-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IkHyR2s3055oo1gh/P1NEuNU/GQCbO0Lj+9nDjTeI+k6U2qLxcYklry61QaVKONN 4qcOHHnEECYzDmrzTZLUEA== 0000083246-00-000009.txt : 20000515 0000083246-00-000009.hdr.sgml : 20000515 ACCESSION NUMBER: 0000083246-00-000009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000512 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HSBC USA INC /MD/ CENTRAL INDEX KEY: 0000083246 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 132764867 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-07436 FILM NUMBER: 630137 BUSINESS ADDRESS: STREET 1: 452 FIFTH AVE CITY: NEW YORK STATE: NY ZIP: 10018 BUSINESS PHONE: 2125256100 MAIL ADDRESS: STREET 1: 452 FIFTH AVENUE CITY: NEW YORK STATE: NY ZIP: 10018 10-Q 1 CONFORMED 1. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended March 31, 2000 Commission file number 1-7436 HSBC USA Inc. (Exact name of registrant as specified in its charter) Maryland Corporation 13-2764867 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 452 Fifth Avenue, New York, New York 10018 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (212) 525-6100 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No All voting stock (704 shares of Common Stock, $5 par value) is owned by HSBC North America Inc., an indirect wholly owned subsidiary of HSBC Holdings plc. This report includes a total of 20 pages. 2. Part I - FINANCIAL INFORMATION Page Item 1 - Financial Statements Consolidated Balance Sheet March 31, 2000 and December 31, 1999 3 Consolidated Statement of Income For The Three Months Ended March 31, 2000 and 1999 4 Consolidated Statement of Changes in Shareholders' Equity For The Three Months Ended March 31, 2000 and 1999 5 Consolidated Statement of Cash Flows For The Three Months Ended March 31, 2000 and 1999 6 Notes to Consolidated Financial Statements 7 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Part II - OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K 17 Signatures 18
3. HSBC USA Inc. - ------------------------------------------------------------------------------- C O N S O L I D A T E D B A L A N C E S H E E T March 31, December 31, 2000 1999 - ------------------------------------------------------------------------------- in thousands Assets Cash and due from banks $ 1,827,278 $ 1,977,756 Interest bearing deposits with banks 4,805,577 4,234,668 Federal funds sold and securities purchased under resale agreements 4,197,256 2,318,361 Trading assets 4,355,631 4,526,988 Securities available for sale 19,017,311 25,973,805 Securities held to maturity (fair value $4,789,025 and $4,811,695) 4,770,515 4,811,695 Loans 38,577,856 37,909,143 Less - allowance for credit losses 659,560 659,603 - ------------------------------------------------------------------------------- Loans, net 37,918,296 37,249,540 Premises and equipment 750,691 745,910 Accrued interest receivable 789,350 778,363 Equity investments 2,546,009 2,540,927 Goodwill and other acquisition intangibles 3,262,362 3,307,147 Other assets 2,199,795 1,774,459 - ------------------------------------------------------------------------------- Total assets $ 86,440,071 $ 90,239,619 =============================================================================== Liabilities Deposits in domestic offices Noninterest bearing $ 6,428,516 $ 6,003,813 Interest bearing 29,458,990 29,393,957 Deposits in foreign offices Noninterest bearing 267,747 187,099 Interest bearing 18,052,196 20,865,022 - ------------------------------------------------------------------------------- Total deposits 54,207,449 56,449,891 - ------------------------------------------------------------------------------- Trading account liabilities 2,698,190 2,440,729 Short-term borrowings 10,205,206 5,271,597 Interest, taxes and other liabilities 3,434,362 3,059,993 Payable to shareholders of acquired company - 7,091,209 Subordinated long-term debt and perpetual capital notes 3,426,094 3,427,649 Guaranteed mandatorily redeemable securities 710,628 710,259 Other long-term debt 1,750,789 1,747,131 - ------------------------------------------------------------------------------- Total liabilities 76,432,718 80,198,458 - ------------------------------------------------------------------------------- Shareholders' equity Preferred stock 500,000 500,000 Common shareholder's equity Common stock 4 4 Capital surplus 8,921,427 8,920,113 Retained earnings 623,745 671,578 Accumulated other comprehensive loss (37,823) (50,534) - ------------------------------------------------------------------------------- Total common shareholder's equity 9,507,353 9,541,161 - ------------------------------------------------------------------------------- Total shareholders' equity 10,007,353 10,041,161 - ------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 86,440,071 $ 90,239,619 =============================================================================== The accompanying notes are an integral part of the consolidated financial statements.
