addition to TDRs which totaled $237 million and $614 million at December 31, 2012 and 2011, respectively.

⁽²⁾        The TDR Loan balances included in the table above reflect the current carrying amount of TDR Loans and includes all basis adjustments on the loan, such as unearned income, unamortized deferred fees and costs on originated loans, partial charge-offs and premiums or discounts on purchased loans. The following table reflects the unpaid principal balance of TDR Loans:

At December 31,	2012				2011
	(in millions)
Commercial loans:
Construction and other real estate	$	398			$	393
Business banking and middle market enterprises	137				147
Other commercial	34				40
Total commercial	569				580
Consumer loans:
Residential mortgages	1,118				682
Credit cards	14				20
Total consumer	1,132				702
Total	$	1,701			$	1,282

⁽³⁾        Includes $608 million and $303 million at December 31, 2012 and 2011, respectively, of loans that are recorded at the lower of amortized cost or fair value of the collateral less cost to sell.

⁽⁴⁾        In 2012, we added $170 million of loans discharged under Chapter 7 bankruptcy and not re-affirmed to our residential mortgage TDR Loan balances, which were written down to the lower of amortized cost or fair value of the collateral less cost to sell consistent with new regulatory guidance issued in the third quarter of 2012.

⁽⁵⁾        Includes balances of $519 million and $331 million at December 31, 2012 and 2011, respectively, which are classified as nonaccrual loans.

⁽⁶⁾        Included in the allowance for credit losses.

Additional information relating to TDR Loans is presented in the table below.

Year Ended December 31,	2012				2011				2010
	(in millions)
Average balance of TDR Loans
Commercial loans:
Construction and other real estate	$	360			$	346			$	273
Business banking and middle market enterprises	91				89				71
Other commercial	33				44				51
Total commercial	484				479				395
Consumer loans:
Residential mortgages	738				532				305
Credit cards	16				23				23
Auto finance(1)	-				-				28
Total consumer	754				555				356
Total average balance of TDR Loans	$	1,238			$	1,034			$	751
Interest income recognized on TDR Loans
Commercial loans:
Construction and other real estate	$	8			$	9			$	3
Business banking and middle market enterprises	-				-				-
Other commercial	4				5				5
Total commercial	12				14				8
Consumer loans:
Residential mortgages	33				20				12
Credit cards	1				1				2
Auto finance(1)	-				-				2
Total consumer	34				21				16
Total interest income recognized on TDR Loans	$	46			$	35			$	24

⁽¹⁾        In August 2010, we sold auto finance loans with an outstanding principal balance of $1.2 billion at the date of sale, and other related assets to Santander Consumer USA ("SC USA").

The following table presents loans which were classified as TDR Loans during the previous 12 months which for commercial loans became 90 days or greater contractually delinquent or for consumer loans became 60 days or greater contractually delinquent during the twelve months ended December 31, 2012 and 2011:

Year ended December 31.	2012				2011
	(in millions)
Commercial loans:
Construction and other real estate	$	27			$	42
Business banking and middle market enterprises	-				-
Other commercial	-				-
Total commercial	27				42
Consumer loans:
Residential mortgages	86				71
Credit cards	-				4
Total consumer	86				75
Total	$	113			$	117

Impaired commercial loans  Impaired commercial loan statistics are summarized in the following table:

	Amount with Impairment Reserves				Amount without Impairment Reserves				Total Impaired Commercial Loans(1)(2)				Impairment Reserve
	(in millions)
At December 31, 2012
Construction and other real estate	$	192			$	305			$	497			$	86
Business banking and middle market enterprises	57				49				106				10
Global banking	-				18				18				-
Other commercial	1				75				76				-
Total	$	250			$	447			$	697			$	96
At December 31, 2011
Construction and other real estate	$	391			$	342			$	733			$	114
Business banking and middle market enterprises	68				59				127				12
Global banking	137				-				137				90
Other commercial	1				89				90				-
Total	$	597			$	490			$	1,087			$	216

⁽¹⁾        Includes impaired commercial loans which are also considered TDR Loans as follows:

At December 31,	2012				2011
	(in millions)
Construction and other real estate	$	343			$	342
Business banking and middle market enterprises	86				94
Other commercial	31				37
Total	$	460			$	473

⁽²⁾        The impaired commercial loan balances included in the table above reflect the current carrying amount of the loan and includes all basis adjustments, such as unamortized deferred fees and costs on originated loans and any premiums or discounts. The unpaid principal balance of impaired commercial loans included in the table above are as follows:

At December 31,	2012				2011
	(in millions)
Construction and other real estate	$	552			$	784
Business banking and middle market enterprises	157				180
Global banking	18				137
Other commercial	79				93
Total	$	806			$	1,194

The following table presents information about average impaired commercial loan balances and interest income recognized on the impaired commercial loans:

Year Ended December 31,	2012				2011				2010
	(in millions)
Average balance of impaired commercial loans:
Construction and other real estate	$	602			$	744			$	638
Business banking and middle market enterprises	119				151				127
Global banking	86				107				149
Other commercial	86				111				155
Total average balance of impaired commercial loans	$	893			$	1,113			$	1,069
Interest income recognized on impaired commercial loans:
Construction and other real estate	$	11			$	9			$	4
Business banking and middle market enterprises	5				4				2
Global banking	-				1				5
Other commercial	3				3				-
Total interest income recognized on impaired commercial loans	$	19			$	17			$	11

Commercial Loan Credit Quality Indicators  The following credit quality indicators are monitored for our commercial loan portfolio:

Criticized asset classifications  These classifications are based on the risk rating standards of our primary regulator. Problem loans are assigned various criticized facility grades. We also assign obligor grades which are used under our allowance for credit losses methodology. Criticized assets for commercial loans are summarized in the following table:

	Special Mention				Substandard				Doubtful				Total
	(in millions)
At December 31, 2012
Construction and other real estate	$	627			$	677			$	105			$	1,409
Business banking and middle market enterprises	369				115				10				494
Global banking	93				50				-				143
Other commercial	36				74				2				112
Total	$	1,125			$	916			$	117			$	2,158
At December 31, 2011
Construction and other real estate	$	1,009			$	990			$	186			$	2,185
Business banking and middle market enterprises	445				241				12				698
Global banking	45				397				109				551
Other commercial	99				131				-				230
Total	$	1,598			$	1,759			$	307			$	3,664

Nonperforming  The status of our commercial loan portfolio is summarized in the following table:

	Performing Loans				Nonaccrual Loans				Accruing Loans Contractually Past Due 90 days or More				Total
	(in millions)
At December 31, 2012
Commercial:
Construction and other real estate	$	8,064			$	385			$	8			$	8,457
Business banking and middle market enterprise	12,533				47				28				12,608
Global banking	19,991				18				-				20,009
Other commercial	3,062				13				1				3,076
Total commercial - continuing operations	$	43,650			$	463			$	37			$	44,150
At December 31, 2011
Commercial:
Construction and other real estate	$	7,244			$	615			$	1			$	7,860
Business banking and middle market enterprise	10,156				58				11				10,225
Global banking	12,521				137				-				12,658
Other commercial	2,889				15				2				2,906
Total commercial - continuing operations	$	32,810			$	825			$	14			$	33,649

Credit risk profile  The following table shows the credit risk profile of our commercial loan portfolio:

	Investment Grade(1)				Non-Investment Grade				Total
	(in millions)
At December 31, 2012
Construction and other real estate	$	4,727			$	3,730			$	8,457
Business banking and middle market enterprises	6,012				6,596				12,608
Global banking	16,206				3,803				20,009
Other commercial	1,253				1,823				3,076
Total commercial	$	28,198			$	15,952			$	44,150
At December 31, 2011
Construction and other real estate	$	3,133			$	4,727			$	7,860
Business banking and middle market enterprises	4,612				5,613				10,225
Global banking	9,712				2,946				12,658
Other commercial	843				2,063				2,906
Total commercial	$	18,300			$	15,349			$	33,649

⁽¹⁾        Investment grade includes commercial loans with credit ratings of at least BBB- or above or the equivalent based on our internal credit rating system.

Consumer Loan Credit Quality Indicators   The following credit quality indicators are utilized for our consumer loan portfolio:

Delinquency  The following table summarizes dollars of two-months-and-over contractual delinquency and as a percent of total loans and loans held for sale ("delinquency ratio") for our consumer loan portfolio:

	December 31, 2012							December 31, 2011
	Dollars of Delinquency				Delinquency Ratio			Dollars of Delinquency				Delinquency Ratio
	(dollars are in millions)
Consumer:
Residential mortgage, excluding home equity mortgages(1)	$	1,233			7.78	%		$	1,101			7.19	%
Home equity mortgages	75				3.23			99				2.89
Total residential mortgages	1,308				7.20			1,200				6.41
Credit card receivables	21				2.58			28				2.25
Other consumer	30				4.52			30				3.17
Total consumer	$	1,359			6.92	%		$	1,258			6.01	%

⁽¹⁾        At December 31, 2012 and 2011, residential mortgage loan delinquency includes $997 million and $803 million, respectively, of loans that are carried at the lower of amortized cost or fair value less cost to sell.

Nonperforming   The status of our consumer loan portfolio for both continuing and discontinued operations is summarized in the following table:

	Performing Loans				Nonaccrual Loans				Accruing Loans Contractually Past Due 90 days or More				Total
	(in millions)
At December 31, 2012
Consumer:
Residential mortgage, excluding home equity mortgages	$	14,333			$	1,038			$	-			$	15,371
Home equity mortgages	2,238				86				-				2,324
Total residential mortgages (1)	16,571				1,124				-				17,695
Credit card receivables	800				-				15				815
Other consumer	565				5				28				598
Total consumer	$	17,936			$	1,129			$	43			$	19,108
At December 31, 2011
Consumer:
Residential mortgage, excluding home equity mortgages	$	13,298			$	815			$	-			$	14,113
Home equity mortgages	2,474				89				-				2,563
Total residential mortgages	15,772				904				-				16,676
Credit card receivables	808				-				20				828
Other consumer	679				8				27				714
Total consumer	$	17,259			$	912			$	47			$	18,218

⁽¹⁾        In 2012, we reclassified $66 million of residential mortgage loans discharged under Chapter 7 bankruptcy and not re-affirmed to nonaccrual, consistent with recently issued regulatory guidance. Interest income reversed on these loans was not material.

Troubled debt restructurings  See discussion of impaired loans above for further details on this credit quality indicator.

Concentration of Credit Risk   A concentration of credit risk is defined as a significant credit exposure with an individual or group engaged in similar activities or affected similarly by economic conditions. We enter 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. We participate in lending activity throughout the United States and internationally. In general, we manage the varying degrees of credit risk involved in on and off-balance sheet transactions through specific credit policies. These policies and procedures provide for a strict approval, monitoring and reporting process. It is our policy to require collateral when it is deemed appropriate. Varying degrees and types of collateral are secured depending upon management's credit evaluation. As with any nonconforming and non-prime loan products, we utilize high underwriting standards and price these loans in a manner that is appropriate to compensate for higher risk.

Our loan portfolio includes the following types of loans:

•       High loan-to-value ("LTV") loans - Certain residential mortgages on primary residences with LTV ratios equal to or exceeding 90 percent at the time of origination and no mortgage insurance, which could result in the potential inability to recover the entire investment in loans involving foreclosed or damaged properties.

•       Interest-only loans - A loan which allows a customer to pay the interest-only portion of the monthly payment for a period of time which results in lower payments during the initial loan period. However, subsequent events affecting a customer's financial position could affect the ability of customers to repay the loan in the future when the principal payments are required.

•       Adjustable rate mortgage ("ARM") loans - A loan which allows us to adjust pricing on the loan in line with market movements. A customer's financial situation and the general interest rate environment at the time of the interest rate reset could affect the customer's ability to repay or refinance the loan after the adjustment.

The following table summarizes the balances of high LTV, interest-only and ARM loans in our loan portfolios, including certain loans held for sale, at December 31, 2012 and 2011, respectively.

At December 31,	2012				2011
	(in billions)
Residential mortgage loans with high LTV and no mortgage insurance(1)	$	.9			$	1.1
Interest-only residential mortgage loans	4.0				3.9
ARM loans(2)	10.4				9.9

⁽¹⁾        Residential mortgage loans with high LTV and no mortgage insurance includes both fixed rate and adjustable rate mortgages. Excludes $20 million and $68 million of subprime residential mortgage loans held for sale at December 31, 2012 and 2011, respectively.

⁽²⁾        ARM loan balances above exclude $19 million and $28 million of subprime residential mortgage loans held for sale at December 31, 2012 and 2011, respectively. In 2013 and 2014, approximately $313 million and $356 million, respectively, of the ARM loans will experience their first interest rate reset.

Concentrations of first and second liens within the outstanding residential mortgage loan portfolio are summarized in the following table. Amounts in the table exclude residential mortgage loans held for sale of $472 million and $2,058 million at December 31, 2012 and 2011, respectively.

At December 31,	2012				2011
	(in millions)
Closed end:
First lien	$	15,371			$	14,113
Second lien	186				237
Revolving:
Second lien	2,138				2,326
Total	$	17,695			$	16,676

Regional exposure at December 31, 2012 for certain loan portfolios is summarized in the following table.

	Commercial Construction and Other Real Estate Loans			Residential Mortgage Loans			Credit Card Receivables
New York State	42.9	%		34.5	%		56.9	%
North Central United States	4.6			6.6			3.7
North Eastern United States	9.8			9.3			12.3
Southern United States	19.9			16.0			13.9
Western United States	22.8			33.3			11.0
Others	-			0.3			2.2
Total	100.0	%		100.0	%		100.0	%

9.    Allowance for Credit Losses

An analysis of the allowance for credit losses is presented in the following table.

