CONFORMED 1.
SECURITIES AND EXCHANGE COMMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 2001
Commission file number 1-7436
HSBC USA INC.
(Exact name of registrant as specified in its charter)
Maryland Corporation
(State or other jurisdiction of
incorporation or organization)
13-2764867
(I.R.S. Employer Identification No.)
452 Fifth Avenue, New York, New York 10018
(Address of principal executive offices)
(212) 525-6100
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months,
and (2) has been subject to such filing requirements for the
past 90 days.
Yes _X_ No ___
All voting stock (704 shares of Common Stock, $5 par value) is
owned by HSBC North America Inc., an indirect wholly owned
subsidiary of HSBC Holdings plc.
This report includes a total of 32 pages.
2.
Part I - FINANCIAL INFORMATION
Item 1 - Financial Statements Page
Consolidated Balance Sheet
September 30, 2001 and December 31, 2000 3
Consolidated Statement of Income
For The Quarter and Nine Months
Ended September 30, 2001 and 2000 4
Consolidated Statement of Changes in
Shareholders' Equity For The Nine Months
Ended September 30, 2001 and 2000 5
Consolidated Statement of Cash Flows
For The Nine Months Ended
September 30, 2001 and 2000 6
Notes to Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
Part II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 29
Signatures 30
3.
HSBC USA Inc.
- -----------------------------------------------------------------------------
C O N S O L I D A T E D B A L A N C E S H E E T
September 30, December 31,
2001 2000*
- -----------------------------------------------------------------------------
in thousands
Assets
Cash and due from banks $ 2,078,353 $ 1,860,713
Interest bearing deposits with banks 4,148,466 5,129,490
Federal funds sold and securities
purchased under resale agreements 3,360,544 1,895,492
Trading assets (incl.$59,080 pledged to
creditors at Sept.30) 8,764,132 5,770,972
Securities available for sale (incl.$2,025,072
pledged to creditors at Sept.30) 15,190,148 17,336,832
Securities held to maturity (fair value
$4,827,247 and $4,417,251) 4,596,627 4,260,492
Loans 42,930,129 40,417,847
Less - allowance for credit losses 540,252 524,984
- -----------------------------------------------------------------------------
Loans, net 42,389,877 39,892,863
Premises and equipment 791,674 777,610
Accrued interest receivable 488,912 785,286
Equity investments 268,377 55,596
Goodwill and other acquisition intangibles 2,972,439 3,229,479
Other assets 2,567,567 2,040,325
- -----------------------------------------------------------------------------
Total assets $ 87,617,116 $ 83,035,150
=============================================================================
Liabilities
Deposits in domestic offices
Noninterest bearing $ 4,726,970 $ 5,114,668
Interest bearing 32,267,138 30,631,511
Deposits in foreign offices
Noninterest bearing 334,236 282,737
Interest bearing 19,482,903 20,013,588
- -----------------------------------------------------------------------------
Total deposits 56,811,247 56,042,504
- -----------------------------------------------------------------------------
Trading account liabilities 4,056,443 2,766,825
Short-term borrowings 9,602,959 8,562,363
Interest, taxes and other liabilities 5,093,271 3,232,918
Subordinated long-term debt and perpetual
capital notes 2,979,120 3,027,014
Guaranteed mandatorily redeemable securities 735,605 711,737
Other long-term debt 1,188,194 1,357,904
- -----------------------------------------------------------------------------
Total liabilities 80,466,839 75,701,265
- -----------------------------------------------------------------------------
Shareholders' equity
Preferred stock 500,000 500,000
Common shareholder's equity
Common stock 4 4
Capital surplus 6,028,804 6,104,264
Retained earnings 570,248 612,798
Accumulated other comprehensive income 51,221 116,819
- -----------------------------------------------------------------------------
Total common shareholder's equity 6,650,277 6,833,885
- -----------------------------------------------------------------------------
Total shareholders' equity 7,150,277 7,333,885
- -----------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 87,617,116 $ 83,035,150
=============================================================================
<FN>
<F1>
The accompanying notes are an integral part of the consolidated financial
statements.
* Restated to exclude investments in entities transferred to HSBC North
America Inc. during 2001.