4. HSBC USA Inc. - ------------------------------------------------------------------------------ C O N S O L I D A T E D S T A T E M E N T O F I N C O M E Three months ended March 31, 2000 1999 - ------------------------------------------------------------------------------ in thousands Interest income Loans $ 721,021 $ 465,830 Securities 420,967 58,843 Trading assets 28,598 11,900 Other short-term investments 107,288 40,541 - ------------------------------------------------------------------------------ Total interest income 1,277,874 577,114 - ------------------------------------------------------------------------------ Interest expense Deposits 525,440 200,933 Short-term borrowings 98,974 38,637 Long-term debt 104,183 26,290 - ------------------------------------------------------------------------------ Total interest expense 728,597 265,860 - ------------------------------------------------------------------------------ Net interest income 549,277 311,254 Provision for credit losses 27,993 22,500 - ------------------------------------------------------------------------------ Net interest income, after provision for credit losses 521,284 288,754 - ------------------------------------------------------------------------------ Other operating income Trust income 20,143 12,658 Service charges 43,508 29,194 Mortgage banking revenue 7,482 11,216 Other fees and commissions 79,443 39,962 Trading revenues 52,227 2,592 Security gains (losses) (3,280) 2,451 Earnings from equity investments 12,718 659 Other income 10,406 22,869 - ------------------------------------------------------------------------------ Total other operating income 222,647 121,601 - ------------------------------------------------------------------------------ Total income from operations 743,931 410,355 - ------------------------------------------------------------------------------ Other operating expenses Salaries and employee benefits 250,891 104,500 Occupancy expense, net 42,100 22,752 Goodwill amortization 43,731 9,582 Other expenses 138,157 69,679 - ------------------------------------------------------------------------------ Total operating expenses 474,879 206,513 - ------------------------------------------------------------------------------ Income before taxes 269,052 203,842 Applicable income tax expense 110,000 82,400 - ------------------------------------------------------------------------------ Net income $ 159,052 $ 121,442 ============================================================================== The accompanying notes are an integral part of the consolidated financial statements.
5. HSBC USA Inc. - ------------------------------------------------------------------------------ C O N S O L I D A T E D S T A T E M E N T O F C H A N G E S I N S H A R E H O L D E R S' E Q U I T Y Three months ended March 31, 2000 1999 - ------------------------------------------------------------------------------ Share- Compre- Share- Compre- holders' hensive holders' hensive Equity Income Equity Income - ------------------------------------------------------------------------------ in thousands Preferred stock Balance, January 1, $ 500,000 $ - * - --------------------------------------- --------- Balance, March 31, 500,000 - - --------------------------------------- --------- Common stock Balance, January 1, 4 5 - --------------------------------------- --------- Balance, March 31, 4 5 - --------------------------------------- --------- Capital surplus Balance, January 1, 8,920,113 1,806,563 Capital contribution from parent 1,314 696 - --------------------------------------- --------- Balance, March 31, 8,921,427 1,807,259 - --------------------------------------- --------- Retained earnings Balance, January 1, 671,578 377,179 Net income 159,052 $159,052 121,442 $121,442 Cash dividends declared: Preferred stock (6,885) - Common stock (200,000) (155,000) - --------------------------------------- --------- Balance, March 31, 623,745 343,621 - --------------------------------------- --------- Accumulated other comprehensive income (loss) Balance, January 1, (50,534) 44,506 Change in unrealized gains (losses) on securities available for sale, net of taxes and reclassification adjustments 12,434 (27,801) Foreign currency translation adjustments, net of taxes 277 - Change in accumulated other comprehensive income, net 12,711 (27,801) ------- ------- Comprehensive income $171,763 $ 93,641 - --------------------------------------- ======= --------- ======= Balance, March 31, (37,823) 16,705 - --------------------------------------- --------- Total shareholders' equity, March 31, $10,007,353 $2,167,590 ======================================= ========= The accompanying notes are an integral part of the consolidated financial statements. * $100 aggregate par value.
6. HSBC USA Inc. - ------------------------------------------------------------------------------ C O N S O L I D A T E D S T A T E M E N T O F C A S H F L O W S Three months ended March 31, 2000 1999 - ------------------------------------------------------------------------------ in thousands Cash flows from operating activities Net income $ 159,052 $ 121,442 Adjustments to reconcile net income to net cash provided by operating activities Depreciation, amortization and deferred taxes 100,823 13,723 Provision for credit losses 27,993 22,500 Net change in other accrual accounts 6,385 104,734 Net change in loans originated for sale (251,041) 119,103 Net change in trading assets and liabilities 492,396 20,923 Other, net 69,517 (32,324) - ------------------------------------------------------------------------------ Net cash provided by operating activities 605,125 370,101 - ------------------------------------------------------------------------------ Cash flows from investing activities Net change in interest bearing deposits with banks (570,909) (250,801) Net change in short-term investments (1,878,895) (649,262) Purchases of securities (7,547,746) (1,036,113) Sales of securities 4,880,730 942,755 Maturities of securities 9,372,724 405,356 Payment to shareholders of acquired company (7,091,209) - Net originations and maturities of loans (675,353) 340,469 Sales of loans 167,149 - Expenditures for premises and equipment (27,734) (7,946) Cash used in acquisitions, net of cash acquired - (8,787) Other, net 121,811 (21,639) - ------------------------------------------------------------------------------ Net cash used by investing activities (3,249,432) (285,968) - ------------------------------------------------------------------------------ Cash flows from financing activities Net change in deposits (2,242,442) (29,813) Net change in short-term borrowings 4,933,609 (345,944) Issuance of long-term debt 171,842 200,000 Repayment of long-term debt (169,140) (100,153) Capital contributions 1,314 696 Dividends paid (201,354) (155,000) - ------------------------------------------------------------------------------ Net cash provided (used) by financing activities 2,493,829 (430,214) - ------------------------------------------------------------------------------ Net change in cash and due from banks (150,478) (346,081) Cash and due from banks at beginning of period 1,977,756 1,262,423 - ------------------------------------------------------------------------------ Cash and due from banks at end of period $ 1,827,278 $ 916,342 ============================================================================== The accompanying notes are an integral part of the consolidated financial statements.
