-----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, U9VFRtO8D5acugCd3ZCYARdrk0TFCr9z4wLwBCAl5EKRAxZHgyooOGKIWN+3WcAR Dd0lWH7upU8aa7bSyD68Pg== 0000083246-01-500004.txt : 20010511 0000083246-01-500004.hdr.sgml : 20010511 ACCESSION NUMBER: 0000083246-01-500004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010510 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: 1628054 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 a10q-331.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 March 31, 2001 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 28 pages. 2. Part I - FINANCIAL INFORMATION - ---------------------------------------------------------------- Item 1 - Financial Statements Page Consolidated Balance Sheet March 31, 2001 and December 31, 2000 3 Consolidated Statement of Income For The Three Months Ended March 31, 2001 and 2000 4 Consolidated Statement of Changes in Shareholders' Equity For The Three Months Ended March 31, 2001 and 2000 5 Consolidated Statement of Cash Flows For The Three Months Ended March 31, 2001 and 2000 6 Notes to Consolidated Financial Statements 7 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Part II - OTHER INFORMATION - ---------------------------------------------------------------- Item 6 - Exhibits and Reports on Form 8-K 25 Signatures 26
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, 2001 2000* - ----------------------------------------------------------------------------- in thousands Assets Cash and due from banks $ 1,987,039 $ 1,860,713 Interest bearing deposits with banks 4,693,344 5,129,490 Federal funds sold and securities purchased under resale agreements 1,115,439 1,895,492 Trading assets (incl. $183,393 pledged to creditors at March 31) 7,783,525 5,770,972 Securities available for sale (incl. $1,818,407 pledged to creditors at March 31) 16,360,299 17,336,832 Securities held to maturity (fair value $5,366,284 and $4,417,251) 5,170,467 4,260,492 Loans 41,042,167 40,417,847 Less - allowance for credit losses 552,664 524,984 - ----------------------------------------------------------------------------- Loans, net 40,489,503 39,892,863 Premises and equipment 794,579 777,610 Accrued interest receivable 575,546 785,286 Equity investments 56,835 55,596 Goodwill and other acquisition intangibles 3,183,334 3,229,479 Other assets 2,276,175 2,040,325 - ----------------------------------------------------------------------------- Total assets $ 84,486,085 $ 83,035,150 ============================================================================= Liabilities Deposits in domestic offices Noninterest bearing $ 4,882,753 $ 5,114,668 Interest bearing 31,587,010 30,631,511 Deposits in foreign offices Noninterest bearing 654,060 282,737 Interest bearing 20,618,917 20,013,588 - ----------------------------------------------------------------------------- Total deposits 57,742,740 56,042,504 Trading account liabilities 3,501,281 2,766,825 Short-term borrowings 7,832,579 8,562,363 Interest, taxes and other liabilities 3,225,862 3,232,918 Subordinated long-term debt and perpetual capital notes 2,958,969 3,027,014 Guaranteed mandatorily redeemable securities 729,907 711,737 Other long-term debt 1,237,512 1,357,904 - ----------------------------------------------------------------------------- Total liabilities 77,228,850 75,701,265 - ----------------------------------------------------------------------------- Shareholders' equity Preferred stock 500,000 500,000 Common shareholder's equity Common stock 4 4 Capital surplus 6,022,018 6,104,264 Retained earnings 611,886 612,798 Accumulated other comprehensive income 123,327 116,819 - ----------------------------------------------------------------------------- Total common shareholder's equity 6,757,235 6,833,885 - ----------------------------------------------------------------------------- Total shareholders' equity 7,257,235 7,333,885 - ----------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 84,486,085 $ 83,035,150 ============================================================================= The accompanying notes are an integral part of the consolidated financial statements. *Restated to exclude investments in entities transferred to HSBC North America Inc. during 2001.
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, 2001 2000* - --------------------------------------------------------------------------- in thousands Interest income Loans $ 785,569 $ 738,674 Securities 375,662 384,542 Trading assets 60,920 28,343 Other short-term investments 115,423 106,475 - --------------------------------------------------------------------------- Total interest income 1,337,574 1,258,034 - --------------------------------------------------------------------------- Interest expense Deposits 582,840 529,112 Short-term borrowings 120,388 96,755 Long-term debt 90,568 104,183 - --------------------------------------------------------------------------- Total interest expense 793,796 730,050 - --------------------------------------------------------------------------- Net interest income 543,778 527,984 Provision for credit losses 47,550 27,993 - --------------------------------------------------------------------------- Net interest income, after provision for credit losses 496,228 499,991 - --------------------------------------------------------------------------- Other operating income Trust income 22,838 20,143 Service charges 43,903 43,508 Mortgage banking revenue 12,197 6,588 Other fees and commissions 76,499 79,434 Trading revenues 50,398 51,408 Security gains (losses) 69,179 (2,402) Other income 17,433 12,272 - --------------------------------------------------------------------------- Total other operating income 292,447 210,951 - --------------------------------------------------------------------------- Total income from operations 788,675 710,942 - --------------------------------------------------------------------------- Other operating expenses Salaries and employee benefits 243,160 248,553 Occupancy expense, net 38,064 41,722 Goodwill amortization 45,091 43,731 Other expenses 165,323 137,651 - --------------------------------------------------------------------------- Total other operating expenses 491,638 471,657 - --------------------------------------------------------------------------- Income before taxes and cumulative effect of accounting change 297,037 239,285 Applicable income tax expense 115,800 89,447 - --------------------------------------------------------------------------- Income before cumulative effect of accounting change 181,237 149,838 - --------------------------------------------------------------------------- Cumulative effect of accounting change - implementation of FAS 133 (451) - - --------------------------------------------------------------------------- Net income $ 180,786 $ 149,838 =========================================================================== The accompanying notes are an integral part of the consolidated financial statements. *Restated to exclude investments in entities transferred to HSBC North America Inc. during 2001 and 2000.