</FN>
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 September 30, Nine months ended September 30,
2001 2000* 2001 2000*
- -------------------------------------------------------------------------------------------
in thousands
Interest income
Loans $ 729,316 $ 783,359 $ 2,267,117 $ 2,272,272
Securities 296,260 402,246 1,012,144 1,188,379
Trading assets 52,670 37,656 175,797 89,794
Other short-term investments 73,080 131,183 288,113 402,789
- -------------------------------------------------------------------------------------------
Total interest income 1,151,326 1,354,444 3,743,171 3,953,234
- -------------------------------------------------------------------------------------------
Interest expense
Deposits 440,769 604,368 1,532,997 1,711,258
Short-term borrowings 74,156 109,591 283,029 329,794
Long-term debt 81,750 101,083 256,925 317,352
- -------------------------------------------------------------------------------------------
Total interest expense 596,675 815,042 2,072,951 2,358,404
- -------------------------------------------------------------------------------------------
Net interest income 554,651 539,402 1,670,220 1,594,830
Provision for credit losses 47,500 50,608 143,050 106,607
- -------------------------------------------------------------------------------------------
Net interest income, after
provision for credit losses 507,151 488,794 1,527,170 1,488,223
- -------------------------------------------------------------------------------------------
Other operating income
Trust income 20,517 20,776 65,360 63,319
Service charges 47,738 42,834 139,177 129,515
Mortgage banking revenue 3,293 7,739 22,907 22,903
Other fees and commissions 86,753 71,770 245,762 225,444
Trading revenues 73,793 30,103 176,036 114,633
Security gains 20,891 9,081 146,671 10,443
Other income 22,817 29,262 40,520 53,785
- -------------------------------------------------------------------------------------------
Total other operating income 275,802 211,565 836,433 620,042
- -------------------------------------------------------------------------------------------
Total income from operations 782,953 700,359 2,363,603 2,108,265
- -------------------------------------------------------------------------------------------
Other operating expenses
Salaries and employee benefits 243,464 241,090 728,053 738,269
Occupancy expense, net 40,665 41,412 116,865 127,004
Goodwill amortization 43,803 44,417 133,062 131,878
Princeton Note Matter 575,000 - 575,000 -
Other expenses 153,730 145,457 478,849 420,461
- -------------------------------------------------------------------------------------------
Total other operating expenses 1,056,662 472,376 2,031,829 1,417,612
- -------------------------------------------------------------------------------------------
Income (loss) before taxes and
cumulative effect of accounting
change (273,709) 227,983 331,774 690,653
Applicable income tax expense
(credit) (106,500) 84,406 129,700 257,005
- -------------------------------------------------------------------------------------------
Income (loss) before cumulative
effect of accounting change (167,209) 143,577 202,074 433,648
- -------------------------------------------------------------------------------------------
Cumulative effect of accounting
change - implementation of
FAS 133 - - (451) -
- -------------------------------------------------------------------------------------------
Net income (loss) $ (167,209)$ 143,577 $ 201,623 $ 433,648
===========================================================================================
<FN>
<F1>
The accompanying notes are an integral part of the consolidated financial statements.
*Restated to exclude investments in entities transferred to HSBC North America Inc.
during 2001 and 2000.
</FN>
5.
HSBC USA Inc.
- --------------------------------------------------------------------
C O N S O L I D A T E D S T A T E M E N T O F C H A N G E S
I N S H A R E H O L D E R S' E Q U I T Y
Nine months ended September 30,
2001 2000*
- --------------------------------------------------------------------
in thousands
Preferred stock
Balance, January 1, $ 500,000 $ 500,000
- --------------------------------------------------------------------
Balance, September 30, 500,000 500,000
- --------------------------------------------------------------------
Common stock
Balance, January 1, 4 4
- --------------------------------------------------------------------
Balance, September 30, 4 4
- --------------------------------------------------------------------
Capital surplus
Balance, January 1, 6,104,264 6,096,317
Return of capital (84,939) -
Capital contribution from parent 9,479 4,813
- --------------------------------------------------------------------
Balance, September 30, 6,028,804 6,101,130
- --------------------------------------------------------------------
Retained earnings
Balance, January 1, 612,798 671,578
Net income 201,623 433,648
Cash dividends declared:
Preferred stock (19,173) (20,820)
Common stock (225,000) (600,000)
- --------------------------------------------------------------------
Balance, September 30, 570,248 484,406
- --------------------------------------------------------------------
Accumulated other comprehensive income (loss), net of tax
Balance, January 1, 116,819 (50,534)
Net change in unrealized gains (losses)
on securities (16,970) 83,473
Net change in unrealized loss on
derivatives classified as cash flow
hedges (36,563) -
Unrealized net transitional gain related
to initial adoption of FAS 133 2,853 -
Amortization of unrealized net
transitional FAS 133 gains credited
to current income (2,140) -
Foreign currency translation adjustment (12,778) (6,251)
- --------------------------------------------------------------------
Other comprehensive income (loss), net of
tax (65,598) 77,222
- --------------------------------------------------------------------
Balance, September 30, 51,221 26,688
- --------------------------------------------------------------------
Total shareholders' equity, September 30, $ 7,150,277 $ 7,112,228
====================================================================
Comprehensive income
Net income $ 201,623 $ 433,648
Other comprehensive income (loss), net
of tax (65,598) 77,222
- --------------------------------------------------------------------
Comprehensive income $ 136,025 $ 510,870
====================================================================
<FN>
<F1>
The accompanying notes are an integral part of the consolidated
financial statements.