7. Notes to Consolidated Financial Statements 1. Basis of Presentation The accounting and reporting policies of HSBC USA Inc. (the Company) and its subsidiaries including its principal subsidiary, HSBC Bank USA conform to generally accepted accounting principles and to predominant practice within the banking industry. Such policies, except as described in Note 6 below, are consistent with those applied in the presentation of the Company's annual financial statements. The interim financial information in this report has not been audited. In the opinion of the Company's management, all adjustments necessary for a fair presentation of financial position, results of operations and cash flows for the interim periods have been made. The interim financial information should be read in conjunction with the 1999 Annual Report on Form 10-K. 2. Acquisition Following the acquisition of Republic New York Corporation (Republic) by HSBC Holdings plc (HSBC) on December 31, 1999, HSBC merged Republic with the Company. Republic had total assets of $46.9 billion and deposits of $29.9 billion at that date. The transaction was accounted for as a purchase and the operating results of Republic are included from January 1, 2000. Goodwill was approximately $3.0 billion and is being amortized against income over 20 years.
The following pro forma financial information presents the combined results of the Company and Republic as if the acquisition had occurred as of the beginning of 1999, after giving effect to certain adjustments, including accounting adjustments related to fair value adjustments, amortization of goodwill and related income tax effect. The proforma financial information does not necessarily reflect the results of operations that would have occurred had the Company and Republic constituted a single entity during such period. - ---------------------------------------------------------------------------------------- Historical Amortization -------------------- of HSBC Republic Acquisition Pro Forma Three months ended March 31, 1999 USA Inc. NY Corp. Adjustments Combined - ---------------------------------------------------------------------------------------- (in millions) Net interest income $311 $257 $ (8) $560 Provision for credit losses 22 4 - 26 - ---------------------------------------------------------------------------------------- Net interest income after provision for credit losses 289 253 (8) 534 Other operating income 122 155 (21) 256 - ---------------------------------------------------------------------------------------- 411 408 (29) 790 Operating expenses 207 353 33 593 - ---------------------------------------------------------------------------------------- Income before taxes 204 55 (62) 197 Income tax expense (benefit) 83 8 (4) 87 - ---------------------------------------------------------------------------------------- Net income $121 $ 47 $(58) $110 - ----------------------------------------------------------------------------------------
As a result of the acquisition as of December 31, 1999 the Company assumed certain liabilities associated with merging Republic's operations with those of the Company and recognized restructuring costs relating to the planned severance of employees and exiting of businesses of the Company. The following table represents the activity in these reserves through March 31, 2000. - ---------------------------------------------------------------------------- Severance Related Premises Other Total - ---------------------------------------------------------------------------- (in millions) Liabilities assumed $133.9 $ 9.7 $14.0 $157.6 Restructuring charges 5.7 21.0 - 26.7 - ---------------------------------------------------------------------------- Balance December 31, 1999 139.6 30.7 14.0 184.3 Payments 14.4 .1 8.0 22.5 - ---------------------------------------------------------------------------- Balance March 31, 2000 $125.2 $30.6 $ 6.0 $161.8 - ----------------------------------------------------------------------------
8. 3. Litigation As described in Note 27 to the financial statements contained in the Company's Annual Report on Form 10-K for 1999 (the 1999 10-K), the Company and certain of its subsidiaries are defendants in a number of legal actions arising out of the Princeton Note Matter (as defined in the 1999 10-K). Regulatory and law enforcement agencies, including the U.S. Attorney for the Southern District of New York, the Securities and Exchange Commission and the Commodity Futures Trading Commission, are continuing to investigate the Princeton Note Matter, including the activities of Republic New York Securities Corporation (RNYSC) and Republic New York Corporation (Republic) (predecessor of the Company) with respect to the Princeton Note Matter. In addition, in April and May 2000, two additional civil actions arising from the Princeton Note Matter were commenced in the United States District Court for the Southern District of New York against RNYSC, the Company (as successor to Republic) and HSBC Bank USA (as successor to Republic National Bank of New York) (together the Republic Parties). Those actions, entitled Nichimen Europe, PLC v. Republic New York Securities Corporation, et. al. and Kofuku Bank Ltd. and Namihaya Bank Ltd. v. Republic New York Securities Corporation, et. al., allege unpaid notes of approximately $15 million and $39.5 million, respectively, and assert common law claims, claims under the federal securities laws, the Commodities Exchange Act and the Racketeer Influenced and Corrupt Organizations Act (RICO). These actions seek compensatory and punitive damages and treble damages under the RICO statute. Proceedings in the eleven other civil actions arising from the Princeton Note Matter which are described in the 1999 10-K have been temporarily stayed by the court with the consent of all parties at the request of the U.S. Attorney for the Southern District of New York and that stay will likely also apply to the two new actions. It is not possible to assess the outcome of these proceedings at present. The Republic Parties intend to defend vigorously against these claims. 