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, 2001 2000* - --------------------------------------------------------------------- in thousands Preferred stock Balance, January 1, $ 500,000 $ 500,000 - --------------------------------------------------------------------- Balance, March 31, 500,000 500,000 - --------------------------------------------------------------------- Common stock Balance, January 1, 4 4 - --------------------------------------------------------------------- Balance, March 31, 4 4 - --------------------------------------------------------------------- Capital surplus Balance, January 1, 6,104,264 6,096,317 Return of capital (84,939) - Capital contribution from parent 2,693 1,314 - --------------------------------------------------------------------- Balance, March 31, 6,022,018 6,097,631 - --------------------------------------------------------------------- Retained earnings Balance, January 1, 612,798 671,578 Net income 180,786 149,838 Cash dividends declared: Preferred stock (6,698) (6,885) Common stock (175,000) (200,000) - --------------------------------------------------------------------- Balance, March 31, 611,886 614,531 - --------------------------------------------------------------------- Accumulated other comprehensive income (loss), net of tax Balance, January 1, 116,819 (50,534) Net change in unrealized gains on securities 34,765 7,938 Net change in unrealized loss on derivatives classified as cash flow hedges (17,949) - Unrealized net transitional loss related to initial adoption of FAS 133 (7,681) - Amortization of unrealized transitional FAS 133 gains credited to current income (713) - Foreign currency translation adjustment (1,914) 253 - --------------------------------------------------------------------- Other comprehensive income, net of tax 6,508 8,191 - --------------------------------------------------------------------- Balance, March 31, 123,327 (42,343) - --------------------------------------------------------------------- Total shareholders' equity, March 31, $ 7,257,235 $ 7,169,823 ===================================================================== Comprehensive income Net income $ 180,786 $ 149,838 Other comprehensive income, net of tax 6,508 8,191 - --------------------------------------------------------------------- Comprehensive income $ 187,294 $ 158,029 ===================================================================== The accompanying notes are an integral part of the consolidated financial statements. *Restated to exclude investments in entities transferred to HSBC North America Inc. during 2001 and 2000.
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, 2001 2000* ------------------------------------------------------------------------------------ in thousands Cash flows from operating activities Net income $ 180,786 $ 149,838 Adjustments to reconcile net income to net cash provided by operating activities Depreciation, amortization and deferred taxes 58,994 99,444 Provision for credit losses 47,550 27,993 Net change in other accrual accounts 248,605 282,591 Net change in loans originated for sale (907,321) (250,232) Net change in trading assets and liabilities (891,476) 364,313 Other, net (120,122) (28,184) ------------------------------------------------------------------------------------ Net cash provided (used) by operating activities (1,382,984) 645,763 ------------------------------------------------------------------------------------ Cash flows from investing activities Net change in interest bearing deposits with banks 445,752 (613,750) Net change in short-term investments 780,053 (1,878,895) Purchases of securities held to maturity (99,773) (14,347) Proceeds from maturities of securities held to maturity 199,414 140,855 Purchases of securities available for sale (3,539,916) (7,093,632) Sales of securities available for sale 2,181,326 4,548,372 Proceeds from maturities of securities available for sale 1,381,701 8,994,972 Payment to shareholders of acquired company - (7,091,209) Net change in credit card receivables 13,859 21,088 Net change in other short term loans 389,562 (499,707) Net originations and maturities of loans 21,524 (124,858) Sales of loans - 167,149 Expenditures for premises and equipment (38,096) (27,734) Net cash used in acquisitions, net of cash acquired (21,547) - Other, net (239,477) (380,264) ------------------------------------------------------------------------------------ Net cash provided (used) by investing activities 1,474,382 (3,851,960) ------------------------------------------------------------------------------------ Cash flows from financing activities Net change in deposits 1,252,443 (1,723,678) Net change in short-term borrowings (729,784) 4,994,498 Issuance of long-term debt 77,373 171,842 Repayment of long-term debt (298,204) (169,140) Return of capital (84,939) - Dividends paid (181,961) (201,354) ------------------------------------------------------------------------------------ Net cash provided by financing activities 34,928 3,072,168 ------------------------------------------------------------------------------------ Net change in cash and due from banks 126,326 (134,029) Cash and due from banks at beginning of period 1,860,713 1,959,213 ------------------------------------------------------------------------------------ Cash and due from banks at end of period $ 1,987,039 $ 1,825,184 ==================================================================================== Non-cash activities: Transfer of securities from held to maturity to available for sale (See Note 8) $ 189,867 $ - Transfer of securities from available for sale to held to maturity 1,041,911 - ------------------------------------------------------------------------------------ The accompanying notes are an integral part of the consolidated financial statements. *Restated to exclude investments in entities transferred to HSBC North America Inc. during 2001 and 2000.
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 (the Bank) conform to accounting principles generally accepted in the United States of America and to predominant practice within the banking industry. Such policies, except as described in Note 8 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 2000 Annual Report on Form 10-K. 2. Acquisitions - --------------------------------------------------------------- On January 1, 2001, the Bank acquired the Panama branches of HSBC Bank plc for approximately $22 million in cash. The purchase included two branches in Panama City, one in the Colon Free Trade Zone, one in Colon and one in Aguadulce. The Bank acquired approximately $500 million in assets and assumed $450 million in customer and bank deposits. The acquisition was accounted for as a transfer of assets between companies under common control at HSBC Bank plc's historical cost, without restatement. As well as aligning ownership along geographic lines, the purchase will allow the Bank to achieve better local synergies from its acquisition of Chase Manhattan's branches in Panama last year. As described in Note 2 to the consolidated financial statements contained in the Company's Annual Report on Form 10-K for 2000, on December 31, 1999, HSBC Holdings plc (HSBC) acquired Republic New York Corporation (Republic). Also on December 31, 1999, following the acquisition, HSBC merged Republic with the Company. The merger was accounted for as a purchase transaction. As a result of the Republic acquisition, the Company assumed certain liabilities associated with merging Republic's operations with those of the Company and recognized integration costs relating to the planned severance of employees and exiting of businesses of the Company. The following table represents the activity in these reserves during the first quarter of 2001.
