-----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, RK3+W+N3VV4bPuEFVQJXQG9rDhbRfKFKbhYd2j9RZiyi4XoZn36WajmS32Cam8kl oJsiZKqLtNfwIhdxWFVjCQ== 0000083246-02-000005.txt : 20020806 0000083246-02-000005.hdr.sgml : 20020806 20020805151353 ACCESSION NUMBER: 0000083246-02-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020805 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: 1934 Act SEC FILE NUMBER: 001-07436 FILM NUMBER: 02719610 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 e10q-602.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 June 30, 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 50 pages. 2. Part I - FINANCIAL INFORMATION - ---------------------------------------------------------------- Item 1 - Financial Statements Page Consolidated Balance Sheet June 30, 2002 and December 31, 2001 3 Consolidated Statement of Income For The Quarter and Six Months Ended June 30, 2002 and 2001 4 Consolidated Statement of Changes in Shareholders' Equity For The Six Months Ended June 30, 2002 and 2001 5 Consolidated Statement of Cash Flows For The Six Months Ended June 30, 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 Item 3 - Quantitative and Qualitative Disclosures About Market Risk 24 Part II - OTHER INFORMATION - ---------------------------------------------------------------- Item 6 - Exhibits and Reports on Form 8-K 30 Signature 31 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
June 30, December 31, 2002 2001 - ------------------------------------------------------------------------ in thousands Assets Cash and due from banks $ 1,816,659 $ 2,102,756 Interest bearing deposits with banks 1,791,675 3,560,873 Federal funds sold and securities purchased under resale agreements 5,979,340 3,744,624 Trading assets 11,516,657 9,088,905 Securities available for sale (incl.$543,806 pledged to creditors at June 30, 2002) 13,738,056 15,267,790 Securities held to maturity (fair value $4,176,975 and $4,839,705) 3,965,604 4,651,329 Loans 41,694,288 40,923,298 Less - allowance for credit losses 540,251 506,366 - ------------------------------------------------------------------------ Loans, net 41,154,037 40,416,932 Premises and equipment 739,167 750,041 Accrued interest receivable 364,254 416,545 Equity investments 276,123 271,402 Goodwill 2,766,826 2,777,521 Other assets 3,039,406 4,064,858 - ------------------------------------------------------------------------ Total assets $ 87,147,804 $ 87,113,576 ======================================================================== Liabilities Deposits in domestic offices Noninterest bearing $ 5,043,366 $ 5,432,106 Interest bearing 33,511,762 31,695,955 Deposits in foreign offices Noninterest bearing 426,703 428,252 Interest bearing 16,651,987 18,951,096 - ------------------------------------------------------------------------ Total deposits 55,633,818 56,507,409 - ------------------------------------------------------------------------ Trading account liabilities 6,319,737 3,799,817 Short-term borrowings 10,781,833 9,202,086 Interest, taxes and other liabilities 2,596,267 6,064,462 Subordinated long-term debt and perpetual capital notes 2,568,953 2,711,549 Guaranteed mandatorily redeemable securities 734,960 728,341 Other long-term debt 1,311,210 1,050,882 - ------------------------------------------------------------------------ Total liabilities 79,946,778 80,064,546 - ------------------------------------------------------------------------ Shareholders' equity Preferred stock 500,000 500,000 Common shareholder's equity Common stock 4 4 Capital surplus 6,042,160 6,034,598 Retained earnings 552,126 415,821 Accumulated other comprehensive income 106,736 98,607 - ------------------------------------------------------------------------ Total common shareholder's equity 6,701,026 6,549,030 - ------------------------------------------------------------------------ Total shareholders' equity 7,201,026 7,049,030 - ------------------------------------------------------------------------ Total liabilities and shareholders' equity $ 87,147,804 $ 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
Quarter ended June 30, Six months ended June 30, 2002 2001 2002 2001 ------------------------------------------------------------------------------ in thousands Interest income Loans $ 630,720 $ 752,231 $ 1,265,732 $ 1,537,801 Securities 235,095 332,956 482,812 700,672 Trading assets 41,290 62,207 74,545 123,126 Short-term investments 42,166 99,610 87,308 215,033 Other interest income 6,194 7,266 11,625 15,212 ------------------------------------------------------------------------------ Total interest income 955,465 1,254,270 1,922,022 2,591,844 ------------------------------------------------------------------------------ Interest expense Deposits 246,696 509,388 508,228 1,092,228 Short-term borrowings 65,742 88,485 118,833 208,873 Long-term debt 69,024 84,607 138,946 175,175 ------------------------------------------------------------------------------ Total interest expense 381,462 682,480 766,007 1,476,276 ------------------------------------------------------------------------------ Net interest income 574,003 571,790 1,156,015 1,115,568 Provision for credit losses 56,250 48,000 129,750 95,550 ------------------------------------------------------------------------------ Net interest income, after provision for credit losses 517,753 523,790 1,026,265 1,020,018 ------------------------------------------------------------------------------ Other operating income Trust income 22,598 22,004 47,497 44,843 Service charges 51,520 47,536 98,941 91,440 Mortgage banking revenue 32,188 7,417 49,469 19,614 Other fees and commissions 98,707 82,511 191,243 159,010 Trading revenues: Treasury business and other 3,799 39,949 47,053 97,065 Residential mortgage business related (34,236) 11,897 (45,551) 5,178 ---------- ------------ ----------- ----------- Total trading revenues (30,437) 51,846 1,502 102,243 Security gains, net 66,300 56,601 104,301 125,780 Other income 25,271 269 50,331 17,702 ------------------------------------------------------------------------------ Total other operating income 266,147 268,184 543,284 560,632 ------------------------------------------------------------------------------ 783,900 791,974 1,569,549 1,580,650 ------------------------------------------------------------------------------ Operating expenses Salaries and employee benefits 242,669 241,429 495,964 484,589 Occupancy expense, net 37,967 38,136 73,872 76,200 Goodwill amortization - 42,469 - 85,861 Other expenses 192,314 161,495 354,832 328,518 ------------------------------------------------------------------------------ Total operating expenses 472,950 483,529 924,668 975,168 ------------------------------------------------------------------------------ Income before taxes and cumulative effect of accounting change 310,950 308,445 644,881 605,482 Applicable income tax expense 113,400 120,400 237,000 236,200 ------------------------------------------------------------------------------ Income before cumulative effect of accounting change 197,550 188,045 407,881 369,282 ------------------------------------------------------------------------------ Cumulative effect of accounting change - implementation of SFAS 133 - - - (451) ------------------------------------------------------------------------------ Net income $ 197,550 $ 188,045 $ 407,881 $ 368,831 ============================================================================== The accompanying notes are an integral part of the consolidated financial statements.
5. HSBC USA Inc. - ------------------------------------------------------------------ C O N S O L I D A T E D S T A T E M E N T O F C H A N G E S I N S H A R E H O L D E R S' E Q U I T Y
Six months ended June 30, 2002 2001 - ------------------------------------------------------------------ Preferred stock Balance, January 1, $ 500,000 $ 500,000 - ------------------------------------------------------------------ Balance, June 30, 500,000 500,000 - ------------------------------------------------------------------ Common stock Balance, January 1, 4 4 - ------------------------------------------------------------------ Balance, June 30, 4 4 - ------------------------------------------------------------------ Capital surplus Balance, January 1, 6,034,598 6,104,264 Return of capital - (84,939) Capital contribution from parent 7,562 5,688 - ------------------------------------------------------------------ Balance, June 30, 6,042,160 6,025,013 - ------------------------------------------------------------------ Retained earnings Balance, January 1, 415,821 612,798 Net income 407,881 368,831 Cash dividends declared: Preferred stock (11,576) (12,987) Common stock (260,000) (175,000) - ------------------------------------------------------------------ Balance, June 30, 552,126 793,642 - ------------------------------------------------------------------ Accumulated other comprehensive income (loss) Balance, January 1, 98,607 116,851 Net change in unrealized gains on securities (5,623) (58,254) Net change in unrealized loss on derivatives classified as cash flow hedges 12,334 (19,024) 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 - (1,426) Foreign currency translation adjustment 1,418 (2,741) - ------------------------------------------------------------------ Other comprehensive income (loss), net of tax 8,129 (78,592) - ------------------------------------------------------------------ Balance, June 30, 106,736 38,259 - ------------------------------------------------------------------ Total shareholders' equity, June 30, $ 7,201,026 $ 7,356,918 ================================================================== Comprehensive income Net income $ 407,881 $ 368,831 Other comprehensive income (loss) 8,129 (78,592) - ------------------------------------------------------------------ Comprehensive income $ 416,010 $ 290,239 ================================================================== The accompanying notes are an integral part of the consolidated financial statements.