	2012				2011				2010
	(In millions)
Balance at beginning of year	$	743			$	852			$	1,602
Provision for credit losses	293				258				34
Charge-offs	(452		)		(386		)		(806		)
Recoveries	63				65				53
Allowance on loans transferred to held for sale	-				(46		)		(33		)
Other	-				-				2
Balance at end of year	$	647			$	743			$	852

The following table summarizes the changes in the allowance for credit losses by product and the related loan balance by product during the years ended December 31, 2012, 2011 and 2010:

	Commercial																Consumer
	Construction and Other Real Estate				Business Banking and Middle Market Enterprises				Global Banking				Other Comm'l				Residential Mortgage, Excl Home Equity Mortgages				Home Equity Mortgages				Credit Card				Auto Finance				Other Consumer				Total
	(in millions)
Year Ended December 31, 2012
Allowance for credit losses - beginning of period	$	212			$	78			$	131			$	21			$	192			$	52			$	39			$	-			$	18			$	743
Provision charged to income	(33		)		48				14				(10		)		114				72				67				-				21				293
Charge offs	(36		)		(37		)		(105		)		(1		)		(107		)		(79		)		(62		)		-				(25		)		(452		)
Recoveries	19				8				1				7				11				-				11				-				6				63
Net charge offs	(17		)		(29		)		(104		)		6				(96		)		(79		)		(51		)		-				(19		)		(389		)
Other	-				-				-				-				-				-				-				-				-				-
Allowance for credit losses - end of period	$	162			$	97			$	41			$	17			$	210			$	45			$	55			$	-			$	20			$	647
Ending balance: collectively evaluated for impairment	$	76			$	87			$	41			$	17			$	105			$	41			$	50			$	-			$	20			$	437
Ending balance: individually evaluated for impairment	86				10				-				-				105				4				5				-				-				210
Total allowance for credit losses	$	162			$	97			$	41			$	17			$	210			$	45			$	55			$	-			$	20			$	647
Loans:
Collectively evaluated for impairment	$	7,960			$	12,502			$	19,991			$	3,000			$	13,563			$	2,303			$	801			$	-			$	598			$	60,718
Individually evaluated for impairment(1)	497				106				18				76				331				21				14				-				-				1,063
Loans carried at lower of amortized cost or fair value less cost to sell	-				-				-				-				1,477				-				-				-				-				1,477
Total loans	$	8,457			$	12,608			$	20,009			$	3,076			$	15,371			$	2,324			$	815			$	-			$	598			$	63,258
Year Ended December 31, 2011
Allowance for credit losses - beginning of period	$	243			$	132			$	116			$	32			$	167			$	77			$	58			$	-			$	27			$	852
Provision charged to income	11				(3		)		31				(28		)		133				49				46				-				19				258
Charge offs	(51		)		(53		)		-				(6		)		(106		)		(70		)		(71		)		-				(29		)		(386		)
Recoveries	9				12				-				23				5				-				12				-				4				65
Net charge offs	(42		)		(41		)		-				17				(101		)		(70		)		(59		)		-				(25		)		(321		)
Allowance on loans transferred to held for sale	-				(10		)		(16		)		-				(7		)		(4		)		(6		)		-				(3		)		(46		)
Other	-				-				-				-				-				-				-				-				-				-
Allowance for credit losses - end of period	$	212			$	78			$	131			$	21			$	192			$	52			$	39			$	-			$	18			$	743
Ending balance: collectively evaluated for impairment	$	98			$	66			$	41			$	21			$	104			$	48			$	32			$	-			$	18			$	428
Ending balance: individually evaluated for impairment	114				12				90				-				88				4				7				-				-				315
Total allowance for credit losses	$	212			$	78			$	131			$	21			$	192			$	52			$	39			$	-			$	18			$	743

	Commercial																Consumer
	Construction and Other Real Estate				Business Banking and Middle Market Enterprises				Global Banking				Other Comm'l				Residential Mortgage, Excl Home Equity Mortgages				Home Equity Mortgages				Credit Card				Auto Finance				Other Consumer				Total
	(in millions)
Loans:
Collectively evaluated for impairment	$	7,127			$	10,098			$	12,521			$	2,816			$	12,817			$	2,550			$	807			$	-			$	714			$	49,450
Individually evaluated for impairment(1)	733				127				137				90				244				13				21				-				-				1,365
Loans carried at lower of amortized cost or fair value less cost to sell	-				-				-				-				1,052				-				-				-				-				1,052
Total loans	$	7,860			$	10,225			$	12,658			$	2,906			$	14,113			$	2,563			$	828			$	-			$	714			$	51,867
Year Ended December 31, 2010
Allowance for credit losses - beginning of period	$	303			$	184			$	301			$	119			$	347			$	185			$	80			$	36			$	47			$	1,602
Provision charged to income	101				19				(163		)		(35		)		(14		)		13				68				35				10				34
Charge offs	(173		)		(88		)		(24		)		(59		)		(170		)		(121		)		(98		)		(37		)		(36		)		(806		)
Recoveries	12				17				2				5				4				-				8				(1		)		6				53
Net charge offs	(161		)		(71		)		(22		)		(54		)		(166		)		(121		)		(90		)		(38		)		(30		)		(753		)
Allowance on loans transferred to held for sale	-				-				-				-				-				-				-				(33		)		-				(33		)
Other	-				-				-				2				-				-				-				-				-				2
Allowance for credit losses - end of period	$	243			$	132			$	116			$	32			$	167			$	77			$	58			$	-			$	27			$	852
Ending balance: collectively evaluated for impairment	$	159			$	106			$	44			$	26			$	118			$	74			$	49			$	-			$	27			$	603
Ending balance: individually evaluated for impairment	84				26				72				6				49				3				9				-				-				249
Total allowance for credit losses	$	243			$	132			$	116			$	32			$	167			$	77			$	58			$	-			$	27			$	852
Loans:
Collectively evaluated for impairment	$	7,473			$	7,793			$	10,640			$	2,970			$	12,411			$	3,812			$	1,223			$	-			$	1,039			$	47,361
Individually evaluated for impairment(1)	755				152				105				115				221				8				27				-				-				1,383
Loans carried at lower of amortized cost or fair value less cost to sell	-				-				-				-				1,065				-				-				-				-				1,065
Total loans	$	8,228			$	7,945			$	10,745			$	3,085			$	13,697			$	3,820			$	1,250			$	-			$	1,039			$	49,809

⁽¹⁾        For consumer loans, these amounts represent TDR Loans for which we evaluate reserves using a discounted cash flow methodology. Each loan is individually identified as a TDR Loan and then grouped together with other TDR Loans with similar characteristics. The discounted cash flow analysis is then applied to these groups of TDR Loans. The loan balance above excludes TDR loans that are carried at the lower of amortized cost or fair value of the collateral less cost to sell which totaled $608 million, $303 million and $173 million at December 31, 2012, 2011 and 2010, respectively.

We historically have estimated probable losses for consumer loans and certain small balance commercial loans which do not qualify as a troubled debt restructure using a roll rate migration analysis that estimates the likelihood that a loan will progress through the various stages of delinquency and ultimately charge-off.  This has historically resulted in the identification of a loss emergence period for these loans collectively evaluated for impairment using a roll rate migration analysis which resulted in less than 12 months of losses in the allowance for credit losses.  A loss coverage of 12 months using a roll rate migration analysis would be more aligned with U.S. bank industry practice.  As previously disclosed, in the third quarter of 2012 our regulators indicated they would like us to more closely align our loss coverage period implicit within the roll rate methodology with U.S. bank industry practice for these loan products. During the fourth quarter of 2012, we extended our loss emergence period to 12 months for U.S. GAAP.  As a result, during the fourth quarter of 2012, we increased our allowance for credit losses by approximately $80 million for these loans. We will perform an annual review of our portfolio going forward to assess the period of time utilized in our roll rate migration period. 

10.  Loans Held for Sale

Loans held for sale consisted of the following:

At December 31,	2012				2011
	(in millions)
Commercial loans	$	481			$	965
Consumer loans:
Residential mortgages	472				2,058
Credit cards receivables	-				416
Other consumer	65				231
Total consumer	537				2,705
Total loans held for sale	$	1,018			$	3,670

Loans held for sale at December 31, 2011 includes $2.5 billion of loans that were subsequently sold as part of our agreement to sell certain branches to First Niagara, including $521 million of commercial loans, $1.4 billion of residential mortgages, $416 million of credit card receivables and $161 million of other consumer loans.

We originate commercial loans in connection with our participation in a number of leveraged acquisition finance syndicates. A substantial majority of these loans were originated with the intent of selling them to unaffiliated third parties and are classified as commercial loans held for sale at December 31, 2012 and 2011. The fair value of commercial loans held for sale under this program was $465 million and $377 million at December 31, 2012 and 2011, respectively.  We have elected to designate all of the leveraged acquisition finance syndicated loans classified as held for sale at fair value under fair value option. See Note 18, "Fair Value Option," for additional information.

Commercial loans held for sale also includes commercial real estate loans of $16 million and $55 million at December 31, 2012 and 2011, respectively, which are originated with the intent to sell to government sponsored enterprises.

In addition to the residential mortgage loans sold to First Niagara discussed above, residential mortgage loans held for sale include subprime residential mortgage loans with a fair value of $52 million and $181 million at December 31, 2012 and 2011, respectively, which were acquired from unaffiliated third parties and from HSBC Finance with the intent of securitizing or selling the loans to third parties. Also included in residential mortgage loans held for sale are first mortgage loans originated and held for sale primarily to various government sponsored enterprises.  Gains and losses from the sale of residential mortgage loans are reflected as a component of residential mortgage banking revenue in the accompanying consolidated statement of income (loss). We retained the servicing rights in relation to the mortgages upon sale.

In addition to routine sales of loans to government sponsored enterprises upon origination, we sold subprime residential mortgage loans with a carrying amount of $102 million and $229 million in 2012 and 2011, respectively. No such sales occurred in 2010.

Excluding the commercial loans designated under fair value option discussed above, loans held for sale are recorded at the lower of amortized cost or fair value. While the initial carrying amount of loans held for sale continued to exceed fair value at December 31, 2012, we experienced a decrease in the valuation allowance for consumer loans during 2012 due primarily to loan sales. The valuation allowance on consumer loans held for sale was $114 million and $251 million at December 31, 2012 and 2011, respectively.

Loans held for sale are subject to market risk, liquidity risk and interest rate risk, in that their value will fluctuate as a result of changes in market conditions, as well as the interest rate and credit environment. Interest rate risk for residential mortgage loans held for sale is partially mitigated through an economic hedging program to offset changes in the fair value of the mortgage loans held for sale attributable to changes in market interest rates. Trading related revenue associated with this economic hedging program, which is included in net interest income and residential mortgage banking revenue (loss) in the consolidated statement of income, was a gain of $4 million during 2012, a loss of $11 million during 2011 and gain of $4 million during 2010.

11.  Properties and Equipment, Net

Properties and equipment, net of accumulated depreciation, is summarized in the following table.

At December 31,	2012				2011				Depreciable Life
	(in millions)
Land	$	8			$	63			-
Buildings and improvements	617				832				10-40 years
Furniture and equipment	137				138				3-30
Total	762				1,033
Accumulated depreciation and amortization	(486		)		(575		)
Properties and equipment, net	$	276			$	458

Depreciation and amortization expense totaled $61 million, $77 million and $79 million in 2012, 2011 and 2010, respectively.

                                                                                                                                                                                                                                12. Intangible Assets

Intangible assets consisted of the following:

At December 31,	2012				2011
	(in millions)
Mortgage servicing rights	$	179			$	227
Purchased credit card relationships	60				-
Other	8				15
Total other intangible assets	$	247			$	242

Mortgage Servicing Rights ("MSRs")  A servicing asset is a contract under which estimated future revenues from contractually specified cash flows, such as servicing fees and other ancillary revenues, are expected to exceed the obligation to service the financial assets. We recognize the right to service mortgage loans as a separate and distinct asset at the time they are acquired or when originated loans are sold.

MSRs are subject to credit, prepayment and interest rate risk, in that their value will fluctuate as a result of changes in these economic variables. Interest rate risk is mitigated through an economic hedging program that uses securities and derivatives to offset changes in the fair value of MSRs. Since the hedging program involves trading activity, risk is quantified and managed using a number of risk assessment techniques.

Residential mortgage servicing rights  Residential MSRs are initially measured at fair value at the time that the related loans are sold and are remeasured at fair value at each reporting date. Changes in fair value of MSRs are reflected in residential mortgage banking revenue in the period in which the changes occur. Fair value is determined based upon the application of valuation models and other inputs. The valuation models incorporate assumptions market participants would use in estimating future cash flows. The reasonableness of these valuation models is periodically validated by reference to external independent broker valuations and industry surveys.

Fair value of residential MSRs is calculated using the following critical assumptions:

At December 31,	2012			2011
Annualized constant prepayment rate ("CPR")	22.4	%		21.4	%
Constant discount rate	11.3	%		11.3	%
Weighted average life	3.4			3.4

Residential MSRs activity is summarized in the following table:

Year Ended December 31,	2012				2011
	(in millions)
Fair value of MSRs:
Beginning balance	$	220			$	394
Additions related to loan sales	24				39
Changes in fair value due to:
Change in valuation inputs or assumptions used in the valuation models	(15		)		(136		)
Realization of cash flows	(61		)		(77		)
Ending balance	$	168			$	220

Information regarding residential mortgage loans serviced for others, which are not included in the consolidated balance sheet, is summarized in the following table:

At December 31,	2012				2011
	(in millions)
Outstanding principal balances at period end	$	32,041			$	37,839
Custodial balances maintained and included in noninterest bearing deposits at period end	$	810			$	838

Servicing fees collected are included in residential mortgage banking revenue (loss) and totaled $87 million, $109 million and $121 million during 2012, 2011 and 2010, respectively.

Commercial mortgage servicing rights  Commercial MSRs, which are accounted for using the lower of amortized cost or fair value method, totaled $11 million and $7 million at December 31, 2012 and 2011, respectively.

Purchased credit card relationships  In March 2012, we purchased from HSBC Finance the account relationships associated with $746 million of credit card receivables which were not included in the sale to Capital One at a fair value of $108 million. Approximately $43 million of this value was associated with the credit card receivables sold to First Niagara. The remaining $65 million was included in intangible assets and is being amortized over its estimated useful life of ten years

Other Intangible Assets  Other intangible assets, which result from purchase business combinations, are comprised of favorable lease arrangements of $8 million and $12 million at December 31, 2012 and 2011, respectively, and customer lists of $3 million at December 31, 2011.

13.  Goodwill

Goodwill was $2.2 billion at both December 31, 2012 and 2011, and includes accumulated impairment losses of $54 million. In 2011, $398 million of goodwill was allocated to the branch operations sold to First Niagara and was classified within other branch assets held for sale. See Note 4, "Branch Assets and Liabilities Held for Sale," for further discussion.

During the fourth quarter of 2012, we performed an interim impairment test of the goodwill associated with all of our reporting units at December 31, 2012. Interim impairment testing for Global Banking and Markets and Global Private Banking was conducted based on the results of our annual impairment testing as of July 1, 2012, which indicated that the fair value of these reporting units was not significantly in excess of carrying value. Interim impairment testing for Retail Banking and Wealth Management and Commercial Banking was performed based on updates to our 5 year forecast. As a result of this testing, the fair value of all of our reporting units continued to exceed their carrying values, including goodwill. At December 31, 2012, the book value of our Global Banking and Markets reporting unit including allocated goodwill of $612 million, was 95 percent of fair value. For the remainder of our reporting units, the book value of each reporting unit including allocated goodwill was 65 percent or less of fair value. Our goodwill impairment testing is, however, highly sensitive to certain assumptions and estimates used. We continue to perform periodic analyses of the risks and strategies of our business and product offerings. If significant deterioration in economic or credit conditions occur, or changes in the strategy or performance of our business or product offerings occur, or fair value and book value differences for Global Banking and Markets remain narrow, an interim impairment test will again be required in 2013.

14.  Deposits

The aggregate amounts of time deposit accounts (primarily certificates of deposits), each with a minimum of $100,000 included in domestic office deposits, were approximately $7.2 billion and $4.8 billion at December 31, 2012 and 2011, respectively. At December 31, 2012 and 2011, deposits totaling $8.7 billion and $9.8 billion, respectively, were carried at fair value. The scheduled maturities of all time deposits at December 31, 2012 are summarized in the following table.