*Restated to exclude investments in entities transferred to HSBC North
America Inc. during 2001 and 2000.
</FN>
6.
HSBC USA Inc.
-------------------------------------------------------------------------------------
C O N S O L I D A T E D S T A T E M E N T O F C A S H F L O W S
Nine months ended September 30,
2001 2000*
-------------------------------------------------------------------------------------
in thousands
Cash flows from operating activities
Net income $ 201,623 $ 433,648
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, amortization and deferred taxes 166,353 328,312
Provision for credit losses 143,050 106,607
Net change in other accrual accounts 625,406 210,276
Net change in loans originated for sale (411,314) (1,471,028)
Net change in trading assets and liabilities (1,307,093) (1,092,070)
Other, net (317,226) (99,897)
-------------------------------------------------------------------------------------
Net cash provided (used) by operating activities (899,201) (1,584,152)
-------------------------------------------------------------------------------------
Cash flows from investing activities
Net change in interest bearing deposits with banks 1,159,698 (2,365,845)
Net change in short-term investments (1,465,052) (310,816)
Purchases of securities held to maturity (113,587) (100,721)
Proceeds from maturities of securities held to maturity 842,497 458,838
Purchases of securities available for sale (12,356,051) (11,478,657)
Sales of securities available for sale 10,977,169 7,905,069
Proceeds from maturities of securities available
for sale 3,318,574 11,393,188
Payment to shareholders of acquired company - (7,091,209)
Net change in credit card receivables 38,554 28,915
Net change in other short term loans 341,188 448,677
Net originations and maturities of loans (2,401,691) (126,184)
Sales of loans - 167,042
Expenditures for premises and equipment (87,254) (90,949)
Net cash used in acquisitions, net of
cash acquired (21,547) (87,492)
Other, net 123,528 (96,628)
-------------------------------------------------------------------------------------
Net cash provided (used) by investing activities 356,026 (1,346,772)
-------------------------------------------------------------------------------------
Cash flows from financing activities
Net change in deposits 320,950 (1,411,362)
Net change in short-term borrowings 1,040,596 5,207,278
Issuance of long-term debt 374,391 594,219
Repayment of long-term debt (645,398) (774,426)
Return of capital (84,939) -
Dividends paid (244,785) (614,727)
-------------------------------------------------------------------------------------
Net cash provided by financing activities 760,815 3,000,982
-------------------------------------------------------------------------------------
Net change in cash and due from banks 217,640 70,058
Cash and due from banks at beginning of period 1,860,713 1,959,213
-------------------------------------------------------------------------------------
Cash and due from banks at end of period $ 2,078,353 $ 2,029,271
=====================================================================================
Non-cash activities:
Transfer of securities from held to maturity to
available for sale $ 189,867 $ -
Transfer of securities from available for sale to
held to maturity 1,041,911 -
-------------------------------------------------------------------------------------
<FN>
<F1>
The accompanying notes are an integral part of the consolidated financial statements.
*Restated to exclude investments in entities transferred to HSBC North America Inc.
during 2001 and 2000.
</FN>
7.
Notes to Consolidated Financial Statements
1. Basis of Presentation
- ---------------------------------------------------------------
The accounting and reporting policies of HSBC USA Inc. (the
Company) and its subsidiaries including its principal
subsidiary, HSBC Bank USA (the Bank), conform to accounting
principles generally accepted in the United States of
America and to predominant practice within the banking
industry. Such policies, except as described in Note 8
below, are consistent with those applied in the presentation
of the Company's 2000 annual financial statements.
The interim financial information in this report has not
been audited. In the opinion of the Company's management,
all adjustments necessary for a fair presentation of
financial position, results of operations and cash flows for
the interim periods have been made. The interim financial
information should be read in conjunction with the 2000
Annual Report on Form 10-K (the 2000 10-K).
2. Acquisitions
- ---------------------------------------------------------------
On April 1, 2001, the Bank acquired approximately a 5
percent interest in the voting shares of HSBC Republic Bank
(Suisse) S.A. ("Swiss Bank"), an affiliate wholly owned by
the HSBC Group, in exchange for the contribution to the Swiss
Bank of private banking businesses conducted by the Bank's
Singapore and Hong Kong branches. The 5 percent interest
represents the fair value estimate of the businesses
transferred to the Swiss Bank and is being accounted for using
the equity method of accounting. The Bank retained its
banknotes activities in Singapore and its banknotes and foreign
currency businesses in Hong Kong, and maintained its branch
licenses in both locations.
The transaction was another step in an internal
reorganization of the HSBC Group's global private banking
operations, which began late last year. The Swiss Bank, a
Switzerland based banking affiliate, will manage much of the
HSBC Group's worldwide private banking business. Swiss Bank
is a foreign bank chartered and regulated under the banking
laws of Switzerland.