6. - ------------------------------------------------------------------------------- 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
Six months ended June 30, 2002 2001 - ------------------------------------------------------------------------------- in thousands Cash flows from operating activities Net income $ 407,881 $ 368,831 Adjustments to reconcile net income to net cash (used) by operating activities Depreciation, amortization and deferred taxes 260,725 125,129 Provision for credit losses 129,750 95,550 Net change in other accrual accounts (1,113,402) (124,937) Net change in loans originated for sale (712,917) (267,460) Net change in trading assets and liabilities (4,615) (1,645,717) Other, net (258,056) (217,049) - ------------------------------------------------------------------------------- Net cash (used) by operating activities (1,290,634) (1,665,653) - ------------------------------------------------------------------------------- Cash flows from investing activities Net change in interest bearing deposits with banks 1,769,198 486,641 Net change in short-term investments (3,307,526) (1,443,133) Purchases of securities held to maturity (26,528) (109,979) Proceeds from maturities of securities held to maturity 698,937 506,413 Purchases of securities available for sale (7,399,715) (8,752,946) Proceeds from sales of securities available for sale 5,506,583 8,464,532 Proceeds from maturities of securities available for sale 2,049,680 2,663,011 Net change in credit card receivables 87,672 38,235 Net change in other short-term loans (337,580) 134,370 Net originations and maturities of long-term loans (47,426) (1,410,039) Sales of loans 188,792 32,311 Expenditures for premises and equipment (39,285) (61,940) Net cash used in acquisitions, net of cash acquired - (21,547) Other, net 325,311 102,023 - ------------------------------------------------------------------------------- Net cash provided (used) by investing activities (531,887) 627,952 - ------------------------------------------------------------------------------- Cash flows from financing activities Net change in deposits (873,591) 1,547,801 Net change in short-term borrowings 2,558,818 12,386 Issuance of long-term debt 638,225 205,064 Repayment of long-term debt (515,701) (514,908) Return of capital - (84,939) Dividends paid (271,327) (188,615) - ------------------------------------------------------------------------------- Net cash provided by financing activities 1,536,424 976,789 - ------------------------------------------------------------------------------- Net change in cash and due from banks (286,097) (60,912) Cash and due from banks at beginning of period 2,102,756 1,860,713 - ------------------------------------------------------------------------------- Cash and due from banks at end of period $ 1,816,659 $ 1,799,801 =============================================================================== Non-cash activities: Transfer of securities from held to maturity to available for sale $ - $ 170,880 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 which are of a normal recurring nature 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 Holdings plc (HSBC). As a result of HSBC line of business changes, the Company altered its business segments during the fourth quarter of 2001 as reported in the 2001 10-K. Prior period disclosures as reported in the second quarter 2001 Form 10-Q 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 8. 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, 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, manage interest rate risk and capital at 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 residing primarily outside the United States including deposit, lending, trading, trust and investment management. Other consists of the average balance of the Princeton Note settlement which was recorded in September of 2001 and paid in January of 2002. A detailed review comparing June 30, 2002 segment results with the prior year period is included in the management's discussion and analysis of financial condition and results. 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. 9. 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. In October 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of (SFAS 144). The statement supersedes SFAS 121 and is effective for fiscal years beginning after June 15, 2002 although early adoption is encouraged. SFAS 144 retains many of the fundamental principles of SFAS 121 but differs from it in that it excludes goodwill and intangible assets from its provisions and provides greater direction relating to the implementation of its principles. Adoption is not expected to have a material impact on the consolidated financial statements of the Company. In April 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections (SFAS 145). The statement rescinds the requirement in SFAS 4 that material gains and losses on the extinguishment of debt be treated as extraordinary items. The statement also amends the accounting guidance in SFAS 13 for transactions where a capital lease is replaced by an operating lease, so that transactions of this type are treated as sale and leaseback transactions. Finally the standard makes a number of consequential and other technical corrections to other standards. The provisions of the statement relating to the rescission of SFAS 4 are effective for fiscal years beginning after May 15, 2002. Provisions of the statement relating to the amendment of SFAS 13 are effective for transactions occurring after May 15, 2002 and the other provisions of the statement are effective for financial statements issued on or after May 15, 2002. Adoption is not expected to have a material effect on the consolidated financial statements of the Company. The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146, Accounting for Exit or Disposal Activities (SFAS 146) in July 2002, which will prescribe the way in which costs associated with exit or disposal activities are to be determined and the timing of their recognition. The statement will also provide guidance for the reporting and disclosure of these costs. The Company is currently reviewing the impact of applying the statement, which will be effective for disposal activities inititated after December 31, 2002. 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, 10. 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 its annual impairment test and determined that the fair value of each of the reporting units exceeded its carrying value at both test dates. As a result, no impairment loss was recognized as of January 1, 2002 and June 30, 2002. The following table presents the consolidated results of operations adjusted as though the adoption of SFAS 142 occurred as of January 1, 2001.
- --------------------------------------------------------------- Six months ended June 30, 2002 2001 - --------------------------------------------------------------- in thousands Reported net income $407,881 $368,831 Goodwill amortization add-back - 85,861 - --------------------------------------------------------------- Adjusted net income $407,881 $454,692 ===============================================================
The following table presents the changes in the carrying amount of goodwill for each of the reported business segments for the six months ended June 30, 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) (1,741) (4,834) (1,051) (10,695) - ----------------------------------------------------------------------------------------- Balance June 30, 2002 $1,186,467 $541,311 $632,793 $406,255 $2,766,826 =========================================================================================
The following table presents all acquired intangibles of the Company that are being amortized. Amortization of the acquired intangible assets was $5.4 million for the six months ended June 30, 2002. Annual amortization is expected to be approximately $11.0 million for the years ended December 31, 2002 through 2006. The weighted average amortization period for the acquired intangible assets is approximately 11.2 years. At June 30, 2002 acquired intangible assets are as follows.
- --------------------------------------------------------------- Gross Carrying Accumulated Amount Amortization - --------------------------------------------------------------- in thousands Favorable lease arrangements $ 62,767 $11,245 Excess premium (SFAS 72) 101,940 40,776 - --------------------------------------------------------------- Total $164,707 $52,021 ===============================================================
5. Pledged Assets - --------------------------------------------------------------- At June 30, 2002, assets amounting to $8.3 billion were pledged as collateral for borrowings, to secure public deposits and for other purposes. The significant components of the assets pledged at June 30, 2002 were as follows: $7.8 billion were securities and trading assets and $.4 billion were loans. 11. 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 fair value of collateral for securities available for sale that can be sold or repledged was $.5 billion at June 30, 2002 compared with $1.8 billion at December 31, 2001. 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 June 30, 2002, totalled $4.3 billion compared with $1.4 billion at December 31, 2001. This collateral was obtained under security resale agreements. Of this collateral, $3.4 billion at June 30, 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 - -------------------------------------------------------------- The Company is named in and is defending legal actions in various jurisdictions arising from its normal business. None of these proceedings is regarded as material litigation. In addition, there are certain proceedings relating to the "Princeton Note Matter" that are described below. In relation to the Princeton Note Matter, as disclosed in the Company's 2001 Annual Report on Form 10-K, the Company has settled civil law suits brought by 51 of the 53 Japanese plaintiffs. It has also resolved all of the previously reported regulatory and criminal investigations arising from the Princeton Note Matter. Two of the noteholders, whose civil suits seek damages arising from unpaid Princeton Notes with face amounts totaling approximately $125 million, are not included in the settlement and their civil suits will continue. The U.S. Government excluded one of them from the restitution order because that noteholder is being criminally prosecuted in Japan for its conduct relating to its Princeton Notes, and excluded the other because the sum it is likely to recover from the Princeton Receiver exceeds its losses attributable to its funds transfers with Republic New York Securities Corporation as calculated by the U.S. Government. 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 12. 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 - -------------------------------------------------------------- The Company reported second quarter 2002 net income of $197.6 million, compared with $188.0 million in the second quarter of 2001. For the first six months of 2002, net income was $407.9 million compared with $368.8 million for the first six months of last year. Higher fee income in many areas and the elimination of goodwill amortization (through the implementation of SFAS 142) more than offset higher credit costs, lower other operating income from the treasury and mortgage businesses, and a higher underlying tax rate during the first six months of 2002. Net Interest Income - -------------------------------------------------------------- 2002 Compared to 2001 Net interest income for the second quarter of 2002 was $574.0 million compared with $571.8 million for the second quarter of 2001, with the benefit of a larger average balance sheet partially offset by a slightly smaller interest margin. For the first six months of 2002, net interest income was $1,156.0 million compared with $1,115.6 million for the first six months of 2001. The 3.6% increase in net interest income for the first six months of 2002 compared to 2001 reflects the impact of a larger average balance sheet and a slightly 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 six months 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 the residential mortgage business and treasury investment operations. Interest income was $955.5 million in the second quarter of 2002 compared with $1,254.3 million in the second quarter of 2001. Average earning assets were $78.5 billion for the second quarter of 2002 compared with $76.8 billion a year ago. The average rate earned on earning assets was 4.92% for the second quarter of 2002 compared with 6.60% a year ago. Interest income was $1,922.0 million for the first six months of 2002 compared with $2,591.8 million in the first six months of 2001. Average earning assets were $78.7 billion for the first six months of 2002 compared with $76.9 billion for the first six months of 2001. The average rate earned on earning assets was 4.96% for the first six months of 2002 compared with 6.84% a year ago. Interest expense for the second quarter of 2002 was $381.5 million compared with $682.5 million in the second quarter of 2001. Average interest bearing liabilities for the second quarter of 2002 were $68.6 billion, compared with $67.1 billion a year ago. The average rate paid on interest bearing liabilities for the second quarter of 2002 was 2.23% compared with 4.08% a 14. year ago. Interest expense for the first six months of 2002 was $766.0 million compared with $1,476.3 million in the first six months of 2001. Average interest bearing liabilities for the first six months of 2002 were $68.8 billion, compared with $66.6 billion a year ago. The average rate paid on interest bearing liabilities was 2.25% for the first six months of 2002 compared with 4.47% a year ago. The taxable equivalent net yield on average total assets for the second quarter of 2002 was 2.67%, compared with 2.72% a year ago. The taxable equivalent net yield on average total assets for the first six months of 2002 was 2.69%, compared with 2.67% a year ago. Average residential mortgages grew $2.2 billion compared to the second quarter 2001, as the mortgage banking division experienced particularly strong levels of production in the later part of 2001 and first half of 2002, driven by a lower rate environment. Lower margin corporate loans were reduced during the first half of 2002. During the first half of 2002, the Company reduced its holdings in mortgage backed, U.S. Treasury and Latin American securities to adjust to interest rate changes and reduce its credit risk. Proceeds from sales of securities were invested in trading assets and other shorter term treasury assets. Average investment securities decreased $1.5 billion compared to the second quarter of 2001 as the Company sold securities, including mortgage backed securities, during the first half of 2001, to adjust to interest rate changes and to reconfigure exposure to residential mortgages. 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. Although the steeper yield curve which benefited the Company in the later part of 2001 and the first quarter of 2002 has flattened slightly, the Company is expected to continue to benefit from the steep yield curve for the remainder of 2002. Other Operating Income - -------------------------------------------------------------- Total other operating income was $266.1 million in the second quarter of 2002, compared with $268.2 million in the second quarter of 2001. For the first six months of 2002, total other operating income was $543.3 million compared with $560.6 million for the first six months of 2001. 2002 Compared to 2001 - Nontrading Income The quarter to quarter and year to date increases in other fees and commissions were driven by increases in brokerage revenues. Brokerage revenues for the first six months of 2002 were up $16.6 million or 44% due 15. in part to sales of annuity products and increased transaction volume. Higher bankcard, trade service and commercial loan related fees also contributed to the above noted increases in other fees. The increase in service charges for the second quarter and first half of 2002 compared with the same periods of 2001 reflects growth in personal and commercial deposit service charges. The quarter to quarter and year to date increases in other income reflect higher levels of insurance revenues. Insurance revenues increased over $7.4 million or 55% compared to the first half of 2001. Over 1,500 professionals are now licensed to sell insurance and certain annuity products through our retail network. Higher earnings on investments, accounted for under the equity method of accounting, also contributed to the increase in other income for the second quarter and first six months of 2002 compared with the same periods of 2001. Security gains for the first half 2002 included gains on sales of mortgage backed, U.S. Treasury and Latin American securities. The Company sold the securities to adjust to interest rate changes and reduce its credit risk. During the first half of 2001 the Company sold securities to adjust to interest rate changes and to reconfigure exposure to residential mortgages. Also during the first half 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 continue its 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. Trading Revenues 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. 16.
