10-Q 1 e10q-302.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, 2002 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) 525-3735 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 30 pages. 2. Part I - FINANCIAL INFORMATION Item 1 - Financial Statements Page Consolidated Balance Sheet March 31, 2002 and December 31, 2001 3 Consolidated Statement of Income For The Three Months Ended March 31, 2002 and 2001 4 Consolidated Statement of Changes in Shareholders' Equity For The Three Months Ended March 31, 2002 and 2001 5 Consolidated Statement of Cash Flows For The Three Months Ended March 31, 2002 and 2001 6 Notes to Consolidated Financial Statements 7 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Part II - OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K 27 Signature 28 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, 2002 2001 ---------------------------------------------------------------------- in thousands Assets Cash and due from banks $ 1,917,635 $ 2,102,756 Interest bearing deposits with banks 2,761,306 3,560,873 Federal funds sold and securities purchased under resale agreements 5,586,667 3,744,624 Trading assets 8,768,015 9,088,905 Securities available for sale (incl.$1,310,627 pledged to creditors at Mar.31, 2002) 14,865,795 15,267,790 Securities held to maturity (fair value $4,438,429 and $4,839,705) 4,280,314 4,651,329 Loans 42,778,874 40,923,298 Less - allowance for credit losses 518,451 506,366 ---------------------------------------------------------------------- Loans, net 42,260,423 40,416,932 Premises and equipment 748,701 750,041 Accrued interest receivable 410,007 416,545 Equity investments 274,984 271,402 Goodwill and other acquisition intangibles 2,885,794 2,895,714 Other assets 2,733,048 3,946,665 ---------------------------------------------------------------------- Total assets $87,492,689 $87,113,576 ====================================================================== Liabilities Deposits in domestic offices Noninterest bearing $ 5,091,896 $ 5,432,106 Interest bearing 34,956,715 31,695,955 Deposits in foreign offices Noninterest bearing 431,989 428,252 Interest bearing 19,191,646 18,951,096 ---------------------------------------------------------------------- Total deposits 59,672,246 56,507,409 ---------------------------------------------------------------------- Trading account liabilities 3,569,528 3,799,817 Short-term borrowings 9,772,318 9,202,086 Interest, taxes and other liabilities 2,566,345 6,064,462 Subordinated long-term debt and perpetual capital notes 2,702,495 2,711,549 Guaranteed mandatorily redeemable securities 727,663 728,341 Other long-term debt 1,365,837 1,050,882 ---------------------------------------------------------------------- Total liabilities 80,376,432 80,064,546 ---------------------------------------------------------------------- Shareholders' equity Preferred stock 500,000 500,000 Common shareholder's equity Common stock 4 4 Capital surplus 6,038,457 6,034,598 Retained earnings 510,402 415,821 Accumulated other comprehensive income 67,394 98,607 ---------------------------------------------------------------------- Total common shareholder's equity 6,616,257 6,549,030 ---------------------------------------------------------------------- Total shareholders' equity 7,116,257 7,049,030 ---------------------------------------------------------------------- Total liabilities and shareholders' equity $87,492,689 $87,113,576 ====================================================================== The accompanying notes are an integral part of the consolidated financial statements.
4.
HSBC USA Inc. ----------------------------------------------------------------------- C O N S O L I D A T E D S T A T E M E N T O F I N C O M E Three months ended March 31, 2002 2001 ----------------------------------------------------------------------- in thousands Interest income Loans $ 635,012 $ 785,569 Securities 247,717 367,716 Trading assets 33,256 60,920 Short-term investments 45,143 115,423 Other interest income 5,430 7,946 ----------------------------------------------------------------------- Total interest income 966,558 1,337,574 ----------------------------------------------------------------------- Interest expense Deposits 261,532 582,840 Short-term borrowings 53,090 120,388 Long-term debt 69,923 90,568 ----------------------------------------------------------------------- Total interest expense 384,545 793,796 ----------------------------------------------------------------------- Net interest income 582,013 543,778 Provision for credit losses 73,500 47,550 ----------------------------------------------------------------------- Net interest income, after provision for credit losses 508,513 496,228 ----------------------------------------------------------------------- Other operating income Trust income 24,899 22,838 Service charges 47,421 43,903 Mortgage banking revenue 17,280 12,197 Other fees and commissions 92,497 76,499 Trading revenues: Treasury business and other 43,254 57,117 Residential mortgage business related (11,315) (6,719) ---------- ------------ Total trading revenues 31,939 50,398 Security gains, net 38,001 69,179 Other income 25,100 17,433 ----------------------------------------------------------------------- Total other operating income 277,137 292,447 ----------------------------------------------------------------------- 785,650 788,675 ----------------------------------------------------------------------- Operating expenses Salaries and employee benefits 253,295 243,160 Occupancy expense, net 35,905 38,064 Goodwill amortization - 43,392 Other expenses 162,519 167,022 ----------------------------------------------------------------------- Total operating expenses 451,719 491,638 ----------------------------------------------------------------------- Income before taxes and cumulative effect of accounting change 333,931 297,037 Applicable income tax expense 123,600 115,800 ----------------------------------------------------------------------- Income before cumulative effect of accounting change 210,331 181,237 ----------------------------------------------------------------------- Cumulative effect of accounting change - implementation of SFAS 133 - (451) ----------------------------------------------------------------------- Net income $ 210,331 $ 180,786 ==============================-======================================== The accompanying notes are an integral part of the consolidated financial statements.
5.