4. Derivative Financial Instruments Derivatives used by the Company include futures, forwards, swaps, caps, floors and options in the interest rate, and foreign exchange markets and, as a result of the Republic acquisition, the precious metals markets. The Company uses these instruments for trading purposes and as part of its asset and liability management activities. Derivatives that are used for trading purposes or are linked to other trading instruments are carried on a mark to market basis with the resultant gains and losses reported as trading revenue. Foreign exchange trading positions are revalued daily by pricing spot foreign exchange and forward contracts for foreign exchange at prevailing rates with the resultant gains and losses reported as trading revenue. Unrealized gains and the balances of unamortized option premiums paid are included in trading account assets while unrealized losses and the unamortized balances of option premiums received are included in trading account liabilities. In conjunction with the Republic acquisition, the Company is involved in various precious metals activities including arbitrage, purchases and sales of precious metals for forward delivery, options on precious metals and precious metals lending and borrowing. Precious metals inventory, outstanding open positions in contracts for forward delivery, options contracts and precious metals loans and borrowings are revalued monthly at prevailing market rates. Precious metals interest arbitrage balances are recorded at cost, with the difference between the fixed forward contract price and cost accreted into trading revenue ratably over the life of the contracts. The Company uses a variety of derivative instruments to manage interest rate risk in conjunction with its asset and liability management process. Risk is managed by achieving a mix of derivative instruments and balance sheet assets and liabilities deemed consistent with expectations of interest rate movements, balance sheet changes and risk management strategies. 9. These instruments follow either the synthetic alteration or hedge model of accounting with cash flows recognized on an accrual basis as an adjustment to the interest income or interest expense associated with the balance sheet items being synthetically altered or hedged. Under both the synthetic alteration and hedge accounting models, derivative instruments are linked to specific individual assets or liabilities or pools of similar assets or liabilities by the notional and interest rate characteristics of the associated instruments. Under the hedge accounting model, it must be demonstrated that the hedged asset, liability or event being hedged exposes the enterprise to price or interest rate risk and that the related derivative reduces that risk. Accordingly there must be high correlation between changes in the market value of the derivative and the market value or cash flows associated with the hedged items so that it is probable that the results of the derivative will substantially offset the effects of price or interest rate movement on the hedged item. Derivatives that cease to qualify for synthetic alteration or hedge accounting are marked to market prospectively through current period earnings with any unrealized gains or losses at that time being deferred and amortized over the life of the original hedge. When the altered or hedged position is liquidated, any deferred amounts are immediately recognized in earnings. Gains or losses realized on terminated derivatives that were used as hedges are deferred and amortized over the life of the hedged item. 5. Pledged Financial Instruments At March 31, 2000, securities, loans and other assets carried at $13.1 billion were pledged as collateral for borrowings, to secure public and trust deposits and for other purposes. 6. Business Segments As a result of the Republic acquisition, the Company altered its business segments that it uses to manage operations as of January 1, 2000. The Company has four distinct segments that it utilizes for management reporting: commercial banking, corporate and institutional banking, personal banking and investment banking and markets. The Commercial Banking Segment provides a diversified range of financial products and services. This segment provides loan and deposit products to small and middle-market corporations including specialized products such as equipment and real estate financing. These products and services are offered through multiple delivery systems, including the branch banking network. In addition, various credit and trade related products are offered such as standby facilities, performance guarantees, acceptances and accounts receivable factoring. The Corporate and Institutional Banking Segment provides deposit and lending functionality to large corporate and multi-national corporations. U.S. dollar clearing services are offered for domestic and international wire transfer transactions. Corporate trust provides various trustee, agency and custody products and services for both corporate and municipal customers. Credit and trade related products such as standby facilities, performance guarantees and acceptances are also provided to large corporate entities. The Personal Banking Segment provides an extensive array of products and services including installment and revolving term loans, deposits, branch services, mutual funds, estate planning and other investment management services. These products are marketed to individuals through the branch banking network. Residential mortgage lending provides loan financing through direct retail and wholesale origination channels. Mortgage loans are originated through a network of brokers, wholesale agents and retail originations offices. Servicing is performed for the individual mortgage holder or on a contractual basis for mortgages owned by third parties. 10. The Investment Banking and Markets Segment comprises treasury, traded markets and international private banking businesses. The treasury function maintains overall responsibility for the investment and borrowing of funds to ensure liquidity, maximize return and manage interest rate risk. Traded markets encompasses the trading and sale of foreign exchange, banknotes, derivatives, precious metals, securities and emerging markets instruments, both domestically and internationally. International private banking offers a full range of services for high net worth individuals throughout the world including deposit, lending, trading, trust and investment management. Other consists of certain non-recurring expenses and the provision for credit losses not assigned to business units. The segment results show the financial performance of the major business units. These results are determined based on the Company's management accounting process, which assigns balance sheet, revenue and expense items to each reportable business unit on a systematic basis. With respect to segment results, management does not analyze depreciation and amortization expense or expenditures for additions to long-lived assets which are not considered significant. As such, these amounts are included in other expenses and average assets, respectively, in the table. Prior year results have been restated according to the redefined segments.