- -------------------------------------------------------------------------------------- Six months ended June 30, 2002 2001 - -------------------------------------------------------------------------------------- in millions Trading revenues - treasury business and other $ 47.1 $ 97.0 Net interest income 29.0 26.8 - -------------------------------------------------------------------------------------- Trading related revenues - treasury business and other $ 76.1 $123.8 ====================================================================================== Business: Derivatives and treasury $ 22.6 $ 37.8 Foreign exchange (1.9) 37.0 Precious metals 35.8 29.8 Other trading 19.6 19.2 - -------------------------------------------------------------------------------------- Trading related revenues - treasury business and other $ 76.1 $123.8 ====================================================================================== Trading revenues (loss) - residential mortgage business related $(45.6) $ 5.2 ======================================================================================
Treasury Business and Other: 2002 Compared to 2001 Total treasury business and other trading related revenues were $76.1 million in the first half of 2002 compared to $123.8 million in the first half of 2001. The decline in trading revenue in the 2002 first half results primarily from foreign exchange losses due to a weakening U.S. dollar and adverse exchange rate movements. The lower level of earnings in derivatives and treasury are in part due to trading positions the Company had taken in June 2002 to protect against rising interest rates. When rates actually declined these positions resulted in mark to market losses. Treasury Business and Other: Forward Outlook The Company expects to build on its expanded capabilities in foreign exchange and interest rate derivatives to grow related revenues. However, these revenues are subject to market factors, among other things, and may vary significantly from quarter to quarter. 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 six months of 2002 was a gain of $2.6 million relating to mortgage servicing rights and a loss of $48.1 million relating to mortgage loans held for sale. When the underlying mortgage loans held for sale at June 30, 2002 are sold during the third quarter, higher gains will be recognized as mortgage banking revenue. These loans are carried at the lower of aggregate cost or market value and as a result do not reflect unrealized gains at June 30, 2002. 17. Operating Expenses - -------------------------------------------------------------- 2002 Compared to 2001 Operating expenses were $472.9 million in the second quarter of 2002 compared with $483.5 million for the second quarter of 2001. Operating expenses were $924.7 million for the first six months of 2002 compared with $975.2 million a year ago. 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. The increase in salaries and employee benefits for the first six months of 2002 compared to the first six months of 2001 reflects higher fringe benefit costs, primarily related to health care and pension costs. The quarter to quarter and year to date increases in other expenses were primarily due to changes related to reserves for letters of credit and for a leveraged lease which is fully reserved. 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 36% in the second quarter of 2002 compared with 39% in the same period of 2001. The effective tax rate was 37% in the first half of 2002 compared with 39% in the same period of 2001. The net deferred tax asset at June 30, 2002 was $181 million compared with $328 million at December 31, 2001. The decrease in the effective tax rate was primarily attributable to the effect of excluding nontaxable goodwill amortization expense, offset in part by the decline in tax advantaged income associated with certain liquidated investments. The underlying tax rate for the first half of 2002 excluding goodwill amortization from last year's expenses, rose approximately 2.5 percentage points over 2001. 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 during the fourth quarter of 2001 as reported in the 2001 10-K. Prior period disclosures as reported in the second quarter 2001 Form 10-Q 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. 18.
- ------------------------------------------------------------------------------------------------ Corporate, Personal Investment Financial Commercial Banking and Private Services Banking Markets Banking Other Total - ------------------------------------------------------------------------------------------------ in millions Six months ended June 30, 2002 - ------------------------------ Net interest income (1) $ 618 $ 313 $ 181 $ 44 $ - $ 1,156 Other operating income 229 81 198 36 - 544 - ------------------------------------------------------------------------------------------------ Total income 847 394 379 80 - 1,700 Operating expenses (2) 474 218 179 54 - 925 - ------------------------------------------------------------------------------------------------ Working contribution 373 176 200 26 - 775 Provision for credit losses (3) 38 79 7 6 - 130 - ------------------------------------------------------------------------------------------------ CMBT * 335 97 193 20 - 645 - ------------------------------------------------------------------------------------------------ Average assets 26,937 15,369 43,300 2,145 - 87,751 Average liabilities/equity (4) 33,071 12,652 33,765 8,232 31 87,751 - ------------------------------------------------------------------------------------------------ Six months ended June 30, 2001 - ------------------------------ Net interest income (1) $ 540 $ 298 $ 228 $ 50 $ - $ 1,116 Other operating income 203 84 236 37 - 560 - ------------------------------------------------------------------------------------------------ Total income 743 382 464 87 - 1,676 Operating expenses (2) 449 203 174 63 - 889 - ------------------------------------------------------------------------------------------------ Working contribution 294 179 290 24 - 787 Provision for credit losses (3) 62 14 12 8 - 96 - ------------------------------------------------------------------------------------------------ CMBT * 232 165 278 16 - 691 - ------------------------------------------------------------------------------------------------ Average assets 23,638 15,802 42,537 3,386 - 85,363 Average liabilities/equity (4) 31,979 12,569 29,075 11,740 - 85,363 ================================================================================================ * Contribution margin before tax represents pretax income (excluding goodwill amortization in the 2001 period). (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.
Personal Financial Services This segment contributed $335 million to CMBT in the first six months of 2002. Growth in CMBT over the same period of 2001 was $103 million or 44%. 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 brokerage fees, insurance revenue and deposit service charges. Improved credit quality resulted in a lower level of provision for credit losses in the first six months of 2002 compared to 2001. 19. Commercial Banking This segment contributed $97 million to CMBT in the first six months of 2002 compared with $165 million in 2001. Overall credit quality declined slightly in the first six months of 2002. The higher provision for credit losses for 2002 is due to a small number of problem loans. The increase in net interest income for 2002 compared to 2001 is primarily due to the availablility of low cost deposits to fund asset portfolios. Corporate, Investment Banking and Markets This segment contributed $193 million to CMBT in the first six months of 2002 compared with $278 million in the same period of 2001. The decrease in CMBT was mainly due to lower levels of foreign exchange, and derivative and treasury related trading revenues during 2002. Private Banking This segment contributed $20 million to CMBT in the first six months of 2002, compared with $16 million in the same period of 2001. The transfer of Asian private banking customers to other HSBC Group members reduced both income and operating expenses for this segment. Asset Quality - -------------------------------------------------------------- The following table provides a summary of the allowance for credit losses and nonaccruing loans.
- -------------------------------------------------------------------------------------- 2nd 2nd 6 Months Year 6 Months Quarter Quarter Ended Ended Ended 2002 2001 6/30/02 12/31/01 6/30/01 - -------------------------------------------------------------------------------------- in millions Balance at beginning of period $518.5 $552.7 $506.4 $525.0 $525.0 Other (2.0) (19.0) (2.0) (19.0) (19.0) Provision charged to income 56.3 48.0 129.8 238.4 95.6 Charge offs: Commercial 20.4 35.2 69.7 188.0 43.9 Consumer 19.6 22.7 39.4 80.0 41.0 International 4.1 1.2 5.7 12.5 1.7 - -------------------------------------------------------------------------------------- Total charge offs 44.1 59.1 114.8 280.5 86.6 - -------------------------------------------------------------------------------------- Recoveries on loans charged off: Commercial 8.4 12.4 14.3 29.0 15.8 Consumer 3.3 3.8 6.6 13.7 7.3 International .1 - .2 .1 - - -------------------------------------------------------------------------------------- Total recoveries 11.8 16.2 21.1 42.8 23.1 - -------------------------------------------------------------------------------------- Total net charge offs 32.3 42.9 93.7 237.7 63.5 - -------------------------------------------------------------------------------------- Translation adjustment (.2) (.9) (.2) (.3) (.2) - -------------------------------------------------------------------------------------- Balance at end of period $540.3 $537.9 $540.3 $506.4 $537.9 - --------------------------------------------------------------------------------------
20.
- -------------------------------------------------------------------------------------- June 30, December 31, June 30, 2002 2001 2001 - -------------------------------------------------------------------------------------- in millions Nonaccruing Loans Balance at end of period $ 416.6 $ 416.8 $ 389.8 As a percent of loans outstanding 1.00% 1.02% .93% Nonperforming Loans and Assets * Balance at end of period $ 427.9 $ 434.5 $ 408.3 As a percent of total assets .49% .50% .48% Allowance Ratios Allowance for credit losses as a percent of: Loans 1.30% 1.24% 1.28% Nonaccruing loans 129.67 121.50 137.98 - --------------------------------------------------------------------------------------- * Includes nonaccruing loans, other real estate and other owned assets.