HSBC USA Inc. ------------------------------------------------------------------ C O N S O L I D A T E D S T A T E M E N T O F C H A N G E S I N S H A R E H O L D E R S' E Q U I T Y Three months ended March 31, 2002 2001 ------------------------------------------------------------------ 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, 6,034,598 6,104,264 Return of capital - (84,939) Capital contribution from parent 3,859 2,693 ------------------------------------------------------------------ Balance, March 31, 6,038,457 6,022,018 ------------------------------------------------------------------ Retained earnings Balance, January 1, 415,821 612,798 Net income 210,331 180,786 Cash dividends declared: Preferred stock (5,750) (6,698) Common stock (110,000) (175,000) ------------------------------------------------------------------ Balance, March 31, 510,402 611,886 ------------------------------------------------------------------ Accumulated other comprehensive income (loss) Balance, January 1, 98,607 116,851 Net change in unrealized gains on securities (47,133) 23,705 Net change in unrealized loss on derivatives classified as cash flow hedges 12,648 (17,949) Unrealized net transitional gain related to initial adoption of SFAS 133 - 2,853 Amortization of net unrealized transitional SFAS 133 gains credited to current income - (713) Foreign currency translation adjustment 3,272 (1,420) ------------------------------------------------------------------ Other comprehensive income (loss), net of tax (31,213) 6,476 ------------------------------------------------------------------ Balance, March 31, 67,394 123,327 ------------------------------------------------------------------ Total shareholders' equity, March 31, $ 7,116,257 $ 7,257,235 ================================================================== Comprehensive income Net income $ 210,331 $ 180,786 Other comprehensive income (loss) (31,213) 6,476 ------------------------------------------------------------------ Comprehensive income $ 179,118 $ 187,262 ================================================================== The accompanying notes are an integral part of the consolidated financial statements.
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, 2002 2001 -------------------------------------------------------------------------------- in thousands Cash flows from operating activities Net income $ 210,331 $ 180,786 Adjustments to reconcile net income to net cash provided (used) by operating activities Depreciation, amortization and deferred taxes 21,673 58,994 Provision for credit losses 73,500 47,550 Net change in other accrual accounts (1,070,254) 248,605 Net change in loans originated for sale (286,966) (320,630) Net change in trading assets and liabilities 11,059 (891,476) Other, net (199,807) (120,122) -------------------------------------------------------------------------------- Net cash provided (used) by operating activities (1,240,464) (796,293) -------------------------------------------------------------------------------- Cash flows from investing activities Net change in interest bearing deposits with banks 799,567 445,752 Net change in short-term investments (2,791,326) 780,053 Purchases of securities held to maturity (64) (99,773) Proceeds from maturities of securities held to maturity 362,838 199,414 Purchases of securities available for sale (4,254,613) (3,539,916) Proceeds from sales of securities available for sale 2,399,967 2,181,326 Proceeds from maturities of securities available for sale 960,083 1,381,701 Net change in credit card receivables 55,194 13,859 Net change in other short-term loans (740,282) 389,562 Net originations and maturities of long-term loans (956,824) (576,500) Sales of loans 15,903 11,333 Expenditures for premises and equipment 3,651 (38,096) Net cash used in acquisitions, net of cash acquired - (21,547) Other, net 287,326 (239,477) -------------------------------------------------------------------------------- Net cash provided (used) by investing activities (3,858,580) 887,691 -------------------------------------------------------------------------------- Cash flows from financing activities Net change in deposits 3,164,837 1,252,443 Net change in short-term borrowings 1,549,303 (729,784) Issuance of long-term debt 493,482 77,373 Repayment of long-term debt (178,067) (298,204) Return of capital - (84,939) Dividends paid (115,632) (181,961) -------------------------------------------------------------------------------- Net cash provided by financing activities 4,913,923 34,928 -------------------------------------------------------------------------------- Net change in cash and due from banks (185,121) 126,326 Cash and due from banks at beginning of period 2,102,756 1,860,713 -------------------------------------------------------------------------------- Cash and due from banks at end of period $ 1,917,635 $ 1,987,039 ================================================================================ Non-cash activities: Transfer of securities from held to maturity to available for sale $ - $ 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.
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 3, are consistent with those applied in the presentation of the Company's 2001 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 2001 Annual Report on Form 10-K (the 2001 10-K). Certain reclassifications have been made to prior period amounts to conform to current period presentations. 2. Business Segments ---------------------------------------------------------------- The Company reports and manages its business segments consistently with the line of business groupings used by HSBC. As a result of HSBC line of business changes, the Company altered its business segments that it used in 2001. Prior period disclosures have been conformed to the presentation of current segments. The Company has four business segments that it utilizes for management reporting and analysis purposes. These segments are based upon products and services offered and are identified in a manner consistent with the requirements outlined in Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information (SFAS 131). The segment results show the financial performance of the major business units. The Personal Financial Services 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 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 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. 8. The Corporate, Investment Banking and Markets Segment is comprised of Corporate/Institutional Banking (CIB) and Investment Banking and Markets (IB&M). CIB provides deposit and lending functionality to large corporate and multi- national corporations and banks. 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 IB&M component includes treasury and traded markets. 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. The Private Banking Segment 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 the average balance of the Princeton Note settlement which was paid in January of 2002. 9.