	Domestic Offices				Foreign Offices				Total
	(in millions)
2013:
0-90 days	$	5,951			$	3,049			$	9,000
91-180 days	745				170				915
181-365 days	1,091				126				1,217
	7,787				3,345				11,132
2014	1,537				-				1,537
2015	1,205				-				1,205
2016	1,888				12				1,900
2017	1,657				-				1,657
Later years	3,514				-				3,514
	$	17,588			$	3,357			$	20,945

Overdraft deposits, which are classified as loans, were approximately $2.2 billion and $1.2 billion at December 31, 2012 and 2011, respectively.

15.    Short-Term Borrowings

Short-term borrowings consisted of the following:

	December 31
	2012								Rate			2011								Rate
	(dollars are in millions)
Federal funds purchased (day to day)	$	3										$	90
Securities sold under repurchase agreements(1)(2)	6,817								0.15	%		7,417								0.22	%
Average during year					$	6,046			0.19							$	11,579			0.28
Maximum month-end balance					11,040											15,088
Commercial paper	5,022								0.27			4,836								0.20
Average during year					4,587				0.26							3,931				0.19
Maximum month-end balance					5,022											6,134
Precious metals	2,326											1,639
Other	765											2,027
Total short-term borrowings	$	14,933										$	16,009

⁽¹⁾        Exceeded 30 percent of shareholders' equity at December 31, 2012 and 2011.

⁽²⁾        The following table presents the quarter end and average quarterly balances of securities sold under repurchase agreements:

	2012																2011
	Fourth				Third				Second				First				Fourth				Third				Second				First
	(in millions)
Quarter end balance	$	6,817			$	3,238			$	3,843			$	4,813			$	7,417			$	12,913			$	8,463			$	8,807
Average quarterly balance	5,481				5,155				5,394				8,168				11,560				10,913				9,927				13,949

At December 31, 2011, we had a committed unused line of credit from HSBC France of $2.5 billion. The line of credit with HSBC France was terminated effective July 30, 2012. In April 2012, we established a third party back-up line of credit totaling $1.9 billion to replace the unused line of credit with HSBC France and support issuances of commercial paper. In January 2013, the third party back-up line of credit commitment was reduced to zero. At December 31, 2012, we had a committed unused line of credit with HSBC Investments (Bahamas) Limited of $900 million.  At December 31, 2012 and 2011, we also had an uncommitted unused line of credit from our immediate parent, HSBC North America Inc. ("HNAI") of $150 million and, at December 31, 2012, a committed unused line of credit with HSBC of $500 million.

As a member of the New York FHLB, we have a secured borrowing facility that is collateralized by real estate loans and investment securities. At December 31, 2012 and 2011, the facility included $1.0 billion of borrowings included in long-term debt. The facility also allows access to further short-term borrowings based upon the amount of residential mortgage loans and securities pledged as collateral with the FHLB, which allows access to borrowings of up to $4.2 billion as of December 31, 2012. See Note 16, "Long-Term Debt," for further information regarding these borrowings.

16.   Long-Term Debt

The composition of long-term debt is presented in the following table. Interest rates on floating rate notes are determined periodically by formulas based on certain money market rates or, in certain instances, by minimum interest rates as specified in the agreements governing the issues. Interest rates in effect at December 31, 2012 are shown in parentheses.

At December 31,	2012				2011
	(in millions)
Issued by HSBC USA:
Non-subordinated debt:
Medium-Term Floating Rate Notes due 2012-2027 (.04% - 2.61%)	$	4,730			$	2,975
$4 billion Floating Rate Debt due 2013-2016 (.91% - 1.65%)	4,000				4,000
2.375% Senior Notes due 2015	2,257				-
5 year Senior Notes due 2018 (1.625%)	1,500				-
	12,487				6,975
Subordinated debt:
Fixed Rate Subordinated Notes due 2014-2097 (5.00% - 9.50%)	1,320				1,320
Perpetual Floating Rate Capital Notes	-				129
Junior Subordinated Debentures due 2026-2027 (7.75% - 8.38%)	559				868
	1,879				2,317
Total issued by HSBC USA	14,366				9,292
Issued or acquired by HSBC Bank USA and its subsidiaries:
Non-subordinated debt:
Global Bank Note Program:
Medium-Term Notes due 2012-2040 (.04% - 1.66%)	658				657
4.95% Fixed Rate Senior Notes due 2012	-				25
	658				682
Federal Home Loan Bank of New York advances:
Fixed Rate FHLB advances	-				7
Floating Rate FHLB advance due 2036 (.39%)	1,000				1,000
	1,000				1,007
Precious metal leases due 2012-2014 (1.02%)	54				50
Secured financings with Structured Note Vehicles(1)	63				189
Other	12				18
Total non-subordinated debt	1,787				1,946
Subordinated debt:
4.625% Global Subordinated Notes due 2014	999				998
Other	92				55
Global Bank Note Program:
Fixed Rate Global Bank Notes due 2017-2039 (4.875% - 7.00%)	4,498				4,152
Total subordinated debt	5,589				5,205
Total issued or acquired by HSBC Bank USA and its subsidiaries	7,376				7,151
Obligations under capital leases	3				266
Total long-term debt	$	21,745			$	16,709

⁽¹⁾        See Note 27, "Variable Interest Entities," for additional information. 

The table excludes $900 million of long-term debt at December 31, 2012 and 2011, due to us from HSBC Bank USA and our subsidiaries. Of this amount, the earliest note is due to mature in 2022 and the latest note is due to mature in 2097.

Foreign currency denominated long-term debt was immaterial at December 31, 2012 and 2011.

At December 31, 2012 and 2011, we have elected fair value option accounting for some of our medium-term floating rate notes and certain subordinated debt. See Note 18, "Fair Value Option," for further details. At December 31, 2012 and 2011, medium term notes totaling $5.3 billion and $3.4 billion, respectively, were carried at fair value. Subordinated debt of $2.0 billion and $1.7 billion was carried at fair value at December 31, 2012 and 2011.

During the third quarter of 2011, we notified the holders of our outstanding Puttable Capital Notes with an aggregate principal amount of $129 million (the "Notes") that, pursuant to the terms of the Notes, we had elected to revoke the obligation to exchange capital securities for the Notes and would redeem the Notes in full. The Notes were redeemed in January 2012.

The Junior Subordinated Debentures due 2026-2032 were issued to and held by three capital funding trusts organized by us.  The trusts issued preferred stock collateralized by the debentures which are guaranteed by us. The trusts also issued common stock, all of which is held by us and recorded in other assets. The debentures issued to the capital funding trusts, less the amount of their common stock we hold, qualify as Tier 1 capital at December 31, 2012. Although the capital funding trusts are VIEs, our investment in the common stock does not expose us to risk as it does not require funding from us and therefore, is not considered  to be equity at risk. Under proposed Basel III capital requirements, these securities would not qualified as Tier 1 capital beginning in 2013. As we hold no other interests in the capital funding trusts and therefore are not their primary beneficiary, we do not consolidate them. In December 2012, we exercised our option to call $309 million of debentures previously issued by HUSI to HSBC USA Capital Trust VII at the contractual call price of 103.925 percent which resulted in a net loss on extinguishment of approximately $12 million.  The Trust used the proceeds to redeem the trust preferred securities previously issued to an affiliate.  We subsequently issued one share of common stock to our parent, HNAI for a capital contribution of $312 million.

Maturities of long-term debt at December 31, 2012, including secured financings and conduit facility renewals, were as follows:

	(in millions)
2013	$	3,355
2014	3,227
2015	3,625
2016	1,275
2017	983
Thereafter	9,280
Total	$	21,745

17.   Derivative Financial Instruments

In the normal course of business, the derivative instruments entered into are for trading, market making and risk management purposes. For financial reporting purposes, a derivative instrument is designated in one of the following categories: (a) financial instruments held for trading, (b) hedging instruments designated as a qualifying hedge under derivative and hedge accounting principles or (c) a non-qualifying economic hedge. The derivative instruments held are predominantly swaps, futures, options and forward contracts. All freestanding derivatives, including bifurcated embedded derivatives, are stated at fair value. Where we enter into enforceable master netting arrangements with counterparties, the master netting arrangements permit us to net those derivative asset and liability positions and to offset cash collateral held and posted with the same counterparty.

Derivatives Held for Risk Management Purposes  Our risk management policy requires us to identify, analyze and manage risks arising from the activities conducted during the normal course of business. We use derivative instruments as an asset and liability management tool to manage our exposures in interest rate, foreign currency and credit risks in existing assets and liabilities, commitments and forecasted transactions. The accounting for changes in fair value of a derivative instrument will depend on whether the derivative has been designated and qualifies for hedge accounting under derivative accounting principles.

We designate derivative instruments to offset the fair value risk and cash flow risk arising from fixed-rate and floating-rate assets and liabilities as well as forecasted transactions. We assess the hedging relationships, both at the inception of the hedge and on an ongoing basis, using regression approach to determine whether the designated hedging instrument is highly effective in offsetting changes in the fair value or the cash flows attributable to the hedged risk. Accounting principles for qualifying hedges require us to prepare detailed documentation describing the relationship between the hedging instrument and the hedged item, including, but not limited to, the risk management objective, the hedging strategy and the methods to assess and measure the ineffectiveness of the hedging relationship. We discontinue hedge accounting when we determine that the hedge is no longer effective, the hedging instrument is terminated, sold or expired, the designated forecasted transaction is not probable of occurring, or when the designation is removed by us.

In the tables that follow below, the fair value disclosed does not include collateral that we either receive or deposit with our interest rate swap counterparties. Such collateral is recorded on our balance sheet at an amount which approximates fair value and is netted on the balance sheet with the fair value amount recognized for derivative instruments.

Fair Value Hedges  In the normal course of business, we hold fixed-rate loans and securities and issue fixed-rate senior and subordinated debt obligations. The fair value of fixed-rate (USD and non-USD denominated) assets and liabilities fluctuates in response to changes in interest rates or foreign currency exchange rates. We utilize interest rate swaps, forward and futures contracts and foreign currency swaps to minimize the effect on earnings caused by interest rate and foreign currency volatility.

For reporting purposes, changes in fair value of a derivative designated in a qualifying fair value hedge, along with the changes in the fair value of the hedged asset or liability attributable to the hedged risk, are recorded in current period earnings. We recognized net losses of $13 million during 2012 compared to net losses of $74 million during 2011 which are reported in other income (loss) in the consolidated statement of income (loss) which represents the ineffective portion of all fair value hedges. The interest accrual related to the derivative contract is recognized in interest income.

The changes in the fair value of the hedged item designated in a qualifying hedge are captured as an adjustment to the carrying amount of the hedged item (basis adjustment). If the hedging relationship is terminated and the hedged item continues to exist, the basis adjustment is amortized over the remaining life of the hedged item. We recorded basis adjustments for active fair value hedges which decreased the carrying amount of our debt by $8 million and increased the carrying amount of our debt by $17 million during 2012 and 2011, respectively. We amortized $12 million and $11 million of basis adjustments related to terminated and/or re-designated fair value hedge relationships during 2012 and 2011, respectively. The total accumulated unamortized basis adjustment amounted to an increase in the carrying amount of our debt of $49 million and $53 million as of December 31, 2012 and 2011, respectively. Basis adjustments for active fair value hedges of available-for-sale securities increased the carrying amount of the securities by $130 million during 2012 compared to an increase in the carrying amount of the securities by $1.0 billion during 2011. Total accumulated unamortized basis adjustments for active fair value hedges of available-for-sale securities amounted to an increase in carrying amount of $836 million and $1.1 billion as of December 31, 2012 and 2011, respectively.

 The following table presents the fair value of derivative instruments designated and qualifying as fair value hedges and their location on the balance sheet.

	Derivative Assets(1)										Derivative Liabilities(1)
	Balance Sheet		Fair Value as of December 31,								Balance Sheet		Fair Value as of December 31,
	Location		2012				2011				Location		2012				2011
											(in millions)
Interest rate contracts	Other assets		$	10			$	4			Interest, taxes and other liabilities		$	875			$	1,134

⁽¹⁾        The derivative asset and derivative liabilities presented above may be eligible for netting and consequently may be shown net against a different line item on the consolidated balance sheet. Balance sheet categories in the above table represent the location of the assets and liabilities absent the netting of the balances.

The following table presents information on gains and losses on derivative instruments designated and qualifying as hedging instruments in fair value hedges and the hedged items in fair value hedges and their location on the consolidated statement of income (loss).

	Gain (Loss) on Derivative								Gain (Loss) on Hedged Items
	Interest Income (Expense)				Other Income (Expense)				Interest Income (Expense)				Other Income (Expense)
	(in millions)
Year Ended December 31, 2012
Interest rate contracts/AFS Securities	$	(204	)		$	(235	)		$	424			$	222
Interest rate contracts/commercial loans	-				-				-				-
Interest rate contracts/subordinated debt	14				9				(62		)		(8		)
Total	$	(190	)		$	(226	)		$	362			$	214
Year Ended December 31, 2011
Interest rate contracts/AFS Securities	$	(31	)		$	(1,762	)		$	712			$	1,694
Interest rate contracts/commercial loans	(22		)		2				-				(5		)
Interest rate contracts/subordinated debt	50				(13		)		(104		)		10
Total	$	(3	)		$	(1,773	)		$	608			$	1,699

Cash Flow Hedges  We own or issue floating rate financial instruments and enter into forecasted transactions that give rise to variability in future cash flows. As a part of our risk management strategy, we use interest rate swaps, currency swaps and futures contracts to mitigate risk associated with variability in the cash flows. Changes in fair value of a derivative instrument associated with the effective portion of a qualifying cash flow hedge are recognized initially in other comprehensive income (loss). When the cash flows for which the derivative is hedging materialize and are recorded in income or expense, the associated gain or loss from the hedging derivative previously recorded in accumulated other comprehensive income (loss) is reclassified into earnings in the same accounting period in which the designated forecasted transaction or hedged item affects earnings. If a cash flow hedge of a forecasted transaction is de-designated because it is no longer highly effective, or if the hedge relationship is terminated, the cumulative gain or loss on the hedging derivative to that date will continue to be reported in accumulated other comprehensive income (loss) unless it is probable that the hedged forecasted transaction will not occur by the end of the originally specified time period as documented at the inception of the hedge, at which time the cumulative gain or loss is released into earnings. As of December 31, 2012 and 2011, active cash flow hedge relationships extend or mature through July 2036. During 2012 and 2011, $17 million and $13 million, respectively, of losses related to terminated and/or re-designated cash flow hedge relationships were amortized to earnings from accumulated other comprehensive income (loss). During the next twelve months, we expect to amortize $12 million of remaining losses to earnings resulting from these terminated and/or re-designated cash flow hedges. The interest accrual related to the derivative contract is recognized in interest income.

The following table presents the fair value of derivative instruments that are designated and qualify as cash flow hedges and their location on the consolidated balance sheet.