The provision for credit losses for the quarter ended June 30, 2002 was $56.3 million compared with $48.0 million a year ago. The provision for credit losses for the first half of 2002 was $129.8 million compared with $95.6 million during the first half of 2001. The Company has experienced some deterioration in credit quality reflecting 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 increased by $26.8 million to $416.6 million at June 30, 2002 from $389.8 million at June 30, 2001. The increase reflects the unconditional sale of $89.5 million of nonaccruing loans since June 30, 2001, offset by an increase in loans migrating to nonaccrual status. Nonaccrual loans remained substantially unchanged from December 31, 2001 to June 30, 2002 reflecting lower levels of delinquent residential mortgages, charge-offs and paydowns of certain nonaccrual commercial credits, offset by a continuing migration of commercial loans to nonaccrual status. Criticized assets increased $202.5 million from June 30, 2001 to December 31, 2001 and by $278.8 million from December 31, 2001 to June 30, 2002. Net charge offs during the second quarter of 2002 of $32.3 million were $10.6 million lower than the second quarter of 2001. Net charge offs during the first six months of 2002 were $93.7 million compared with $63.5 million for the first six months of 2001. Overall, key coverage statistics remained strong. The allowance for credit losses at June 30, 2002 represented 1.30% of total loans as compared with 1.24% at December 31, 2001 and 1.28% at June 30, 2001. The allowance for credit losses at June 30, 2002 as a percentage of nonaccruing loans decreased to 129.67% from 137.98% at June 30, 2001 but increased from 121.50% at December 31, 2001. The Company identified impaired loans totaling $330 million at June 30, 2002, of which $190 million had an allocation from the allowance of $113 million. At December 31, 2001, impaired loans were $243 million of which $151 million had an allocation from the allowance of $83 million. 21. As regards to credit, the Company remains cautious in light of recent world events and the overall uncertainty with regard to domestic and foreign economies. The impact on credit quality that may result from change in governmental and corporate spending priorities, consumer confidence and the general business climate as a result of these events and conditions is uncertain. 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. 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. Counterparties generally include financial institutions including banks, other government agencies, both foreign and domestic, and insurance companies. These counterparties are 22. subject to regular credit review by the Company's credit risk management department. 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 Value at Risk (VaR) and other methodologies. 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 and 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. In carrying out this responsibility, the Asset and 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 June 30, 2002, the Company and its principal operating subsidiary, HSBC Bank USA, maintained the following long and short-term debt ratings: 23.
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 $16 billion, approximately $4 billion of which is scheduled to mature within the next twelve months, a liquid trading portfolio of approximately $11 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 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. The Company projects, as part of normal ongoing contingency planning, that in the event of a severe liquidity problem there would be sources of cash exceeding projected uses of cash by over $10 billion. This also assumes that the Company no longer has access to the wholesale funds market. In addition, the Company maintains residential mortgages and eligible collateral at the Federal Reserve that could provide additional liquidity if needed. 24. Capital - -------------------------------------------------------------- Total common shareholder's equity was $6.7 billion at June 30, 2002, compared with $6.5 billion as December 31, 2001. The following table presents the capital ratios of the Company. To be categorized as well-capitalized under the Federal Reserve Board guidelines, a banking institution must have a minimum total risk-based capital ratio of at least 10%, a Tier 1 risk-based ratio of at least 6%, and Tier 1 leverage ratio of at least 5%.
- --------------------------------------------------------------- June 30, December 31, 2002 2001 - --------------------------------------------------------------- Total capital (to risk weighted assets) 13.69% 13.31% Tier 1 capital (to risk weighted assets) 8.63 8.34 Tier 1 capital (to average assets) 5.68 5.48 - ---------------------------------------------------------------
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 June 30, 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 June 30, 2002, the Company had a position of $2.2 million PVBP reflecting the impact of a one basis point increase in interest rates. The Company also monitors changes in value of the balance sheet for large movements in interest rates with an overall limit of +/- 12%, after tax, change from the base case valuation for a 200 basis point gradual rate movement. As of June 30, 2002, for a gradual 200 basis point increase in rates, the value was projected to drop by .4% and for a 200 basis point gradual decrease in rates, value was projected to drop by 8.6%. 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. 25. 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. Utilizing these modeling techniques, a gradual 200 basis point parallel rise or fall in the yield curve on July 1, 2002 would cause projected net interest income for the next twelve months to decrease by $22 million and increase by $15 million, respectively. This +/- 1% change is well within the Company's +/- 10% limit. An immediate 100 basis point parallel rise or fall in the yield curve on July 1, 2002, would cause projected net interest income for the next twelve months to decrease by $21 million and $55 million, respectively. An immediate 200 basis point parallel rise or fall would decrease projected net interest income for the next twelve months by $53 million and $171 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. 26. 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 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. The following table summarizes trading VaR of the Company.
- ----------------------------------------------------------------------------- 2nd Quarter 2002 June 30, --------------------------- December 31, 2002 Minimum Maximum Average 2001 - ----------------------------------------------------------------------------- in millions Total trading $22.3 $11.5 $38.3 $20.9 $19.2 Commodities 7.7 .1 7.7 1.2 .3 Equities 1.1 .4 8.0 2.4 2.0 Foreign exchange 8.1 3.3 16.1 7.1 4.6 Interest rate 11.9 11.7 37.4 20.0 21.5 - -----------------------------------------------------------------------------
The following summary illustrates the Company's daily revenue earned from market risk-related activities during the second 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- 27. related revenues shows that there were 29 days with negative revenue during the second quarter of 2002. The most frequent result was a daily loss of between $2 million and zero with 24 occurrences. The highest daily revenue was $7.2 million and the largest daily loss was $3.8 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 5 24 23 11 - 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. 28. HSBC USA Inc. - -------------------------------------------------------------------------------- CONSOLIDATED AVERAGE BALANCES AND INTEREST RATES*
Second Quarter 2002 Second Quarter 2001 Balance Interest Rate Balance Interest Rate - -------------------------------------------------------------------------------- in millions Assets Interest bearing deposits with banks $ 2,365 $ 16.2 2.75%$ 4,648 $ 61.9 5.34% Federal funds sold and securities purchased under resale agreements 5,626 26.0 1.85 3,322 37.8 4.56 Trading assets 10,815 41.3 1.53 8,149 62.2 3.06 Securities 17,960 241.1 5.38 19,486 342.6 7.05 Loans Domestic Commercial 16,302 200.3 4.93 16,851 276.6 6.58 Consumer Residential mortgages 19,107 320.0 6.70 16,900 312.1 7.39 Other consumer 3,000 67.8 9.06 3,143 89.2 11.38 - -------------------------------------------------------------------------------- Total domestic 38,409 588.1 6.14 36,894 677.9 7.37 International 3,275 42.8 5.24 4,297 74.6 6.97 - -------------------------------------------------------------------------------- Total loans 41,684 630.9 6.07 41,191 752.5 7.33 - -------------------------------------------------------------------------------- Other interest ** 6.2 ** ** 7.3 ** - -------------------------------------------------------------------------------- Total earning assets 78,450 $ 961.7 4.92% 76,796 $1,264.3 6.60% - -------------------------------------------------------------------------------- Allowance for credit losses (528) (553) Cash and due from banks 1,910 1,966 Other assets 7,461 7,468 - -------------------------------------------------------------------------------- Total assets $ 87,293 $ 85,677 ================================================================================ Liabilities and Shareholders' Equity Interest bearing demand deposits $ 378 $ 0.5 0.46%$ 401 $ 0.6 0.56% Consumer savings deposits 15,404 43.0 1.12 12,786 62.6 1.97 Other consumer time deposits 9,249 60.8 2.64 11,453 137.2 4.80 Commercial, public savings and other time deposits 8,746 35.7 1.64 7,210 62.2 3.46 Deposits in foreign offices 19,022 106.7 2.25 20,737 246.8 4.77 - -------------------------------------------------------------------------------- Total interest bearing deposits 52,799 246.7 1.87 52,587 509.4 3.89 - -------------------------------------------------------------------------------- Short-term borrowings 11,084 65.8 2.37 9,604 88.5 3.70 Long-term debt 4,751 69.0 5.83 4,874 84.6 6.96 - -------------------------------------------------------------------------------- Total interest bearing liabilities 68,634 $ 381.5 2.23% 67,065 $ 682.5 4.08% - -------------------------------------------------------------------------------- Interest rate spread 2.69% 2.52% - -------------------------------------------------------------------------------- Noninterest bearing deposits 5,359 5,640 Other liabilities 6,150 5,665 Total shareholders' equity 7,150 7,307 - -------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 87,293 $ 85,677 ================================================================================ Net yield on average earning assets 2.97% 3.04% Net yield on average total assets 2.67 2.72 ================================================================================ * 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.
29. HSBC USA Inc. - ----------------------------------------------------------------------------- CONSOLIDATED AVERAGE BALANCES AND INTEREST RATES*
Six Months 2002 Six Months 2001 Balance Interest Rate Balance Interest Rate - ----------------------------------------------------------------------------- in millions Assets Interest bearing deposits with banks $ 2,974 $ 39.2 2.65%$ 4,700 $ 134.2 5.76% Federal funds sold and securities purchased under resale agreements 5,270 48.1 1.84 3,123 80.8 5.22 Trading assets 10,078 74.6 1.48 8,036 123.2 3.07 Securities 18,494 495.0 5.40 20,232 715.9 7.14 Loans Domestic Commercial 16,487 407.6 4.99 16,584 572.8 6.97 Consumer Residential mortgages 18,931 631.9 6.68 16,545 620.6 7.50 Other consumer 3,025 137.7 9.18 3,224 185.6 11.61 - ----------------------------------------------------------------------------- Total domestic 38,443 1,177.2 6.18 36,353 1,379.0 7.65 International 3,450 89.0 5.20 4,446 159.3 7.23 - ----------------------------------------------------------------------------- Total loans 41,893 1,266.2 6.10 40,799 1,538.3 7.60 - ----------------------------------------------------------------------------- Other interest ** 11.6 ** ** 15.2 ** - ----------------------------------------------------------------------------- Total earning assets 78,709 $1,934.7 4.96% 76,890 $ 2,607.6 6.84% - ----------------------------------------------------------------------------- Allowance for credit losses (522) (545) Cash and due from banks 1,980 1,830 Other assets 7,584 7,188 - ----------------------------------------------------------------------------- Total assets $ 87,751 $ 85,363 ============================================================================= Liabilities and Shareholders' Equity Interest bearing demand deposits $ 379 $ 0.8 0.44%$ 402 $ 1.3 0.66% Consumer savings deposits 15,170 84.8 1.13 12,616 134.8 2.15 Other consumer time deposits 9,464 133.3 2.84 11,525 285.8 5.00 Commercial, public savings and other time deposits 8,537 71.1 1.68 6,747 124.4 3.72 Deposits in foreign offices, primarily banks 19,386 218.2 2.27 21,050 545.9 5.23 - ----------------------------------------------------------------------------- Total interest bearing deposit 52,936 508.2 1.94 52,340 1,092.2 4.21 - ----------------------------------------------------------------------------- Short-term borrowings 11,048 118.8 2.17 9,263 208.9 4.55 Long-term debt 4,805 139.0 5.83 4,950 175.2 7.14 - ----------------------------------------------------------------------------- Total interest bearing liabilities 68,789 $ 766.0 2.25% 66,553 $1,476.3 4.47% - ----------------------------------------------------------------------------- Interest rate spread 2.71% 2.37% - ----------------------------------------------------------------------------- Noninterest bearing deposits 5,497 5,631 Other liabilities 6,314 5,842 Shareholders' equity 7,151 7,337 - ----------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 87,751 $85,363 ============================================================================= Net yield on average earning assets 2.99% 2.97% Net yield on average total assets 2.69 2.67 ============================================================================= * 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.
