10-Q 1 0001.txt CONFORMED 1. SECURITIES AND EXCHANGE COMMMISSION 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 September 30, 2000 Commission file number 1-7436 HSBC USA INC. (Exact name of registrant as specified in its charter) Maryland Corporation (State or other jurisdiction of incorporation or organization) 13-2764867 (I.R.S. Employer Identification No.) 452 Fifth Avenue, New York, New York 10018 (Address of principal executive offices) (212) 525-6100 Registrant's telephone number, including area code: Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, 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 27 pages. 2. Part I - FINANCIAL INFORMATION Item 1 - Financial Statements Page Consolidated Balance Sheet September 30, 2000 and December 31, 1999 3 Consolidated Statement of Income For The Quarter and Nine Months Ended September 30, 2000 and 1999 4 Consolidated Statement of Changes in Shareholders' Equity For The Nine Months Ended September 30, 2000 and 1999 5 Consolidated Statement of Cash Flows For The Nine Months Ended September 30, 2000 and 1999 6 Notes to Consolidated Financial Statements 7 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Part II - OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K 22 Signatures 23
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 September 30, December 31, 2000 1999 ----------------------------------------------------------------------------- in thousands Assets Cash and due from banks $ 2,029,872 $ 1,977,756 Interest bearing deposits with banks 6,557,518 4,234,668 Federal funds sold and securities purchased under resale agreements 2,629,177 2,318,361 Trading assets 5,276,584 4,526,988 Securities available for sale 18,072,186 25,973,805 Securities held to maturity (fair value $4,540,714 and $4,811,695) 4,486,292 4,811,695 Loans 39,247,169 37,909,143 Less - allowance for credit losses 558,337 659,603 ----------------------------------------------------------------------------- Loans, net 38,688,832 37,249,540 Premises and equipment 753,565 745,910 Accrued interest receivable 877,600 778,363 Equity investments 2,581,682 2,540,927 Goodwill and other acquisition intangibles 3,254,459 3,307,147 Other assets 1,856,658 1,774,459 ----------------------------------------------------------------------------- Total assets $ 87,064,425 $ 90,239,619 ============================================================================= Liabilities Deposits in domestic offices Noninterest bearing $ 5,626,408 $ 6,003,813 Interest bearing 29,641,450 29,393,957 Deposits in foreign offices Noninterest bearing 247,698 187,099 Interest bearing 19,636,623 20,865,022 ----------------------------------------------------------------------------- Total deposits 55,152,179 56,449,891 Trading account liabilities 2,272,295 2,440,729 Short-term borrowings 10,434,549 5,271,597 Interest, taxes and other liabilities 3,489,826 3,059,993 Payable to shareholders of acquired company - 7,091,209 Subordinated long-term debt and perpetual capital notes 3,323,624 3,427,649 Guaranteed mandatorily redeemable securities 711,368 710,259 Other long-term debt 1,666,760 1,747,131 ----------------------------------------------------------------------------- Total liabilities 77,050,601 80,198,458 ----------------------------------------------------------------------------- Shareholders' equity Preferred stock 500,000 500,000 Common shareholder's equity Common stock 4 4 Capital surplus 8,924,925 8,920,113 Retained earnings 554,513 671,578 Accumulated other comprehensive income (loss) 34,382 (50,534) ----------------------------------------------------------------------------- Total common shareholder's equity 9,513,824 9,541,161 ----------------------------------------------------------------------------- Total shareholders' equity 10,013,824 10,041,161 ----------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 87,064,425 $ 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 Quarter ended Nine months ended September 30, September 30, 2000 1999 2000 1999 ---------------------------------------------------------------------------------------- in thousands Interest income Loans $ 764,915 $ 456,846 $ 2,214,727 $ 1,379,579 Securities 431,193 50,308 1,285,448 163,009 Trading assets 37,892 13,327 90,285 35,824 Other short-term investments 131,406 59,601 406,969 152,918 ---------------------------------------------------------------------------------------- Total interest income 1,365,406 580,082 3,997,429 1,731,330 ---------------------------------------------------------------------------------------- Interest expense Deposits 594,473 215,591 1,689,199 625,455 Short-term borrowings 110,644 31,325 333,967 101,076 Long-term debt 101,032 27,657 317,352 81,104 ---------------------------------------------------------------------------------------- Total interest expense 806,149 274,573 2,340,518 807,635 ---------------------------------------------------------------------------------------- Net interest income 559,257 305,509 1,656,911 923,695 Provision for credit losses 29,000 22,500 85,000 67,500 ---------------------------------------------------------------------------------------- Net interest income, after provision for credit losses 530,257 283,009 1,571,911 856,195 ---------------------------------------------------------------------------------------- Other operating income Trust income 20,776 12,554 63,319 38,662 Service charges 42,834 33,205 129,515 92,914 Mortgage banking revenue 7,739 6,086 22,903 26,076 Other fees and commissions 71,778 41,933 225,468 122,972 Trading revenues 29,337 1,801 111,080 7,277 Security gains 11,706 (65) 12,451 7,241 Earnings from equity investments 10,576 991 43,102 2,783 Other income 27,526 11,605 48,933 40,680 ---------------------------------------------------------------------------------------- Total other operating income 222,272 108,110 656,771 338,605 ---------------------------------------------------------------------------------------- Total income from operations 752,529 391,119 2,228,682 1,194,800 ---------------------------------------------------------------------------------------- Other operating expenses Salaries and employee benefits 243,343 110,011 745,684 319,421 Occupancy expense, net 42,304 23,051 128,971 67,314 Goodwill amortization 