- -------------------------------------------------------------------------------------------------------------- Segments ----------------------------------------------------- Corporate/ Investment Commercial Institutional Personal Banking/ Banking Banking Banking Markets Other Total - -------------------------------------------------------------------------------------------------------------- (in millions) Three months ended March 31, 2000 Net interest income $ 129 $ 39 $ 276 $ 100 $ 5 $ 549 Other operating income 25 23 88 98 (11) 223 - -------------------------------------------------------------------------------------------------------------- Total income 154 62 364 198 (6) 772 Operating expenses 70 19 217 102 67 475 - -------------------------------------------------------------------------------------------------------------- Pretax income (loss) before provision for credit losses 84 43 147 96 (73) 297 Provision for credit losses 19 6 17 8 (22) 28 - -------------------------------------------------------------------------------------------------------------- Pretax income 65 37 130 88 (51) 269 Taxes/preferred dividends 22 12 43 29 11 117 - -------------------------------------------------------------------------------------------------------------- Net income after preferred dividends 43 25 87 59 (62) 152 - -------------------------------------------------------------------------------------------------------------- Average assets 12,190 6,569 19,994 42,375 3,174 84,302 Average liabilities/equity 7,960 5,747 29,993 33,201 7,401 84,302 - -------------------------------------------------------------------------------------------------------------- Three months ended March 31, 1999 Net interest income $ 87 $ 33 $ 176 $ 9 $ 6 $ 311 Other operating income 21 17 78 1 5 122 - -------------------------------------------------------------------------------------------------------------- Total income 108 50 254 10 11 433 Operating expenses 44 16 130 2 15 207 - -------------------------------------------------------------------------------------------------------------- Pretax income (loss) before provision for credit losses 64 34 124 8 (4) 226 Provision for credit losses 2 - 22 - (2) 22 - -------------------------------------------------------------------------------------------------------------- Pretax income 62 34 102 8 (2) 204 Taxes/preferred dividends 25 14 41 3 - 83 - -------------------------------------------------------------------------------------------------------------- Net income after preferred dividends 37 20 61 5 (2) 121 - -------------------------------------------------------------------------------------------------------------- Average assets 7,398 4,310 12,639 7,948 1,450 33,745 Average liabilities/equity 5,943 2,020 16,031 6,838 2,913 33,745 - --------------------------------------------------------------------------------------------------------------
11. 6. New Accounting Standards In 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (FAS 133). FAS 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that all derivatives be recognized as either assets or liabilities in the balance sheet and that those instruments be measured at fair value. The accounting for changes in the fair value of a derivative (that is, gains and losses) depends on the intended use of the derivative and the resulting designation as described below. - - For a derivative designated as hedging the exposures to changes in the fair value of a recognized asset or liability or a firm commitment, the gain or loss is recognized in earnings in the period of change together with the associated loss or gain on the hedged item attributable to the risk being hedged. - - For a derivative designated as hedging the exposure to variable cash flows, the derivatives gain or loss associated with the effective portion of the hedge is initially reported as a component of other comprehensive income and subsequently reclassified into earnings when the forecasted transaction affects earnings. The ineffective portion is reported in earnings immediately. - - For a derivative not designated as a hedging instrument, the gain or loss is recognized in earnings in the period of change in fair value. FAS 133, as amended, is effective for the Company beginning January 1, 2001. The Company is in the process of evaluating the potential impact of FAS 133 including reconsidering the Company's risk management strategies. 12. Management's Discussion and Analysis of Financial Condition and Results of Operations HSBC USA Inc. (the Company) reported first quarter 2000 net income of $159.1 million, compared with $121.4 million in the first quarter of 1999. The largest factor contributing to the increased net income between quarters was the acquisition of Republic New York Corporation (Republic) on December 31, 1999. Republic had consolidated total assets of $46.9 billion and deposits of $29.9 billion on December 31, 1999. Net Interest Income Net interest income for the first quarter of 2000 was $549.3 million compared with $311.2 million for the first quarter of 1999. The Republic acquisition was the principal factor contributing to the increase. Interest income was $1,277.9 million in the first quarter of 2000 compared with $577.1 million in the first quarter of 1999. Average earning assets were $73.7 billion in the first quarter of 2000 compared with $31.4 billion a year ago. The average rate earned on earning assets was 7.00% compared with 7.45% a year ago. The reduced rate earned from 1999 relates primarily to higher levels of lower yielding treasury assets as a result of the Republic acquisition. Interest expense for the first quarter of 2000 was $728.6 million, compared with $265.9 million in the first quarter of 1999. Average interest bearing liabilities for the first quarter of 2000 were $61.4 billion, compared with $27.6 billion a year ago. The average rate paid on interest bearing liabilities was 4.78% compared with 3.91% a year ago. The taxable equivalent net yield on average total assets for the current year's first quarter was 2.65% compared with 3.75% in the 1999 first quarter. Other Operating Income Total other operating income was $222.6 million in the first quarter of 2000, compared with $121.6 million in the 1999 first quarter. Fee income categories of trust, service charges and other fees and commissions were up 75.8% during the first quarter of 2000 compared with the first quarter of 1999, primarily as a result of the Republic acquisition. Mortgage banking revenue declined in 2000 due to lower gains on sales of mortgages compared with 1999.