	Derivative Assets(1)										Derivative Liabilities(1)
	Balance Sheet		Fair Value as of December 31,								Balance Sheet		Fair Value as of December 31,
	Location		2012				2011				Location		2012				2011
	(in millions)
Interest rate contracts	Other assets		$	47			$	29			Interest, taxes and other liabilities		$	236			$	248

(1)   The derivative asset and derivative liabilities presented above may be eligible for netting and consequently may be shown net against a different line item on the consolidated balance sheet. Balance sheet categories in the above table represent the location of the assets and liabilities absent the netting of the balances.

The following table presents information on gains and losses on derivative instruments designated and qualifying as hedging instruments in cash flow hedges (including amounts recognized in AOCI from all terminated cash flow hedges) and their locations on the consolidated statement of income (loss).

	Gain (Loss) Recognized in AOCI on Derivative (Effective Portion)								Location of Gain (Loss) Reclassified from AOCI into Income (Effective Portion)		Gain (Loss) Reclassed From AOCI into Income (Effective Portion)								Location of Gain (Loss) Recognized in Income on the Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)		Gain (Loss) Recognized in Income on the Derivative (Ineffective Portion)
	2012				2011						2012				2011						2012				2011
	(in millions)
Interest rate contracts	$	29			$	(265	)		Interest income (expense)		$	(17	)		$	(13	)		Other income (loss)		$	-			$	(5	)

Trading and Other Derivatives  In addition to risk management, we enter into derivative instruments for trading and market making purposes, to repackage risks and structure trades to facilitate clients' needs for various risk taking and risk modification purposes. We manage our risk exposure by entering into offsetting derivatives with other financial institutions to mitigate the market risks, in part or in full, arising from our trading activities with our clients. In addition, we also enter into buy protection credit derivatives with other market participants to manage our counterparty credit risk exposure. Where we enter into derivatives for trading purposes, realized and unrealized gains and losses are recognized in trading revenue or residential mortgage banking revenue (loss). Credit losses arising from counterparty risk on over-the-counter derivative instruments and offsetting buy protection credit derivative positions are recognized as an adjustment to the fair value of the derivatives and are recorded in trading revenue.

Derivative instruments designated as economic hedges that do not qualify for hedge accounting are recorded at fair value through profit and loss. Realized and unrealized gains and losses are recognized in other income or residential mortgage banking revenue (loss) while the derivative asset or liability positions are reflected as other assets or other liabilities. As of December 31, 2012, we have entered into credit default swaps which are designated as economic hedges against the credit risks within our loan portfolio. In the event of an impairment loss occurring in a loan that is economically hedged, the impairment loss is recognized as provision for credit losses while the gain on the credit default swap is recorded as other income (loss). In addition, we also from time to time have designated certain forward purchase or sale of to-be-announced ("TBA") securities to economically hedge mortgage servicing rights.

Changes in the fair value of TBA positions, which are considered derivatives, are recorded in residential mortgage banking revenue.

The following table presents the fair value of derivative instruments held for trading purposes and their location on the consolidated balance sheet.

	Derivative Assets(1)										Derivative Liabilities(1)
	Balance Sheet		Fair Value as of December 31,								Balance Sheet		Fair Value as of December 31,
	Location		2012				2011				Location		2012				2011
	(in millions)
Interest rate contracts	Trading assets		$	70,865			$	60,719			Trading liabilities		$	70,450			$	61,280
Foreign exchange contracts	Trading assets		13,799				15,654				Trading liabilities		13,601				15,413
Equity contracts	Trading assets		1,287				1,165				Trading liabilities		1,291				1,164
Precious metals contracts	Trading assets		791				1,842				Trading liabilities		738				1,248
Credit contracts	Trading assets		7,128				14,388				Trading liabilities		7,347				14,285
Total			$	93,870			$	93,768					$	93,427			$	93,390

The derivative asset and derivative liabilities presented above may be eligible for netting and consequently may be shown net against a different line item on the consolidated balance sheet. Balance sheet categories in the above table represent the location of the assets and liabilities absent the netting of the balances.

The following table presents the fair value of derivative instruments held for other purposes and their location on the consolidated balance sheet.

	Derivative Assets(1)										Derivative Liabilities(1)
	Balance Sheet		Fair Value as of December 31,								Balance Sheet		Fair Value as of December 31,
	Location		2012				2011				Location		2012				2011
	(in millions)
Interest rate contracts	Other assets		$	901			$	957			Interest, taxes and other liabilities		$	97			$	106
Foreign exchange contracts	Other assets		52				11				Interest, taxes and other liabilities		17				13
Equity contracts	Other assets		472				51				Interest, taxes and other liabilities		126				87
Credit contracts	Other assets		1				2				Interest, taxes and other liabilities		4				8
Total			$	1,426			$	1,021					$	244			$	214

⁽¹⁾        The derivative asset and derivative liabilities presented above may be eligible for netting and consequently may be shown net against a different line item on the consolidated balance sheet. Balance sheet categories in the above table represent the location of the assets and liabilities absent the netting of the balances.

The following table presents information on gains and losses on derivative instruments held for trading purposes and their locations on the consolidated statement of income (loss).

	Location of Gain (Loss)		Amount of  Gain (Loss) Recognized in Income on Derivatives Year Ended December 31,
	Recognized in Income on Derivatives		2012				2011
	(in millions)
Interest rate contracts	Trading revenue (loss)		$	(29	)		$	(82	)
Interest rate contracts	Residential mortgage banking revenue (loss)		26				119
Foreign exchange contracts	Trading revenue (loss)		649				263
Equity contracts	Trading revenue (loss)		57				128
Precious metals contracts	Trading revenue (loss)		115				114
Credit contracts	Trading revenue (loss)		(790		)		(174		)
Total			$	28			$	368

The following table presents information on gains and losses on derivative instruments held for other purposes and their locations on the consolidated statement of income (loss).

	Location of Gain (Loss)		Amount of  Gain (Loss) Recognized in Income on Derivatives Year Ended December 31,
	Recognized in Income on Derivatives		2012				2011
	(in millions)
Interest rate contracts	Other income (loss)		$	91			$	677
Interest rate contracts	Residential mortgage banking revenue (loss)		4				(11		)
Foreign exchange contracts	Other income (loss)		95				38
Equity contracts	Other income (loss)		630				22
Credit contracts	Other income (loss)		1				(2		)
Total			$	821			$	724

Credit-Risk Related Contingent Features  We enter into total return swap, interest rate swap, cross-currency swap and credit default swap contracts, amongst others which contain provisions that require us to maintain a specific credit rating from each of the major credit rating agencies. Sometimes the derivative instrument transactions are a part of broader structured product transactions. If HSBC Bank USA's credit ratings were to fall below the current ratings, the counterparties to our derivative instruments could demand us to post additional collateral. The amount of additional collateral required to be posted will depend on whether HSBC Bank USA is downgraded by one or more notches and whether the downgrade is in relation to long-term or short-term ratings. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that are in a liability position as of December 31, 2012, is $8.7 billion for which we have posted collateral of $7.9 billion. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that are in a liability position as of December 31, 2011, is $10.3 billion for which we have posted collateral of $8.5 billion. Substantially all of the collateral posted is in the form of cash which is reflected in either interest bearing deposits with banks or other assets. See Note 28, "Guarantee Arrangements and Pledged Assets," for further details.

In the event of a credit downgrade, we currently do not expect HSBC Bank USA's long-term ratings to go below A2 and A+ or the short-term ratings to go below P-2 and A-1 by Moody's and S&P, respectively. The following tables summarize our obligation to post additional collateral (from the current collateral level) in certain hypothetical commercially reasonable downgrade scenarios. It is not appropriate to accumulate or extrapolate information presented in the tables below to determine our total obligation because the information presented to determine the obligation in hypothetical rating scenarios is not mutually exclusive.

Moody's	Long-Term Ratings
Short-Term Ratings	A1				A2				A3
	(in millions)
P-1	$	-			$	49			$	221
P-2	2				4				221

S&P	Long-Term Ratings
Short-Term Ratings	AA-				A+				A
	(in millions)
A-1+	$	-			$	-			$	45
A-1	29				74				246

We would be required to post $33 million of additional collateral on total return swaps and certain other transactions if HSBC Bank USA is downgraded by S&P and Moody's by two notches on our long term rating accompanied by one notch downgrade in our short term rating.

Notional Value of Derivative Contracts  The following table summarizes the notional values of derivative contracts.

At December 31,	2012				2011
	(in billions)
Interest rate:
Futures and forwards	$	313.9			$	320.3
Swaps	2,842.6				2,325.1
Options written	43.3				69.9
Options purchased	44.2				67.3
	3,244.0				2,782.6
Foreign Exchange:
Swaps, futures and forwards	743.7				725.0
Options written	54.9				39.7
Options purchased	55.5				40.4
Spot	56.3				60.1
	910.4				865.2
Commodities, equities and precious metals:
Swaps, futures and forwards	48.1				50.2
Options written	21.0				8.2
Options purchased	21.4				17.1
	90.5				75.5
Credit derivatives	484.9				657.3
Total	$	4,729.8			$	4,380.6

18.  Fair Value Option

We report our results to HSBC in accordance with its reporting basis, International Financial Reporting Standards ("IFRSs"). We have elected to apply fair value option accounting to selected financial instruments in most cases to align the measurement attributes of those instruments under U.S. GAAP and IFRSs and to simplify the accounting model applied to those financial instruments. We elected to apply fair value option ("FVO") reporting to commercial leveraged acquisition finance loans and related unfunded commitments, certain fixed rate long-term debt issuances and hybrid instruments which include all structured notes and structured deposits. Changes in fair value for these assets and liabilities are reported as gain (loss) on instruments designated at fair value and related derivatives in the consolidated statement of income (loss).

Loans  We elected to apply FVO to all commercial leveraged acquisition finance loans held for sale and related unfunded commitments. The election allows us to account for these loans and commitments at fair value which is consistent with the manner in which the instruments are managed. As of December 31, 2012, commercial leveraged acquisition finance loans held for sale and related unfunded commitments of $465 million carried at fair value had an aggregate unpaid principal balance of $486 million. As of December 31, 2011, commercial leveraged acquisition finance loans held for sale and related unfunded commitments of $377 million carried at fair value had an aggregate unpaid principal balance of $448 million.

These loans are included in loans held for sale in the consolidated balance sheet. Interest from these loans is recorded as interest income in the consolidated statement of income. Because a substantial majority of the loans elected for the fair value option are floating rate assets, changes in their fair value are primarily attributable to changes in loan-specific credit risk factors. The components of gain (loss) related to loans designated at fair value are summarized in the table below. As of December 31, 2012 and 2010, no loans for which the fair value option has been elected are 90 days or more past due or on nonaccrual status.

Long-Term Debt (Own Debt Issuances)  We elected to apply FVO for certain fixed-rate long-term debt for which we had applied or otherwise would elect to apply fair value hedge accounting. The election allows us to achieve a similar accounting effect without meeting the hedge accounting requirements. We measure the fair value of these debt issuances based on inputs observed in the secondary market. Changes in fair value of these instruments are attributable to changes of our own credit risk and interest rates.

The fair value of fixed-rate debt accounted for under FVO at December 31, 2012 totaled $2.0 billion and had an aggregate unpaid principal balance of $1.8 billion. The fair value of fixed-rate debt accounted for under FVO at December 31, 2011 totaled $1.7 billion and had an aggregate unpaid principal balance of $1.8 billion. Interest on the fixed-rate debt accounted for under FVO isrecorded as interest expense in the consolidated statement of income. The components of gain (loss) related to long-term debt designated at fair value are summarized in the table below.

Hybrid Instruments  We elected to apply fair value option accounting principles to all of our hybrid instruments, inclusive of structured notes and structured deposits, issued after January 1, 2006. As of December 31, 2012, interest bearing deposits in domestic offices included $8.7 billion of structured deposits accounted for under FVO which had an unpaid principal balance of $8.4 billion. As of December 31, 2011, interest bearing deposits in domestic offices included $9.8 billion of structured deposits accounted for under FVO which had an unpaid principal balance of $9.6 billion. Long-term debt at December 31, 2012 included structured notes of $5.3 billion accounted for under FVO which had an unpaid principal balance of $5.0 billion. Long-term debt at December 31, 2011 included structured notes of $3.4 billion accounted for under FVO which had an unpaid principal balance of $3.5 billion. Interest on this debt is recorded as interest expense in the consolidated statement of income. The components of gain (loss) related to hybrid instruments designated at fair value which reflect the instruments described above are summarized in the table below.

Components of Gain on Instruments at Fair Value and Related Derivatives  Gain (loss) on instruments designated at fair value and related derivatives includes the changes in fair value related to interest, credit and other risks as well as the mark-to-market adjustment on derivatives related to the financial instrument designated at fair value and net realized gains or losses on these derivatives. The components of gain (loss) on instruments designated at fair value and related derivatives related to the changes in fair value of the financial instrument accounted for under FVO are as follows:

	Loans				Long-Term Debt				Hybrid Instruments				Total
	(in millions)
Year Ended December 31, 2012
Interest rate and other components(1)	$	3			$	13			$	(791	)		$	(775	)
Credit risk component	49				(361		)		(75		)		(387		)
Total mark-to-market on financial instruments designated at fair value	52				(348		)		(866		)		(1,162		)
Net realized loss on financial instruments	(1		)		-				-				(1		)
Mark-to-market on the related derivatives	-				(38		)		796				758
Net realized gain on the related long-term debt derivatives	-				63				-				63
Gain (loss) on instruments designated at fair value and related derivatives	$	51			$	(323	)		$	(70	)		$	(342	)
Year Ended December 31, 2011
Interest rate and other components(1)	$	(5	)		$	(345	)		$	(391	)		$	(741	)
Credit risk component	(14		)		376				113				475
Total mark-to-market on financial instruments designated at fair value	(19		)		31				(278		)		(266		)
Net realized loss on financial instruments	(1		)		-				-				(1		)
Mark-to-market on the related derivatives	-				369				305				674
Net realized gain on the related long-term debt derivatives	-				64				-				64
Gain (loss) on instruments designated at fair value and related derivatives	$	(20	)		$	464			$	27			$	471
Year Ended December 31, 2010
Interest rate and other components(1)	$	2			$	(99	)		$	(556	)		$	(653	)
Credit risk component	42				62				41				145
Total mark-to-market on financial instruments designated at fair value	44				(37		)		(515		)		(508		)
Net realized loss on financial instruments	-				-				-				-
Mark-to-market on the related derivatives	(3		)		199				529				725
Net realized gain on the related long-term debt derivatives	-				77				-				77
Gain (loss) on instruments designated at fair value and related derivatives	$	41			$	239			$	14			$	294

⁽¹⁾       As it relates to hybrid instruments, interest rate and other components includes interest rate, foreign exchange and equity contract risks.

19.  Income Taxes

Total income taxes for continuing operations were as follows.

Year Ended December 31,	2012				2011				2010
	(in millions)
Provision (benefit) for income taxes	$	338			$	227			$	439
Income taxes related to adjustments included in common shareholder's equity:
Unrealized gains (losses) on securities available-for-sale, net	76				552				96
Unrealized gains (losses) on derivatives classified as cash flow hedges	17				(110		)		10
Employer accounting for post-retirement plans	5				(3		)		(2		)
Other-than-temporary impairment	-				1				30
Total	$	436			$	667			$	573

The components of income tax expense (benefit) follow.