----------------------------------------------------------------------------------------------------- Corporate, Personal Investment Financial Commercial Banking and Private Services Banking Markets Banking Other Total ----------------------------------------------------------------------------------------------------- in millions Three months ended March 31, 2002 --------------------------------- Net interest income (1) $ 307 $ 160 $ 94 $ 21 $ - $ 582 Other operating income 120 46 96 15 - 277 ----------------------------------------------------------------------------------------------------- Total income 427 206 190 36 - 859 Operating expenses (2) 234 106 88 24 - 452 ----------------------------------------------------------------------------------------------------- Working contribution 193 100 102 12 - 407 Provision for credit losses (3) 19 39 15 - - 73 ----------------------------------------------------------------------------------------------------- CMBT * 174 61 87 12 - 334 ----------------------------------------------------------------------------------------------------- Average assets 26,596 16,387 42,810 2,421 - 88,214 Average liabilities/equity (4) 33,212 12,987 33,168 8,786 61 88,214 ----------------------------------------------------------------------------------------------------- Three months ended March 31, 2001 --------------------------------- Net interest income (1) $ 266 $ 159 $ 92 $ 27 $ - $ 544 Other operating income 100 49 120 23 - 292 ----------------------------------------------------------------------------------------------------- Total income 366 208 212 50 - 836 Operating expenses (2) 228 108 77 35 - 448 ----------------------------------------------------------------------------------------------------- Working contribution 138 100 135 15 - 388 Provision for credit losses (3) 30 18 (5) 5 - 48 ----------------------------------------------------------------------------------------------------- CMBT * 108 82 140 10 - 340 ----------------------------------------------------------------------------------------------------- Average assets 23,302 16,909 41,442 3,393 - 85,046 Average liabilities/equity (4) 31,953 12,862 28,564 11,667 - 85,046 ===================================================================================================== * Contribution margin before tax represents pretax income (excluding goodwill amortization in the 2001 quarter). (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. (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. (4) 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.
10. 3. New Accounting Standards ---------------------------------------------------------------- In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations (SFAS 143), which addresses financial accounting and reporting for obligations associated with the retirement of tangible long- lived assets and the associated asset retirement costs. The standard applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) normal use of the asset. SFAS 143 requires the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The fair value of the liability is added to the carrying amount of the associated asset and this additional carrying amount is depreciated over the life of the asset. The liability is accreted at the end of each period through credits to operating expense. If the obligation is settled for other than the carrying amount of the liability, the Company will recognize a gain or loss on settlement. The Company is required and plans to adopt the provisions of SFAS 143 for the quarter ending March 31, 2003. Adoption of this standard is not expected to have a material effect on the consolidated financial statements of the Company. 4. Goodwill and Intangible Assets ---------------------------------------------------------------- The Company adopted the provisions of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142), on January 1, 2002. Under SFAS 142, goodwill is no longer amortized, but is reviewed for impairment at least annually at the reporting unit level. Identifiable intangible assets acquired in a business combination are amortized over their useful lives unless their useful lives are indefinite, in which case those intangible assets are tested for impairment annually. In accordance with SFAS 142, the Company has completed its transitional goodwill impairment test and determined that the fair value of each of the reporting units exceeded its carrying value. As a result, no impairment loss was recognized as of January 1, 2002. The following table presents the consolidated results of operations adjusted as though the adoption of SFAS 142 occurred as of January 1, 2001.
--------------------------------------------------------------- Three months ended March 31, 2002 2001 --------------------------------------------------------------- in thousands Reported net income $210,331 $180,786 Goodwill amortization add-back - 43,392 --------------------------------------------------------------- Adjusted net income $210,331 $224,178 ===============================================================
11. The following table presents the changes in the carrying amount of goodwill for each of the reported business segments for the three months ended March 31, 2002.
---------------------------------------------------------------------------------------- Corporate, Personal Investment Financial Commercial Banking & Private Services Banking Markets Banking Total ---------------------------------------------------------------------------------------- in thousands Balance December 31, 2001 $1,189,536 $543,052 $637,627 $407,306 $2,777,521 Goodwill adjustments and other (3,069) (1,401) (1,645) (1,051) (7,166) ---------------------------------------------------------------------------------------- Balance March 31, 2002 $1,186,467 $541,651 $635,982 $406,255 $2,770,355 ========================================================================================
The following table presents all acquired intangibles of the Company that are being amortized. Amortization of the acquired intangible assets was $2.8 million for the three months ended March 31, 2002. Annual amortization is expected to be approximately $11.0 million for the years ended December 31, 2002 through 2006. At March 31, 2002 acquired intangible assets are as follows.
---------------------------------------------------------------- Gross Carrying Accumulated Amount Amortization ---------------------------------------------------------------- in thousands Favorable lease arrangements $ 62,767 $10,194 Excess premium (SFAS 72) 101,940 39,077 ---------------------------------------------------------------- Total $164,707 $49,271 ================================================================
5. Pledged Assets ---------------------------------------------------------------- At March 31, 2002, assets amounting to $9.2 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, 2002 were as follows: $8.7 billion were securities and trading assets and $.4 billion were loans. In accordance with the Statement of Financial Accounting Standards No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (SFAS 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, 2002 2001 ---------------------------------------------------------------- in billions Trading assets $ .1 $ - Securities available for sale 1.3 1.8 ----------------------------------------------------------------