On January 1, 2001, the Bank acquired the Panama branches of
HSBC Bank plc for approximately $22 million in cash. The
purchase included two branches in Panama City, one in the
Colon Free Trade Zone, one in Colon and one in Aguadulce.
The Bank acquired approximately $500 million in assets and
assumed $450 million in customer and bank deposits. The
acquisition was accounted for as a transfer of assets
between companies under common control at HSBC Bank plc's
historical cost.
As well as aligning ownership along geographic lines, the
purchase will allow the Bank to achieve better local
synergies from its acquisition of Chase Manhattan's branches
in Panama last year.
8.
As described in Note 2 to the consolidated financial
statements contained in the Company's 2000 10-K, on
December 31, 1999, HSBC Holdings plc (HSBC) acquired Republic
New York Corporation (Republic). Also on December 31, 1999,
following the acquisition, HSBC merged Republic with the
Company. The merger was accounted for as a purchase
transaction. As a result of the Republic acquisition, the
Company assumed certain liabilities associated with merging
Republic's operations with those of the Company and recognized
integration costs relating to the planned severance of employees
and exiting of businesses of the Company. The following table
represents the activity in these reserves through September 30,
2001.
- --------------------------------------------------------------------
Severance
Related Premises Other Total
- --------------------------------------------------------------------
(in millions)
Balance December 31, 2000 $151.8 $10.8 $5.3 $167.9
Less: Payments 81.2 6.8 1.9 89.9
- --------------------------------------------------------------------
Balance September 30, 2001 $ 70.6 $ 4.0 $3.4 $ 78.0
- --------------------------------------------------------------------
During 2000, $85.0 million of integration costs were
expensed as systems and operations were combined, of which
$22.7 million was incurred during the third quarter. During
the third quarter of 2001, $.6 million of integration costs
were expensed. Integration costs for the first nine months
of 2001 were $13.0 million compared with $44.3 million for
the same period of 2000. The integration costs do not
include the higher level of equipment and software
depreciation incurred during 2001 on infrastructure
investments made during 2000 related to the Republic
acquisition. All restructuring related to the acquisition
from a customer perspective is complete.
3. Litigation
- ---------------------------------------------------------------
As described in Note 26 to the consolidated financial
statements contained in the Company's 2000 10-K and the
Company's Form 10-Q for the second quarter of 2001, the
Company and certain of its subsidiaries are defendants
in a number of legal actions arising out of the Princeton
Note Matter (as defined in the 2000 10-K).
These proceedings include investigations by regulatory and
law enforcement agencies, including the U.S. Attorney for
the Southern District of New York, the Securities and
Exchange Commission and the Commodity Futures Trading
Commission. As previously disclosed, Republic New York
Securities Corporation ("RNYSC") is a target of the federal
grand jury investigation being conducted by the U.S. Attorney.
In light of a probable law enforcement proceeding against
RNYSC in connection with the Princeton Note Matter, a matter
that came to light before the acquisition of Republic, a
provision of $79 million, the amount of shareholder's equity
of RNYSC, was taken in the consolidated financial statements
of the Company as of December 31, 2000, as an adjustment to
the cost of the acquisition of Republic. During the course
of the U.S. Attorney's investigation, with which the Company
has been cooperating fully, discussions have been initiated
to attempt to resolve the grand jury investigation
and regulatory investigations, and such resolution if it
occurs may also encompass
9.
resolution of many of the civil actions that have been
previously described. Based on progress in such discussions
the Company has taken a charge to earnings of $575 million
before tax in the third quarter to reflect an anticipated
resolution. There can be no assurance that such a
resolution will be achieved, however.
4. Accounting for Derivatives and Hedging Activities
- ---------------------------------------------------------------
Pursuant to Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging
Activities (FAS 133), all derivatives are recognized on the
balance sheet at their fair value (see Note 8, New
Accounting Standards). On the date the derivative contract
is entered into (January 1, 2001 for all derivatives in
place at that date) the Company designates it as (1) a
qualifying FAS 133 hedge of the fair value of a recognized
asset or liability or of an unrecognized firm commitment
("fair value" hedge); or (2) a qualifying FAS 133 hedge of a
forecasted transaction of the variability of cash flows to
be received or paid related to a recognized asset or
liability ("cash flow" hedge); or (3) as a trading position.
Changes in the fair value of a derivative that has been
designated and qualifies as a fair value hedge, along with
the changes in the fair value of the hedged asset or
liability that is attributable to the hedged risk (including
losses or gains on firm commitments), are recorded in
current period earnings. Changes in the fair value of a
derivative that has been designated and qualifies as a cash
flow hedge are recorded in other comprehensive income to the
extent of its effectiveness, until earnings are impacted by
the variability of cash flows from the hedged item. Changes
in the fair value of derivatives held for trading purposes
are reported in current period earnings.