- --------------------------------------------------------------------- Severance Related Premises Other Total - --------------------------------------------------------------------- (in millions) Balance December 31, 2000 $151.8 $10.8 $5.3 $167.9 Less: Payments 71.9 4.1 - 76.0 - --------------------------------------------------------------------- Balance March 31, 2001 $ 79.9 $ 6.7 $5.3 $ 91.9 - ---------------------------------------------------------------------
8. During 2000, $85.0 million of integration costs were expensed as systems and operations were combined, of which $2.5 million was incurred during the first quarter. During the first quarter of 2001, $5.9 million of integration costs were expensed. Although the consolidation of most systems and operations is nearing completion, it is anticipated that some further integration costs will be incurred during the remainder of 2001. 3. Litigation - --------------------------------------------------------------- As described in Note 26 to the consolidated financial statements contained in the Company's Annual Report on Form 10-K for 2000 (the 2000 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 2000 10-K). These proceedings include investigations by 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. As previously disclosed Republic New York Securities Corporation ("RNYSC") is a target of the federal grand jury investigation being conducted by the U.S. Attorney. In light of a probable law enforcement proceeding against RNYSC in connection with the Princeton Note Matter, a matter that came to light before the acquisition of Republic, a provision of $79 million, the amount of shareholder's equity of RNYSC, was taken in the consolidated financial statements of the Company as of December 31, 2000, as an adjustment to the cost of the acquisition of Republic. During the course of the U.S. Attorney's investigation, with which the Company has been cooperating fully, discussions have been initiated to attempt to resolve the grand jury investigation and regulatory investigations, and such resolution if it occurs may also encompass resolution of some of the civil actions noted below. At the present time it is not possible to predict whether a resolution will be reached or to estimate the amount of its additional cost to the Company. In addition to the regulatory and law enforcement investigations, nineteen separate civil actions have been brought to date in the United States District Court for the Southern District of New York against RNYSC by Japanese entities in connection with the Princeton Note Matter. The first eighteen of these actions are described in Note 26 to the Company's consolidated financial statements included in the Company's Annual Report on Form 10-K for 2000. The nineteenth action, PG Star, Ltd. v. Republic New York Securities Corporation, et. al., was filed on March 28, 2001. It alleges an unpaid note in the amount of Yen 450 million (approximately $3.35 million). The complaint asserts common law claims and claims under the federal commodities laws. At the present time it is not possible to assess the outcome of the civil proceedings relating to the Princeton Note Matter. 9. 4. Accounting for Derivatives and Hedging Activities - --------------------------------------------------------------- Pursuant to FAS 133, all derivatives are recognized on the balance sheet at their fair value (see Note 8, New Accounting Standards). On the date the derivative contract is entered into (January 1, 2001 for all derivatives in place at that date) the Company designates it as (1) a qualifying FAS 133 hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment ("fair value" hedge); or (2) a qualifying FAS 133 hedge of a forecasted transaction of the variability of cash flows to be received or paid related to a recognized asset or liability ("cash flow" hedge); or (3) as a trading position. Changes in the fair value of a derivative that has been designated and qualifies as a fair value hedge, along with the changes in the fair value of the hedged asset or liability that is attributable to the hedged risk (including losses or gains on firm commitments), are recorded in current period earnings. Changes in the fair value of a derivative that has been designated and qualifies as a cash flow hedge are recorded in other comprehensive income to the extent of their effectiveness, until earnings are impacted by the variability of cash flows from the hedged item. Changes in the fair value of derivatives held for trading purposes are reported in current period earnings. At the inception of each hedge (January 1, 2001 for all derivatives in place at that date), the Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as fair value or cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. Increased earnings volatility will result from the on-going mark to market of certain economically viable derivative contracts that do not satisfy the requirements of FAS 133, as well as from the hedge ineffectiveness associated with the qualifying contracts. The Company expects however that it will be able to continue to pursue its overall asset and liability risk management objectives using a combination of derivatives and cash instruments. Embedded Derivatives The Company may acquire or originate a financial instrument that contains a derivative instrument "embedded" within it. Upon origination or acquisition of any such instrument, the Company assesses whether the economic characteristics of the embedded derivative are clearly and closely related to the economic characteristics of the remaining component of the financial instrument (i.e., the "host contract") and whether a separate instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument. 10. When it is determined that (1) the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract; and (2) a separate instrument with the same terms would qualify as a derivative instrument, the embedded derivative is separated from the host contract, carried at fair value, and designated as a fair value hedge, cash flow hedge or as a trading instrument. Hedge Discontinuation The Company formally assesses, both at the hedge's inception and on an on-going basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items and whether they are expected to continue to be highly effective in future periods. If it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, the Company discontinues hedge accounting prospectively, as discussed below. The Company discontinues hedge accounting prospectively when (1) the derivative is no longer effective in offsetting changes in the fair value or cash flows of a hedged item (including firm commitments or forecasted transactions); (2) the derivative expires or is sold, terminated, or exercised; (3) it is unlikely that a forecasted transaction will occur; (4) the hedged firm commitment no longer meets the definition of a firm commitment; or (5) the designation of the derivative as a hedged instrument is no longer appropriate. When hedge accounting is discontinued because it is determined that the derivative no longer qualifies as an effective fair value or cash flow hedge, the derivative will continue to be carried on the balance sheet at its fair value, and the hedged item will no longer be adjusted for changes in fair value or changes in the fair value of the derivative reclassified to other comprehensive income. If the hedged item was a firm commitment or forecasted transaction that is not expected to occur, any amounts recorded on the balance sheet related to the hedged item, including any amounts recorded in other comprehensive income, are reversed to current period earnings. In all other situations in which hedge accounting is discontinued, the derivative will be carried at its fair value on the balance sheet, with changes in its fair value recognized in current period earnings unless redesignated as a qualifying FAS 133 hedge. 5. Pledged Assets - --------------------------------------------------------------- At March 31, 2001, assets amounting to $10.1 billion were pledged as collateral for borrowings, to secure public deposits and for other purposes. The significant components of the assets pledged at March 31, 2001 were as follows: $9.6 billion were securities and trading assets and $.6 billion were loans. 11. In accordance with the Statement of Financial Accounting Standards No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (FAS 140), debt securities pledged as collateral that can be sold or repledged by the secured party continue to be reported on the consolidated balance sheet. The following table provides the fair value of collateral that can be sold or repledged.