12. 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, 2002, totalled $3.6 billion compared with $1.4 billion at December 31, 2001. This collateral was obtained under security resale agreements. Of this collateral, $2.2 billion at March 31, 2002 has been sold or repledged as collateral under repurchase agreements or to cover short sales compared with $.6 billion at December 31, 2001. 7. Litigation ---------------------------------------------------------------- As previously reported, there is pending a purported class action entitled Ravens v. Republic New York Corporation, et al., that was filed in the United States District Court for the Eastern District of Pennsylvania on October 7, 1999 on behalf of former shareholders of Republic New York Corporation (Republic) who acquired their common stock between May 10, 1999 (when signing of the merger agreement between Republic and HSBC was announced) and September 15, 1999. On October 16, 2000 an amended complaint in the Ravens action was filed, alleging that the defendants violated the federal securities laws in the merger transaction between Republic and HSBC by failing to disclose facts relating to potential liabilities with respect to the Princeton Note Matter. The amended complaint seeks unspecified damages on behalf of the class. On January 16, 2001, defendants filed a motion to dismiss the Ravens action. On April 24, 2002, the court denied in part the Company's motion to dismiss. The Company intends to defend vigorously against these claims. 13. Management's Discussion and Analysis of Financial Condition and Results of Operations ---------------------------------------------------------------- HSBC USA Inc. (the Company) reported first quarter 2002 net income of $210.3 million, compared with $180.8 million in the first quarter of 2001. Revenue growth and the implementation of SFAS 142 in January 2002, which eliminates the amortization of goodwill through operating expenses, more than offset lower security gains, increased provision for credit losses and a higher underlying tax rate. Net Interest Income ---------------------------------------------------------------- 2002 Compared to 2001 Net interest income for the first quarter of 2002 was $582.0 million compared with $543.8 million for the first quarter of 2001. The 7% increase in net interest income reflects the impact of a larger balance sheet and a wider interest margin. The Federal Reserve lowered short-term interest rates eleven times during 2001. The lower interest rate environment continued to impact the Company in the first quarter of 2002 and led to lower gross yields earned on assets and to lower gross rates paid on liabilities compared to 2001. The short- term rate cuts led to wider interest margins in certain commercial businesses, the residential mortgage business and treasury. Interest income was $966.6 million in the first quarter of 2002 compared with $1,337.6 million in the first quarter of 2001. Average earning assets were $79.0 billion for the first quarter of 2002 compared with $77.0 billion a year ago. The average rate earned on earning assets was 5.00% for the first quarter of 2002 compared with 7.08% a year ago. Interest expense for the first quarter of 2002 was $384.5 million compared with $793.8 million in the first quarter of 2001. Average interest bearing liabilities for the first quarter of 2002 were $68.9 billion, compared with $66.0 billion a year ago. The average rate paid on interest bearing liabilities for the first quarter of 2002 was 2.26% compared with 4.88% a year ago. The taxable equivalent net yield on average total assets for the first quarter of 2002 was 2.71%, compared with 2.62% a year ago. Average residential mortgages grew $2.6 billion compared to first quarter 2001, as the mortgage banking division experienced particularly strong levels of production in the later part of 2001 and first quarter 2002, driven by a lower rate environment. Average investment securities decreased $2.0 billion as the Company sold securities, including mortgage backed securities, during the first half of 2001, to adjust to interest rate 14. changes and to reconfigure exposure to residential mortgages. During the first quarter of 2002, the Company continued to reduce its holdings in Mexican securities. The overall balance sheet growth was funded largely by increased levels of consumer savings and commercial money market deposits. Forward Outlook For the remainder of 2002, the Company will continue to pursue modest growth in high quality commercial loans, residential mortgages and core personal and commercial deposits. Some less profitable commercial lending relationships are expected to be exited during the remainder of 2002. The steeper yield curve which benefited the Company in the later part of 2001 and the first quarter of 2002 is expected to continue into the third quarter. As an anticipated sustainable economic recovery emerges, the yield curve should be less steep and interest margins are expected to tighten. Other Operating Income ---------------------------------------------------------------- Total other operating income was $277.1 million in the first quarter of 2002, compared with $292.4 million in the first quarter of 2001. 2002 Compared to 2001 - Nontrading Income Wealth management, insurance and bankcard fees continued to show growth in the first quarter of 2002. Brokerage revenues were up $10.5 million or 60% due in part to sales of annuity products and increased transaction volume. Insurance revenues increased over $5.0 million or 73% compared to the first quarter of 2001. Security gains for the first quarter 2002 included gains on sales of mortgage backed, U.S. Treasury and Republic of Mexico securities. Security gains in the first quarter of 2001 were unusually high as the Company sold securities to adjust to interest rate changes and to reconfigure exposure to residential mortgages. Also during the first quarter of 2001, a $19.3 million one-time security gain was realized on the sale of shares in Canary Wharf, a retail/office development project in London, England. Forward Outlook - Nontrading Income During the remainder of 2002, the Company will focus on growth in brokerage, insurance, trust, asset management and trade service related fees. The Company will utilize its strong retail distribution network, its improving branch visibility in the United States as well as its HSBC Group linkage to pursue revenue growth despite an uncertain economy. The Company continues to face strong competitive challenges from other banks and financial service providers to maintain and grow market share in key customer segments. 15. Trading Income Trading revenues are generated by the Company's participation in the foreign exchange and precious metal markets, from trading derivative contracts, including interest rate swaps and options, from trading securities, and as a result of certain residential mortgage banking activities classified as trading revenue due to the adoption of SFAS 133 effective January 1, 2001. The following table presents trading revenues by business. The data in the table includes net interest income earned/(paid) on trading instruments, as well as an allocation by management to reflect the funding benefit or cost associated with the trading positions.