30. Part II - OTHER INFORMATION - -------------------------------------------------------------- Item 6 - Exhibits and Reports on Form 8-K (a) Exhibit 3 Registrant's By-Laws, as Amended to Date 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 A current report on Form 8-K was filed July 2, 2002 announcing that HSBC USA Inc. had signed a memorandum of understanding with certain partners of Arthur Andersen LLP's (AA LLP) U.S. Private Client Service Practice and with AA LLP. The report relates to the proposed transaction with certain partners of AA LLP to join a new HSBC Private Client Services Group as well as a memorandum of understanding with AA LLP relating to the release of such partners and providing for the acquisition of certain assets. 31. 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: August 5, 2002 /s/ Gerald A. Ronning Gerald A.Ronning Executive Vice President & Controller (On behalf of Registrant and as Chief Accounting Officer) 32. Exhibit 12.01 HSBC USA Inc. Computation of Ratio of Earnings to Fixed Charges (in millions, except ratios)
- ----------------------------------------------------------------- Six months ended June 30, 2002 2001 - ----------------------------------------------------------------- Excluding interest on deposits Income before cumulative effect of accounting change $ 408 $ 369 Applicable income tax expense 237 236 Less undistributed equity earnings 13 3 Fixed charges: Interest on: Borrowed funds 119 209 Long-term debt 139 175 One third of rents, net of income from subleases 8 9 - ----------------------------------------------------------------- Total fixed charges 266 393 Earnings before taxes and cumulative effect of accounting change based on income and fixed charges (as above) $ 898 $ 995 - ----------------------------------------------------------------- Ratio of earnings to fixed charges 3.38 2.53 - ----------------------------------------------------------------- Including interest on deposits Total fixed charges (as above) $ 266 $ 393 Add: Interest on deposits 508 1,092 - ----------------------------------------------------------------- Total fixed charges and interest on deposits $ 774 $1,485 - ----------------------------------------------------------------- Earnings before taxes and cumulative effect of accounting change based on income and fixed charges (as above) $ 898 $ 995 Add: Interest on deposits 508 1,092 - ----------------------------------------------------------------- Total $1,406 $2,087 - ----------------------------------------------------------------- Ratio of earnings to fixed charges 1.82 1.41 - -----------------------------------------------------------------
33. Exhibit 12.02 HSBC USA Inc. Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Dividends (in millions, except ratios)
- ---------------------------------------------------------------- Six months ended June 30, 2002 2001 - ---------------------------------------------------------------- Excluding interest on deposits Income before cumulative effect of accounting change $ 408 $ 369 Applicable income tax expense 237 236 Less undistributed equity earnings 13 3 Fixed charges: Interest on: Borrowed funds 119 209 Long-term debt 139 175 One third of rents, net of income from subleases 8 9 - ---------------------------------------------------------------- Total fixed charges 266 393 Earnings before taxes and cumulative effect of accounting change based on income and fixed charges $ 898 $ 995 - ---------------------------------------------------------------- Total fixed charges $ 266 $ 393 Preferred dividends 12 13 Ratio of pretax income to income before cumulative effect of accounting change 1.58 1.64 - ---------------------------------------------------------------- Total preferred stock dividend factor 18 21 Fixed charges, including preferred stock dividend factor $ 284 $ 414 - ---------------------------------------------------------------- Ratio of earnings to combined fixed charges and preferred dividends 3.16 2.40 - ---------------------------------------------------------------- Including interest on deposits Total fixed charges, including preferred stock dividend factor (as above) $ 284 $ 414 Add: Interest on deposits 508 1,092 - ---------------------------------------------------------------- Fixed charges, including preferred stock dividend factor and interest on deposits $ 792 $1,506 - ---------------------------------------------------------------- Earnings before taxes and cumulative effect of accounting change based on income and fixed charges (as above) $ 898 $ 995 Add: Interest on deposits 508 1,092 - ---------------------------------------------------------------- Total $1,406 $2,087 - ---------------------------------------------------------------- Ratio of earnings to combined fixed charges and preferred dividends 1.78 1.39 - ----------------------------------------------------------------
34. HSBC USA INC. BY-LAWS (As Amended and Restated effective April 20, 2000) (As Further Amended effective April 11, 2002) 35. -1- BY-LAWS OF HSBC USA INC. ARTICLE I OFFICES Section 1.1 The principal office of HSBC USA Inc. (the "Corporation") in the State of Maryland shall be in the City of Baltimore, State of Maryland. Section 1.2 The Corporation may also have offices at such other place or places, both within and without the State of Maryland, as the Board of Directors, or the President of the Corporation acting under delegated authority, may from time to time determine. ARTICLE II STOCKHOLDERS Section 2.1 Place of Stockholders' Meetings. Meetings of the Corporation's stockholders shall be held at such place in the United States as is set from time to time by the Corporation's Board of Directors. Section 2.2 Annual Meetings of Stockholders. An annual meeting of the Corporation's stockholders shall be held in April each year. At each annual meeting, the Corporation's stockholders shall elect a Board of Directors and transact such other business as may properly be brought before the meeting in accordance with these By-Laws. Except as the Charter or statute provides otherwise, any business may be considered at an annual meeting without the purpose of the meeting having been specified in the notice. Failure to hold an annual meeting does not invalidate the Corporation's corporate existence or affect any otherwise valid corporate acts of the Corporation. Section 2.3 Special Meetings of Stockholders. At any time in the interval between annual meetings, a special meeting of the Corporation's stockholders may be called by the Chairman of the Board or the President or by a majority of the Corporation's Board of Directors by vote at a meeting or in writing (addressed to the Corporate Secretary of the Corporation) with or without a meeting. Special meetings of the Corporation's stockholders shall be called by the Corporate Secretary on the written request of stockholders of the Corporation entitled to cast at least 25 percent of all the votes entitled to be cast at the meeting. A stockholders' request for a special meeting shall state the purpose of the meeting and the matters proposed to be acted on at it. The Corporate Secretary shall inform the stockholders who make the request of the reasonably estimated costs of preparing and mailing a notice of meeting and, on payment of these costs to the Corporation, notify each stockholder entitled to notice of the meeting. Unless requested by stockholders entitled to cast a majority of all the votes entitled to be cast at the meeting, a special meeting need not be called to consider any matter which is substantially the same as a matter voted on at any special meeting of stockholders of the Corporation held in the preceding 12 months. Business transacted at any 36. -2- special meeting of stockholders shall be limited to the purpose stated in the notice thereof. Section 2.4 Notice of Stockholders' Meetings; Waiver of Notice. Not less than 10 days nor more than 90 days before the date of every stockholders' meeting, the Corporate Secretary shall give to each stockholder entitled to vote at such meeting written notice stating the time and place of the meeting and, in the case of a special meeting or if notice of the purpose is required by statute, the purpose or purposes for which the meeting is called, either by mail or by presenting it to him personally or by leaving it at his residence or usual place of business. If mailed, such notice shall be deemed to be given when deposited in the United States mail addressed to the stockholder at his address as it appears on the records of the Corporation, with postage thereon prepaid. Notwithstanding the foregoing provisions, a waiver of notice in writing, signed by the person or persons entitled to such notice and filed with the records of the meeting, whether before or after the holding thereof, or actual attendance at the meeting in person or by proxy, shall be deemed equivalent to the giving of such notice to such persons. Section 2.5 Quorum at Stockholders' Meetings; Voting; Adjournments. Unless any statute or the Charter provides otherwise, at each meeting of the Corporation's stockholders, the presence in person or by proxy of stockholders entitled to cast a majority of all the votes entitled to be cast at the meeting constitutes a quorum, and a majority of all the votes cast at a meeting at which a quorum is present is sufficient to approve any matter which properly comes before the meeting, except that a plurality of all votes cast at a meeting at which a quorum is present is sufficient to elect a director. Whether or not a quorum is present, a meeting of stockholders convened on the date for which it was called may be adjourned from time to time without further notice by a majority vote of the stockholders present in person or by proxy to a date not more than 120 days after the original record date. Any business which might have been transacted at the meeting as originally notified may be deferred and transacted at any such adjourned meeting at which a quorum is present. Section 2.6 General Right to Vote; Proxies. Unless the Charter provides for a greater or lesser number of votes per share or limits or denies voting rights, each outstanding share of stock, regardless of class, is entitled to one vote on each matter submitted to a vote at a meeting of stockholders; however, a share is not entitled to be voted if any installment payable on it is overdue and unpaid. In all elections of directors, each share of stock may be voted for as many persons as there are directors to be elected and for whose election the share is entitled to be voted. A stockholder may vote the stock the stockholder owns of record either in person or by proxy. A stockholder may sign a writing authorizing another person to act as proxy. Signing may be accomplished by the stockholder or the stockholder's authorized agent signing the writing or causing the stockholder's signature to be affixed to the writing by any reasonable means, including facsimile signature. A stockholder may authorize another person to act as proxy by transmitting, or authorizing the transmission of, a telegram, cablegram, datagram, or other means of electronic transmission to the person authorized to act as proxy or to a proxy solicitation firm, proxy support service organization, or other person authorized by the person who will act as proxy to receive the transmission. Unless a proxy provides for a longer period, it is not valid more than eleven months after its date. A proxy is revocable by a stockholder at any time without condition or qualification unless the proxy states that it is irrevocable and the proxy is coupled with an interest. The interest with which a proxy may be coupled includes an interest in the stock to be voted under the proxy or 37. -3- another general interest in the Corporation or its assets or liabilities. Section 2.7 List of Stockholders. At each meeting of stockholders, a full, true and complete list of all stockholders entitled to vote at such meeting, showing the number and class of shares held by each and certified by the transfer agent for such class or by the Corporate Secretary, shall be furnished by the Corporate Secretary. Section 2.8 Conduct of Voting. At all meetings of stockholders, unless the voting is conducted by inspectors, the proxies and ballots shall be received, and all questions touching the qualification of voters and the validity of proxies, the acceptance or rejection of votes and procedures for the conduct of business not otherwise specified by these By-Laws, the Charter or law, shall be decided or determined by the chairman of the meeting. If demanded by stockholders, present in person or by proxy, entitled to cast 10% in number of votes entitled to be cast, or if ordered by the chairman of the meeting, the vote upon any election or question shall be taken by ballot. Before any meeting of the stockholders, the Board of Directors may appoint persons to act as inspectors of election at the meeting and any adjournment thereof. If no inspectors of election are so appointed, the chairman of the meeting may, and on the request of stockholders, present in person or by proxy, entitled to cast 10% in number