At the inception of each hedge (January 1, 2001 for all
derivatives in place at that date), the Company formally
documents all relationships between hedging instruments and
hedged items, as well as its risk management objective and
strategy for undertaking various hedge transactions. This
process includes linking all derivatives that are designated
as fair value or cash flow hedges to specific assets and
liabilities on the balance sheet or to specific firm
commitments or forecasted transactions.
Increased earnings volatility may result from the on-going
mark to market of certain economically viable derivative
contracts that do not satisfy the hedging requirements of
FAS 133, as well as from the hedge ineffectiveness
associated with the qualifying contracts. The Company
expects however that it will be able to continue to pursue
its overall asset and liability risk management objectives
using a combination of derivatives and cash instruments.
10.
Embedded Derivatives
The Company may acquire or originate a financial instrument
that contains a derivative instrument "embedded" within it.
Upon origination or acquisition of any such instrument, the
Company assesses whether the economic characteristics of the
embedded derivative are clearly and closely related to the
economic characteristics of the principal component of the
financial instrument (i.e., the "host contract") and whether
a separate instrument with the same terms as the embedded
instrument would meet the definition of a derivative
instrument.
When it is determined that (1) the embedded derivative
possesses economic characteristics that are not clearly and
closely related to the economic characteristics of the host
contract; and (2) a separate instrument with the same terms
would qualify as a derivative instrument, the embedded
derivative is separated from the host contract, carried at
fair value, and designated as a fair value hedge, cash flow
hedge or as a trading instrument.
Hedge Discontinuation
The Company formally assesses, both at the hedge's inception
and on an on-going basis, whether the derivatives that are
used in hedging transactions are highly effective in
offsetting changes in fair values or cash flows of hedged
items and whether they are expected to continue to be highly
effective in future periods. If it is determined that a
derivative is not highly effective as a hedge or that it has
ceased to be a highly effective hedge, the Company
discontinues hedge accounting prospectively, as discussed
below.
The Company discontinues hedge accounting prospectively when
(1) the derivative is no longer effective in offsetting
changes in the fair value or cash flows of a hedged item
(including firm commitments or forecasted transactions); (2)
the derivative expires or is sold, terminated, or exercised;
(3) it is unlikely that a forecasted transaction will occur;
(4) the hedged firm commitment no longer meets the
definition of a firm commitment; or (5) the designation of
the derivative as a hedged instrument is no longer
appropriate.
When hedge accounting is discontinued because it is
determined that the derivative no longer qualifies as an
effective fair value or cash flow hedge, the derivative will
continue to be carried on the balance sheet at its fair
value, and the hedged item will no longer be adjusted for
changes in fair value or changes in the fair value of the
derivative reclassified to other comprehensive income. If
the hedged item was a firm commitment or forecasted
transaction that is not expected to occur, any amounts
recorded on the balance sheet related to the hedged item,
including any amounts recorded in other comprehensive
income, are reversed to current period earnings. In all
other situations in which hedge accounting is discontinued,
the derivative will be carried at its fair value on the
balance sheet, with changes in its fair value recognized in
current period earnings unless redesignated as a qualifying
FAS 133 hedge.
11.
5. Pledged Assets
- ---------------------------------------------------------------
At September 30, 2001, assets amounting to $10.3 billion
were pledged as collateral for borrowings, to secure public
deposits and for other purposes. The significant components
of the assets pledged at September 30, 2001 were as follows:
$9.7 billion were securities and trading assets and $.6
billion were loans.
In accordance with the Statement of Financial Accounting
Standards No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities (FAS
140), debt securities pledged as collateral that can be sold
or repledged by the secured party continue to be reported
on the consolidated balance sheet. The following table
provides the fair value of collateral that can be sold or
repledged.
- ---------------------------------------------------------------
September 30, December 31,
2001 2000
- ---------------------------------------------------------------
(in billions)
Trading assets $ .1 $.2
Securities available for sale 2.0 .4
- ---------------------------------------------------------------
6. Collateral
- ---------------------------------------------------------------
The fair value of collateral accepted by the Company not
reported on the consolidated balance sheet that can be sold
or repledged at September 30, 2001, totalled $1.5 billion
compared with $.7 billion at December 31, 2000. This
collateral was obtained under security resale agreements.
Of this collateral, $1.0 billion at September 30, 2001 has
been sold or repledged as collateral under repurchase
agreements or to cover short sales compared with $.3 billion
at December 31, 2000.
7. Business Segments
- ---------------------------------------------------------------
The Company has four distinct segments that it utilizes for
management reporting: commercial banking, corporate and
institutional banking, personal banking, and investment
banking and markets.
The Commercial Banking Segment provides a diversified range
of financial products and services. This segment provides
loan and deposit products to small and middle-market
corporations including specialized products such as
equipment and real estate financing. These products and
services are offered through multiple delivery systems,
including the branch banking network. In addition, various
credit and trade related products are offered such as
standby facilities, performance guarantees, acceptances and
accounts receivable factoring.