- ------------------------------------------------------------- March 31, December 31, 2001 2000 - ------------------------------------------------------------- (in billions) Trading assets $ .2 $.2 Securities available for sale 1.8 .4 - -------------------------------------------------------------
6. Collateral - --------------------------------------------------------------- The fair value of collateral accepted by the Company not reported on the consolidated balance sheet that can be sold or repledged at March 31, 2001, totalled $1.3 billion compared with $.7 billion at December 31, 2000. This collateral was obtained under security resale agreements. Of this collateral, $.9 billion at March 31, 2001 has been sold or repledged as collateral under repurchase agreements or to cover short sales compared with $.3 billion at December 31, 2000. 7. Business Segments - --------------------------------------------------------------- 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, insurance, estate planning and other investment 12. 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. 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, including Republic related integration costs, goodwill amortization, preferred stock dividends 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. 13.
- ------------------------------------------------------------------------------------------------ Segments ---------------------------------------------- Corporate/ Investment Commercial Institutional Personal Banking/ Banking Banking Banking Markets Other Total - ------------------------------------------------------------------------------------------------ Three months ended March 31, 2001 - ------------------------------------------------------------------------------------------------ (in millions) Net interest income (1) $ 147 $ 35 $ 274 $ 88 $ - $ 544 Other operating income 32 25 85 135 16 293 - ------------------------------------------------------------------------------------------------ Total income 179 60 359 223 16 837 Operating expenses (2) 86 23 200 92 91 492 - ------------------------------------------------------------------------------------------------ Pretax income (loss) before provision for credit losses 93 37 159 131 (75) 345 Provision for credit losses (3) 11 - 20 (3) 20 48 - ------------------------------------------------------------------------------------------------ Pretax income (loss) 82 37 139 134 (95) 297 Taxes (4) 28 13 48 46 (19) 116 - ------------------------------------------------------------------------------------------------ Income (loss) before cumulative effect of accounting change 54 24 91 88 (76) 181 - ------------------------------------------------------------------------------------------------ Average assets 14,020 5,755 21,991 39,728 3,552 85,046 Average liabilities/equity (5) 8,614 3,144 25,665 33,213 14,410 85,046 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ Three months ended March 31, 2000 - ------------------------------------------------------------------------------------------------ Net interest income (1) $ 135 $ 36 $ 247 $ 110 $ - $ 528 Other operating income 25 23 90 62 11 211 - ------------------------------------------------------------------------------------------------ Total income 160 59 337 172 11 739 Operating expenses (2) 81 22 204 94 71 472 - ------------------------------------------------------------------------------------------------ Pretax income (loss) before provision for credit losses 79 37 133 78 (60) 267 Provision for credit losses (3) 21 5 15 (5) (8) 28 - ------------------------------------------------------------------------------------------------ Pretax income (loss) 58 32 118 83 (52) 239 Taxes (4) 19 10 38 26 (4) 89 - ------------------------------------------------------------------------------------------------ Net income (loss) 39 22 80 57 (48) 150 - ------------------------------------------------------------------------------------------------ Average assets 13,432 5,978 19,137 39,000 4,162 81,709 Average liabilities/equity (5) 7,646 4,889 26,403 28,259 14,512 81,709 - ------------------------------------------------------------------------------------------------ (1)Net interest income of each segment represents the difference between actual interest earned on assets and interest paid on liabilities of the segment adjusted for a funding charge or credit. Segments are charged a cost to fund assets (e.g. customer loans) and receive a funding credit for funds provided (e.g. customer deposits) based on equivalent market rates. (2)Expenses for the segments include fully apportioned corporate overhead expenses with the exception of non- recurring corporate expenses and goodwill amortization. (3)The provision apportioned to the segments is based on the segments' net charge offs and the change in allowance for credit losses. Credit loss reserves are established at a level sufficient to absorb the losses considered to be inherent in the portfolio. The difference between segment provisions and the Company provision is included in other. (4)Taxes are allocated to the segments based on pretax income excluding goodwill amortization. (5)Common shareholder's equity and earnings on common shareholder's equity are allocated back to the segments based on the percentage of capital assigned to the business.
8. New Accounting Standards - --------------------------------------------------------------- On January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (FAS 133) as amended by FAS 137 and FAS 138. FAS 133 standardizes the accounting for derivative instruments, including certain derivative 14. instruments embedded in other contracts. Under FAS 133, entities are required to carry all derivatives in the consolidated balance sheet at fair value. The accounting for changes in fair value (i.e. gains or losses) of a derivative depends on whether it has been designated and qualifies as part of a hedging relationship and, if so, the type of hedge. In accordance with the transition provisions of FAS 133, the Company recorded a net of tax cumulative effect adjustment charge of $.5 million in earnings representing the difference between the fair value of derivatives that were designated as fair value hedging instruments at the date of adoption and the related mark to market of the previously hedged assets and liabilities. The Company also recorded a net of tax cumulative effect gain of $2.9 million in accumulated other comprehensive income representing the fair value of derivatives that were designated as cash flow hedging instruments at the date of adoption, all of which will be recognized in earnings during the current year. Gains and losses on derivatives that were previously deferred as adjustments to the carrying amount of hedged items were not affected and continue to be amortized over the life of the previously hedged items. Upon adoption of FAS 133, the Company also transferred $189.9 million of previously classified held to maturity securities to securities available for sale. This reclassification resulted in a net of tax cumulative effect adjustment loss of $10.5 million in other comprehensive income. The Company continues to hold these securities. Under the provisions of FAS 133, such a reclassification does not call into question the Company's intent to hold current or future debt securities to their maturity. 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 replaced Statement of Financial Accounting Standards No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (FAS 125). It revised the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carried over most of FAS 125's provisions without change. FAS 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities of the Company occurring after March 31, 2001. Adoption of this standard is not anticipated to have a material effect on the consolidated financial statements of the Company. 