44,417 6,994 131,878 26,347 Other expenses 147,885 60,303 422,594 197,637 ---------------------------------------------------------------------------------------- Total operating expenses 477,949 200,359 1,429,127 610,719 ---------------------------------------------------------------------------------------- Income before taxes 274,580 190,760 799,555 584,081 Applicable income tax expense 98,000 75,850 295,800 234,250 ---------------------------------------------------------------------------------------- Net income $ 176,580 $ 114,910 $ 503,755 $ 349,831 ======================================================================================== 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 Nine months ended September 30, 2000 1999 -------------------------------------------------------------------------------------------- Share- Compre- Share- Compre- holders' hensive holders' hensive Equity Income Equity Income -------------------------------------------------------------------------------------------- in thousands Preferred stock Balance, January 1, $ 500,000 $ - * ------------------------------------------------------ ----------- Balance, September 30, 500,000 - ------------------------------------------------------ ----------- Common stock Balance, January 1, 4 5 ------------------------------------------------------ ----------- Balance, September 30, 4 5 ------------------------------------------------------ ----------- Capital surplus Balance, January 1, 8,920,113 1,806,563 Capital contribution from parent 4,812 2,586 ------------------------------------------------------ ----------- Balance, September 30, 8,924,925 1,809,149 ------------------------------------------------------ ----------- Retained earnings Balance, January 1, 671,578 377,179 Net income 503,755 $ 503,755 349,831 $ 349,831 Cash dividends declared: Preferred stock (20,820) - Common stock (600,000) (155,000) ------------------------------------------------------ ----------- Balance, September 30, 554,513 572,010 ------------------------------------------------------ ----------- 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 100,803 (72,790) Foreign currency translation adjustments, net of taxes (15,887) - Change in accumulated other comprehensive income, net 84,916 (72,790) -------- --------- Comprehensive income $ 588,671 $ 277,041 ------------------------------------------------------ ========= ----------- ========= Balance, September 30, 34,382 (28,284) ------------------------------------------------------ ----------- Total shareholders' equity, September 30, $ 10,013,824 $ 2,352,880 ====================================================== =========== 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 Nine months ended September 30, 2000 1999 ------------------------------------------------------------------------------------ in thousands Cash flows from operating activities Net income $ 503,755 $ 349,831 Adjustments to reconcile net income to net cash provided by operating activities Depreciation, amortization and deferred taxes 340,500 43,303 Provision for credit losses 85,000 67,500 Net change in other accrual accounts 232,250 91,793 Net change in loans originated for sale (1,471,028) 789,980 Net change in trading assets and liabilities (1,082,838) (167,128) Other, net (205,142) (67,806) ------------------------------------------------------------------------------------ Net cash provided (used) by operating activities (1,597,503) 1,107,473 ------------------------------------------------------------------------------------ Cash flows from investing activities Net change in interest bearing deposits with banks (2,322,851) 106,034 Net change in short-term investments (310,816) (2,054,931) Purchases of securities (11,755,627) (1,900,500) Sales of securities 8,349,237 1,953,629 Maturities of securities 12,168,844 796,194 Payment to shareholders of acquired company (7,091,209) - Net originations and maturities of loans 466,500 (284,667) Sales of loans 167,042 - Expenditures for premises and equipment (90,949) (20,910) Cash used in acquisitions, net of cash acquired (87,492) (8,787) Other, net (194,162) (118,345) ------------------------------------------------------------------------------------ Net cash used by investing activities (701,483) (1,532,283) ------------------------------------------------------------------------------------ Cash flows from financing activities Net change in deposits (2,021,728) 385,882 Net change in short-term borrowings 5,162,952 (303,428) Issuance of long-term debt 594,219 200,132 Repayment of long-term debt (774,426) (101,057) Capital contributions 4,812 2,587 Dividends paid (614,727) (155,000) ------------------------------------------------------------------------------------ Net cash provided (used) by financing activities 2,351,102 29,116 ------------------------------------------------------------------------------------ Net change in cash and due from banks 52,116 (395,694) Cash and due from banks at beginning of period 1,977,756 1,262,423 ------------------------------------------------------------------------------------ Cash and due from banks at end of period $ 2,029,872 $ 866,729 ==================================================================================== 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 Nine months ended HSBC Republic Acquisition Pro Forma September 30, 1999 USA Inc. NY Corp. Adjustments Combined ----------------------------------------------------------------------------- (in millions) Net interest income $ 924 $ 789 $ (15) $ 1,698 Provision for credit lossses 68 12 - 80 ----------------------------------------------------------------------------- Net interest income after provision for credit losses 856 777 (15) 1,618 Other operating income 339 509 (63) 785 ----------------------------------------------------------------------------- 1,195 1,286 (78) 2,403 Operating expenses 611 857 99 1,567 ----------------------------------------------------------------------------- Income before taxes 584 429 (177) 836 Income tax expense (benefit) 234 113 (9) 338 ----------------------------------------------------------------------------- Net income $ 350 $ 316 $ (168) $ 498 -----------------------------------------------------------------------------
8.