Year Ended December 31,	2012				2011				2010
	(in millions)
Current:
Federal	$	153			$	316			$	85
State and local	173				143				33
Foreign	(28		)		57				47
Total current	298				516				165
Deferred, primarily federal	40				(289		)		274
Total income tax expense (benefit)	$	338			$	227			$	439

The following table is an analysis of the difference between effective rates based on the total income tax provision attributable to pretax income and the statutory U.S. Federal income tax rate.

Year Ended December 31,	2012							2011							2010
	(dollars are in millions)
Tax expense (benefit) at the U.S. federal statutory income tax rate	$	(318	)		(35.0	)%		$	239			35.0	%		$	506			35.0	%
Increase (decrease) in rate resulting from:
State and local taxes, net of federal benefit	46				5.0			92				13.5			28				1.9
Adjustment of tax rate used to value deferred taxes	(13		)		(1.4	)		-				-			(84		)		(5.8	)
Non-deductible expense accrual related to certain regulatory matters(1)	483				53.1			-				-			-				-
Non-deductible goodwill related to branch sale(1)	139				15.3			-				-			-				-
Valuation allowance(2)	-				-			(217		)		(31.8	)		(26		)		(1.8	)
Accrual of tax reserves(3)	45				4.9			161				23.6			75				5.2
Impact of foreign operations(4)	51				5.6			63				9.2			56				3.9
Tax exempt interest income	(14		)		(1.5	)		(10		)		(1.5	)		(12		)		(.8	)
Low income housing and other tax credits	(85		)		(9.3	)		(115		)		(16.9	)		(111		)		(7.7	)
Non-taxable income	-				-			(4		)		(.6	)		(5		)		(.3	)
Other	4				0.4			18				2.8			12				.8
Total income tax expense (benefit)	$	338			37.1	%		$	227			33.3	%		$	439			30.4	%

⁽¹⁾        For 2012, largely impacted by non-deductible expense related to certain regulatory matters and non-deductible goodwill related to the branches sold to First Niagara.

⁽²⁾        For 2011, relates to release of valuation allowance previously established on foreign tax credits.

⁽³⁾        Tax reserves in 2012, 2011 and 2010, relate to state uncertain tax positions which we no longer believe we meet the more likely than not requirement for recognition.  Specifically, the increase in 2011 relates to a state court decision that required us to increase our reserves.

⁽⁴⁾        For 2012, relates to foreign (U.K.) tax expense for which no foreign tax credits are allowed, and for 2011 and 2010, primarily related to an accrued foreign tax expense related to Brazilian withholding taxes reversed in 2010 - 2012.

 The components of the net deferred tax position are presented in the following table.

At December 31,	2012				2011
	(in millions)
Deferred tax assets:
Allowance for credit losses	$	267			$	369
Benefit accruals	120				147
Accrued expenses not currently deductible	247				315
Tax credit carry-forwards	-				145
Interest and discount income	230				74
Future benefit of state reserves	161				140
REMIC losses not currently deductible	188				130
Other	463				482
Total deferred tax assets	1,676				1,802
Less deferred tax liabilities:
Fair value adjustments	10				172
Unrealized gains (losses) on available-for-sale securities	692				606
Mortgage servicing rights	69				85
Total deferred tax liabilities	771				863
Net deferred tax asset	$	905			$	939

A reconciliation of the beginning and ending amount of unrecognized tax benefits (hereinafter referred to as uncertain tax reserves) is as follows.

	2012				2011				2010
	(in millions)
Balance at January 1,	$	416			$	210			$	88
Additions based on tax positions related to the current year	86				105				62
Reductions based on tax positions related to the current year	(31		)		-				-
Additions for tax positions of prior years	32				145				84
Reductions for tax positions of prior years	(15		)		(44		)		(24		)
Reductions related to settlements with taxing authorities	(10		)		-				-
Balance at December 31,	$	478			$	416			$	210

The state tax portion of this amount is reflected gross and not reduced by Federal tax effect. It is reasonably possible that there could be a change in the amount of our unrecognized tax benefits within the next 12 months due to settlements or statutory expirations in various state and local tax jurisdictions. The total amount of unrecognized tax benefits at December 31, 2012 that, if recognized, would affect the effective income tax rate is $296 million and $276 million at December 31, 2012 and 2011, respectively.

It is our policy to recognize accrued interest related to unrecognized tax positions in interest expense in the consolidated statement of income and to recognize penalties, if any, related to unrecognized tax positions as a component of other operating expenses in the consolidated statement of income. We had accruals for the payment of interest and penalties associated with uncertain tax positions of $159 million and $130 million at December 31, 2012 and 2011, respectively. Our accrual for the payment of interest and penalties associated with uncertain tax positions increased by $29 million and $99 million during 2012 and 2011, respectively.

HSBC North America Consolidated Income Taxes  We are included in HSBC North America's consolidated Federal income tax return and in various combined state income tax returns. As such, we have entered into a tax allocation agreement with HSBC North America and its subsidiary entities (the "HNAH Group") included in the consolidated returns which govern the current amount of taxes to be paid or received by the various entities included in the consolidated return filings. As a result, we have looked at the HNAH Group's consolidated deferred tax assets and various sources of taxable income, including the impact of HSBC and HNAH Group tax planning strategies, in reaching conclusions on recoverability of deferred tax assets. Where a valuation allowance is determined to be necessary at the HSBC North America consolidated level, such allowance is allocated to principal subsidiaries within the HNAH Group as described below in a manner that is systematic, rational and consistent with the broad principles of accounting for income taxes.

The HNAH Group evaluates deferred tax assets for recoverability using a consistent approach which considers the relative impact of negative and positive evidence, including historical financial performance, projections of future taxable income, future reversals of existing taxable temporary differences, tax planning strategies and any available carryback capacity.

In evaluating the need for a valuation allowance, the HNAH Group estimates future taxable income based on management approved business plans, future capital requirements and ongoing tax planning strategies, including capital support from HSBC necessary as part of such plans and strategies. The HNAH Group has continued to consider the impact of the economic environment on the North American businesses and the expected growth of the deferred tax assets. This evaluation process involves significant management judgment about assumptions that are subject to change from period to period.

In conjunction with the HNAH Group deferred tax evaluation process, based on our forecasts of future taxable income, which include assumptions about the depth and severity of home price depreciation and the U.S. economic environment, including unemployment levels and their related impact on credit losses, we currently anticipate that our results of future operations will generate sufficient taxable income to allow us to realize our deferred tax assets. However, since these market conditions have created losses in the HNAH Group in recent periods and volatility in our pre-tax book income, our analysis of the realizability of the deferred tax assets significantly discounts any future taxable income expected from continuing operations and relies to a greater extent on continued capital support from our parent, HSBC, including tax planning strategies implemented in relation to such support. HSBC has indicated they remain fully committed and have the capacity and willingness to provide capital as needed to run operations, maintain sufficient regulatory capital, and fund certain tax planning strategies.

Only those tax planning strategies that are both prudent and feasible, and which management has the ability and intent to implement, are incorporated into our analysis and assessment. The primary and most significant strategy is HSBC's commitment to reinvest excess HNAH Group capital to reduce debt funding or otherwise invest in assets to ensure that it is more likely than not that the deferred tax assets will be utilized.

Currently, it has been determined that the HNAH Group's primary tax planning strategy, in combination with other tax planning strategies, provides support for the realization of the net deferred tax assets recorded for the HNAH Group. Such determination is based on HSBC's business forecasts and assessment as to the most efficient and effective deployment of HSBC capital, most importantly including the length of time such capital will need to be maintained in the U.S. for purposes of the tax planning strategy.

During the first quarter of 2011, the HNAH Group identified an additional tax planning strategy that provided support for the realization of the deferred tax assets recorded for its foreign tax credits and certain state related deferred tax assets. The use of foreign tax credits is limited by the HNAH Group's U.S. tax liability and the availability of foreign source income. The tax planning strategy included the purchase of foreign bonds and REMIC residual interests. These purchases are expected to generate sufficient foreign source taxable income to allow for the utilization of the foreign tax credits before the credits expire unused and recognition of certain state deferred tax assets.

 Notwithstanding the above, the HNAH Group had valuation allowances against certain state deferred tax assets and certain Federal tax loss carry forwards for which the aforementioned tax planning strategies did not provide appropriate support.

HNAH Group valuation allowances are allocated to the principal subsidiaries, including us. The methodology allocates the valuation allowance to the principal subsidiaries based primarily on the entity's relative contribution to the growth of the HSBC North America consolidated deferred tax asset against which the valuation allowance is being recorded.

If future results differ from the HNAH Group's current forecasts or the tax planning strategies were to change, a valuation allowance against some or all of the remaining net deferred tax assets may need to be established which could have a material adverse effect on our results of operations, financial condition and capital position. The HNAH Group will continue to update its assumptions and forecasts of future taxable income, including relevant tax planning strategies, and assess the need for such incremental valuation allowances.

Absent the capital support from HSBC and implementation of the related tax planning strategies, the HNAH Group, including us, would be required to record a valuation allowance against the remaining deferred tax assets.

HSBC USA Inc. Income Taxes  We recognize deferred tax assets and liabilities for the future tax consequences related to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for tax credits and state net operating losses. Our net deferred tax assets, including both deferred tax liabilities and valuation allowances, totaled $905 million and $939 million as of December 31, 2012 and 2011, respectively.

During the third quarter of 2012, the Internal Revenue Service ("IRS") Appeals Office closed its review covering the tax periods 2004 and 2005 after the settlement was approved by the Joint Committee of Taxation. There is no resulting impact to our uncertain tax reserves.

The IRS began its audit of our 2006 and 2007 income tax returns in 2009, with an anticipated completion in 2013. The IRS began their examination of 2008 and 2009 during the third quarter of 2011, with an anticipated completion in 2013.

We remain subject to state and local income tax examinations for years 2004 and forward. We are currently under audit by various state and local tax jurisdictions. Uncertain tax positions are reviewed on an ongoing basis and are adjusted in light of changing facts and circumstances, including progress of tax audits, developments in case law and the closing of statute of limitations. Such adjustments are reflected in the tax provision. As a result of a 2011 state court decision related to a state tax uncertainty, we no longer believe that we can uphold the more likely than not conclusion taken on one of these uncertain tax positions. Therefore, tax reserves of approximately $288 million (net of federal tax benefit) and related accrued interest expense of $143 million were recorded through the fourth quarter of 2012 to recognize the estimated tax exposure on this matter.

 At December 31, 2012, we had net operating losses carryforwards of $40 million for state tax purposes which expire as follows: $16 million in 2013 - 2017, $2 million in 2023 - 2027, $22 million in 2028 and forward.

At December 31, 2012, we had general business tax credits carryforwards of $1 million for state income tax purposes with no expiration period.

20.  Preferred Stock

The following table presents information related to the issues of HSBC USA preferred stock outstanding.

	Shares Outstanding			Dividend Rate			Amount Outstanding
At December 31,	2012			2012			2012				2011
	(dollars are in millions)
Floating Rate Non-Cumulative Preferred Stock, Series F ($25 stated value)	20,700,000			3.549	%		$	517			$	517
14,950,000 Depositary Shares each representing a one-fortieth interest in a share of Floating Rate Non-Cumulative Preferred Stock, Series G ($1,000 stated value)	373,750			4.056			374				374
14,950,000 Depositary Shares each representing a one-fortieth interest in a share of 6.50% Non-Cumulative Preferred Stock, Series H ($1,000 stated value)	373,750			6.500			374				374
6,000,000 Depositary shares each representing a one-fourth interest in a share of Adjustable Rate Cumulative Preferred Stock, Series D ($100 stated value)	1,500,000			4.500			150				150
$2.8575 Cumulative Preferred Stock ($50 stated value)	3,000,000			5.715			150				150
							$	1,565			$	1,565

Dividends on the Floating Rate Non-Cumulative Series F Preferred Stock are non-cumulative and will be payable when and if declared by our Board of Directors quarterly on the first calendar day of January, April, July and October of each year. Dividends on the stated value per share are payable for each dividend period at a rate equal to a floating rate per annum of .75% above three month LIBOR, but in no event will the rate be less than 3.5% per annum. The Series F Preferred Stock may be redeemed at our option, in whole or in part, on or after April 7, 2010 at a redemption price equal to $25 per share, plus accrued and unpaid dividends for the then-current dividend period.

Dividends on the Floating Rate Non-Cumulative Series G Preferred Stock are non-cumulative and will be payable when and if declared by our Board of Directors quarterly on the first calendar day of January, April, July and October of each year. Dividends on the stated value per share are payable for each dividend period at a rate equal to a floating rate per annum of .75% above three month LIBOR, but in no event will the rate be less than 4% per annum. The Series G Preferred Stock may be redeemed at our option, in whole or in part, on or after January 1, 2011 at a redemption price equal to $1,000 per share, plus accrued and unpaid dividends for the then-current dividend period.

Dividends on the 6.50% Non-Cumulative Series H Preferred Stock are non-cumulative and will be payable when and if declared by our Board of Directors quarterly on the first calendar day of January, April, July and October of each year at the stated rate of 6.50%. The Series H Preferred Stock may be redeemed at our option, in whole or in part, on or after July 1, 2011 at $1,000 per share, plus accrued and unpaid dividends for the then-current dividend period.

The Adjustable Rate Cumulative Preferred Stock, Series D is redeemable, as a whole or in part, at our option at $100 per share (or $25 per depositary share), plus accrued and unpaid dividends. The dividend rate is determined quarterly, by reference to a formula based on certain benchmark market interest rates, but will not be less than 4.5% or more than 10.5% per annum for any applicable dividend period.

The $2.8575 Cumulative Preferred Stock may be redeemed at our option, in whole or in part, on or after October 1, 2007 at $50 per share, plus accrued and unpaid dividends. Dividends are paid quarterly.

21.  Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive loss includes certain items that are reported directly within a separate component of shareholders' equity. The following table presents changes in accumulated other comprehensive loss balances.