of votes entitled to be cast, shall, appoint inspectors of election at the meeting. The number of inspectors shall be either one or more. If inspectors are appointed at a meeting on the request of stockholders, the holders of a majority of shares present in person or by proxy shall determine whether one or more inspectors are to be appointed. No candidate for election as a director at a meeting shall serve as an inspector thereat. If any person appointed as inspector fails to appear or fails or refuses to act, the chairman of the meeting may, and upon the request of a stockholder shall, appoint a person to fill that vacancy. The inspectors shall determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, and the authenticity, validity and effect of proxies; receive votes, ballots or consents; hear and determine all challenges and questions in any way arising in connection with the right to vote; count and tabulate all votes or consents; determine when polls shall close; determine the result; and do any other acts that may be proper to conduct the election or vote with fairness to all stockholders. Unless so demanded or ordered, no vote need be by ballot and voting need not be conducted by inspectors. Section 2.9 Advance Notice Provisions for Election of Directors. Only persons who are nominated in accordance with the following procedures shall be eligible for election as directors of the Corporation. Nominations of persons for election to the Board of Directors may be made at any annual meeting of stockholders, or at any special meeting of stockholders called for the purpose of electing directors, (a) by or at the direction of the Board of Directors (or any duly authorized committee thereof) or (b) by any stockholder of the Corporation (i) who is a stockholder of record on the date of the giving of the notice provided for in this Section 2.9 and on the record date for the determination of stockholders entitled to vote at such meeting and (ii) who complies with the notice procedures set forth in this Section 2.9. To be timely, a stockholder's notice must be delivered to or mailed and received by the Corporate Secretary at the principal executive offices of the Corporation (a) in the case of an annual meeting, not less than 120 days nor more than 150 days prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is advanced 38. -4- by more than 30 days or delayed by more than 60 days from such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the 150th day prior to such annual meeting and not later than the close of business on the later of the 120th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made; and (b) in the case of a special meeting of stockholders called for the purpose of electing directors, not later than the close of business on the 10th day following the day on which notice of the date of the special meeting was mailed or public disclosure of the date of the special meeting was made, whichever first occurs. To be in proper written form, a stockholder's notice to the Corporate Secretary must set forth (a) as to each person whom the stockholder proposes to nominate for election as a director, all information relating to such person that is required to be disclosed in connection with solicitations of proxies for election of directors pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations promulgated thereunder; and (b) as to the stockholder giving the notice, (i) the name and address of such stockholder as they appear on the Corporation's books and of the beneficial owner, if any, on whose behalf the nomination is made, (ii) the class or series and number of shares of capital stock of the Corporation which are owned beneficially or of record by such stockholder and such beneficial owner, (iii) a description of all arrangements or understandings between such stockholder and each proposed nominee and any other person or persons (including their names) pursuant to which the nomination(s) are to be made by such stockholder, (iv) a representation that such stockholder intends to appear in person or by proxy at the meeting to nominate the persons named in its notice and (v) any other information relating to such stockholder that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Regulation 14A of the Exchange Act and the rules and regulations promulgated thereunder. Such notice must be accompanied by a written consent of each proposed nominee to be named as a nominee and to serve as a director if elected. No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth in this Section 2.9. If the chairman of the meeting determines that nomination was not made in accordance with the foregoing procedures, the chairman shall declare to the meeting that the nomination was defective and such defective nomination shall be disregarded. No adjournment or postponement of a meeting of stockholders shall commence a new period for the giving of notice of a stockholder proposal hereunder. Section 2.10 Advance Notice Provisions for Business to be Transacted at Annual Meeting. No business may be transacted at an annual meeting of stockholders, other than business that is either (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors (or any duly authorized committee thereof), (b) otherwise properly brought before the annual meeting by or at the direction of the Board of Directors (or any duly authorized committee thereof) or (c) otherwise properly brought before the annual meeting by any stockholder of the Corporation (i) who is a stockholder of record on the date of the giving of the notice provided for in this Section 2.10 and on the record date for the determination of stockholders entitled to vote at such annual meeting and (ii) who complies with the notice procedures set forth in this Section 2.10. 39. -5- To be timely, a stockholder's notice must be delivered to or mailed and received by the Corporate Secretary at the principal executive offices of the Corporation not less than 120 days nor more than 150 days prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is advanced by more than 30 days or delayed by more than 60 days from such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the 150th day prior to such annual meeting and not later than the close of business on the later of the 120th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made. To be in proper written form, a stockholder's notice to the Corporate Secretary must set forth as to each matter such stockholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and address of such stockholder as they appear on the Corporation's books and of the beneficial owner, if any, on whose behalf the proposal is made, (iii) the class or series and number of shares of capital stock of the Corporation which are owned beneficially or of record by such stockholder and such beneficial owner, (iv) a description of all arrangements or understandings between such stockholder and any other person or persons (including their names) in connection with the proposal of such business by such stockholder and any material interest of such stockholder in such business, and (v) a representation that such stockholder intends to appear in person or by proxy at the annual meeting to bring such business before the meeting. No business shall be conducted at the annual meeting of stockholders except business brought before the annual meeting in accordance with the procedures set forth in Section 2.09 or in this Section 2.10, provided, however, that once business has been properly brought before the annual meeting in accordance with such procedures, nothing in Section 2.09 nor in this Section 2.10 shall be deemed to preclude discussion by any stockholder of any such business. If the chairman of an annual meeting determines that business was not properly brought before the annual meeting in accordance with the foregoing procedures, the chairman shall declare to the meeting that the business was not properly brought before the meeting and such business shall not be transacted. No adjournment or postponement of a meeting of stockholders shall commence a new period for the giving of notice of a stockholder proposal hereunder. ARTICLE III DIRECTORS Section 3.1 The number of directors of the Corporation which shall constitute the whole of the Corporation's Board of Directors (the "Board") shall not be less than three nor more than thirty. Within the limits above specified, the number of directors constituting the Board shall be determined by resolution of the Board or by the Corporation's stockholders at the Annual Meeting, but the tenure of office of a director shall not be affected by any decrease in the number of directors so made by the Board. The directors shall be elected at the Annual Meeting of stockholders, except as provided in Section 3.2 of this Article, and each director elected shall hold office until the succeeding Annual Meeting of stockholders or until his successor is elected and qualified. Directors need not be stockholders. 40. -6- Section 3.2 Vacancies and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office, though less than a quorum, or by a sole remaining director, and the directors so chosen shall hold office until the next Annual Meeting and until their successors are duly elected and shall qualify, unless sooner displaced. Section 3.3 The business of the Corporation shall be managed by its Board, which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the Articles of Incorporation or by these By-Laws directed or required to be exercised or done by the stockholders. The directors shall choose from among their number a Chairman of the Board. Section 3.4 At any meeting of stockholders, duly called and at which a quorum is present, the stockholders may, by the affirmative vote of the holders of a majority of the votes entitled to be cast on the election or removal of such director, remove any director or directors from office and may elect a successor or successors to fill any resulting vacancies for the unexpired terms of removed directors. In case such a removal occurs but the stockholders entitled to vote thereon fail to fill any resulting vacancies, such vacancies may be filled by the Board of Directors pursuant to Section 3.2. MEETINGS OF THE BOARD OF DIRECTORS Section 3.5 The Board may hold meetings, both regular and special, either within or without the State of Maryland. Section 3.6 After each meeting of stockholders at which a Board of Directors shall have been elected, the Board of Directors so elected shall meet, as soon as practicable, for the purpose of organization and the transaction of other business; and, in the event that no other time is designated by the stockholders, the Board of Directors shall meet one hour after the time for such stockholders' meeting or immediately following the close of such meeting, whichever is later, on the day of such meeting. No notice of such meeting shall be necessary if held as hereinabove provided. Section 3.7 Regular meetings of the Board shall be held at such time and place as designated by the Board. No notice of a Regular Meeting shall be required if the meeting is held according to a Schedule of Regular Meetings approved by the Board. Section 3.8 Special Meetings of the Board may be called by the Chairman or the President upon notice to each director, either personally, by mail, by telex or by telegram. Special Meetings shall be called by the President or Secretary in like manner and on like notice upon the written request of three or more directors. Notice of the place, day and hour of every Special Meeting shall be given to each director at least twenty-four (24) hours before the time of the meeting, by delivering the same to him personally, by telephone, by telex, by telegraph, or by delivering the same at his residence or usual place of business, or, in the alternative, by mailing such notice at least seventy- two (72) hours before the time of the meeting, postage paid, and addressed to him at his last known post office address, according to the records of the Corporation. Unless required by the By- Laws or by resolution of the Board of Directors, no notice of any meeting of the Board of Directors need state the business to be transacted thereat. No notice of any meeting of the Board of Directors need 41. -7- be given to any director who attends, or to any director who, in writing executed and filed with the records of the meeting either before or after the holding thereof, waives such notice. Any meeting of the Board of Directors, Annual or Special, may adjourn from time to time to reconvene at the same or some other place, and no notice need be given of any such adjourned meeting other than by announcement. Section 3.9 One third of the entire Board shall constitute a quorum at any meeting except as may be otherwise specifically provided by statute or by the Articles of Incorporation. If a quorum shall not be present at any meeting of the Board, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Members of the Board or any committee designated thereby may participate in a meeting of the Board or any such committee by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other at the same