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 September 30, 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 50.9 1.0 12.1 64.0 ---------------------------------------------------------------------------- Balance September 30, 2000 $ 88.7 $ 29.7 $ 1.9 $ 120.3 ----------------------------------------------------------------------------
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) and Note 3 to the financial statements contained in the Company's Quarterly Report on Form 10-Q for the first quarter of 2000, 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) with respect to the Princeton Note Matter. In addition, in August 2000, an additional civil action arising from the Princeton Note Matter was 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). That action, entitled Eichi Takagi and Koei Shoji, Ltd. v. HSBC USA Inc., et. al., alleges unpaid notes of approximately $2.1 million and $1.21 million on behalf of an individual and corporation and asserts common law claims, claims under the federal securities laws, the Commodities Exchange Act and the Racketeer Influenced and Corrupt Organizations Act (RICO). The action seeks compensatory and punitive damages and treble damages under the RICO statute. The temporary stay in these civil actions that was previously reported ended in September 2000 and discovery proceedings have commenced. It is not possible to assess the outcome of these proceedings at present. The Republic Parties intend to defend vigorously against these claims. 9. 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. 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 10. 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 September 30, 2000, securities, loans and other assets carried at $12.3 billion were pledged as collateral for borrowings, to secure public and trust deposits and for other purposes. 6. Business Segments 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 and domestic private banking products (mutual funds, estate planning and other investment management services). These products are marketed to individuals through the branch banking network. Residential mortgage lending 11. 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. 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. 12.
--------------------------------------------------------------------------------------------------- Segments --------------------------------------------------- Corporate/ Investment Commercial Institutional Personal Banking/ Banking Banking Banking Markets Other Total --------------------------------------------------------------------------------------------------- (in millions) Nine months ended September 30, 2000 Net interest income $ 430 $ 113 $ 791 $ 321 $ 2 $ 1,657 Other operating income 90 70 268 257 (28) 657 --------------------------------------------------------------------------------------------------- Total income 520 183 1,059 578 (26) 2,314 Operating expenses 249 66 594 274 246 1,429 --------------------------------------------------------------------------------------------------- Pretax income (loss) before provision for credit losses 271 117 465 304 (272) 885 Provision for credit losses 75 7 52 (5) (44) 85 --------------------------------------------------------------------------------------------------- Pretax income (loss) 196 110 413 309 (228) 800 Taxes/preferred dividends 59 33 124 93 8 317 --------------------------------------------------------------------------------------------------- Net income (loss)after preferred dividends 137 77 289 216 (236) 483 --------------------------------------------------------------------------------------------------- Average assets 14,077 5,714 20,014 42,412 2,990 85,207 Average liabilities/equity 10,084 5,168 29,151 34,161 6,643 85,207 --------------------------------------------------------------------------------------------------- Nine months ended September 30, 1999 Net interest income $ 264 $ 84 $ 522 $ 21 $ 33 $ 924 Other operating income 63 55 203 4 14 339 --------------------------------------------------------------------------------------------------- Total income 327 139 725 25 47 1,263 Operating expenses 138 44 392 6 31 611 --------------------------------------------------------------------------------------------------- Pretax income (loss) before provision for credit losses 189 95 333 19 16 652 Provision for credit losses 20 5 56 - (13) 68 --------------------------------------------------------------------------------------------------- Pretax income 169 90 277 19 29 584 Taxes/preferred dividends 67 36 111 8 12 234 --------------------------------------------------------------------------------------------------- Net income after preferred dividends 102 54 166 11 17 350 --------------------------------------------------------------------------------------------------- Average assets 7,365 3,781 12,485 8,374 2,035 34,040 Average liabilities/equity 5,962 1,982 16,146 6,975 2,975 34,040 ---------------------------------------------------------------------------------------------------