At December 31,	2012				2011				2010
	(in millions)
Unrealized gains (losses) on securities available-for-sale, not other-than temporarily impaired:
Balance at beginning of period	$	883			$	97			$	(68	)
Other comprehensive income for period:
Net unrealized holding gains arising during period, net of tax of $136 million, $605 million and $123 million, respectively	194				862				211
Reclassification adjustment for gains realized in net income, net of tax of $(60) million, $(53) million and $(27) million, respectively	(85		)		(76		)		(46		)
Total other comprehensive income for period	109				786				165
Balance at end of period	992				883				97
Unrealized gains (losses) on other-than-temporarily impaired debt securities available-for-sale:
Balance at beginning of period	-				(1		)		(56		)
Other comprehensive income for period:
Net unrealized other-than-temporary impairment arising during period, net of tax $21 million in 2010	-				-				38
Reclassification adjustment for losses realized in net income, net of tax of $1 million and $9 million in 2011 and 2010, respectively	-				1				17
Total other comprehensive income (loss) for period	-				1				55
Balance at end of period	-				-				(1		)
Unrealized gains (losses) on other-than-temporarily impaired debt securities held-to-maturity:
Balance at beginning of period	-				(153		)		-
Adjustment to initially apply new guidance for consolidation of VIE	-				-				(246		)
Balance at beginning of period, as adjusted	-				(153		)		(246		)
Other comprehensive income for period:
Net unrealized other-than-temporary impairment arising during period	-				11				93
Adjustment to reverse other-than-temporary impairment due to deconsolidation of VIE	-				142				-
Total other comprehensive income for period	-				153				93
Balance at end of period	-				-				(153		)
Unrealized (losses) gains on derivatives classified as cash flow hedges:
Balance at beginning of period	(229		)		(87		)		(100		)
Other comprehensive income (loss) for period:
Net gains (losses) arising during period, net of tax of $10 million, $(115) million and $4 million, respectively	18				(150		)		7
Reclassification adjustment for losses realized in net income, net of tax of $7 million, $5 million and $4 million, respectively	10				8				6
Total other comprehensive income (loss) for period	28				(142		)		13
Balance at end of period	(201		)		(229		)		(87		)
Pension and postretirement benefit liability:
Balance at beginning of period	(12		)		(9		)		(4		)
Other comprehensive income (loss) for period:
Change in unfunded pension postretirement liability, net of tax of $4 million, $(5) million and $(3) million, respectively	4				(5		)		(7		)
Amortization of prior service costs and transition obligation included in net income, net of tax $1 million, $2 million and $1 million, respectively	2				2				2
Total other comprehensive (loss) for period	6				(3		)		(5		)
Balance at end of period	(6		)		(12		)		(9		)
Total accumulated other comprehensive income (loss) at end of period	$	785			$	642			$	(153	)

22.  Share-Based Plans

Employee Stock Purchase Plans  The HSBC Holdings Savings-Related Share Option Plan ("HSBC Sharesave Plan") allows eligible employees to enter into savings contracts of one, three or five year lengths, with the ability to decide at the end of the contract term to either use their accumulated savings to purchase HSBC ordinary shares at a discounted option price or have the savings plus interest repaid in cash. Employees can currently save up to $400 per month over all their HSBC Sharesave Plans savings contracts.

The following table presents information for the HSBC Sharesave Plan.

At December 31,	2012				2011				2010
	(dollars are in millions)
Sharesave (5 year vesting period):
Total options granted	107,000				59,000				67,000
Fair value per option granted	$	1.61			$	2.22			$	2.76
Total compensation expense recognized	$	-			$	1			$	1
Significant assumptions used to calculate fair value:
Risk free interest rate	.92		%		2.17		%		2.63		%
Expected life (years)	5				5				5
Expected volatility	25		%		25		%		30		%
Sharesave (3 year vesting period):
Total options granted	430,000				209,000				268,000
Fair value per option granted	$	1.63			$	2.08			$	2.57
Total compensation expense recognized	$	1			$	1			$	1
Significant assumptions used to calculate fair value:
Risk free interest rate	.45		%		1.19		%		1.65		%
Expected life (years)	3				3				3
Expected volatility	25		%		25		%		30		%
Sharesave (1 year vesting period):
Total options granted	153,000				173,000				168,000
Fair value per option granted	$	1.35			$	1.62			$	2.00
Total compensation expense recognized	$	-			$	-			$	1
Significant assumptions used to calculate fair value:
Risk free interest rate	.23		%		.25		%		.47		%
Expected life (years)	1				1				1
Expected volatility	25		%		25		%		30		%

Restricted Share Plans  Key employees have been provided awards in the form of restricted share rights ("RSRs"), restricted shares ("RSs") and restricted share units ("RSUs") under the HSBC Group Share Plan. These shares have been granted subject to either time-based vesting or performance based-vesting, typically over three to five years. Currently, share-based awards granted to U.S. employees are granted in the form of RSUs. Annual awards to employees in 2011 and 2010 are subject to three-year time-based graded vesting. Also during 2011, we made a one-time grant of performance-based awards that are subject to performance-based vesting periods ranging from 12 to 30 months. Annual awards to employees in 2009 vest after three years. We also issue a small number of off-cycle grants each year, primarily for reasons related to recruitment of new employees. Compensation expense for these restricted share plans totaled $34 million in 2012, $54 million in 2011 and $40 million in 2010.

23.  Pension and Other Postretirement Benefits

Defined Benefit Pension Plans  Effective January 1, 2005, our previously separate qualified defined benefit pension plan was combined with that of HSBC Finance into a single HSBC North America qualified defined benefit pension plan (either the "HSBC North America Pension Plan" or the "Plan") which facilitates the development of a unified employee benefit policy and unified employee benefit plan administration for HSBC companies operating in the U.S. The table below reflects the portion of pension expense and its related components of the HSBC North America Pension Plan which has been allocated to us and is recorded in our consolidated statement of income (loss).

Year Ended December 31,	2012				2011				2010
	(in millions)
Service cost - benefits earned during the period	$	15			$	14			$	23
Interest cost on projected benefit obligation	67				74				72
Expected return on assets	(91		)		(81		)		(71		)
Amortization of prior service cost (benefit)	(5		)		(6		)		(5		)
Recognized losses	46				38				46
Curtailment benefit recognized	(31		)		-				-
Pension expense	$	1			$	39			$	65

Pension expense declined in 2012 due largely to the recognition of a curtailment benefit associated with the decision in the third quarter of 2012 to cease all future contributions under the Cash Balance formula and freeze the Plan effective January 1, 2013.  While participants with existing balances will continue to receive interest credits until the account is distributed, they will no longer accrue benefits beginning in 2013.  Also contributing to the decrease in pension expense was higher expected returns on plan assets driven by higher asset levels, including additional contributions to the Plan during 2012 and 2011, as well as lower interest costs as a result of a decrease in the number of active participants in the Plan.

In December 2011, an amendment was made to the Plan effective January 1, 2011 to amend the benefit formula, thus increasing the benefits associated with services provided by certain employees in past periods. The financial impact is being amortized to pension expense over the remaining life expectancy of the participants.

During the first quarter of 2010, we announced that the Board of Directors of HSBC North America had approved a plan to cease all future benefit accruals for legacy participants under the final average pay formula components of the HSBC North America Pension Plan effective January 1, 2011. This change to the Plan has been accounted for as a negative plan amendment and, therefore, the reduction in our share of HSBC North America's projected benefit obligation as a result of this decision is being amortized to net periodic pension cost over the future service periods of the affected employees.

The assumptions used in determining pension expense of the HSBC North America Pension Plan are as follows:

	2012			2011			2010
Discount rate	4.60	%		5.30	%		5.60	%
Salary increase assumption	2.75			2.75			2.90
Expected long-term rate of return on Plan assets	7.00			7.25			7.70

Long-term historical rates of return in conjunction with our current outlook of return rates over the term of the pension obligation are considered in determining an appropriate long-term rate of return on Plan assets. In this regard, a "best estimate range" of expected rates of return on Plan assets is established by our actuaries based on a portfolio of passive investments considering asset mix upon which a distribution of compound average returns for such portfolio is calculated over a 20 year horizon. This approach, however, ignores the characteristics and performance of the specific investments the pension plan is invested in, their historical returns and their performance against industry benchmarks. In evaluating the range of potential outcomes, a "best estimate range" is established between the 25th and 75th percentile. In addition to this analysis, we also seek the input of the firm which provides us pension advisory services. This firm performs an analysis similar to that done by our actuaries, but instead uses real investment types and considers historical fund manager performance. In this regard, we also focus on the range of possible outcomes between the 25th and 75th percentile, with a focus on the 50th percentile. The combination of these analyses creates a range of potential long-term rate of return assumptions from which we determine an appropriate rate. Given the Plan's current allocation of equity and fixed income securities and using investment return assumptions which are based on long term historical data, the long term expected return for plan assets is reasonable.

Investment strategy for Plan Assets  The primary objective of the HSBC North America U.S. Pension Plan is to provide eligible employees with regular pension benefits. Since the Plan is governed by the Employee Retirement Security Act of 1974 ("ERISA"), ERISA regulations serve as guidance for the management of plan assets. In this regard, an Investment Committee (the "Committee") for the Plan has been established and its members have been appointed by the Chief Executive Officer as authorized by the Board of Directors of HSBC North America. The Committee is responsible for establishing the funding policy and investment objectives supporting the Plan including allocating the assets of the Plan, monitoring the diversification of the Plan's investments and investment performance, assuring the Plan does not violate any provisions of ERISA and the appointment, removal and monitoring of investment advisers and the trustee. Consistent with prudent standards for preservation of capital and maintenance of liquidity, the goal of the Plan is to earn the highest possible total rate of return consistent with the Plan's tolerance for risk as periodically determined by the Committee. A key factor shaping the Committee's attitude towards risk is the generally long term nature of the underlying benefit obligations. The asset allocation decision reflects this long term horizon as well as the ability and willingness to accept some short-term variability in the performance of the portfolio in exchange for the expectation of competitive long-term investment results for its participants.

The Plan's investment committee utilizes a proactive approach to managing the Plan's overall investment strategy. During the past year, this resulted in the Committee conducting four quarterly meetings including two strategic reviews and two in-depth manager performance reviews. These quarterly meetings are supplemented by the pension investment staff tracking actual investment manager performance versus the relevant benchmark and absolute return expectations on a monthly basis. The pension investment staff also monitors adherence to individual investment manager guidelines via a quarterly compliance certification process. A sub-committee consisting of the pension investment staff and three members of the investment committee are delegated responsibility for conducting in-depth reviews of managers performing below expectation. This sub-committee also provides replacement recommendations to the Committee when manager performance fails to meet expectations for an extended period. In 2011, the Committee shifted the Plan's target asset allocation to 40 percent equities, 59 percent fixed income securities and 1 percent cash and maintained this mix in 2012. Should interest rates rise faster than currently anticipated by the Committee, a further shift to a higher percentage of fixed income securities may be made.

In order to achieve the return objectives of the Plan, investment diversification is employed to ensure that adverse results from one security or security class will not have an unduly detrimental effect on the entire portfolio. Diversification is interpreted to include diversification by type, characteristic, and number of investments as well as investment style of investment managers and number of investment managers for a particular investment style. Equity securities are invested in large, mid and small capitalization domestic stocks as well as large and small capitalization international, global and emerging market stocks. Fixed income securities are invested in U.S. Treasuries (including Treasury Inflation Protected Securities), agencies, corporate bonds, and mortgage and other asset backed securities. Without sacrificing returns or increasing risk, the Committee prefers a limited number of investment manager relationships which improves efficiency of administration while providing economies of scale with respect to fees.

An investment consultant is used to provide investment consulting services such as recommendations on the type of funds to be utilized, appropriate fund managers, and the monitoring of the performance of those fund managers. Plan performance is measured against absolute and relative return objectives. Results are reviewed from both a short-term (less than 1 year) and intermediate term (three to five year i.e. a full market cycle) perspective. Separate account fund managers are prohibited from investing in all HSBC Securities, restricted stock (except Rule 144(a) securities which are not prohibited investments), short-sale contracts, non-financial commodities, investments in private companies, leveraged investments and any futures or options (unless used for hedging purposes and approved by the Committee). Commingled account and limited partnership fund managers however are allowed to invest in the preceding to the extent allowed in each of their offering memoranda. As a result of the current low interest rate environment and expectation that interest rates will rise in the future, the Committee mandated the suspension of its previously approved interest rate hedging strategy in June 2009. Outside of the approved interest rate hedging strategy, the use of derivative strategies by investment managers must be explicitly authorized by the Committee. Such derivatives may be used only to hedge an account's investment risk or to replicate an investment that would otherwise be made directly in the cash market.

The Committee expects total investment performance to exceed the following long-term performance objectives:

•       A long-term return of 6.00 percent;

•       A passive, blended index comprised of 11.5 percent S&P 500, 3 percent Russell 2000, 11.5 percent EAFE, 3 percent S&P/Citigroup Extended Market World Ex-US, 5.5 percent MSCI AC World Free Index, 5.5 percent MSCI Emerging Markets, 51 percent Barclays Long Gov/Credit, 8 percent Barclays Treasury Inflation Protected Securities and 1 percent 90-day T-Bills; and

•       Above median performance of peer corporate pension plans.

HSBC North America's overall investment strategy for Plan assets is to achieve a mix of at least 95 percent of investments for long-term growth and up to 5 percent for near-term benefit payments with a wide diversification of asset types, fund strategies, and fund managers. The target sector allocations of Plan assets at December 31, 2012 are as follows:

	Percentage of Plan Assets at December 31, 2012
Domestic Large/Mid-Cap Equity	11.5	%
Domestic Small Cap Equity	3.0
International Large Cap Equity	11.5
International Small Cap Equity	3.0
Global Equity	5.5
Emerging Market Equity	5.5
Fixed Income Securities	59.0
Cash or Cash Equivalents	1.0
Total	100.0	%

Plan Assets  A reconciliation of beginning and ending balances of the fair value of net assets associated with the HSBC North America Pension Plan is shown below.

Year Ended December 31,	2012				2011
	(in millions)
Fair value of net Plan assets at beginning of year	$	3,130			$	2,564
Cash contributions by HSBC North America	181				357
Actual return on Plan assets	395				393
Benefits paid	(221		)		(184		)
Fair value of net Plan assets at end of year	$	3,485			$	3,130

As a result of the capital markets improving since December 2011, as well as the $181 million contribution to the Plan during 2012, the fair value of Plan assets at December 31, 2012 increased approximately 11 percent compared to 2011.

The Pension Protection Act of 2006 requires companies to meet certain pension funding requirements. As a result, during the third quarter of 2009, the Committee revised the Pension Funding Policy to better reflect current marketplace conditions and ensure the Plan's ability to continue to make lump sum payments to retiring participants. In 2011, we revised the Pension Funding Policy to lower the fourth criteria as listed below to $50 million (from $100 million) to reflect lower expected service costs. Until the Plan is fully funded, the revised Pension Funding Policy requires HSBC North America to annually contribute the greater of:

•       The minimum contribution required under ERISA guidelines;

•       An amount necessary to ensure the adjusted funding target attainment percentage for the Plan Year is equal to or greater than 90 percent;

•       Pension expense for the year as determined under current accounting guidance; or

•       $50 million which approximates the actuarial present value of benefits earned by Plan participants on an annual basis through 2012. Effective January 1, 2013 participants will no longer accrue benefits.

As a result, during 2012 HSBC North America made a contribution to the Plan of $181 million. Additional contributions during 2013 are anticipated.

Accounting principles related to fair value measurements provide a framework for measuring fair value and focuses on an exit price in the principal (or alternatively, the most advantageous) market accessible in an orderly transaction between willing market participants (the "Fair Value Framework"). The Fair Value Framework establishes a three-tiered fair value hierarchy with Level 1 representing quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs are inputs that are observable for the identical asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are inactive, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability and include situations where there is little, if any, market activity for the asset or liability. Transfers between leveling categories are recognized at the end of each reporting period. The following table presents the fair values associated with the major categories of Plan assets and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair values as of December 31, 2012 and 2011.