The Corporate and Institutional Banking Segment provides
deposit and lending functionality to large corporate and
multi-national corporations. U.S. dollar clearing services
are offered for domestic and international wire
12.
transfer transactions. Corporate trust provides various
trustee, agency and custody products and services for both
corporate and municipal customers. Credit and trade related
products such as standby facilities, performance guarantees
and acceptances are also provided to large corporate
entities.
The Personal Banking Segment provides an extensive array of
products and services including installment and revolving
term loans, deposits, branch services, mutual funds,
insurance, estate planning and other investment management
services. These products are marketed to individuals
through the branch banking network. Residential mortgage
lending provides loan financing through direct retail and
wholesale origination channels. Mortgage loans are
originated through a network of brokers, wholesale agents
and retail originations offices. Servicing is performed for
the individual mortgage holder or on a contractual basis for
mortgages owned by third parties.
The Investment Banking and Markets Segment includes
treasury, traded markets, and international private banking
businesses. The treasury function maintains overall
responsibility for the investment and borrowing of funds to
ensure liquidity, maximize return and manage interest rate
risk. Traded markets encompasses the trading and sale of
foreign exchange, banknotes, derivatives, precious metals,
securities and emerging markets instruments, both
domestically and internationally. International private
banking offers a full range of services for high net worth
individuals throughout the world including deposit, lending,
trading, trust and investment management.
Other consists of certain non-recurring expenses, including
Republic related integration costs, goodwill amortization
and expenses related to the Princeton Note Matter.
The segment results show the financial performance of the
major business units. These results are determined based on
the Company's management accounting process, which assigns
balance sheet, revenue and expense items to each reportable
business unit on a systematic basis. With respect to
segment results, management does not analyze depreciation
and amortization expense or expenditures for additions to
long-lived assets which are not considered significant. As
such, these amounts are included in other expenses and
average assets, respectively, in the table.
13.
- ------------------------------------------------------------------------------------------------------------
Segments
-------------------------------------------------
Corporate/ Investment
Commercial Institutional Personal Banking/
Banking Banking Banking Markets Other Total
- ------------------------------------------------------------------------------------------------------------
Nine months ended September 30, 2001
- ------------------------------------------------------------------------------------------------------------
(in millions)
Net interest income (1) $ 492 $ 103 $ 835 $ 312 $ (72) $ 1,670
Other operating income 127 80 256 355 19 837
- ------------------------------------------------------------------------------------------------------------
Total income 619 183 1,091 667 (53) 2,507
Operating expenses (2) 333 74 647 300 678 2,032
- ------------------------------------------------------------------------------------------------------------
Pretax income (loss) before
provision for credit losses 286 109 444 367 (731) 475
Provision for credit losses (3) 20 65 57 1 - 143
- ------------------------------------------------------------------------------------------------------------
Pretax income (loss) 266 44 387 366 (731) 332
Taxes (4) 92 18 135 126 (241) 130
- ------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative
effect of accounting change 174 26 252 240 (490) 202
- ------------------------------------------------------------------------------------------------------------
Average assets 16,390 5,431 22,809 39,786 1,318 85,734
Average liabilities/equity (5) 11,923 3,779 28,226 36,445 5,361 85,734
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Nine months ended September 30, 2000
- ------------------------------------------------------------------------------------------------------------
Net interest income (1) $ 437 $ 107 $ 771 $ 351 $ (71) $ 1,595
Other operating income 92 71 266 160 31 620
- ------------------------------------------------------------------------------------------------------------
Total income 529 178 1,037 511 (40) 2,215
Operating expenses (2) 290 70 647 257 153 1,417
- ------------------------------------------------------------------------------------------------------------
Pretax income (loss) before
provision for credit losses 239 108 390 254 (193) 798
Provision for credit losses (3) 52 5 35 15 - 107
- ------------------------------------------------------------------------------------------------------------
Pretax income (loss) 187 103 355 239 (193) 691
Taxes (4) 53 32 108 74 (10) 257
- ------------------------------------------------------------------------------------------------------------
Net income (loss) 134 71 247 165 (183) 434
- ------------------------------------------------------------------------------------------------------------
Average assets 14,861 5,715 19,842 39,685 2,624 82,727
Average liabilities/equity (5) 10,072 5,088 28,654 32,387 6,526 82,727
- ------------------------------------------------------------------------------------------------------------
<FN>
<F1>
(1)Net interest income of each segment represents the
difference between actual interest earned on assets and
interest paid on liabilities of the segment adjusted for
a funding charge or credit. Segments are charged a cost
to fund assets (e.g. customer loans) and receive a
funding credit for funds provided (e.g. customer
deposits) based on equivalent market rates.
(2)Expenses for the segments include fully apportioned
corporate overhead expenses with the exception of non-
recurring corporate expenses, goodwill amortization and
expenses related to the Princeton Note Matter.