7. 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. 13. - 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. Adoption is not expected to have a material financial statement impact. At transition, all derivatives will be recognized on the balance sheet at current market value. It is expected that certain of the derivative contracts currently accounted for as hedges, including many of those with most significant market valuations will continue to be accounted for as hedges under FAS 133. Based upon current market rates, the net transition amount is expected to be less than $10.0 million. It is noted that market values are subject to change based upon fluctuations in interest rates and market conditions. We will continue to mitigate economic risks with derivatives, which will result in increased volatility in earnings, related to the timing of their recognition, in certain future periods. In September 2000, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (FAS 140). FAS 140 replaces Statement of Financial Accounting Standards No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (FAS 125). It revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of FAS 125's provisions without consideration. FAS 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities of the Company occurring after March 31, 2001. However, the provisions of FAS 140 concerning the recognition and reclassification of collateral and disclosures relating to securitization transactions and collateral are effective for the Company for year ending December 31, 2000. FAS 140 is to be applied prospectively with certain exceptions. Adoption is not expected to have a material impact on the Company's financial statements. 14. Management's Discussion and Analysis of Financial Condition and Results of Operations HSBC USA Inc. (the Company) reported third quarter 2000 net income of $176.6 million, compared with $114.9 million in the third quarter of 1999. For the first nine months of 2000, net income was $503.8 million compared with $349.8 million for the first nine months of last year. Net income plus goodwill amortization was $695.9 million for the first nine months of 2000 compared with $376.2 million for the first nine months of 1999. The largest factor contributing to the increased net income between 2000 and 1999 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 third quarter of 2000 was $559.3 million compared with $305.5 million for the third quarter of 1999. For the first nine months of 2000, net interest income was $1,656.9 million compared with $923.7 million for the first nine months of 1999. The Republic acquisition was the principal factor contributing to the increase. Interest income was $1,365.4 million in the third quarter of 2000 compared with $580.1 million in the third quarter of 1999. Average earning assets were $74.8 billion for the third quarter of 2000 compared with $32.0 billion a year ago. The average rate earned on earning assets was 7.30% for the third quarter of 2000 compared with 7.19% a year ago. Interest income was $3,997.4 million for the first nine months of 2000 compared with $1,731.3 million in the first nine months of 1999. Average earning assets were $74.8 billion for the first nine months of 2000 compared with $31.8 billion for the first nine months of 1999. The average rate earned on earning assets was 7.17% for the first nine months of 2000 compared with 7.28% a year ago. Interest expense for the third quarter of 2000 was $806.1 million compared with $274.6 million in the third quarter of 1999. Average interest bearing liabilities for the third quarter of 2000 were $62.8 billion, compared with $28.0 billion a year ago. The average rate paid on interest bearing liabilities was 5.10% compared with 3.90% a year ago. Interest expense for the first nine months of 2000 was $2,340.5 million compared with $807.6 million in the first nine months of 1999. Average interest bearing liabilities for the first nine months of 2000 were $62.8 billion, compared with $27.9 billion a year ago. The average rate paid on interest bearing liabilities was 4.98% for the first nine months of 2000 compared with 3.87% a year ago. The taxable equivalent net yield on average total assets for the third quarter of 2000 was 2.65%, compared with 3.55% a year ago. The taxable equivalent net yield on average total assets for the first nine months of 15. 2000 was 2.63%, compared with 3.63% a year ago. The reduced yield earned from 1999 relates primarily to higher levels of lower yielding treasury assets and higher costing deposits as a result of the Republic acquisition. Other Operating Income Total other operating income was $222.3 million in the third quarter of 2000, compared with $108.1 million in the 1999 third quarter. For the first nine months of 2000, total operating income was $656.8 million compared with $338.6 million for the first nine months of 1999. Fee income categories of trust, service charges and other fees and commissions were up 65.7% during the first nine months of 2000 compared with the first nine months 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. --------------------------------------------------------------------- Nine months ended September 30 2000 1999 --------------------------------------------------------------------- (in millions) Derivatives $ 27.7 $ (.2) Foreign exchange 76.3 4.5 Precious metals 2.5 - Trading account profits and commissions 4.6 3.0 --------------------------------------------------------------------- Total trading revenue $ 111.1 $ 7.3 ---------------------------------------------------------------------