	Fair Value Measurement at December 31, 2012
	Total				(Level 1)				(Level 2)				(Level 3)
	(in millions)
Investments at Fair Value:
Cash and short term investments	$	74			$	74			$	-			$	-
Equity Securities
U.S. Large-cap(1)	378				374				4				-
U.S. Small-cap(2)	109				109				-				-
International Large-cap(3)	401				150				251				-
Global	189				53				136				-
Emerging Market	207				-				207				-
U.S. Treasury	829				829				-				-
U.S. Government agency issued or guaranteed	82				7				75				-
Obligations of U.S. states and political subdivisions	70				-				70				-
Asset-backed securities	44				-				1				43
U.S. corporate debt securities(4)	754				-				752				2
Corporate stocks - preferred	4				4				-				-
Foreign debt securities	211				4				186				21
Other investments	103				-				103				-
Accrued interest	20				6				14				-
Total investments	3,475				1,610				1,799				66
Receivables:
Receivables from sale of investments in process of settlement	89				89				-				-
Derivative financial assets	7				-				7				-
Total receivables	96				89				7				-
Total Assets	3,571				1,699				1,806				66
Liabilities	(86		)		(86		)		-				-
Total Net Assets	$	3,485			$	1,613			$	1,806			$	66

	Fair Value Measurement at December 31, 2011
	Total				(Level 1)				(Level 2)				(Level 3)
	(in millions)
Investments at Fair Value:
Cash and short term investments	$	97			$	97			$	-			$	-
Equity Securities
U.S. Large-cap(1)	347				342				5				-
U.S. Small-cap(2)	159				158				1				-
International(3)	282				117				165				-
Global	174				86				88				-
Emerging Market	175				-				175				-
U.S. Treasury	861				861				-				-
U.S. Government agency issued or guaranteed	70				7				63				-
Obligations of U.S. states and political subdivisions	50				-				42				8
Asset-backed securities	37				-				1				36
U.S. corporate debt securities(4)	598				-				598				-
Corporate stocks - preferred	4				3				1				-
Foreign debt securities	169				2				159				8
Other investments	61				-				61				-
Accrued interest	20				7				13				-
Total investments	3,104				1,680				1,372				52
Receivables:
Receivables from sale of investments in process of settlement	28				28				-				-
Derivative financial assets	26				-				26				-
Total receivables	54				28				26				-
Total Assets	3,158				1,708				1,398				52
Liabilities	(28		)		(28		)		-				-
Total Net Assets	$	3,130			$	1,680			$	1,398			$	52

⁽¹⁾        This category comprises actively managed enhanced index investments that track the S&P 500 and actively managed U.S. investments that track the Russell 1000.

⁽²⁾        This category comprises actively managed U.S. investments that track the Russell 2000.

⁽³⁾        This category comprises actively managed equity investments in non-U.S. and Canada developed markets that generally track the MSCI EAFE index. MSCI EAFE is an equity market index of 22 developed market countries in Europe, Australia, Asia and the Far East including Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom.

⁽⁴⁾        This category represents predominantly investment grade bonds of U.S. issuers from diverse industries.

⁽⁵⁾        This category is comprised completely of interest rate swaps.

The following table provides additional detail regarding the rating of our U.S. corporate debt securities at December 31, 2012:

	Level 2				Level 3				Total
	(in millions)
AAA to AA(1)	$	40			$	-			$	40
A+ to A-(1)	274				-				274
BBB+ to Unrated(1)	438				2				440
Total	$	752			$	2			$	754

⁽¹⁾        We obtain ratings on our U.S. corporate debt securities from both Moody's Investor Services and Standard and Poor's Corporation. In the event the ratings we obtain from these agencies differ, we utilize the lower of the two ratings.

Significant Transfers Into/Out of Levels 1 and 2 for Plan Assets  There were no significant transfers between Levels 1 and 2 during 2012.

Information on Level 3 Assets and Liabilities  The following table summarizes additional information about changes in the fair value of Level 3 assets during 2012 and 2011

					Total Gains and (Losses) Included in																												Current Period Unrealized Gains (Losses)
	Jan 1, 2012				Income				Other Comp. Income				Purchases				Settlement				Transfers Into Level 3				Transfers Out of Level 3				Dec. 31, 2012
	(in millions)
Obligations of U.S. states and political subdivisions	$	8			$	-			$	-			$	-			$	(1	)		$	-			$	(7	)		$	-			$	-
Asset-backed securities	36				-				3				9				(5		)		-				-				43				4
U.S. corporate debt securities	-				-				-				2				-				-				-				2				-
Foreign debt securities	8				-				(2		)		17				-				-				(2		)		21				1
Total assets	$	52			$	-			$	1			$	28			$	(6	)		$	-			$	(9	)		$	66			$	5

					Total Gains and (Losses) Included in																												Current Period UnrealizedGains (Losses)
	Jan 1, 2011				Income				Other Comp. Income				Purchases				Settlement				Transfers Into Level 3				Transfers Out of Level 3				Dec. 31, 2011
	(in millions)
Obligations of U.S. states and political subdivisions	$	-			$	-			$	-			$	2			$	-			$	6			$	-			$	8			$	1
Asset-backed securities	28				-				-				11				(4		)		1				-				36				-
Foreign debt securities	17				-				(2		)		-				(7		)		-				-				8				-
Total assets	$	45			$	-			$	(2	)		$	13			$	(11	)		$	7			$	-			$	52			$	1

Valuation techniques for Plan Assets  Following is a description of valuation methodologies used for significant categories of Plan assets recorded at fair value.

Securities:  Fair value of securities is generally determined by a third party valuation source. The pricing services generally source fair value measurements from quoted market prices and if not available, the security is valued based on quotes from similar securities using broker quotes and other information obtained from dealers and market participants. For securities which do not trade in active markets, such as fixed income securities, the pricing services generally utilize various pricing applications, including models, to measure fair value. The pricing applications are based on market convention and use inputs that are derived principally from or corroborated by observable market data by correlation or other means. The following summarizes the valuation methodology used for the major security types of our pension plan assets:

•       Equity securities - Since most of our securities are transacted in active markets, fair value measurements are determined based on quoted prices for the identical security. Equity securities and derivative contracts that are non-exchange traded are primarily investments in common stock funds. The funds permit investors to redeem the ownership interests back to the issuer at end-of-day for the net asset value ("NAV") per share and there are no significant redemption restrictions. Thus the end-of-day NAV is considered observable.

•       U.S. Treasury, U.S. government agency issued or guaranteed and Obligations of U.S. States and political subdivisions - As these securities transact in an active market, the pricing services source fair value measurements from quoted prices for the identical security or quoted prices for similar securities with adjustments as necessary made using observable inputs which are market corroborated.

•       U.S. government sponsored enterprises - For certain government sponsored mortgage-backed securities which transact in an active market, the pricing services source fair value measurements from quoted prices for the identical security or quoted prices for similar securities with adjustments as necessary made using observable inputs which are market corroborated. For government sponsored mortgage-backed securities which do not transact in an active market, fair value is determined using discounted cash flow models and inputs related to interest rates, prepayment speeds, loss curves and market discount rates that would be required by investors in the current market given the specific characteristics and inherent credit risk of the underlying collateral.

•       Asset-backed securities - Fair value is determined using discounted cash flow models and inputs related to interest rates, prepayment speeds, loss curves and market discount rates that would be required by investors in the current market given the specific characteristics and inherent credit risk of the underlying collateral.

•       U.S. corporate and foreign debt securities - For non-callable corporate securities, a credit spread scale is created for each issuer. These spreads are then added to the equivalent maturity U.S. Treasury yield to determine current pricing. Credit spreads are obtained from the new issue market, secondary trading levels and dealer quotes. For securities with early redemption features, an option adjusted spread ("OAS") model is incorporated to adjust the spreads determined above. Additionally, the pricing services will survey the broker/dealer community to obtain relevant trade data including benchmark quotes and updated spreads.

•       Corporate stocks - preferred - In general, fair value for preferred securities is calculated using an appropriate spread over a comparable U.S. Treasury security for each issue. These spreads represent the additional yield required to account for risk including credit, refunding and liquidity. The inputs are derived principally from or corroborated by observable market data.

•       Derivatives - Derivatives are recorded at fair value. Asset and liability positions in individual derivatives that are covered by legally enforceable master netting agreements, including cash collateral are offset and presented net in accordance with accounting principles which allow the offsetting of amounts relating to certain contracts. Derivatives traded on an exchange are valued using quoted prices. OTC derivatives, which comprise a majority of derivative contract positions, are valued using valuation techniques. The fair value for the majority of our derivative instruments are determined based on internally developed models that utilize independently-sourced market parameters, including interest rate yield curves, option volatilities, and currency rates. For complex or long-dated derivative products where market data is not available, fair value may be affected by the choice of valuation model and the underlying assumptions about, among other things, the timing of cash flows and credit spreads. The fair values of certain structured derivative products are sensitive to unobservable inputs such as default correlations and volatilities. These estimates are susceptible to significant change in future periods as market conditions change.

Projected benefit obligation  A reconciliation of beginning and ending balances of the projected benefit obligation of the defined benefit pension plan is shown below and reflects the projected benefit obligation of the merged HSBC North American plan.

	2012				2011
	(in millions)
Projected benefit obligation at beginning of year	$	3,923			$	3,384
Service cost	39				45
Interest cost	168				178
Actuarial losses	465				466
Plan amendments(1)	-				34
Benefits paid	(221		)		(184		)
Projected benefit obligation at end of year	$	4,374			$	3,923

⁽¹⁾        The Plan Amendments relate to the approval in December 2010 effective January 1, 2011 to amend the benefit formula, thus increasing the benefits associated with services provided by certain employees in past periods and to the approval in the first quarter of 2010 to cease all future benefit accruals for legacy participants under the final average pay formula effective January 1, 2011.

The accumulated benefit obligation for the HSBC North America Pension Plan was $4.4 billion and $3.9 billion at December 31, 2012 and 2011, respectively. As the projected benefit obligation and the accumulated benefit obligation relate to the HSBC North America Pension Plan, only a portion of this deficit should be considered our responsibility.

The assumptions used in determining the projected benefit obligation of the HSBC North America Pension Plan at December 31 are as follows:

	2012			2011			2010
Discount rate	3.95	%		4.60	%		5.45	%
Salary increase assumption	2.75			2.75			2.75

Estimated future benefit payments for the HSBC North America Pension Plan are as follows:

	HSBC North America
	(in millions)
2013	$	183
2014	186
2015	189
2016	193
2017	196
2018-2022	1,031

Defined Contribution Plans  We maintain a 401(k) plan covering substantially all employees. Employer contributions to the plan are based on employee contributions. Total expense recognized for this plan was approximately $30 million, $32 million and $30 million in 2012, 2011 and 2010, respectively.

Certain employees are participants in various defined contribution and other non-qualified supplemental retirement plans. Total expense recognized for these plans was less than $1 million in 2012, 2011 and 2010.

Postretirement Plans Other Than Pensions  Our employees also participate in plans which provide medical, dental and life insurance benefits to retirees and eligible dependents. These plans cover substantially all employees who meet certain age and vested service requirements. We have instituted dollar limits on payments under the plans to control the cost of future medical benefits.

The net postretirement benefit cost included the following components:

Year Ended December 31,	2012				2011				2010
	(in millions)
Service cost - benefits earned during the period	$	1			$	1			$	1
Interest cost	3				4				4
Amortization of transition obligation	2				2				2
Net periodic postretirement benefit cost	$	6			$	7			$	7

The assumptions used in determining the net periodic postretirement benefit cost for our postretirement benefit plans are as follows:

	2012			2011			2010
Discount rate	4.25	%		4.95	%		5.20	%
Salary increase assumption	2.75			2.75			2.90

A reconciliation of the beginning and ending balances of the accumulated postretirement benefit obligation is as follows:

	2012				2011
	(in millions)
Accumulated benefit obligation at beginning of year	$	85			$	79
Service cost	1				1
Interest cost	3				4
Actuarial losses	(2		)		6
Plan curtailments	(8		)		-
Benefits paid	(9		)		(5		)
Accumulated benefit obligation at end of year	$	70			$	85

Our postretirement benefit plans are funded on a pay-as-you-go basis. We currently estimate that we will pay benefits of approximately $7 million relating to our postretirement benefit plans in 2013. The funded status of our postretirement benefit plans was a liability of $70 million at December 31, 2012.

Estimated future benefit payments for our postretirement benefit plans are summarized in the following table.

	(in millions)
2013	$	7
2014	7
2015	7
2016	7
2017	7
2018-2022	31

The assumptions used in determining the benefit obligation of our postretirement benefit plans at December 31 are as follows:

	2012			2011
Discount rate	3.35	%		4.25	%
Salary increase assumption	2.75			2.75

For measurement purposes, 7.4 percent (pre-65) and 7.0 percent (post-65) annual rates of increase in the per capita costs of covered health care benefits were assumed for 2012. These rates are assumed to decrease gradually reaching the ultimate rate of 4.5 percent in 2027, and remain at that level thereafter.

Assumed health care cost trend rates have an effect on the amounts reported for health care plans. A one-percentage point change in assumed health care cost trend rates would increase (decrease) service and interest costs and the postretirement benefit obligation as follows:

	One Percent Increase				One Percent Decrease
	(in millions)
Effect on total of service and interest cost components	$	-			$	-
Effect on accumulated postretirement benefit obligation	1				(1		)

24.  Related Party Transactions

In the normal course of business, we conduct transactions with HSBC and its subsidiaries. These transactions occur at prevailing market rates and terms and include funding arrangements, derivative execution, purchases and sales of receivables, servicing arrangements, information technology and some centralized services, item and statement processing services, banking and other miscellaneous services. All extensions of credit by HSBC Bank USA to other HSBC affiliates (other than FDIC-insured banks) are legally required to be secured by eligible collateral. The following table presents related party balances and the income and expense generated by related party transactions:

At December 31,	2012				2011
	(in millions)
Assets:
Cash and due from banks	$	114			$	263
Interest bearing deposits with banks	714				1,416
Federal funds sold and securities purchased under agreements to resell	-				228
Trading assets(1)	21,370				22,367
Loans	4,514				858
Other	858				248
Total assets	$	27,570			$	25,380
Liabilities:
Deposits	$	13,863			$	18,153
Trading liabilities(1)	23,910				25,298
Short-term borrowings	2,721				2,916
Long-term debt	3,990				3,988
Other	459				451
Total liabilities	$	44,943			$	50,806

⁽¹⁾        Trading assets and liabilities exclude the impact of netting which allow the offsetting of amounts relating to certain contracts if certain conditions are met.