time and participation by such means shall constitute presence in person at such meeting. Section 3.10 Unless otherwise restricted by the Articles of Incorporation or these By-Laws, any action required or permitted to be taken at any meeting of the Board or of any committee thereof may be taken without a meeting, if all members of the Board or committee, as the case may be, consent thereto, in writing or writings and the writing or writings are filed with the minutes of the proceedings of the Board or committee. Section 3.11 On any question on which the Board of Directors shall vote, the names of those voting and their votes shall be entered in the minutes of the meeting when any member of the Board so requests. COMMITTEES OF DIRECTORS Section 3.12 Executive Committee. The Board of Directors may appoint from among its members an Executive Committee of not less than five directors and one of which shall be appointed Chairman of the Executive Committee. When the Board of Directors is not in session, the Executive Committee shall have and may exercise, in the absence of or subject to any restrictions which the Board of Directors may from time to time impose, all of the powers of the Board of Directors in the management of the business and affairs of the Corporation, except the power to authorize dividends on stock, elect directors, issue stock other than as provided in the next sentence, recommend to the stockholders any action which requires stockholder approval, amend these By-Laws, or approve any merger or share exchange which does not require stockholder approval. If the Board of Directors has given general authorization for the issuance of stock providing for or establishing a method or procedure for determining the number of shares to be issued, a committee of the Board, in accordance with that general authorization or any stock option or other plan or program adopted by the Board of Directors, may authorize or fix the terms of stock subject to classification or reclassification and the terms on which any stock may be issued, including all terms and conditions required or permitted to be established or authorized by the Board of Directors. 42. -8- Section 3.13 Audit & Examining Committee. The Board shall designate an Audit & Examining Committee, which shall hold office until the next annual meeting of the Board following the annual meeting of stockholders, consisting of not less than three of its members, other than officers of the Corporation, and whose duty it shall be to make an examination at least once during each calendar year and within 15 months of the last such examination into the affairs of the Corporation including the administration of fiduciary powers, or cause suitable examinations to be made by auditors responsible only to the Board and to report the result of such examination in writing to the Board. Such report shall state whether the Corporation is in a sound condition, whether adequate internal controls and procedures are being maintained and shall recommend to the Board such changes in the manner of conducting the affairs of the Corporation as shall be deemed advisable. Section 3.14 Other Committees. The Board of Directors may appoint any other committees, each of which shall be composed of one or more directors, as determined by the Board from time to time. Such other committees shall have such powers, subject to the same limitations as are applicable to the Executive Committee under Section 3.12, as shall be designated by the Board from time to time. Section 3.15 Committee Procedure. Each committee shall keep minutes of its proceedings when exercising powers of the Board of Directors and may fix rules of procedure for its business. A majority of the members of a committee shall constitute a quorum for the transaction of business and the act of a majority of those present at a meeting at which a quorum is present shall be the act of the committee. The members of a committee present at any meeting, whether or not they constitute a quorum, may appoint an eligible director to act in the place of an absent member. Any action required or permitted to be taken at a meeting of a committee may be taken without a meeting, if an unanimous written consent which sets forth the action is signed by each member of the committee and filed with the minutes of the committee. The members of a committee may conduct any meeting thereof by conference telephone in accordance with the provisions of Section 3.9. COMPENSATION OF DIRECTORS Section 3.16 The Board shall fix the amounts to be paid directors for their services as directors and for their attendance at the meetings of the Board or of committees or otherwise. No director who receives a salary from the Corporation shall receive any fee for attending meetings of the Board or of any of its committees. RESIGNATION OF DIRECTORS Section 3.17 Any director may resign at any time either by oral tender of such resignation at any meeting of the Board or to the Chairman or President or by giving written notice thereof to the Corporation. Any resignation shall be effective immediately, unless a date certain is specified for it to take effect. 43. -9- ARTICLE IV OFFICERS Section 4.1 The Corporation shall have a President, a Corporate Secretary and a Treasurer who shall be the Chief Financial Officer, and who need not be directors. The Corporation shall also have a Chairman of the Board and a Chairman of the Executive Committee, and may have one or more Vice Chairmen, each of whom shall be directors. The Board shall designate who shall serve as Chief Executive Officer, who shall have general supervision of the business and affairs of the Corporation. The Corporation may also have one or more Vice-Presidents, assistant and subordinate officers, other officers not designated by these By-Laws, and agents as it shall deem necessary, none of whom need be a director. A person may hold more than one office in the Corporation except that no person may serve concurrently as both President and Vice-President of the Corporation. Section 4.2 Chairman of the Board. The Chairman of the Board shall be a director and shall preside at all meetings of the Board and of the Stockholders at which he shall be present. Section 4.3 Chairman of the Executive Committee. The Chairman of the Executive Committee shall be a director and shall chair meetings of the Executive Committee, supervise and carry out policies adopted or approved by the Board and exercise such further powers and duties as are, from time to time, conferred upon or assigned to him by the Board. Section 4.4 Vice Chairman. Each Vice Chairman, if one or more be elected, shall be a director and shall perform such duties and may have such other powers as are, from time to time, assigned to him by the Board. Section 4.5 President. The President shall be a director. The President may execute, in the name of the Corporation, all authorized deeds, mortgages, bonds, contracts or other instruments, except in cases in which the execution thereof shall have been expressly delegated to some other officer or agent of the Corporation. In general, he shall perform such duties usually performed by a president of a corporation and shall perform such other duties and may have such other powers as are from time to time assigned to him by the Board. Section 4.6 Chief Executive Officer. The Chief Executive Officer shall exercise general supervision over the policies and business affairs of the Corporation and the carrying out of the policies adopted or approved by the Board. The Chairman of the Board or the President may at the same time be appointed Chief Executive Officer. Except as otherwise provided by these By- Laws, he shall have power to determine the duties to be performed by the officers appointed as provided in Section 4.9 of these By- Laws, and to employ and discharge officers and employees. Except as otherwise provided by the By-Laws or the Board, he shall be a member ex officio of all committees authorized by these By-Laws or created by the Board. In the absence of the Chairman of the Board and the President, he shall preside at all meetings of the Board and of shareholders. Section 4.7 Corporate Secretary. The Corporate Secretary shall attend all meetings of the stockholders and all meetings of the Board and record, or cause to be recorded, all the procedures of the meetings of the stockholders and the Board in books to be kept for that purpose. The Corporate 44. -10- Secretary may perform like duties for the standing committees when required. He shall, as required, give, or cause to be given, notice of all meetings of the stockholders and meetings of the Board. He shall have custody of the corporate seal of the Corporation and he, or a Deputy or Associate or Assistant Corporate Secretary, shall affix the same to any instrument which is required or desired to be under its seal and when so affixed, it may be attested by his signature or by the signature of such Deputy or Associate or Assistant Corporate Secretary. The Board may give general authority to any other officer to affix the seal of the Corporation and to attest the affixing by his signature. In general, the Corporate Secretary shall perform all duties incident to the office of a secretary of a corporation, and shall perform such other duties and may have such other powers as are from time to time assigned to him by the Board, the Chief Executive Officer or the President. Section 4.8 Deputy Corporate Secretary, Associate Corporate Secretary and Assistant Corporate Secretary. The Deputy Corporate Secretary or the Associate Corporate Secretary or the Assistant Corporate Secretary, or if there be more than one, each of them, may, in the absence of the Corporate Secretary or during his inability or refusal to act, perform the duties and exercise the powers of the Corporate Secretary and shall perform such other duties and have such other powers as are from time to time assigned to each of them by the Board, the Chief Executive Officer, the President or the Corporate Secretary. Section 4.9 Treasurer. The Treasurer shall be the Chief Financial Officer and shall have charge of and be responsible for all corporate funds and securities and shall keep, or cause to be kept, full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit, or cause to be deposited, all moneys and other valuable effects, in the name and to the credit of the Corporation, in such depositories as may from time to time be designated. He shall render to the Board, the Chief Executive Officer or the President, when so required, an account of the financial condition of the Corporation. In general, the Treasurer shall perform all the duties incident to the office of a treasurer of a corporation, and shall perform such other duties and may have such other powers as are from time to time assigned to him by the Board, the Chief Executive Officer or the President. Section 4.10 Executive and Other Senior Officers. The Board shall by resolution determine from time to time those officers whose appointment shall require approval by the Board or a committee of the Board. Each such officer shall have such powers and duties as may be assigned by the Board, a committee of the Board, the President or the Chief Executive Officer. Section 4.11 Other Officers. The President or the Chief Executive Officer or his designee may appoint all officers whose appointment does not require approval by the Board or a committee of the Board, and assign to them such titles, as from time to time may appear to be required or desirable to transact the business of the Corporation. Each such officer shall have such powers and duties as may be assigned by the Board, the President or the Chief Executive Officer. Section 4.12 Tenure of Office. The Chairman of the Board, the President and the Chief Executive Officer shall hold office for the current year for which the Board was elected, unless they shall resign, become disqualified, or be removed. All other officers shall hold office until their successors have been appointed and qualify unless they shall resign, become disqualified or be removed. The Board shall have the power to remove the Chairman of the Board, the President and 45. -11- the Chief Executive Officer. The Board or the President or the Chief Executive Officer or his designee shall have the power to remove all other officers and employees. Any vacancy occurring in the offices of Chairman of the Board, President or Chief Executive Officer shall be filled promptly by the Board. Section 4.13 Compensation. The Board shall by resolution determine from time to time the officers whose compensation will require approval by the Board or a committee of the Board. The Chief Executive Officer shall fix the compensation of all officers and employees whose compensation does not require approval by the Board. ARTICLE V CERTIFICATES OF STOCK Section 5.1 Every holder of stock in the Corporation shall be entitled to have a certificate, signed by, or in the name of the Corporation by the Chairman of the Board or President or a Vice President and the Treasurer or an Assistant Treasurer, or the Secretary or a Deputy or Associate or Assistant Secretary of the Corporation, certifying the number of shares owned by him in the Corporation. Section 5.2 Where a certificate is manually countersigned (1) by a transfer agent, other than the Corporation or its employee, or, (2) by a registrar, other than the Corporation or its employee, any other signature on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is signed, it may be issued by the Corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. LOST CERTIFICATES Section 5.3 The Board may authorize a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the Board may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen or destroyed. TRANSFER OF STOCK Section 5.4 Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. 