Earnings from equity investments for the nine months ended September 30, 2000 includes $38.2 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 goodwill amortization expense of $60.3 million as well as a gain of $12.2 million on the redemption of debentures. Other Operating Expenses Other operating expenses were $477.9 million in the 2000 third quarter compared with $200.4 million for the 1999 third quarter. The expense increase relates directly to the Republic acquisition. Other operating expenses were $1,429.1 million for the first nine months of 2000 compared with $610.7 million a year ago. Operating expenses included $21.7 million and $42.2 million in the third quarter and first nine months of 2000, respectively, in 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 $131.9 million for the first nine months of 2000 compared with $26.3 million in the first nine months of 1999. The cost:income ratio, excluding goodwill amortization and restructuring costs was 51.2% in the third quarter of 2000 and 52.7% for the first nine months of 2000, compared with 46.7% and 46.3% for the same periods of 1999, respectively. 16. Income Taxes The effective tax rate was 37% in the first nine months of 2000 compared with 40% in the same period of 1999. The deferred tax asset at September 30, 2000 was $39.2 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. ---------------------------------------------------------------------------------------- 3RD 3RD 9 Months Year 9 Months Quarter Quarter Ended Ended Ended 2000 1999 9/30/00 12/31/99 9/30/99 ---------------------------------------------------------------------------------------- (in millions) Allowance for Credit Losses Balance at beginning of period $ 636.2 $ 371.6 $ 659.6 $ 379.7 $ 379.7 Allowance related to acquired (sold) companies (8.5) - (12.0) 290.2 1.1 Provision charged to income 29.0 22.5 85.0 90.0 67.5 Net charge offs (98.3) (25.8) (173.8) (100.3) (80.0) Translation adjustment (.1) - (.5) - - ---------------------------------------------------------------------------------------- Balance at end of period $ 558.3 $ 368.3 $ 558.3 $ 659.6 $ 368.3 ----------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------- September 30, December 31, September 30, 2000 1999 1999 ---------------------------------------------------------------------------------------- (in millions) Nonaccruing Loans Balance at end of period $ 299.1 $ 343.5 $ 293.9 As a percent of loans outstanding .76 % .91 % 1.25 % Nonperforming Loans and Assets * Balance at end of period $ 317.6 $ 357.5 $ 296.2 As a percent of total assets .36 % .40 % .86 % Allowance Ratios Allowance for credit losses as a percent of: Loans 1.42 % 1.74 % 1.56 % Nonaccruing loans 186.68 192.01 125.32 ---------------------------------------------------------------------------------------- * Includes nonaccruing loans, other real estate and other owned assets.
Provisions for credit losses were $29.0 million in the third quarter of 2000 compared with $22.5 million in the third quarter of 1999. Provisions for credit losses for the first nine months of 2000 were $85.0 million compared with $67.5 million during the same period of 1999. Net charge offs in the credit card portfolio were $15.0 million and $17.5 million in the third quarter of 2000 and 1999, respectively, and $45.8 million and $56.5 million in the first nine months of 2000 and 1999, respectively. The delinquency rate for the credit card portfolio was 3.64% at September 30, 2000, compared with 3.41% at December 31, 1999 and 3.58% at September 30, 1999. 17. Net charge offs on commercial loans were $79.7 million and $6.4 million in the third quarter of 2000 and 1999, respectively, and $121.2 million and $10.1 million in the first nine months of 2000 and 1999, respectively. Commercial charge offs in 2000 included reduction in certain credits reported as impaired at December 31, 1999 and charge offs on three large credits. While credit quality has generally been stable, we have seen a deterioration in credit quality of leveraged commercial loans. The Company identified impaired loans totaling $163 million at September 30, 2000, of which $62 million had a specific credit loss allowance of $31 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 September 30, 2000, $64.5 billion notional value of such positions, with an estimated positive fair value of approximately $53 million were outstanding. At December 31, 1999, $40.9 billion notional value of such positions, with an estimated positive fair value of $170 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 September 30, 2000, $252.0 billion notional value of such positions with an estimated negative fair value of $112 million were outstanding. At December 31, 1999, $220.2 billion of notional value of such positions with an estimated negative fair value of $22 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 September 30, 2000. Wholesale liabilities increased to $30.3 billion at September 30, 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. 