(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)Taxes are allocated to the segments based on pretax
income (loss) excluding goodwill amortization.
(5)Common shareholder's equity and earnings on common
shareholder's equity are allocated back to the segments
based on the percentage of capital assigned to the
business.
</FN>
8. New Accounting Standards
- ---------------------------------------------------------------
In July 2001, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 141,
Business Combinations (FAS 141). The Statement is effective
for all business combinations initiated after June 30, 2001
and for all business combinations accounted for by the
purchase method that are completed after June 30, 2001. FAS
141 prohibits the pooling-of-interests method of accounting
for business combinations and prescribes the
14.
initial recognition and measurement of goodwill and other
intangible assets, accounting for negative goodwill and the
required disclosures in respect of business combinations.
In July 2001, the Financial Accounting Standards Board also
issued Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets (FAS 142). The
Statement is effective for fiscal years beginning after
December 15, 2001 and may not be retroactively applied to
financial statements of prior periods. FAS 142 requires
that goodwill, including previously existing goodwill, and
intangible assets with indefinite useful lives should not be
amortized but should be tested for impairment annually. FAS
142 does not carry forward the concept of corporate or
enterprise-wide goodwill found in current accounting
literature. Under FAS 142, all goodwill must be assigned to
one or more reporting units of the entity and evaluated for
impairment at that level. This represents a significant
departure from current accounting guidance which generally
applies an acquisition-specific or an enterprise-wide basis
for evaluating goodwill for impairment.
The Company is required to adopt the provisions of FAS 141
immediately and FAS 142 with effect from January 1, 2002.
Any goodwill and any intangible asset determined to have an
indefinite useful life acquired in a purchase business
combination completed after June 30, 2001 will not be
amortized and will continue to be evaluated for impairment
under current accounting literature until the date that FAS
142 applies in its entirety. Goodwill and intangible assets
acquired in business combinations completed before July 1,
2001 will continue to be amortized until the full adoption
of FAS 142 on January 1, 2002.
At the date of adoption, the Company expects to have
unamortized goodwill of approximately $2.9 billion, which
will be subject to the transition provisions of FAS 141 and
FAS 142. Amortization expense related to goodwill was
$176.2 million and $133.1 million for the year ended
December 31, 2000 and the nine months ended September 30,
2001, respectively. Because of the extensive effort needed
to comply with adopting FAS 141 and FAS 142, it is not
practicable to estimate reasonably the impact of adopting
these Statements on the Company's financial statements at
the date of this report, including whether any transitional
impairment losses will be required to be recognized as the
cumulative effect of a change in accounting principles.
In June 2001, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 143,
Accounting for Asset Retirement Obligations (FAS 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.
FAS 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
15.
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 charges to operating expense.
If the obligation is settled for other than the carrying
amount of the liability, the Company will recognize a gain
or loss on settlement.
The Company is required and plans to adopt the provisions of
FAS 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.
On January 1, 2001, the Company adopted Statement of
Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities (FAS 133) as
amended by FAS 137 and FAS 138. FAS 133 standardizes the
accounting for derivative instruments, including certain
derivative instruments embedded in other contracts. Under
FAS 133, entities are required to carry all derivatives in the
consolidated balance sheet at fair value. The accounting for
changes in fair value (i.e. gains or losses) of a derivative
depends on whether it has been designated and qualifies as
part of a hedging relationship and, if so, the type of hedge.
In accordance with the transition provisions of FAS 133, the
Company recorded a net of tax cumulative effect adjustment
charge of $.5 million in earnings for the nine months ended
September 30, 2001 representing the difference between the
fair value of derivatives that were designated as fair value
hedging instruments at the date of adoption and the related
mark to market of the previously hedged assets and
liabilities.
The Company also recorded a net of tax cumulative effect
gain of $2.9 million in accumulated other comprehensive
income representing the fair value of derivatives that were
designated as cash flow hedging instruments at the date of
adoption, all of which will be recognized in earnings during
the current year as the hedged items impact operating
results. Gains and losses on derivatives that were
previously deferred as adjustments to the carrying amount of
hedged items were not affected and continue to be amortized
over the life of the previously hedged items.
In September 2000, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 140,
Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities (FAS 140). FAS 140
replaced Statement of Financial Accounting Standards No.
125, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities (FAS 125). It revised
the standards for accounting for securitizations and other
transfers of financial assets and collateral and requires
certain disclosures, but it carried over most of FAS 125's
provisions without change.
FAS 140 is effective for transfers and servicing of
financial assets and extinguishments of liabilities of the
Company occurring after March 31, 2001. Adoption of this
standard has not had a material effect on the consolidated
financial statements of the Company.
16.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
- ---------------------------------------------------------------
HSBC USA Inc. (the Company) reported a third quarter 2001
net loss of $(167.2) million, compared with net income of
$143.6 million in the third quarter of 2000. For the first
nine months of 2001, net income was $201.6 million compared
with $433.6 million for the first nine months of last year.