15. Management's Discussion and Analysis of Financial Condition and Results of Operations - --------------------------------------------------------------- HSBC USA Inc. (the Company) reported first quarter 2001 net income of $180.8 million, compared with $149.8 million in the first quarter of 2000. The key factors contributing to the increased net income between 2001 and 2000 were growth in core loans and deposits and growing wealth management fees. Also, revenues from the investment banking and markets business (recorded in the trading revenues and securities gains categories) were up sharply as the Company took advantage of favorable market conditions. Net Interest Income - --------------------------------------------------------------- Net interest income for the first quarter of 2001 was $543.8 million compared with $528.0 million for the first quarter of 2000. The increase in net interest income was driven by growth in core loans and deposits. Higher levels of wholesale treasury assets and liabilities also contributed to the increase in net interest income. Interest income was $1,337.6 million in the first quarter of 2001 compared with $1,258.0 million in the first quarter of 2000. Average earning assets were $77.5 billion for the first quarter of 2001 compared with $73.1 billion a year ago. The average rate earned on earning assets was 7.03% for the first quarter of 2001 compared with 6.96% a year ago. The increase in interest income reflects growth achieved in residential mortgage loans as well as higher rates earned on consumer loans and securities. The higher first quarter 2001 average rate earned on residential mortgages as compared to first quarter 2000, reflects the impact of loans added during the past year at rates higher than current market rates. Interest expense for the first quarter of 2001 was $793.8 million compared with $730.0 million in the first quarter of 2000. Average interest bearing liabilities for the first quarter of 2001 were $66.0 billion, compared with $61.6 billion a year ago. The average rate paid on interest bearing liabilities was 4.88% compared with 4.77% a year ago. The increase in interest expense reflects higher levels of interest bearing deposits, including growth achieved in core customer deposits. Higher rates were paid on deposits in foreign offices, other short-term borrowings and long-term debt. The taxable equivalent net yield on average total assets for the first quarter of 2001 was 2.62%, compared with 2.63% a year ago. The positive impact of higher levels of core loans and deposits were offset by the negative impact of a larger wholesale treasury balance sheet, which reduced our overall net interest spread. 16. Other Operating Income - --------------------------------------------------------------- Total other operating income was $292.4 million in the first quarter of 2001, compared with $211.0 million in the 2000 first quarter. The increases in trust income and other income reflect growth achieved in our wealth management business. The significant increase in securities gains in 2001 primarily relates to the sale of mortgage backed securities. The Company decided to sell these securities before the mortgages underlying the securities could prepay. The security gains for 2001 also included a one-time gain of $19.3 million on the sale of shares in Canary Wharf, a retail/office development investment project in London, England. Trading revenues are generated by the Company's participation in the foreign exchange and precious metals markets, trading activities in other derivative contracts, including interest rate swaps, and from trading securities. The Company reports the net revenues from these activities, which include mark to market adjustments and any related direct trading expenses, as trading revenues in the consolidated statement of income. Trading revenues are summarized by categories of financial instruments in the following table.
- ----------------------------------------------------------------- Three months ended March 31 2001 2000 - ----------------------------------------------------------------- (in millions) Foreign exchange $ 32.5 $28.9 Precious metals (14.6) .3 Trading account profits and commissions 32.5 22.2 - ----------------------------------------------------------------- Trading revenues $ 50.4 $51.4 - -----------------------------------------------------------------
Included in the first quarter 2000 trading revenues was $8.0 million of revenue earned by certain non-U.S. entities that were transferred or sold to other HSBC entities during the first half of 2000. The first quarter 2001 precious metals results reflect unrealized losses on positions impacted by lower short term interest rates. These precious metals losses are offset by unrealized gains recorded in trading account profits on swaps which appreciated in value, as well as additional net interest income. Other Operating Expenses - --------------------------------------------------------------- Other operating expenses were $491.6 million in the first quarter of 2001 compared with $471.7 million for the first quarter of 2000. The increase in other operating expenses versus the first quarter of 2000 was due largely to business expansion initiatives, infrastructure investments, and inflationary increases. The business initiatives are focused on growing wealth management and treasury businesses and eBusiness delivery channels. Operating expenses for the first quarter of 2001 included $5.9 million of Republic acquisition related integration costs versus $2.5 million for the same period of 2000. Equipment and software depreciation was higher than the first quarter of last year, because of infrastructure investments made during 2000 related to the Republic acquisition. 17. Income Taxes - --------------------------------------------------------------- The effective tax rate was 39% in the first quarter of 2001 compared with 37% in the same period of 2000. The net deferred tax asset at March 31, 2001 was $124 million compared with $94 million at December 31, 2000.
Asset Quality - --------------------------------------------------------------- The following table provides a summary of the allowance for credit losses and nonaccruing loans. - ----------------------------------------------------------------- 3 Months Year 3 Months Ended Ended Ended 3/31/01 12/31/00 3/31/00 - ----------------------------------------------------------------- (in millions) Allowance for Credit Losses - --------------------------- Balance at beginning of period $525.0 $ 638.0 $638.0 Allowance related to acquired (sold) companies - (11.3) - Provision charged to income 47.6 137.6 28.0 Net charge offs (20.6) (238.7) (27.8) Translation adjustment/other .7 (.6) (.2) - ----------------------------------------------------------------- Balance at end of period $552.7 $ 525.0 $638.0 - -----------------------------------------------------------------
- ------------------------------------------------------------------------ March 31, December 31, March 31, 2001 2000 2000 - ------------------------------------------------------------------------ (in millions) Nonaccruing Loans - ----------------- Balance at end of period $441.8 $423.2 $344.1 As a percent of loans outstanding 1.08% 1.05% .88% Nonperforming Loans and Assets * - -------------------------------- Balance at end of period $460.4 $443.7 $359.4 As a percent of total assets .54% .53% .43% Allowance Ratios - ---------------- Allowance for credit losses as a percent of: Loans 1.35% 1.30% 1.63% Nonaccruing loans 125.09 124.06 185.38 - ------------------------------------------------------------------------ * Includes nonaccruing loans, other real estate and other owned assets.