18. Capital Total common shareholder's equity was $9.5 billion at September 30, 2000, approximately the same level as December 31, 1999. Under risk-based capital guidelines, the Company's capital ratios were 12.82% at the Tier 1 level and 14.17% at the total capital level at September 30, 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 8.91% at September 30, 2000 compared with 23.41% at December 31, 1999. Based on period end assets, the ratio was 8.48% at December 31, 1999. Acquisitions The Company purchased the banking operations of Chase Manhattan Bank, Panama on August 1, 2000 for $115 million. The branch operations had $730 million in assets and net book value of $33 million. The acquisition was accounted for as a purchase transaction. Assets acquired and liabilities assumed were recorded at their estimated fair values. As a separate transaction, the Company plans to purchase the branches of HSBC Bank plc in Panama. These branches had approximately $540 million in assets and net book value of $15 million at March 31, 2000. This transaction is expected to occur in the fourth quarter of 2000. Recent Developments As part of the integration of Republic into the Company (the acquisition of which was completed by HSBC on December 31, 1999), including the integration of Republic's overseas activities with the foreign operations of HSBC, various transactions have either taken place or are proposed to be undertaken within the fourth quarter of 2000 and subsequent quarters in 2001. To date various operations of foreign branches and subsidiaries of the Company have been transferred to foreign operations of HSBC, such as the transfer of a branch in Tokyo to the Asia Pacific operations of HSBC. Such plans also involve the reorganization of the private banking business of HSBC outside the Americas to operate through one global private banking organization in Switzerland and operating in various locations throughout the world. In conjunction with the private banking reorganization, the Company will distribute its 49% ownership interest in HSBC Republic as a return of capital to its parent. Thereafter, the private banking operations of HSBC Republic will be transferred to the global private banking organization. In addition, the Company will transfer certain other private banking operations, primarily in Asia, in exchange for shares in the newly formed global private banking business. The 49% ownership interest in HSBC Republic currently has a book value of approximately $2.5 billion, and is deducted from regulatory capital 19. for the purpose of calculating the total capital ratio of the Company. After the completion of the transaction, the Company will continue to be well capitalized, as defined by U.S. banking regulators. These plans are subject to U.S. regulatory approval. 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.
20. HSBC USA Inc. ------------------------------------------------------------------------------------- CONSOLIDATED AVERAGE BALANCES AND INTEREST RATES* Third Quarter 2000 Third Quarter 1999 Balance Interest Rate Balance Interest Rate ------------------------------------------------------------------------------------- in millions Assets Interest bearing deposits with banks $ 4,107 $ 71.1 6.88 % $ 1,346 $ 18.3 5.40 % Federal funds sold and securities purchased under resale agreements 3,638 60.3 6.60 3,097 41.3 5.29 Trading assets 5,698 37.9 2.66 974 13.4 5.49 Securities 22,819 437.4 7.63 3,370 50.3 5.93 Loans Domestic Commercial 18,062 350.9 7.73 10,491 205.3 7.76 Consumer Residential mortgages 15,028 281.4 7.49 9,240 162.5 7.03 Other consumer 2,608 80.6 12.31 2,428 70.3 11.49 ------------------------------------------------------------------------------------- Total domestic 35,698 712.9 7.94 22,159 438.1 7.84 International 2,799 52.2 7.43 1,083 19.2 7.05 ------------------------------------------------------------------------------------- Total loans 38,497 765.1 7.91 23,242 457.3 7.81 ------------------------------------------------------------------------------------- Total earning assets 74,759 $1,371.8 7.30 % 32,029 $580.6 7.19 % ------------------------------------------------------------------------------------- Allowance for credit losses (619) (374) Cash and due from banks 1,969 982 Other assets 8,949 1,591 ------------------------------------------------------------------------------------- Total assets $85,058 $34,228 ===================================================================================== Liabilities and Shareholders' Equity Interest bearing demand deposits $ 2,901 $ 7.3 1.00 % $ 2,245 $ 5.1 0.91 % Consumer savings deposits 10,209 71.6 2.79 5,682 36.2 2.53 Other consumer time deposits 8,931 121.8 5.43 6,892 79.9 4.60 Commercial, public savings and other time deposits 7,110 87.9 4.92 4,067 36.3 3.54 Deposits in foreign offices 19,384 305.9 6.28 4,751 58.1 4.85 ------------------------------------------------------------------------------------- Total interest bearing deposits 48,535 594.5 4.87 23,637 215.6 3.62 ------------------------------------------------------------------------------------- Federal funds purchased and securities sold under repurchase agreements 1,828 28.5 6.24 915 11.4 4.96 Other short-term borrowings 6,736 82.1 4.85 1,556 19.9 5.07 Long-term debt 5,742 101.0 7.00 1,846 27.7 5.94 ------------------------------------------------------------------------------------- Total interest bearing liabilities 62,841 $ 806.1 5.10 % 27,954 $274.6 3.90 % ------------------------------------------------------------------------------------- Interest rate spread 2.20 % 3.29 % ------------------------------------------------------------------------------------- Noninterest bearing deposits 6,123 3,041 Other liabilities 6,201 938 Shareholders' equity 9,893 2,295 ------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $85,058 $34,228 ===================================================================================== Net yield on average earning assets 3.01 % 3.79 % Net yield on average total assets 2.65 3.55 ===================================================================================== * Interest and rates are presented on a taxable equivalent basis.