---------------------------------------------------------------------------- Three months ended March 31, 2002 2001 ---------------------------------------------------------------------------- in millions Trading revenues - treasury business and other $ 43.2 $57.1 Net interest income 13.0 12.2 ---------------------------------------------------------------------------- Trading related revenues - treasury business and other $ 56.2 $69.3 ============================================================================ Business: Derivatives and treasury $ 26.0 $20.3 Foreign exchange .7 16.4 Precious metals 19.1 18.6 Other trading 10.4 14.0 ---------------------------------------------------------------------------- Trading related revenues - treasury business and other $ 56.2 $69.3 ============================================================================ Trading revenues - residential mortgage business related $(11.3) $(6.7) ============================================================================
Treasury Business and Other: 2002 Compared to 2001 Total treasury business and other trading related revenues were $56.2 million in the first quarter of 2002 compared to $69.3 million in the first quarter of 2001. The decline in the 2002 first quarter foreign exchange trading revenue reflects unanticipated adverse exchange rate movements in certain foreign capital markets. Derivatives and treasury trading revenues increased to $26.0 million, a $5.7 million or 28.1% increase over the prior year's quarter. The Company's decision to upgrade its derivatives product capability and ability to market derivative products to clients resulted in a $3.4 million increase in revenue over the comparable quarter of 2001. The remainder of the increase period to period achieved by the derivatives and treasury businesses related to domestic treasury activities, where the Company was able to take advantage of the favorable interest rate environment and price volatility during 2002. Treasury Business and Other: Forward Outlook The Company expects to build on its expanded capabilities in foreign exchange and interest rate derivatives to grow dealing related revenues during the remainder of 2002. However, these revenues are subject to market factors, among other things, and may vary significantly from quarter to quarter. Downward pressure on U.S. interest rates is anticipated until signs of a sustainable economic recovery emerge, at which time the yield 16. curve is expected to be less steep. Net interest margins in treasury are expected to decline reflecting higher margin securities sold in 2001 and the first quarter of 2002 and the anticipated flatter yield curve as the economy begins to improve. Residential Mortgage Business Related In conjunction with the adoption of the Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133) on January 1, 2001, certain derivative financial instruments including interest rate lock commitments granted to customers, forward sales commitments associated with originated mortgage loans held for sale, and instruments used to protect against the decline in economic value of mortgage servicing rights, are recorded as trading positions. The mark to market of these instruments recognized during the first quarter of 2002 was a loss of $2.6 million relating to mortgage servicing rights and a loss of $8.7 million relating to mortgage loans held for sale. Operating Expenses ---------------------------------------------------------------- 2002 Compared to 2001 Operating expenses were $451.7 million in the first quarter of 2002 compared with $491.6 million for the first quarter of 2001. The decrease in operating expenses was primarily a result of the adoption of SFAS 142. See Note 4 for a discussion of SFAS 142. Under SFAS 142, goodwill is no longer being amortized through operating expenses. Partially offsetting the significant decrease of amortization expense was an increase in salaries and employee benefits reflecting higher levels of incentive and additional compensation in investment banking and markets, mortgage banking and wealth management, as well as increased fringe benefit and pension costs. Forward Outlook The Company continues to position itself to operate in an uncertain economy. Improving efficiencies and maintaining strict cost disciplines will be a priority for the remainder of 2002. Limited infrastructure and personnel related expansion are anticipated to support continued growth in wealth management and selected trading related businesses. Income Taxes ---------------------------------------------------------------- The effective tax rate was 37% in the first quarter of 2002 compared with 39% in the same period of 2001. The net deferred tax asset at March 31, 2002 was $361 million compared with $328 million at December 31, 2001. The decrease in the effective tax rate was primarily attributable to the affect of excluding goodwill amortization expense, offset in part by the decline in tax advantaged income associated with certain liquidated investments. 17. Business Segments ---------------------------------------------------------------- The Company reports and manages its business segments consistently with the line of business groupings used by HSBC. As a result of HSBC line of business changes, the Company altered its business segments that it used in 2001. Prior period disclosures have been conformed to the presentation of current segments. The Company has four business segments that it uses for management reporting: personal financial services; commercial banking; corporate, investment banking and markets; and private banking. A description of each segment and the methodologies used to measure financial performance are included in Note 2, Business Segments. The following summarizes the results for each segment. Personal Financial Services This segment contributed $174 million to CMBT in the first quarter of 2002. Growth in CMBT over the same quarter of 2001 was $66 million or 61%. The increase in net interest income for 2002 reflects the impact of a larger balance sheet and a wider interest margin. Asset growth reflects increases in residential mortgages driven by a lower interest rate environment. The balance sheet growth was funded by increased levels of consumer savings and commercial money market deposits. The increase in other operating income reflects growth in wealth management fees, insurance and deposit service charges. Commercial Banking This segment contributed $61 million to CMBT in the first quarter of 2002 compared with $82 million in 2001. The decline in CMBT was driven by higher provisions for credit losses, as a small number of loans incurred losses during the first quarter of 2002. Both revenue and operating expenses in this segment were relatively flat period to period. Corporate, Investment Banking and Markets This segment contributed $87 million to CMBT in the first quarter of 2002 compared with $140 million in the same quarter of 2001. The decrease in CMBT was mainly due to lower levels of security gains during 2002. Security gains in the first quarter of 2001 were unusually high as the Company sold securities to adjust to interest rate changes and to reconfigure exposure to residential mortgages. The reduction in other operating income also reflects lower levels of trading revenue in 2002 due to difficult conditions in the capital markets. The provision for credit losses increased during 2002 as the prior year had unusually light credit losses during the first quarter. Private Banking This segment contributed $12 million to CMBT in the first quarter of 2002, compared with $10 million in the same quarter of 2001. The transfer of Asian private banking customers to other HSBC Group members reduced both income and operating expenses for this segment. 18. 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 3/31/02 12/31/01 3/31/01 ----------------------------------------------------------------------- in millions Balance at beginning of period $506.4 $525.0 $525.0 Other - (19.0) - Provision charged to income 73.5 238.4 47.6 Charge offs: Commercial 49.3 188.0 8.7 Consumer 19.8 80.0 18.3 International 1.6 12.5 .5 ----------------------------------------------------------------------- Total charge offs 70.7 280.5 27.5 ----------------------------------------------------------------------- Recoveries on loans charged off: Commercial 5.9 29.0 3.4 Consumer 3.3 13.7 3.5 International .1 .1 - ----------------------------------------------------------------------- Total recoveries 9.3 42.8 6.9 ----------------------------------------------------------------------- Total net charge offs 61.4 237.7 20.6 ----------------------------------------------------------------------- Translation adjustment - (.3) .7 ----------------------------------------------------------------------- Balance at end of period $518.5 $506.4 $552.7 -----------------------------------------------------------------------
----------------------------------------------------------------------- March 31, December 31, March 31, 2002 2001 2001 ----------------------------------------------------------------------- in millions Nonaccruing Loans ----------------- Balance at end of period $ 375.0 $ 416.8 $ 441.8 As a percent of loans outstanding .88% 1.02% 1.08% Nonperforming Loans and Assets * ------------------------------ Balance at end of period $ 392.6 $ 434.5 $ 460.4 As a percent of total assets .45% .50% .54% Allowance Ratios ---------------- Allowance for credit losses as a percent of: Loans 1.21% 1.24% 1.35% Nonaccruing loans 138.24 121.50 125.09 ----------------------------------------------------------------------- * Includes nonaccruing loans, other real estate and other owned assets.