During the first quarter of 2001, the overall credit quality of the loan portfolio remained stable. Provisions for credit losses were $47.6 million in the first quarter of 2001 compared with $28.0 million in the first quarter of 2000. Net charge offs in the credit card portfolio were $12.9 million and $14.2 million in the first quarter of 2001 and 2000, respectively. The delinquency rate for the credit card portfolio was 3.63% at March 31, 2001, compared with 3.75% at December 31, 2000 and 3.37% at March 31, 2000. Net charge offs on commercial loans were $5.8 million and $11.7 million in the first quarter of 2001 and 2000, respectively. 18. The Company identified impaired loans totaling $233 million at March 31, 2001, of which $119 million had a specific credit loss allowance of $58 million. At December 31, 2000, impaired loans were $224 million of which $109 million had a specific credit loss allowance of $46 million. Derivative Instruments and Hedging Activities - --------------------------------------------------------------- The Company is party to various derivative financial instruments as an end user (1) for asset and liability management purposes; (2) in order to offset the risk associated with changes in the value of various assets and liabilities accounted for in the trading account; (3) to protect against changes in value of its mortgage servicing rights portfolio, and (4) for speculative trading in its own account. The Company is also an international dealer in derivative instruments denominated in U.S. dollars and other currencies which include futures, forwards, swaps and options related to interest rates, foreign exchange rates, equity indices and commodity prices, focusing on structuring of transactions to meet clients' needs. Types of Derivatives Derivative instruments are contracts whose value is derived from that of an underlying instrument, physical commodity or market index and generally do not involve the exchange of principal but may involve the payment of a fee or receipt of a premium at inception of a contract. Certain instruments such as futures and forward contracts commit the Company to buy or sell a specified financial instrument, currency, precious metal or other commodity at a future date. Futures contracts are exchange-trading instruments that settle through an independent clearinghouse and require daily cash settlement. Forward contracts are customized transactions that require no cash settlement until the end of the contract. Other contracts, such as interest rate swaps, involve commitments to make periodic cash settlements based upon the differential between specified rates or indices applied to a stated notional amount. Purchased option contracts give the right, but do not obligate the holder, to acquire or sell for a limited time a financial instrument, precious metal or commodity at a designated price upon payment for assuming the risk of unfavorable changes in the price of the underlying instrument or index. Within the context of its overall balance sheet risk management strategy, derivatives are utilized to protect against changes in fair values and cash flows associated with certain balance sheet assets, liabilities, forecasted transactions and firm commitments in order to maintain net interest margin within a range that management considers acceptable. To achieve this objective, the Company has identified and currently pursues two qualifying FAS 133 fair value hedge strategies and one qualifying cash flow hedge strategy. 19. Fair Value Hedges Specifically, interest rate swaps that call for the receipt of a variable market rate and the payment of a fixed rate are utilized under fair value strategies to hedge the risk associated with changes in the risk free rate component of the value of certain fixed rate investment securities. Interest rate swaps that call for the receipt of a fixed rate and payment of a variable market rate are utilized to hedge the risk associated with changes in the risk free rate component of certain fixed rate debt obligations. For the quarter ended March 31, 2001, the Company recognized a net gain of $114 thousand (reported as other income in the consolidated statement of income), which represented the ineffective portion of all fair value hedges. Only the time value component of these derivative contracts has been excluded from the assessment of hedge effectiveness. Cash Flow Hedges Similarly, interest rate swaps that call for the receipt of a variable market rate and the payment of a fixed rate are utilized under a cash flow strategies to hedge the forecasted repricing of certain deposit liabilities. For the quarter ended March 31, 2001, the Company recognized a net gain of $753 thousand (reported as other income in the consolidated statement of income), which represented the total ineffectiveness of all cash flow hedges. Only the time value component of the change in the fair value of these derivative contracts has been excluded from the assessment of hedge effectiveness. Gains or losses on derivative contracts that are reclassified from accumulated other comprehensive income to current period earnings pursuant to this strategy, are included in interest expense on deposit liabilities during the periods that net income is impacted by the repricing. As of March 31, 2001, $4.5 million of deferred net losses on derivative instruments accumulated in other comprehensive income are expected to be charged to earnings during the remainder of 2001. Trading and Other Activities The Company enters into certain derivative contracts for purely speculative trading purposes in order to realize profits from short-term movements in interest rates, commodity prices and foreign exchange rates. In addition, certain contracts do not qualify as FAS 133 hedges and are accounted for on a full mark to market basis through current earnings even though they were not acquired for trading purposes. For example, in conjunction with managing the risks associated with its mortgage banking business, the Company purchases interest rate floors. Although these derivative contracts do not qualify as hedges under FAS 133, 20. they have the economic impact of largely offsetting the erosion in value of the mortgage servicing rights portfolio in declining rate environments. The changes in value of these and all such "economic hedges" are recognized in current period earnings as if they were trading positions. Credit and Market Risks By using derivative instruments, the Company is exposed to credit and market risk. If the counterparty fails to perform, credit risk is equal to the fair value gain in a derivative. When the fair value of a derivative contract is positive, this generally indicates that the counterparty owes the Company, and, therefore, creates a repayment risk for the Company. When the fair value of a derivative contract is negative, the Company owes the counterparty and, therefore, it has no repayment risk. The Company minimizes the credit (or repayment) risk in derivative instruments by entering into transactions with high quality counterparties including other members of the HSBC Group. Exposures are reviewed periodically by the Company's credit committee. Counterparties generally include financial institutions including banks, other government agencies, both foreign and domestic, and insurance companies. The Company also maintains a policy of requiring that all derivative contracts be governed by an International Swaps and Derivatives Association Master Agreement; depending on the nature of the derivative transaction, bilateral collateral arrangements may be required as well. When the Company has more than one outstanding derivative transaction with a counterparty, and there exists a legally enforceable master netting agreement, the "net" mark to market exposure represents the netting of the positive and negative exposure with the same counterparty. When there is a net negative exposure, the Company considers its exposure to be zero. The net mark to market position with a particular counterparty represents a reasonable measure of credit risk when there is a legally enforceable master netting agreement (i.e., a legal right of set off of receivable and payable derivative contracts) between the Company and a counterparty. The Company's policy is to use master netting agreements with all counterparties. Market risk is the adverse effect that a change in interest rates, currency, or implied volatility rates has on the value of a financial instrument. The Company manages the market risk associated with interest rate and foreign exchange contracts by establishing and monitoring limits as to the types and degree of risk that may be undertaken. The Company periodically measures this risk by using a value at risk methodology. The Company's Asset and Liability Policy Committee is responsible for implementing various hedging strategies that are developed through its analysis of data from financial simulation models and other internal and industry sources. The resulting hedge strategies are then incorporated into the Company's overall interest rate risk management and trading strategies. 