Republic was an active participant in trading activities including derivatives, foreign exchange and precious metals. The following table presents information related to trading revenues. - ------------------------------------------------------------------------------ Three months ended March 31 2000 1999 - ------------------------------------------------------------------------------ (in millions) Derivatives $19.6 $(.5) Foreign exchange 27.2 1.4 Precious metals .3 - Trading account profits and commissions 5.1 1.7 - ----------------------------------------------------------------------------- Total trading revenue $52.2 $2.6 - -----------------------------------------------------------------------------
Earnings from equity investments includes $11.7 million earned from the Company's 49% ownership in HSBC Republic Holdings (Luxembourg) S.A. (HSBC Republic), formerly Safra Republic Holdings S.A. This amount includes the impact of amortization expense of $20.1 million relating to the Company's portion of goodwill of HSBC Republic acquired. 13. Other Operating Expenses Other operating expenses were $474.9 million in the 2000 first quarter compared with $206.5 million for the 1999 first quarter. The expense increase relates directly to the Republic acquisition. Operating expenses in the first quarter of 2000 included $3.6 million in additional restructuring costs relating to integration activities associated with the Republic acquisition. Since the acquisition was accounted for as a purchase, goodwill was recognized and amortization of goodwill increased to $43.7 million for the first quarter of 2000 compared with $9.6 million in the first quarter of 1999. The cost:income ratio, excluding goodwill expense amortization as well as that associated with the investment in HSBC Republic from costs, was 54.0% in the first quarter of 2000 compared with 45.5% for the first quarter of 1999. Income Taxes The effective tax rate was 41% in the first quarter of 2000 compared with 40% in the same quarter of 1999. The deferred tax asset at March 31, 2000 was $100.0 million compared with $120.7 million at December 31, 1999.
Asset Quality The following table provides a summary of the allowance for credit losses and nonaccruing loans. - ---------------------------------------------------------------------------------- 3 Months 3 Months Year Ended Ended Ended 3/31/00 3/31/99 12/31/99 - ---------------------------------------------------------------------------------- (in millions) Allowance for Credit Losses Balance at beginning of period $659.6 $379.7 $ 379.7 Allowance related to acquired companies - 1.1 290.2 Provision charged to income 28.0 22.5 90.0 Net charge offs (27.8) (17.0) (100.3) Translation adjustment (.2) - - - ---------------------------------------------------------------------------------- Balance at end of period $659.6 $386.3 $ 659.6 - ----------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------- March 31, December 31, March 31, 2000 1999 1999 - ---------------------------------------------------------------------------------- (in millions) Nonaccruing Loans Balance at end of period $344.1 $343.5 $321.0 As a percent of loans outstanding .89% .91% 1.36% Nonperforming Loans and Assets * Balance at end of period $359.4 $357.5 $325.5 As a percent of total assets .42% .40% .96% Allowance Ratios Allowance for credit losses as a percent of: Loans 1.71% 1.74% 1.63% Nonaccruing loans 191.66 192.01 120.36 - ---------------------------------------------------------------------------------- * Includes nonaccruing loans, other real estate and other owned assets.