The provision for credit losses for the quarter ended March 31, 2002 was $73.5 million compared with $47.6 million at March 31, 2001. This increase reflects the general weakness in the U.S. economy coupled with specific deterioration in markets and business segments served by the Company including large corporate and middle market commercial business and international sites. Total nonaccruing loans decreased by $66.8 million to $375.0 million at March 31, 2002 from $441.8 million at March 31, 2001. The decrease reflects the unconditional sale of $89.5 million of nonaccruing loans since March 31, 19. 2001, offset by an increase in loans migrating to nonaccrual status. This deterioration was further evidenced by a $528.0 million increase in criticized assets, which are loans the Company has credit graded "special mention," "substandard" or "doubtful" during the same period. Net charge offs during the first quarter of 2002 of $61.4 million were $40.8 million higher than the first quarter of 2001, largely related to a small number of problem loans. Overall, key coverage statistics remained strong. Although the allowance for credit losses at March 31, 2002 represented 1.21% of total loans compared with 1.35% at March 31, 2001, the decrease was primarily attributable to growth in the residential mortgage loan portfolio which tends to have a lower credit risk profile. The allowance for credit losses at March 31, 2002 as a percentage of nonaccruing loans increased to 138.24% compared with 125.09% at March 31, 2001. The Company identified impaired loans totaling $245 million at March 31, 2002, of which $156 million had an allocation from the allowance of $82 million. At December 31, 2001, impaired loans were $243 million of which $151 million had an allocation from the allowance of $83 million. The Company anticipates that the impact of recent world events and the overall uncertainty in the domestic and world economies will continue to have a significant long-term effect on general economic conditions, governmental and corporate spending priorities, consumer confidence and the general business climate. Credit quality in all portfolios is a concern and the Company has and will continue to take decisive action to quickly identify and address problem situations. 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. 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. 20. 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 SFAS 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. 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. 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 Management 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. Liquidity Management ---------------------------------------------------------------- Liquidity is managed to provide the ability to generate cash to meet lending, deposit withdrawal and other commitments at a reasonable cost in a reasonable amount of time, while maintaining routine operations and market confidence. The Asset Liability Management Committee is responsible for the development and implementation of related policies and procedures to ensure that the minimum liquidity ratios and a strong overall liquidity position are maintained. 21. In carrying out this responsibility, the Asset Liability Management Committee projects cash flow requirements and determines the optimal level of liquid assets and available funding sources to have at the Company's disposal, with consideration given to anticipated deposit and balance sheet growth, contingent liabilities, and the ability to access short-term wholesale funding markets. In addition, the Committee must monitor deposit and funding concentrations in terms of overall mix and to avoid undue reliance on individual funding sources and large deposit relationships. They must also maintain a liquidity management contingency plan, which identifies certain potential early indicators of liquidity problems, and actions which can be taken both initially and in the event of a liquidity crisis to minimize the long-term impact on the Company's business and customer relationships. Deposit accounts from a diverse mix of "core" retail, commercial and public sources represent a significant, cost- effective source of liquidity under normal operating conditions. The Company's ability to regularly attract wholesale funds at a competitive cost is enhanced by strong ratings from the major credit ratings agencies. As of March 31, 2002, the Company and its principal operating subsidiary, HSBC Bank USA, maintained the following long and short-term debt ratings: Short-Term Debt Long-Term Debt ------------------- ------------------- Moody's S&P Fitch Moody's S&P Fitch ------- --- ----- ------- --- ----- HSBC USA Inc. P-1 A-1 F1+ A1 A+ AA- HSBC Bank USA P-1 A-1+ F1+ Aa3 AA- AA- The Company has filed a shelf registration statement with the Securities and Exchange Commission under which it may issue up to $1.1 billion in debt and equity securities and has ready access to the capital markets for long-term funding through the issuance of registered debt. In addition, the Company maintains an unused $500 million bank line of credit with HSBC, and as member of the New York Federal Home Loan Bank, a secured borrowing facility in excess of $5 billion collateralized by residential mortgage loan assets. Off-balance sheet special purpose vehicles or other off-balance sheet mechanisms are not utilized as a source of liquidity or funding. Assets, principally consisting of a portfolio of highly rated investment securities in excess of $19 billion, approximately $3 billion of which is scheduled to mature during 2002, a liquid trading portfolio of approximately $9 billion, and residential mortgages are a primary source of liquidity to the extent that they can be sold or used as collateral for borrowing. The economics and long-term business impact of obtaining liquidity from assets must be weighed against the economics of obtaining liquidity from liabilities, along with consideration given to the associated capital ramifications of these two alternatives. Currently, assets supplement liquidity derived from liabilities, only in a crisis scenario. It is the policy of the Bank to maintain both primary and secondary collateral in order to ensure precautionary borrowing availability from the Federal Reserve. Primary collateral is that which is physically maintained 22. at the Federal Reserve, and serves as a safety net against any unexpected funding shortfalls that may occur. Secondary collateral is collateral that is acceptable to the Federal Reserve, but is not maintained there. If unutilized borrowing capacity were to be low, secondary collateral would be identified and maintained as necessary. With over $15 billion of available wholesale short-term funding at its disposal, the Company has ample liquidity to handle almost any crisis scenario. For example, in the event that the Company had no ability to access the wholesale liability markets and additional funding of commercial credit lines and letters of credit totaling up to $5 billion were to occur, there would still be more than $5 billion of surplus cash to meet any additional withdrawals or funding requirements. Capital ---------------------------------------------------------------- Total common shareholder's equity was $6.6 billion at March 31, 2002, compared with $6.5 billion as December 31, 2001. Under risk-based capital guidelines, the Company's capital ratios were 8.36% at the Tier 1 level and 13.25% at the total capital level at March 31, 2002. These ratios compared with 8.34% at the Tier 1 level and 13.31% at the total capital level at December 31, 2001. Under guidelines for leverage ratios, the Company's ratio of Tier 1 capital to quarterly average total assets was 5.59% at March 31, 2002 compared with 5.48% at December 31, 2001. 