	Year Ended December 31,
	2012				2011				2010
	(in millions)
Income/(Expense):
Interest income	$	52			$	62			$	91
Interest expense	(91		)		(82		)		(44		)
Net interest income (loss)	$	(39	)		$	(20	)		$	47
Servicing and other fees from HSBC affiliate:
Fees and commissions:
HSBC Finance	$	76			$	68			$	45
HSBC Markets (USA) Inc. ("HMUS")	18				23				13
Other HSBC affiliates	73				73				72
Fees on transfers of refund anticipation loans to HSBC Finance	-				-				4
Other HSBC affiliates income	35				38				22
Total affiliate income	$	202			$	202			$	156
Residential mortgage banking revenue	$	3			$	17			$	11
Support services from HSBC affiliates:
HSBC Finance	$	(27	)		$	(36	)		$	(101	)
HMUS	(303		)		(257		)		(288		)
HSBC Technology & Services (USA) ("HTSU")	(912		)		(967		)		(780		)
Other HSBC affiliates	(187		)		(194		)		(117		)
Total support services from HSBC affiliates	$	(1,429	)		$	(1,454	)		$	(1,286	)
Stock based compensation expense with HSBC	$	(36	)		$	(56	)		$	(42	)

Transactions Conducted with HSBC Finance Corporation 

•       In July 2004, we sold the account relationships associated with $970 million of credit card receivables to HSBC Finance and on a daily basis, we purchased new originations on these credit card receivables. HSBC Finance continues to service these loans for us for a fee. As discussed in Note 12, "Intangible Assets," on March 29, 2012 we re-purchased these account relationships from HSBC Finance for $108 million and as a result, we stopped purchasing new originations on these credit card accounts from HSBC Finance. We purchased $492 million of credit card receivables from HSBC Finance during 2012 compared to purchases of credit card receivables of $2.3 billion and $2.4 billion during 2011 and 2010, respectively. HSBC Finance continued to service these loans for us for a fee through April 30, 2012. At December 31, 2011, HSBC Finance was servicing credit card receivables on our behalf of $1.2 billion. Effective with the close of the sale of our General Motors ("GM") and Union Plus ("UP") credit card receivables and our private label credit card and closed-end receivables on May 1, 2012, these loans are now serviced by Capital One for a fee. Premiums paid are amortized to interest income over the estimated life of the receivables purchased. We paid HSBC finance fees for servicing these loans of $7 million during 2012, $15 million during 2011 and $15 million during 2010.

•       In 2003 and 2004, we purchased approximately $3.7 billion of residential mortgage loans from HSBC Finance. HSBC Finance continues to service these loans for us for a fee. At December 31, 2012 and 2011, HSBC Finance was servicing $1.2 billion and $1.3 billion of residential mortgage loans for us. We paid HSBC Finance fees for servicing these loans of $4 million during 2012 compared to $4 million during 2011 and $5 million during 2010.

•       In the fourth quarter of 2009, an initiative was begun to streamline the servicing of real estate secured receivables across North America. As a result, certain functions that we had previously performed for our mortgage customers were being performed by HSBC Finance for all North America mortgage customers, including our mortgage customers. Additionally, we began performing certain functions for all North America mortgage customers where these functions had been previously provided separately by each entity. During 2011, we began a process to separate these functions so that each entity will be servicing its own mortgage customers when the process is completed. During 2012, 2011 and 2010, we paid $6 million, $7 million and $7 million, respectively, for services we received from HSBC Finance and received $3 million, $10 million and $8 million, respectively, for services we provided to HSBC Finance.

•       In July 2010, certain employees in the real estate receivable default servicing department of HSBC Finance were transferred to the mortgage loan servicing department of a subsidiary of HSBC Bank USA and subsequently to HSBC Bank USA. These employees continue to service defaulted real estate secured receivables for HSBC Finance and we receive a fee for providing these services. During 2012, 2011 and 2010, we received servicing revenue from HSBC Finance of $58 million, $62 million and $34 million, respectively.

•       Prior to 2011, our wholly-owned subsidiaries, HSBC Bank USA and HSBC Trust Company (Delaware), N.A. ("HTCD"), historically have been the originating lenders on behalf of HSBC Finance for a federal income tax refund anticipation loan program for clients of a single third party tax preparer which is managed by HSBC Finance. By agreement, HSBC Bank USA and HTCD historically processed applications, funded and subsequently transferred a portion of these loans to HSBC Finance. Prior to 2010, all loans were transferred to HSBC Finance. Beginning in 2010, we began keeping a portion of these loans on our balance sheet and earn a fee. The loans kept were transferred to HSBC Finance at par only upon reaching a defined delinquency status. We paid HSBC Finance a fee to service the loans we retain on our balance sheet and to assume the credit risk associated with these receivables. During 2010, we received fees of $4 million for the loans we originated and sold to HSBC Finance. Fees paid to HSBC Finance for servicing and assuming the credit risk for these loans totaled $58 million during 2010.

In December 2010, as a result of an Internal Revenue Service decision to stop providing information regarding certain unpaid taxpayer obligations which historically served as a significant part of the underwriting process, it was determined that tax refund anticipation loans could no longer be offered in a safe and sound manner and, therefore, we would no longer offer these loans and other related products going forward. These products have historically had an insignificant impact to our results of operations. See Note 5, "Exit from Taxpayer Financial Services Loan Program," for further discussion.

•       We extended a secured $1.5 billion uncommitted 364 day credit facility to certain subsidiaries of HSBC Finance. This facility was renewed for an additional 364 days in November 2012.  Any draws on this credit facility by HSBC Finance require regulatory approval.  There were no balances outstanding at December 31, 2012 and 2011.

•       During the fourth quarter of 2011, we extended an unsecured $3.0 billion 364 day uncommitted revolving credit agreement to HSBC Finance which allowed for borrowings with maturities of up to 15 years.  During the second quarter of 2012, an amendment was executed to increase this uncommitted revolving credit agreement to $4.0 billion.  As of December 31, 2012, $2.0 billion was outstanding under this credit agreement with $512 million maturing in September 2017 and $1.5 billion maturing in January 2018.  As of December 31, 2011, there were no amounts outstanding under this credit agreement.

•       In May 2012, we extended a $2.0 billion 364 day committed revolving credit facility to HSBC Finance. As of December 31, 2012 there were no amounts outstanding under this credit facility.

Transactions Conducted with HSBC Finance Corporation Involving Discontinued Operations  As it relates to our discontinued credit card and private label operations, in January 2009, we purchased the GM and UP Portfolios from HSBC Finance, with an outstanding principal balance of $12.4 billion at the time of sale, at a total net premium of $113 million. Additionally, in December 2004, we purchased the private label credit card receivable portfolio as well as private label commercial and closed end loans from HSBC Finance. HSBC Finance retained the customer account relationships for both the GM and UP receivables and the private label credit card receivables and by agreement we purchased on a daily basis substantially all new originations from these account relationships from HSBC Finance. Premiums paid for these receivables are amortized to interest income over the estimated life of the receivables purchased and are included as a component of Income from Discontinued Operations. HSBC Finance serviced these credit card loans for us for a fee up until May 2012. Information regarding these loans is summarized in the table below.

	Private Label								Credit Card
	Cards				Commercial and Closed End Loans				General Motors				Union Privilege				Other				Total
	(in billions)
Loans serviced by HSBC Finance:
December 31, 2012	$	-			$	-			$	-			$	-			$	-			$	-
December 31, 2011	12.5				0.3				4.1				3.5				0.8				21.2
Total loans purchased on a daily basis from HSBC Finance during:
2012	4.4				-				3.9				1.0				0.6				9.9
2011	15.4				-				13.0				3.2				1.8				33.4
2010	14.6				-				13.5				3.2				1.7				33.0

Fees paid for servicing these loan portfolios, which are included as a component of Income from discontinued operations, totaled $199 million, $578 million and $615 million during 2012, 2011 and 2010, respectively.

The GM and UP credit card receivables as well as the private label credit card receivables that were purchased from HSBC Finance on a daily basis at a sales price for each type of portfolio determined using a fair value calculated semi-annually in April and October by an independent third party based on the projected future cash flows of the receivables. The projected future cash flows were developed using various assumptions reflecting the historical performance of the receivables and adjusting for key factors such as the anticipated economic and regulatory environment. The independent third party used these projected future cash flows and a discount rate to determine a range of fair values. We used the mid-point of this range as the sales price. If significant information became available that altered the projected future cash flows, an analysis was performed to determine if fair value rates needed to be updated prior to the normal semi-annual cycles. With the announcement of the Capital One transaction, an analysis was performed and an adjustment to the fair value rates was made effective August 10, 2011 to reflect the sale of the receivables to a third party during the first half of 2012. The rates continued to be updated as part of our normal semi-annual process until the time the transaction was completed.

•       Certain of our consolidated subsidiaries have revolving lines of credit totaling $1.0 billion with HSBC Finance. There were no balances outstanding under any of these lines of credit at December 31, 2011.  These credit facilities were terminated in April 2012.

•       We extended a $1.0 billion committed unsecured 364 day credit facility to HSBC Bank Nevada, a subsidiary of HSBC Finance, in December 2009. This facility was renewed for an additional 364 days in November 2011. There were no balances outstanding at December 31, 2011.  This credit facility was terminated in May 2012.

Transactions Conducted with HMUS and Subsidiaries

•       We utilize HSBC Securities (USA) Inc. ("HSI") for broker dealer, debt and preferred stock underwriting, customer referrals, loan syndication and other treasury and traded markets related services, pursuant to service level agreements. Fees charged by HSI for broker dealer, loan syndication services, treasury and traded markets related services are included in support services from HSBC affiliates. Debt underwriting fees charged by HSI are deferred as a reduction of long-term debt and amortized to interest expense over the life of the related debt. Preferred stock issuance costs charged by HSI are recorded as a reduction of capital surplus. Customer referral fees paid to HSI are netted against customer fee income, which is included in other fees and commissions.

•       We have extended loans and lines, some of them uncommitted, to HMUS and its subsidiaries in the amount of $3.8 billion and $3.3 billion at December 31, 2012 and 2011. At December 31, 2012 and 2011, $310 million and $229 million, respectively, was outstanding on these loans and lines. Interest income on these loans and lines totaled $4 million in 2012, $6 million in 2011 and $15 million during 2010.

Other Transactions with HSBC Affiliates

•       In January 2011, we acquired Halbis Capital Management (USA) Inc (Halbis), an asset management business, from an affiliate, Halbis Capital Management (UK) Ltd. as part of a reorganization which resulted in an increase to additional paid-in-capital of approximately $21 million.

•       In April 2011, we completed the sale of our European Banknotes Business with assets of $123 million to HSBC Bank plc.

•       HNAH extended a $1.0 billion senior debt to us in August 2009. This is a five year floating rate debt which matures on August 2014. In addition, in April 2011, we borrowed an additional $3.0 billion from HNAH. This senior debt matures in three equal installments of $1.0 billion in April 2013, 2015 and 2016. The debt bear interest at 90 day USD Libor plus a spread, with each maturity at a different spread. Interest expense on this debt totaled $64 million in 2012, $46 million in 2011 and $17 million in 2010.

•       In addition to purchases of U.S. Treasury and U.S. Government Agency securities, we have periodically purchased both foreign-denominated and USD denominated marketable securities from certain affiliates including HSI, HSBC Asia-Pacific, HSBC Mexico, HSBC London, HSBC Brazil, HSBC Chile and HSBC Canada. Marketable securities outstanding from these purchases are reflected in trading assets and totaled $14 million and $8.5 billion at December 31, 2012 and 2011, respectively.

•       In June 2010, we sold certain securities with a book value of $302 million to HSBC Bank plc and recognized a pre-tax loss of $40 million.

•       In 2011, we sold our equity interest in Guernsey Joint Venture to HSBC Private Bank (Suisse) SA, resulting in a gain of $53 million.

•       We had a committed unused line of credit with HSBC France of $2.5 billion at December 31, 2011.  The facility was terminated effective July 30, 2012.

•       We have committed unused line of credit with HSBC Investment (Bahamas) Limited of $900 million at December 31, 2012.

•       We have committed unused line of credit with HSBC Holdings plc of $500 million at December 31, 2012.

•       We have an uncommitted unused line of credit with HNAI of $150 million at December 31, 2012 and 2011.

•       We have extended loans and lines of credit to various other HSBC affiliates totaling $460 million at December 31, 2012 and 2011. At December 31, 2012 and 2011, there were no amounts outstanding under these loans or lines of credit. Interest income on these lines totaled less than $1 million in both 2012 and 2011 and $5 million in 2010.

•       Historically, we have provided support to several HSBC affiliate sponsored asset-backed commercial paper ("ABCP") conduits by purchasing A-1/P-1 rated commercial paper issued by them. At December 31, 2012 and 2011, no ABCP issued by such conduits was held.

•       We routinely enter into derivative transactions with HSBC Finance and other HSBC affiliates as part of a global HSBC strategy to offset interest rate or other market risks associated with debt issues and derivative contracts with unaffiliated third parties. The notional value of derivative contracts related to these contracts was approximately $1,066.5 billion and $887.1 billion at December 31, 2012 and 2011, respectively. The net credit exposure (defined as the net fair value of derivative assets and liabilities) related to the contracts was approximately $691 million and $423 million at December 31, 2012 and 2011, respectively. Our Global Banking and Markets business accounts for these transactions on a mark to market basis, with the change in value of contracts with HSBC affiliates substantially offset by the change in value of related contracts entered into with unaffiliated third parties.

•       In December 2008, HSBC Bank USA entered into derivative transactions with another HSBC affiliate to offset the risk associated with the contingent "loss trigger" options embedded in certain leveraged super senior ("LSS") tranched credit default swaps. These transactions reduced income volatility for HSBC Bank USA by transferring the volatility to the affiliate. The last of these transactions matured during the third quarter of 2011.

•       HSBC North America's technology and certain centralized support services including human resources, corporate affairs, risk management, legal, compliance, tax, finance and other shared services are centralized within HTSU. Technology related assets and software purchased are generally purchased and owned by HTSU. HTSU also provides certain item processing and statement processing activities which are included in Support services from HSBC affiliates in the consolidated statement of income (loss).  We also receive fees from HTSU for providing them certain administrative services.  The fees we receive from HTSU are recorded as a component of servicing and other fees from HSBC affiliates.

•       Our domestic employees participate in a defined benefit pension plan sponsored by HSBC North America. Additional information regarding pensions is provided in Note 23, "Pension and Other Post retirement Benefits."

•       Employees participate in one or more stock compensation plans sponsored by HSBC. Our share of the expense of these plans on a pre-tax basis was $36 million in 2012, $56 million in 2011 and $42 million in 2010. As of December 31, 2012, our share of compensation cost related to nonvested stock compensation plans was approximately $42 million, which is expected to be recognized over a weighted-average period of less than one year. A description of these stock compensation plans can be found in Note 22, "Share-based Plans."

•       We use HSBC Global Resourcing (UK) Ltd., an HSBC affiliate located outside of the United States, to provide various support services to our operations including among other areas customer service, systems, collection and accounting functions. The expenses related to these services of $23 million in 2012, $25 million in 2011 and $32 million in 2010, are included as a component of Support services from HSBC affiliates in the table above. Through February 2011, the expenses for these services for all HSBC North America operations were billed directly to HTSU who then billed these services to the appropriate HSBC affiliate who benefited from the services.  Beginning in March 2011, HSBC Global Resourcing (UK) Ltd. began billing us directly for the services we receive from them.

•       We did not pay any dividends to our parent company, HNAI, on our common stock in 2012, 2011 or 2010.

 

END

 

 

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