21. Liquidity - --------------------------------------------------------------- The Company maintains a strong liquidity position. 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 $500 million at March 31, 2001. Wholesale liabilities were $19.2 billion at March 31, 2001 compared with $18.5 billion at December 31, 2000. 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 $6.8 billion at March 31, 2001, approximately the same level as December 31, 2000. Under risk-based capital guidelines, the Company's capital ratios were 8.07% at the Tier 1 level and 13.16% at the total capital level at March 31, 2001. These ratios compared with 8.39% at the Tier 1 level and 13.56% at the total capital level at December 31, 2000. Under guidelines for leverage ratios, the Company's ratio of Tier 1 capital to quarterly average total assets was 5.57% at March 31, 2001 compared with 5.73% at December 31, 2000. Quantitative and Qualitative Disclosures About Market Risk - --------------------------------------------------------------- In consideration of the degree of interest rate risk inherent in the banking industry, the Company has interest rate risk management policies designed to meet performance objectives within defined risk/safety parameters. In the course of managing interest rate risk, a combination of risk assessment techniques, including dynamic simulation modeling, gap analysis, and capital at risk analysis are employed. The combination of these tools enables management to identify and assess the potential impact of interest rate movements and take appropriate action. Certain limits and benchmarks that serve as guidelines in determining the appropriate levels of interest rate risk for the institution have been established. One such limit is expressed in terms of the Present Value of a Basis Point (PVBP), which reflects the change in value of the balance sheet for a one basis point movement in all interest rates. The institutional PVBP limit as of March 31, 2001 was plus or minus $4.7 million, which includes distinct limits associated with trading portfolio activities and off-balance sheet instruments. Thus, for a one basis point change in interest rates, the policy dictates that the value of the balance sheet shall not change by more than $4.7 million. As of March 31, 2001, the Company had a position of $(3.5) million PVBP reflecting the impact of a one basis point increase in 22. interest rates. Mortgage servicing rights are excluded from the PVBP determination as their interest rate risk is significantly different from other balance sheet items. The mortgage servicing rights risk is to lower interest rates, which is managed through the purchase of appropriate hedges. The Company also monitors changes in value of the balance sheet for large movements in interest rates with an overall limit of +/- 10%, after tax, change from the base case for a 200 basis point gradual rate movement. As of March 31, 2001, for a gradual 200 basis point increase in rates, the value was projected to drop by 5.6% and for a 200 basis point gradual decrease in rates, value was projected to drop by 6.9% were no management actions ever taken to manage exposures to the changing environment. In addition to the above mentioned limits, the Company's Asset and Liability Policy Committee monitors, on a monthly basis, the impact of a number of interest rate scenarios on net interest income. These scenarios include both rate shock scenarios which assume immediate market rate movements of +/- 10% and 200 basis points, as well as rate change scenarios in which rates rise or fall by 200 basis points over a twelve month period. The individual limit for such gradual 200 basis point movements is currently +/- 10%, pretax, of base case earnings over a twelve month period. Simulations are also performed for other relevant interest rate scenarios including immediate rate movements and changes in the shape of the yield curve or in competitive pricing policies. Net interest income under the various scenarios is reviewed over a twelve month period, as well as over a three year period. The simulations capture the effects of the timing of the repricing of all on-balance sheet assets and liabilities, as well as all off-balance sheet positions such as interest rate swaps, futures and option contracts. Additionally, the simulations incorporate any behavioral aspects such as prepayment sensitivity under various scenarios. For purposes of simulation modeling, base case earnings reflect the existing balance sheet composition, with balances generally maintained at current levels by the anticipated reinvestment of expected runoff. These balance sheet levels will however, factor in specific known or likely changes including material increases, decreases or anticipated shifts in balances due to management actions. Current rates and spreads are then applied to produce base case earnings estimates on both a twelve month and three year time horizon. Rate shocks are then modeled and compared to base earnings (earnings at risk), and include behavioral assumptions as dictated by specific scenarios relating to such factors as prepayment sensitivity and the tendency of balances to shift among various products in different rate environments. It is assumed that no management actions are taken to manage exposures to the changing environment being simulated. Utilizing these modeling techniques, a gradual 200 basis point parallel rise and fall in the yield curve on April 1, 2001 would cause projected net interest income for the next twelve months to decrease by $25 million and increase by $31 million, respectively. This +/- 2% change is well within the Company's +/- 10% limit. An immediate 100 basis point parallel rise and fall 23. in the yield curve on April 1, 2001, would cause projected net interest income for the next twelve months to decrease by $54 million and increase by $26 million, respectively. A 200 basis point parallel rise and fall would decrease projected net interest income for the next twelve months by $114 million and increase by $57 million, respectively. The projections noted above do not take into consideration possible complicating factors such as the effect of changes in interest rates on the credit quality, size and composition of the balance sheet. Therefore, although this provides a reasonable estimate of interest rate sensitivity, actual results will vary from these estimates, possibly by significant amounts. Recent Developments - --------------------------------------------------------------- On April 1, 2001, the Bank acquired an approximately 5 percent interest in the voting shares of HSBC Republic Bank (Suisse) S.A. ("Swiss Bank"), an affiliate, in exchange for the contribution to the Swiss Bank of certain Bank businesses conducted by its Singapore and Hong Kong branches. The 5 percent interest represents the fair value of the businesses being transferred to the Swiss Bank. The Bank will retain its banknotes activities in Singapore and its banknotes and foreign currency businesses in Hong Kong, and will maintain its branch licenses in both locations. The transaction is another step in an internal reorganization of the HSBC Group's global private banking operations, which began late last year. The Swiss Bank, a Switzerland based banking affiliate, will manage much of the HSBC Group's worldwide private banking business. Swiss Bank is a foreign bank chartered and regulated under the banking laws of Switzerland. 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.