Provisions for credit losses were $28.0 million in the first quarter of 2000 compared with $22.5 million in the first quarter of 1999. Net charge offs in the credit card portfolio were $14.2 million and $19.0 million in the first quarters of 2000 and 1999, respectively. The delinquency rate for the credit card portfolio was 3.37% at March 31, 2000, compared with 3.41% at December 31, 1999 and 3.86% at March 31, 1999. Commercial loan credit quality resulted in net charge offs of $11.7 million in the first quarter of 2000 compared with net recoveries of $4.4 million in the first quarter of 1999. 14. The Company identified impaired loans totaling $199 million at March 31, 2000, of which $122 million had a specific credit loss allowance of $61 million. At December 31, 1999, impaired loans were $216 million of which $110 million had a specific credit loss allowance of $65 million. Derivative Financial Instruments The Company uses various derivative financial instruments to manage its overall interest rate risk and to reduce the risk associated with changes in the income stream of certain on-balance sheet assets and liabilities. At March 31, 2000, $51.0 billion notional value of such positions, with an estimated positive fair value of approximately $309 million were outstanding. At December 31, 1999, $40.9 billion notional value of such positions, with an estimated positive fair value of $759 million were outstanding. The Company also maintains various derivatives in its trading portfolio to offset risk associated with changes in market value of certain trading assets and for speculative purposes, as hedges in conjunction with the acquired precious metals businesses, foreign exchange trading activities and to facilitate customer transactions. These derivatives are carried at fair value. At March 31, 2000, $237.0 billion notional value of such positions with an estimated negative fair value of $401 million were outstanding. At December 31, 1999, $220.2 billion of notional value of such positions with an estimated positive fair value of $182 million were outstanding. The Company controls the credit risk associated with these positions by dealing with investment grade counterparties including other members of the HSBC Group, obtaining collateral where appropriate and by using master netting agreements where available. Liquidity The Company maintains a strong liquidity position which was further enhanced by the Republic acquisition. The size and stability of its deposit base are complemented by its maintenance of a surplus borrowing capacity in the money markets, including the ability to issue additional commercial paper and access unused lines of credit of $600 million at March 31, 2000. Wholesale liabilities increased to $28.8 billion at March 31, 2000 compared with $26.9 billion at December 31, 1999. The Company also has strong liquidity as a result of a high level of immediately saleable or pledgeable assets including its available for sale securities portfolio, trading assets, mortgages and other assets. Capital Total common shareholder's equity was $9.5 billion at March 31, 2000, approximately the same level as December 31, 1999. Under risk-based capital guidelines, the Company's capital ratios were 13.33% at the Tier 1 level and 15.18% at the total capital level at March 31, 2000. These ratios compared with 13.42% at the Tier 1 level and 15.53% at the total capital level at December 31, 1999. Under guidelines for leverage ratios, the Company's ratio of Tier 1 capital to quarterly average total assets was 9.08% at March 31, 2000 compared with 23.41% at December 31, 1999. Based on period end assets, the ratio was 8.48% at December 31, 1999. 15. Forward-Looking Statements This report includes forward-looking statements. Statements that are not historical facts, including statements about management's beliefs and expectations, are forward-looking statements and involve inherent risks and uncertainties. A number of important factors could cause actual results to differ materially from those contained in any forward-looking statements. Such factors include, but are not limited to: sharp and/or rapid changes in interest rates; significant changes in the economic conditions which could materially change anticipated credit quality trends and the ability to generate loans; technology changes and challenges; significant changes in accounting, tax or regulatory requirements; and competition in the geographic and business areas in which the Company conducts its operations.
16. HSBC USA Inc. - -------------------------------------------------------------------------------------------------------- CONSOLIDATED AVERAGE BALANCES AND INTEREST RATES* First Quarter 2000 First Quarter 1999 Balance Interest Rate Balance Interest Rate - -------------------------------------------------------------------------------------------------------- in millions Assets Interest bearing deposits with banks $ 3,582 $ 58.9 6.61% $ 2,092 $ 27.6 5.34% Federal funds sold and securities purchased under resale agreements 2,974 48.4 6.54 1,079 13.0 4.88 Trading assets 5,281 28.6 2.17 875 11.9 5.46 Securities 23,767 427.1 7.22 3,999 58.9 5.97 Loans Domestic Commercial 18,043 332.6 7.41 10,415 208.3 8.11 Consumer Residential mortgages 13,441 242.3 7.21 9,524 165.6 6.95 Other consumer 2,586 72.5 11.28 2,474 74.4 12.19 - ------------------------------------------------------------------------------------------------------- Total domestic 34,070 647.4 7.64 22,413 448.3 8.11 International 4,063 73.9 7.32 979 18.0 7.46 - ------------------------------------------------------------------------------------------------------- Total loans 38,133 721.3 7.61 23,392 466.3 8.08 - ------------------------------------------------------------------------------------------------------- Total earning assets 73,737 $1,284.3 7.00% 31,437 $ 577.7 7.45% - ------------------------------------------------------------------------------------------------------- Allowance for credit losses (663) (383) Cash and due from banks 1,767 1,154 Other assets 9,461 1,537 - ------------------------------------------------------------------------------------------------------- Total assets $84,302 $33,745 ======================================================================================================= Liabilities and Shareholders' Equity Interest bearing demand deposits $ 2,827 $ 6.8 0.97% $ 2,214 $ 4.9 0.91% Consumer savings deposits 10,576 68.1 2.59 5,625 34.7 2.50 Other consumer time deposits 8,135 99.1 4.90 6,835 79.8 4.73 Commercial, public savings and other time deposits 7,412 96.8 5.26 3,913 35.6 3.69 Deposits in foreign offices 18,432 254.6 5.55 4,139 45.9 4.49 - ------------------------------------------------------------------------------------------------------- Total interest bearing deposits 47,382 525.4 4.46 22,726 200.9 3.59 - ------------------------------------------------------------------------------------------------------- Federal funds purchased and securities sold under repurchase agreements 1,832 24.7 5.38 974 10.5 4.37 Other short-term borrowings 6,262 74.3 4.77 2,094 28.2 5.45 Long-term debt 5,878 104.2 7.13 1,803 26.3 5.91 - ------------------------------------------------------------------------------------------------------- Total interest bearing liabilities 61,354 $ 728.6 4.78% 27,597 $ 265.9 3.91% - ------------------------------------------------------------------------------------------------------- Interest rate spread 2.23% 3.54% - ------------------------------------------------------------------------------------------------------- Noninterest bearing deposits 6,302 3,241 Other liabilities 6,685 744 Shareholders' equity 9,961 2,163 - ------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $84,302 $33,745 ======================================================================================================= Net yield on average earning assets 3.03% 4.02% Net yield on average total assets 2.65 3.75 ======================================================================================================= * Interest and rates are presented on a taxable equivalent basis.