46. -12- Section 5.5 The Board may, at its discretion, appoint one or more banks or trust companies in New York City, and in such other city or cities as the Board may deem advisable, including any banking subsidiary of the Corporation, from time to time, to act as transfer agent(s) and registrar(s) of the stock of the Corporation. FIXING RECORD DATE Section 5.6 The Board is hereby empowered to fix, in advance, a date as the record date for the purpose of determining stockholders, or stockholders entitled to receive payment of any dividend or the allotment of any rights, or in order to make determination of stockholders for any other proper purpose. Such date in any case shall be not more than ninety (90) days, and in case of a meeting of stockholders, not less than ten (10) days, prior to the date of which the particular action, requiring such determination of stockholders is to be taken. In lieu of fixing a record date, the Board may provide that the stock transfer books shall be closed for a stated period but not to exceed, in any case, twenty (20) days. If the stock transfer books are closed for the purpose of determining stockholders entitled to notice of or to vote at a meeting of stockholders, such books shall be closed for at least ten (10) days immediately preceding such meeting. STOCK LEDGER Section 5.7 Original or duplicate stock ledgers, containing the name and addresses of the stockholders of the Corporation and the number of shares of each class held by them respectively, shall be kept at the offices of a transfer agent for the particular class of stock, within or without the State of Maryland, or, if none, at a principal office or the principal executive offices of the Corporation. REGISTERED STOCKHOLDERS Section 5.8 The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Maryland. ARTICLE VI GENERAL PROVISIONS DIVIDENDS Section 6.1 Subject to the provisions of the Articles of Incorporation, dividends, if any, may be declared by the Board at any meeting, pursuant to the law. 47. -13- EXECUTION OF INSTRUMENTS Section 6.2 All agreements, indentures, mortgages, deeds, conveyances, transfers, certificates, declarations, receipts, discharges, releases, satisfactions, settlements, petitions, schedules, accounts, affidavits, bonds, undertakings, proxies and other instruments or documents may be signed, executed, acknowledged, verified, delivered or accepted on behalf of the Corporation by the Chairman of the Board, or the President, or the Chief Executive Officer, or the Secretary, or any Vice President, or any other officer or employee designated by the Board or the Chief Executive Officer or his designee. Any such instruments may also be executed, acknowledged, verified, delivered or accepted in behalf of the Corporation in such other manner and by such other officers as the Board may from time to time direct. The provisions of this Section 6.2 are supplementary to any other provisions of these By-Laws. Each of the foregoing authorizations shall be at the pleasure of the Board, and each such authorization by the Chief Executive Officer or his designee also shall be at the pleasure of the Chief Executive Officer. FISCAL YEAR Section 6.3 The fiscal year of the Corporation shall be the calendar year. SEAL Section 6.4 The Corporation's seal shall have inscribed thereon the name of the Corporation and the words "Corporate Seal, Maryland". The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. SHARES OF OTHER CORPORATIONS Section 6.5 The Chairman of the Board, the President, any Vice President, and the Secretary is each authorized to vote, represent and exercise on behalf of the Corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of the Corporation. The authority herein granted to said officer to vote or represent on behalf of the Corporation any and all shares held by the Corporation in any other corporation or corporations may be exercised either by said officer in person or by any other person authorized so to do by proxy or power of attorney duly executed by said officers. Notwithstanding the above, however, the Board, in its discretion, may designate by resolution the person to vote or represent said shares of other corporations. RECORDS Section 6.6 The By-Laws and the proceedings of all meeting of the shareholders, the Board, and standing committees of the Board, shall be recorded in appropriate minute books provided for the purpose. The minutes of each meeting shall be signed by the Secretary or other officer appointed to act as Secretary of the meeting. 48. -14- EMERGENCY OPERATIONS Section 6.7 In the event of war or warlike damage or disaster of sufficient severity to prevent the conduct and management of the affairs, business, and property of the Corporation by its directors and officers as contemplated by these By-Laws, any two or more available members of the then incumbent Board shall constitute a quorum for the full conduct and management of the affairs, business, and property of the Corporation. This By-Law shall be subject to implementation by resolutions of the Board passed from time to time for that purpose, and any provisions of these By-Laws (other than this Section) and any resolutions which are contrary to the provisions of this Section or to the provisions of any such implementary resolutions shall be suspended until it shall be determined by any interim Board acting under this Section that it shall be to the advantage of the Corporation to resume the conduct and management of its affairs, business, and property under all of the other provisions of these By-Laws. RIGHT TO INDEMNIFICATION Section 6.8 (a) Each person who was or is made a party or is threatened to be made a party to or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was a director or officer of the Corporation or, while a director or officer of the Corporation is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to an employee benefit plan (an "Indemnitee"), whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director or officer, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Annotated Code of Maryland, as the same exists or may hereafter be amended, against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid in settlement) reasonably incurred or suffered by such Indemnitee in connection therewith and such indemnification shall continue as to an Indemnitee who has ceased to be a director or officer and shall inure to the benefit of the Indemnitee's heirs, executors and administrators; provided, however, that, except as provided in Section 6.8(b) hereof with respect to proceedings to enforce rights to indemnification, the Corporation shall indemnify any such Indemnitee in connection with a proceeding (or party thereof) initiated by such Indemnitee only if such proceeding (or part thereof) was authorized by the Board. The right to indemnification conferred in this Section 6.8 shall be a contract right and shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that, if the Annotated Code of Maryland so requires, an advancement of expenses incurred by an Indemnitee shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such Indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal that such Indemnitee is not entitled to be indemnified for such expenses under this Section or otherwise. (b) Right of Indemnitee to Bring Suit. If a claim under paragraph (a) of this Section 6.8 is not paid in full by the Corporation within sixty days after a written claim has been received by the Corporation, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be twenty days, the Indemnitee may at any time thereafter bring suit against 49. -15- the Corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of such Indemnitee's undertaking the Indemnitee shall be entitled to be paid the expense of prosecuting or defending such suit. In any suit brought by the Indemnitee to enforce a right to indemnification hereunder it shall be a defense that, and in any suit by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking the Corporation shall be entitled to recover such expenses upon a final adjudication that, the Indemnitee has not met the applicable standard of conduct set forth in the Annotated Code of Maryland. Neither the failure of the Corporation to have made a determination prior to the commencement of such suit that indemnification of the Indemnitee is proper in the circumstances because the Indemnitee has met the applicable standard of conduct set forth in the Annotated Code of Maryland, nor an actual determination by the Corporation that the Indemnitee has not met such applicable standard of conduct, shall create a presumption that the Indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the Indemnitee, be a defense to such suit. In any suit brought by the Indemnitee to enforce a right to indemnification or to an advancement of expenses hereunder, or by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking by the Indemnitee, the Corporation shall have the burden of proving that the Indemnitee is not entitled to be indemnified, or to such advancement of expenses, under this Section 6.8 or otherwise. (c) Non-Exclusivity of Rights. The rights to indemnification and to the advancement of expenses conferred in this Section 6.8 shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, the Corporation's Certificate of Incorporation, By-Law, agreement, vote of shareholders or disinterested directors or otherwise. (d) Indemnification of Employees and Agents of the Corporation. The Corporation may, to the extent authorized from time to time by the Board, grant rights to indemnification, and to the advancement of expenses to any employee or agent of the Corporation to the fullest extent of the provisions of this Section 6.8 with respect to the indemnification and advancement of expenses of directors and officers of the Corporation. (e) Insurance. The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense liability or loss under the Delaware General Corporation Law, as the same exists or may hereafter be amended. ARTICLE VII AMENDMENTS Section 7.1 The By-Laws may be added to, amended, altered or repealed at any regular meeting of the Board, by a vote of a majority of the total number of the directors, or at any meeting of shareholders, duly called and held, by a majority of the stock represented at such meeting. 50. -16- ARTICLE VIII Section 8.1 Notwithstanding any other provision of the charter of the Corporation or these By-Laws, Title 3, Subtitle 7 of the Corporations and Associations Article of the Annotated Code of Maryland (or any successor statute) shall not apply to the acquisition of all of the common stock, $5.00 par value per share, of the Corporation by HSBC Holdings plc, an English public limited company, pursuant to that certain Transaction Agreement and Plan of Merger, dated May 10, 1999, as amended by Amendment No. 1, dated November 8, 1999, and as may be further amended from time to time, by and among HSBC Holdings Plc, the Corporation, Safra Republic Holdings S.A., a societe anonyme organized and existing under the laws of Luxembourg, and RNYC Merger Corporation, a Maryland corporation, and to the other transactions contemplated thereby. Section 8.2 Notwithstanding any other provision of the charter of the Corporation or these By-Laws, Title 3, Subtitle 7 of the Corporations and Associations Article of the Annotated Code of Maryland (or any successor statute) shall not apply to the grant by the Corporation of the option to HSBC Holdings Plc, an English public limited company, pursuant to that certain Stock Option Agreement, dated May 10, 1999, between the Corporation and HSBC of shares of the Corporation's common stock pursuant thereto. Section 8.3 Notwithstanding any other provision of the charter of the Corporation or these By-Laws, Title 3, Subtitle 7 of the Corporations and Associations Article of the Annotated Code of Maryland (or any successor statute) shall not apply to the Stockholders Agreement, dated May 10, 1999, as amended by Amendment No. 1 to the Stockholders Agreement, dated November 8, 1999, and as may be further amended from time to time, among HSBC, an English public limited company, RNYC Holdings Limited, a Gibraltar corporation, Congregation Beit Yaakov, Saban S.A., a Panamanian corporation, Mr. Edmond J. Safra, HSBC North America Inc., a Delaware corporation, and in part, the Corporation, or the exercise by HSBC of its rights thereunder. -----END PRIVACY-ENHANCED MESSAGE-----