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, Value at Risk (VaR) 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, 2002 was plus or minus $4.0 million, which includes distinct limits associated with trading portfolio activities and financial 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 +/- $4.0 million. As of March 31, 2002, the Company had a position of $.2 million PVBP reflecting the impact of a one basis point 23. increase in 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 various financial instruments including interest rate floors and mortgage backed securities. 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 valuation for a 200 basis point gradual rate movement. As of March 31, 2002, for a gradual 200 basis point increase in rates, the value was projected to drop by .8% and for a 200 basis point gradual decrease in rates, value was projected to drop by 9.8%. The projected drop in value is primarily related to changes in the value of balance sheet products with ascribed maturities beyond three years and assumes no management actions to either manage exposures to the changing interest rate environment or reinvesting the proceeds from any maturing assets or liabilities. In addition to the above mentioned limits, the Company's Asset and Liability Management Committee particularly monitors the simulated 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 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%, after tax, 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 assets and liabilities, including derivative instruments 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. 24. Utilizing these modeling techniques, a gradual 200 basis point parallel rise or fall in the yield curve on April 1, 2002 would cause projected net interest income for the next twelve months to decrease by $41 million and increase by $32 million, respectively. This +/- 2% change is well within the Company's +/- 10% limit. An immediate 100 basis point parallel rise or fall in the yield curve on April 1, 2002, would cause projected net interest income for the next twelve months to decrease by $31 million and $8 million, respectively. An immediate 200 basis point parallel rise or fall would decrease projected net interest income for the next twelve months by $81 million and $47 million, respectively. The projections do not take into consideration possible complicating factors such as the effect of changes in interest rates on the credit quality, size and composition of the balance sheet. Therefore, although this provides a reasonable estimate of interest rate sensitivity, actual results will vary from these estimates, possibly by significant amounts. Trading Activities ---------------------------------------------------------------- The trading portfolios of the Company have defined limits pertaining to items such as permissible investments, risk exposures, loss review, balance sheet size and product concentrations. "Loss review" refers to the maximum amount of loss that may be incurred before senior management intervention is required. The Company relies upon Value at Risk (VaR) analysis as a basis for quantifying and managing risks associated with the trading portfolios. Such analysis is based upon the following two general principles: (i) VaR applies to all trading positions across all risk classes including interest rate, equity, commodity, optionality and global/foreign exchange risks and (ii) VaR is based on the concept of independent valuations, with all transactions being repriced by an independent risk management function using separate models prior to being stressed against VaR parameters. VaR attempts to capture the potential loss resulting from unfavorable market developments within a given time horizon (typically ten days) and given a certain confidence level (99%). VaR calculations are performed for all material trading and investment portfolios and for market risk- related treasury activities. The VaR is calculated using the historical simulation or the variance/covariance (parametric) method. A VaR report broken down by trading business and on a consolidated basis is distributed daily to management. To measure the accuracy of the VaR model output, the daily VaR is compared to the actual result from trading activities. 25. The following table summarizes trading VaR of the Company.
-------------------------------------------------------------------------- 1st Quarter 2002 March 31, ------------------------- December 31, 2002 Minimum Maximum Average 2001 -------------------------------------------------------------------------- in millions Total trading $20.3 $10.3 $24.3 $16.4 $19.2 Commodities 1.4 .1 2.4 .7 .3 Equities 2.7 1.0 4.7 2.3 2.0 Foreign exchange 6.7 1.2 13.5 6.3 4.6 Interest rate 21.6 10.4 23.1 16.0 21.5 --------------------------------------------------------------------------
The following summary illustrates the Company's daily revenue earned from market risk-related activities during the first quarter of 2002. Market risk-related revenues include realized and unrealized gains (losses) related to treasury and trading activities but excludes the related net interest income. The analysis of the frequency distribution of daily market risk-related revenues shows that there were 27 days with negative revenue during the first quarter of 2002. The most frequent result was a daily revenue of between zero and $2 million with 26 occurrences. The highest daily revenue was $6.5 million and the largest daily loss was $3.0 million.
------------------------------------------------------------------------------------------ Ranges of daily revenue earned from market risk- related activities (in millions) $(4) to $(2) $(2) to $0 $0 to $2 $2 to $4 $4 to $6 Over $6 ------------------------------------------------------------------------------------------ Number of trading days market risk-related revenue was within the stated range 6 21 26 5 2 1 ------------------------------------------------------------------------------------------
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. 26.