17. Part II - OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K (a) Exhibit 12.01 Computation of Ratio of Earnings to Fixed Charges 12.02 Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Dividends. (b) Report on Form 8-K None 18. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HSBC USA Inc. (Registrant) Date: May 12, 2000 /s/ Gerald A. Ronning Gerald A.Ronning Executive Vice President & Controller (On behalf of Registrant and as Chief Accounting Officer)
19. Exhibit 12.01 HSBC USA Inc. Computation of Ratio of Earnings to Fixed Charges (in millions, except ratios) - ------------------------------------------------------------------------------- Three months ended March 31, 2000 1999 - ------------------------------------------------------------------------------- Excluding interest on deposits Net income $ 159 $ 121 Applicable income tax expense 110 82 Less undistributed equity earnings 13 1 Fixed charges: Interest on: Borrowed funds 99 39 Long-term debt 104 26 One third of rents, net of income from subleases 6 4 - ------------------------------------------------------------------------------- Total fixed charges 209 69 Earnings before taxes based on income and fixed charges $ 465 $ 271 - ------------------------------------------------------------------------------- Ratio of earnings to fixed charges 2.22 3.93 - ------------------------------------------------------------------------------- Including interest on deposits Total fixed charges (as above) $ 209 $ 69 Add: Interest on deposits 525 201 - ------------------------------------------------------------------------------ Total fixed charges and interest on deposits $ 734 $ 270 - ------------------------------------------------------------------------------- Earnings before taxes based on income and fixed charges (as above) $ 465 $ 271 Add: Interest on deposits 525 201 - ------------------------------------------------------------------------------- Total $ 990 $ 472 - ------------------------------------------------------------------------------- Ratio of earnings to fixed charges 1.35 1.75 - -------------------------------------------------------------------------------
20. Exhibit 12.02 HSBC USA Inc. Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Dividends (in millions, except ratios) - ------------------------------------------------------------------------------- Three months ended March 31, 2000 1999 - ------------------------------------------------------------------------------- Excluding interest on deposits Net income $ 159 $ 121 Applicable income tax expense 110 82 Less undistributed equity earnings 13 1 Fixed charges: Interest on: Borrowed funds 99 39 Long-term debt 104 26 One third of rents, net of income from subleases 6 4 - ------------------------------------------------------------------------------- Total fixed charges 209 69 Earnings before taxes based on income and fixed charges $ 465 $ 271 - ------------------------------------------------------------------------------- Total fixed charges $ 209 $69 Preferred dividends 7 - Ratio of pretax income to income after applicable income tax expense 1.69 1.68 - ------------------------------------------------------------------------------- Total preferred stock dividend factor 12 - Fixed charges, including preferred stock dividend factor $ 221 $ 69 - ------------------------------------------------------------------------------- Ratio of earnings to combined fixed charges and preferred dividends 2.10 3.93 - ------------------------------------------------------------------------------- Including interest on deposits Total fixed charges, including preferred stock dividend factor (as above) $ 221 $ 69 Add: Interest on deposits 525 201 - ------------------------------------------------------------------------------- Fixed charges, including preferred stock dividend factor and interest on deposits $ 746 $ 270 - ------------------------------------------------------------------------------- Earnings before taxes based on income and fixed charges (as above) $ 465 $ 271 Add: Interest on deposits 525 201 - ------------------------------------------------------------------------------- Total $ 990 $ 472 - ------------------------------------------------------------------------------- Ratio of earnings to combined fixed charges and preferred dividends 1.33 1.75 - -------------------------------------------------------------------------------
EX-27 2
9 1,000,000 3-MOS DEC-31-2000 MAR-31-2000 1,827 4,806 4,197 4,356 19,017 4,771 4,789 38,578 660 86,440 54,207 10,205 6,133 5,177 711 500 0 9,507 86,440 721 421 136 1,278 525 729 549 28 (3) 475 269 0 0 0 159 0 0 3.03 344 82 0 0 660 38 10 660 332 119 209
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