21. HSBC USA Inc. ----------------------------------------------------------------------------------------- CONSOLIDATED AVERAGE BALANCES AND INTEREST RATES* Nine Months 2000 Nine Months 1999 Balance Interest Rate Balance Interest Rate ----------------------------------------------------------------------------------------- in millions Assets Interest bearing deposits with banks $ 4,569 $ 233.3 6.82 % $ 1,778 $ 70.1 5.27 % Federal funds sold and securities purchased under resale agreements 3,484 173.6 6.66 2,176 82.8 5.09 Trading assets 5,218 90.4 2.31 877 35.9 5.46 Securities 23,454 1,304.1 7.43 3,656 163.2 5.97 Loans Domestic Commercial 18,105 1,035.2 7.64 10,470 621.7 7.94 Consumer Residential mortgages 14,180 782.4 7.36 9,399 491.1 6.97 Other consumer 2,583 217.6 11.25 2,441 216.3 11.85 ---------------------------------------------------------------------------------------- Total domestic 34,868 2,035.2 7.80 22,310 1,329.1 7.97 International 3,203 180.3 7.52 1,020 51.8 6.79 ---------------------------------------------------------------------------------------- Total loans 38,071 2,215.5 7.77 23,330 1,380.9 7.91 ---------------------------------------------------------------------------------------- Total earning assets 74,796 $4,016.9 7.17 % 31,817 $1,732.9 7.28 % ---------------------------------------------------------------------------------------- Allowance for credit losses (645) (381) Cash and due from banks 1,834 1,051 Other assets 9,222 1,553 ---------------------------------------------------------------------------------------- Total assets $85,207 $34,040 ======================================================================================== Liabilities and Shareholders' Equity Interest bearing demand deposits $ 2,868 $ 21.0 0.98 % $ 2,238 $ 15.2 0.91 % Consumer savings deposits 10,438 208.7 2.67 5,674 106.7 2.51 Other consumer time deposits 8,421 325.3 5.16 6,855 237.5 4.63 Commercial, public savings and other time deposits 7,370 289.4 5.25 4,087 110.4 3.61 Deposits in foreign offices, primarily banks 18,937 844.8 5.96 4,487 155.7 4.64 ---------------------------------------------------------------------------------------- Total interest bearing deposits 48,034 1,689.2 4.70 23,341 625.5 3.58 ---------------------------------------------------------------------------------------- Federal funds purchased and securities sold under repurchase agreements 1,947 84.3 5.77 930 31.8 4.58 Other short-term borrowings 6,919 249.7 4.82 1,769 69.2 5.23 Long-term debt 5,853 317.3 7.24 1,832 81.1 5.92 ---------------------------------------------------------------------------------------- Total interest bearing liabilities 62,753 $2,340.5 4.98 % 27,872 $ 807.6 3.87 % ---------------------------------------------------------------------------------------- Interest rate spread 2.19 % 3.41 % ---------------------------------------------------------------------------------------- Noninterest bearing deposits 6,230 3,106 Other liabilities 6,323 837 Shareholders' equity 9,901 2,225 ---------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $85,207 $34,040 ======================================================================================== Net yield on average earning assets 2.99 % 3.89 % Net yield on average total assets 2.63 3.63 ======================================================================================== * Interest and rates are presented on a taxable equivalent basis.
22. Part II - OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K (a) Exhibit 3 Amendment to the Registrant's Certificate of Incorporation 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) Reports on Form 8-K None 23. 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: November 8, 2000 /s/ Gerald A. Ronning Gerald A.Ronning Executive Vice President & Controller (On behalf of Registrant and as Chief Accounting Officer) 24.
Exhibit 12.01 HSBC USA Inc. Computation of Ratio of Earnings to Fixed Charges (in millions, except ratios) -------------------------------------------------------------------------- Nine months ended September 30, 2000 1999 -------------------------------------------------------------------------- Excluding interest on deposits Net income $ 504 $ 350 Applicable income tax expense 296 234 Less undistributed equity earnings 43 3 Fixed charges: Interest on: Borrowed funds 334 101 Long-term debt 317 81 One third of rents, net of income from subleases 17 11 -------------------------------------------------------------------------- Total fixed charges 668 193 Earnings before taxes based on income and fixed charges $ 1,425 $ 774 -------------------------------------------------------------------------- Ratio of earnings to fixed charges 2.13 4.01 -------------------------------------------------------------------------- Including interest on deposits Total fixed charges (as above) $ 668 $ 193 Add: Interest on deposits 1,689 625 -------------------------------------------------------------------------- Total fixed charges and interest on deposits 2,357 818 -------------------------------------------------------------------------- Earnings before taxes based on income and fixed charges (as above) 1,425 774 Add: Interest on deposits 1,689 625 -------------------------------------------------------------------------- Total $ 3,114 $ 1,399 -------------------------------------------------------------------------- Ratio of earnings to fixed charges 1.32 1.71 --------------------------------------------------------------------------
25.