HSBC USA Inc. -------------------------------------------------------------------------------- CONSOLIDATED AVERAGE BALANCES AND INTEREST RATES* First Quarter 2002 First Quarter 2001 Balance Interest Rate Balance Interest Rate -------------------------------------------------------------------------------- in millions Assets Interest bearing deposits with banks $ 3,590 $ 22.9 2.59% $ 4,753 $ 72.4 6.18% Federal funds sold and securities purchased under resale agreements 4,911 22.2 1.83 2,921 43.0 5.97 Trading assets 9,332 33.3 1.43 7,923 60.9 3.08 Securities 19,035 253.9 5.41 20,987 373.3 7.21 Loans Domestic Commercial 16,675 187.8 4.57 16,317 296.2 7.36 Consumer Residential mortgages 18,752 311.9 6.65 16,186 308.5 7.62 Other consumer 3,050 70.0 9.31 3,305 96.4 11.83 -------------------------------------------------------------------------------- Total domestic 38,477 569.7 6.00 35,808 701.1 7.94 International 3,627 65.6 7.33 4,594 84.7 7.48 -------------------------------------------------------------------------------- Total loans 42,104 635.3 6.12 40,402 785.8 7.89 -------------------------------------------------------------------------------- Other interest ** 5.4 ** ** 7.9 ** -------------------------------------------------------------------------------- Total earning assets 78,972 $ 973.0 5.00% 76,986 $1,343.3 7.08% -------------------------------------------------------------------------------- Allowance for credit losses (515) (536) Cash and due from banks 2,049 1,693 Other assets 7,708 6,903 -------------------------------------------------------------------------------- Total assets $ 88,214 $ 85,046 ================================================================================ Liabilities and Shareholders' Equity Interest bearing demand deposits $ 381 $ 0.4 0.42% $ 368 $ 0.9 1.06% Consumer savings deposits 14,933 41.8 1.14 12,479 72.1 2.34 Other consumer time deposits 9,681 72.4 3.04 11,598 148.4 5.19 Commercial, public savings and other time deposits 8,325 35.4 1.72 6,278 62.2 4.02 Deposits in foreign offices 19,754 111.5 2.29 21,367 299.2 5.68 -------------------------------------------------------------------------------- Total interest bearing deposits 53,074 261.5 2.00 52,090 582.8 4.54 -------------------------------------------------------------------------------- Federal funds purchased and securities sold under repurchase agreements 1,764 6.8 1.55 1,954 25.5 5.23 Other short-term borrowings 9,247 46.3 2.03 6,963 94.9 5.52 Long-term debt 4,860 69.9 5.83 5,028 90.6 7.31 -------------------------------------------------------------------------------- Total interest bearing liabilities 68,945 $ 384.5 2.26% 66,035 $ 793.8 4.88% -------------------------------------------------------------------------------- Interest rate spread 2.74% 2.20% -------------------------------------------------------------------------------- Noninterest bearing deposits 5,636 5,622 Other liabilities 6,482 6,022 Total shareholders' equity 7,151 7,367 -------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 88,214 $ 85,046 ================================================================================ Net yield on average earning assets 3.02% 2.89% Net yield on average total assets 2.71 2.62 ================================================================================ * Interest and rates are presented on a taxable equivalent basis. ** Other interest relates to Federal Reserve Bank and Federal Home Loan Bank stock included in other assets.
27. 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 28. SIGNATURE --------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HSBC USA Inc. (Registrant) Date: May 1, 2002 /s/ Gerald A. Ronning ------------------------------------- Gerald A.Ronning Executive Vice President & Controller (On behalf of Registrant and as Chief Accounting Officer) 29. Exhibit 12.01 HSBC USA Inc. Computation of Ratio of Earnings to Fixed Charges (in millions, except ratios)
----------------------------------------------------------------- Three months ended March 31, 2002 2001 ----------------------------------------------------------------- Excluding interest on deposits Income before cumulative effect of accounting change $ 210 $ 181 Applicable income tax expense 124 116 Less undistributed equity earnings 9 1 Fixed charges: Interest on: Borrowed funds 53 120 Long-term debt 70 91 One third of rents, net of income from subleases 4 5 ----------------------------------------------------------------- Total fixed charges 127 216 Earnings before taxes and cumulative effect of accounting change based on income and fixed charges $ 452 $ 512 ----------------------------------------------------------------- Ratio of earnings to fixed charges 3.56 2.37 ----------------------------------------------------------------- Including interest on deposits Total fixed charges (as above) $ 127 $ 216 Add: Interest on deposits 262 583 ----------------------------------------------------------------- Total fixed charges and interest on deposits $ 389 $ 799 ----------------------------------------------------------------- Earnings before taxes and cumulative effect of accounting change based on income and fixed charges (as above) $ 452 $ 512 Add: Interest on deposits 262 583 ----------------------------------------------------------------- Total $ 714 $1,095 ----------------------------------------------------------------- Ratio of earnings to fixed charges 1.84 1.37 -----------------------------------------------------------------
30. 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, 2002 2001 ----------------------------------------------------------------- Excluding interest on deposits Income before cumulative effect of accounting change $ 210 $ 181 Applicable income tax expense 124 116 Less undistributed equity earnings 9 1 Fixed charges: Interest on: Borrowed funds 53 120 Long-term debt 70 91 One third of rents, net of income from subleases 4 5 ----------------------------------------------------------------- Total fixed charges 127 216 Earnings before taxes and cumulative effect of accounting change based on income and fixed charges $ 452 $ 512 ----------------------------------------------------------------- Total fixed charges $ 127 $ 216 Preferred dividends 6 7 Ratio of pretax income to income before cumulative effect of accounting change 1.59 1.64 ----------------------------------------------------------------- Total preferred stock dividend factor 9 11 Fixed charges, including preferred stock dividend factor $ 136 $ 227 ----------------------------------------------------------------- Ratio of earnings to combined fixed charges and preferred dividends 3.32 2.26 ----------------------------------------------------------------- Including interest on deposits Total fixed charges, including preferred stock dividend factor (as above) $ 136 $ 227 Add: Interest on deposits 262 583 ----------------------------------------------------------------- Fixed charges, including preferred stock dividend factor and interest on deposits $ 398 $ 810 ----------------------------------------------------------------- Earnings before taxes and cumulative effect of accounting change based on income and fixed charges (as above) $ 452 $ 512 Add: Interest on deposits 262 583 ----------------------------------------------------------------- Total $ 714 $1,095 ----------------------------------------------------------------- Ratio of earnings to combined fixed charges and preferred dividends 1.79 1.35 -----------------------------------------------------------------