24. HSBC USA Inc. - -------------------------------------------------------------------------------- CONSOLIDATED AVERAGE BALANCES AND INTEREST RATES* First Quarter 2001 First Quarter 2000** Balance Interest Rate Balance Interest Rate - -------------------------------------------------------------------------------- in millions Assets Interest bearing deposits with banks $ 4,754 $ 72.4 6.17 % $ 3,614 $ 58.8 6.54 % Federal funds sold and securities purchased under resale agreements 2,921 43.0 5.97 2,974 47.7 6.45 Trading assets 7,923 60.9 3.08 5,278 28.3 2.15 Securities 21,450 381.2 7.21 22,587 390.6 6.96 Loans Domestic Commercial 16,317 297.4 7.39 17,157 324.8 7.61 Consumer Residential mortgages 16,186 308.5 7.62 13,441 242.3 7.21 Other consumer 3,305 95.8 11.75 3,102 84.2 10.92 - -------------------------------------------------------------------------------- Total domestic 35,808 701.7 7.95 33,700 651.3 7.77 International 4,594 84.1 7.42 4,939 87.7 7.14 - -------------------------------------------------------------------------------- Total loans 40,402 785.8 7.89 38,639 739.0 7.69 - -------------------------------------------------------------------------------- Total earning assets 77,450 $1,343.3 7.03 % 73,092 $1,264.4 6.96 % - -------------------------------------------------------------------------------- Allowance for credit losses (536) (642) Cash and due from banks 1,692 1,760 Other assets 6,440 7,499 - -------------------------------------------------------------------------------- Total assets $85,046 $81,709 ================================================================================ Liabilities and Shareholders' Equity Interest bearing demand deposits $ 368 $ 0.9 1.06 % $ 785 $ 2.2 1.10 % Consumer savings deposits 12,479 72.1 2.34 12,570 75.5 2.42 Other consumer time deposits 11,598 148.4 5.19 8,064 96.1 4.79 Commercial, public savings and other time deposits 6,278 62.2 4.02 7,531 97.1 5.19 Deposits in foreign offices 21,367 299.2 5.68 18,727 258.2 5.55 - -------------------------------------------------------------------------------- Total interest bearing deposits52,090 582.8 4.54 47,677 529.1 4.46 - -------------------------------------------------------------------------------- Federal funds purchased and securities sold under repurchase agreements 1,954 25.5 5.23 1,832 24.6 5.41 Other short-term borrowings 6,963 94.9 5.52 6,221 72.1 4.66 Long-term debt 5,028 90.6 7.31 5,878 104.2 7.13 - -------------------------------------------------------------------------------- Total interest bearing liabilities 66,035 $ 793.8 4.88 % 61,608 $ 730.0 4.77 % - -------------------------------------------------------------------------------- Interest rate spread 2.15 % 2.19 % - -------------------------------------------------------------------------------- Noninterest bearing deposits 5,622 6,297 Other liabilities 6,022 6,667 Shareholders' equity 7,367 7,137 - -------------------------------------------------------------------------------- Total liabilities and shareholders' equity $85,046 $81,709 ================================================================================ Net yield on average earning assets 2.88 % 2.94 % Net yield on average total assets 2.62 2.63 ================================================================================ * Interest and rates are presented on a taxable equivalent basis. ** Restated to exclude investments in entites transferred to HSBC North America Inc. during 2001 and 2000.
25. 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) Reports on Form 8-K None 26. 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 9, 2001 /s/ Gerald A. Ronning Gerald A.Ronning Executive Vice President & Controller (On behalf of Registrant and as Chief Accounting Officer) 27.
Exhibit 12.01 HSBC USA Inc. Computation of Ratio of Earnings to Fixed Charges (in millions, except ratios) - ------------------------------------------------------------------ Three months ended March 31, 2001 2000* - ------------------------------------------------------------------ Excluding interest on deposits Income before cumulative effect of accounting change $ 181 $ 150 Applicable income tax expense 116 89 Less undistributed equity earnings 1 1 Fixed charges: Interest on: Borrowed funds 120 97 Long-term debt 91 104 One third of rents, net of income from subleases 5 5 - ------------------------------------------------------------------ Total fixed charges 216 206 Earnings before taxes and cumulative effect of accounting change based on income and fixed charges $ 512 $ 444 - ------------------------------------------------------------------ Ratio of earnings to fixed charges 2.37 2.16 - ------------------------------------------------------------------ Including interest on deposits Total fixed charges (as above) $ 216 $ 206 Add: Interest on deposits 583 529 - ------------------------------------------------------------------ Total fixed charges and interest on deposits $ 799 $ 735 - ------------------------------------------------------------------ Earnings before taxes and cumulative effect of accounting change based on income and fixed charges (as above) $ 512 $ 444 Add: Interest on deposits 583 529 - ------------------------------------------------------------------ Total $1,095 $ 973 - ------------------------------------------------------------------ Ratio of earnings to fixed charges 1.37 1.32 - ------------------------------------------------------------------ *Restated to exclude investments in entities transferred to HSBC North America Inc. during 2001 and 2000.
28.
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, 2001 2000* - ------------------------------------------------------------------- Excluding interest on deposits Income before cumulative effect of accounting change $ 181 $ 150 Applicable income tax expense 116 89 Less undistributed equity earnings 1 1 Fixed charges: Interest on: Borrowed funds 120 97 Long-term debt 91 104 One third of rents, net of income from subleases 5 5 - ------------------------------------------------------------------- Total fixed charges 216 206 Earnings before taxes and cumulative effect of accounting change based on income and fixed charges $ 512 $ 444 - ------------------------------------------------------------------- Total fixed charges $ 216 $ 206 Preferred dividends 7 7 Ratio of pretax income to income before cumulative effect of accounting change 1.64 1.60 - ------------------------------------------------------------------- Total preferred stock dividend factor 11 11 Fixed charges, including preferred stock dividend factor $ 227 $ 217 - ------------------------------------------------------------------- Ratio of earnings to combined fixed charges and preferred dividends 2.26 2.05 - ------------------------------------------------------------------- Including interest on deposits Total fixed charges, including preferred stock dividend factor (as above) $ 227 $ 217 Add: Interest on deposits 583 529 - ------------------------------------------------------------------- Fixed charges, including preferred stock dividend factor and interest on deposits $ 810 $ 746 - ------------------------------------------------------------------- Earnings before taxes and cumulative effect of accounting change based on income and fixed charges (as above) $ 512 $ 444 Add: Interest on deposits 583 529 - ------------------------------------------------------------------- Total $1,095 $ 973 - ------------------------------------------------------------------- Ratio of earnings to combined fixed charges and preferred dividends 1.35 1.30 - ------------------------------------------------------------------- *Restated to exclude investments in entities transferred to HSBC North America Inc. during 2001 and 2000.
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