Exhibit 12.02 HSBC USA Inc. Computation of Ratio of Earnings to Fixed Charges (in millions, except ratios) -------------------------------------------------------------------------- Nine months ended September 30, 2000 1999 -------------------------------------------------------------------------- Excluding interest on deposits Net income $ 504 $ 350 Applicable income tax expense 296 234 Less undistributed equity earnings 43 3 Fixed charges: Interest on: Borrowed funds 334 101 Long-term debt 317 81 One third of rents, net of income from subleases 17 11 -------------------------------------------------------------------------- Total fixed charges 668 193 Earnings before taxes based on income and fixed charges 1,425 774 -------------------------------------------------------------------------- Total fixed charges 668 193 Preferred dividends 21 - Ratio of pretax income to income after applicable income tax expense 1.59 1.67 -------------------------------------------------------------------------- Total preferred stock dividend factor 33 - Fixed charges, including preferred stock dividend factor $ 701 $ 193 -------------------------------------------------------------------------- Ratio of earnings to combined fixed charges and preferred dividends 2.03 4.01 -------------------------------------------------------------------------- Including interest on deposits Total fixed charges, including preferred stock dividend factor (as above) $ 701 $ 193 Add: Interest on deposits 1,689 625 -------------------------------------------------------------------------- Fixed charges, including preferred stock dividend factor and interest on deposits 2,390 818 -------------------------------------------------------------------------- Earnings before taxes based on income and fixed charges (as above) 1,425 774 Add: Interest on deposits 1,689 625 -------------------------------------------------------------------------- Total $ 3,114 $ 1,399 -------------------------------------------------------------------------- Ratio of earnings to combined fixed charges and preferred dividends 1.30 1.71 --------------------------------------------------------------------------
26. Exhibit 3 HSBC USA INC. ARTICLES OF AMENDMENT HSBC USA INC., a Maryland corporation, having its principal office in Baltimore City, Maryland (which is hereinafter called the "Corporation"), hereby certifies to the State Department of Assessments and Taxation of Maryland (the "Department") that: FIRST: The Charter of the Corporation is hereby amended as follows: Article SECOND, Section 10 of the Articles Supplementary of the Corporation dated December 16, 1999 and filed with the Department on December 16, 1999 containing the terms of the Series X Preferred Stock of the Corporation is amended in its entirety to read as follows: 10. Transferability. No holders of shares of Series X Preferred Stock may transfer or assign shares of Series X Preferred Stock held by such holder, in whole or in part, except to The Toronto- Dominion Bank, CT Financial Services Inc. or to any direct or indirect wholly-owned subsidiary of The Toronto-Dominion Bank organized under the laws of Canada or any Province thereof or under the laws of the United States of America, any State thereof or the District of Columbia, or to any other party the Corporation may approve in writing in its sole and absolute discretion without any requirement that the Corporation be reasonable in the exercise of such discretion. SECOND: The foregoing amendment to the Charter of the Corporation does not increase the authorized capital stock of the Corporation. THIRD: The foregoing amendment to the Charter of the Corporation has been advised by the Board of Directors and approved by the stockholders of the Corporation. IN WITNESS WHEREOF, HSBC USA INC. has caused these presents to be signed in its name and on its behalf by its Executive Vice President and witnessed by its Assistant Corporate Secretary on September 26, 2000. WITNESS: HSBC USA INC. By: /s/ Helen Kujawa By: /s/ Gerald A. Ronning ------------------- ----------------------- Assistant Corporate Executive Vice President Secretary 27. THE UNDERSIGNED, Executive Vice President of HSBC USA INC., who executed on behalf of the Corporation the foregoing Articles of Amendment of which this certificate is made a part, hereby acknowledges in the name and on behalf of said Corporation the foregoing Articles of Amendment to be the corporate act of said Corporation and hereby certifies that to the best of his knowledge, information, and belief the matters and facts set forth therein with respect to the authorization and approval thereof are true in all material respects under the penalties of perjury. /s/ Gerald A. Ronning ------------------------ Executive Vice President