The third quarter 2001 net loss and the lower year-to-date
net income reflect the impact of the third quarter 2001
expenses related to the Princeton Note Matter (See Note 3).
Excluding the Princeton related expenses, net income for the
third quarter and nine months of 2001 was $183.8 million and
$552.6 million, respectively.
Net Interest Income
- ---------------------------------------------------------------
Net interest income for the third quarter of 2001 was $554.7
million compared with $539.4 million for the third quarter
of 2000. The 2.8% increase in net interest income for the
third quarter of 2001 compared to the third quarter of 2000
was due to a larger balance sheet. Growth in commercial
loans and residential mortgages fueled overall loan growth
of 8% which was largely funded by higher consumer deposits.
Interest rate reductions in 2001 have led to declining
levels of both interest income and interest expense
throughout the year. Securities sales in 2001 led to
sizable gains in other operating income, but was a factor
causing spreads to contract slightly in the third quarter of
2001.
For the first nine months of 2001, net interest income was
$1,670.2 million compared with $1,594.8 million for the
first nine months of 2000. The 4.7% increase in net
interest income for the first nine months of 2001 compared
to 2000 was due principally to a larger balance sheet,
coupled with slightly wider spreads. Growth in commercial
loans and residential mortgages were the most significant
factors driving asset growth which was largely funded by a
higher level of consumer deposits. The declining interest
rate environment in 2001 has led to lower gross yields
earned on assets and lower gross rates paid on liabilities.
The improved balance sheet mix, specifically higher levels
of loans and deposits, led to slightly wider margins.
Interest income was $1,151.4 million in the third quarter of
2001 compared with $1,354.4 million in the third quarter of
2000. Average earning assets were $78.5 billion for the
third quarter of 2001 compared with $74.3 billion a year
ago. The average rate earned on earning assets was 5.87%
for the third quarter of 2001 compared with 7.29% a year
ago. Interest income was $3,743.2 million for the first
nine months of 2001 compared with $3,953.2 million in the
first nine months of 2000. Average earning assets were
$77.8 billion for the first nine months of 2001 compared
with $74.2 billion for the first nine months of 2000. The
average rate earned on earning assets was 6.48% for the
first nine months of 2001 compared with 7.15% a year ago.
Interest expense for the third quarter of 2001 was $596.7
million compared with $815.0 million in the third quarter of
2000. Average interest bearing liabilities for the third
quarter of 2001 were $67.2 billion, compared with
17.
$63.4 billion a year ago. The average rate paid on interest
bearing liabilities was 3.52% compared with 5.12% a year
ago. Interest expense for the first nine months of 2001 was
$2,073.0 million compared with $2,358.4 million in the first
nine months of 2000. Average interest bearing liabilities
for the first nine months of 2001 were $66.8 billion,
compared with $63.2 billion a year ago. The average rate
paid on interest bearing liabilities was 4.15% for the first
nine months of 2001 compared with 4.99% a year ago.
The taxable equivalent net yield on average total assets for
the third quarter of 2001 was 2.59%, compared with 2.63% a
year ago. The taxable equivalent net yield on average total
assets for the first nine months of 2001 was 2.64%, compared
with 2.61% a year ago.
Other Operating Income
- ---------------------------------------------------------------
Total other operating income was $275.8 million in the third
quarter of 2001, compared with $211.6 million in the 2000
third quarter. For the first nine months of 2001, total
operating income was $836.4 million compared with $620.0
million for the first nine months of 2000. Security gains
for the first nine months of 2001 were primarily realized
from securities sales to adjust to interest rate changes and
to reconfigure exposure to residential mortgages. The
security gains for 2001 also included a first quarter one-
time gain of $19.3 million on the sale of shares in Canary
Wharf, a retail/office development investment project in
London, England. Wealth management and insurance, loan and
bankcard fees and service charges were all strong during the
first nine months of 2001. Fee income from domestic wealth
management was $157.7 million during the first nine months
of 2001, an increase of 14.4 percent compared to the same
period in 2000. The third quarter 2001 mortgage banking
revenue was adversely impacted by the impairment of mortgage
servicing rights due to lower interest rates. In addition,
the gains on sale of mortgage loan assets, included in
mortgage banking revenue, was impacted by timing issues
associated with interest rate locks and forward loan sale
commitments, which were marked to market as required under
FAS 133. The World Trade Center disaster has had minor
effect so far on revenues and is estimated to be between
$2.0 million and $3.0 million, including lower personal
banking charges, bankcard fees and brokerage fees.
Trading revenues are generated by the Company's participation
in the foreign exchange and precious metals markets, trading
activities in derivative contracts and from trading securities.
The Company reports the net revenues from these activities,
which include mark to market adjustments and any related
direct trading expenses, as trading revenues in the
consolidated statement of income. Trading revenues are
summarized by categories of financial instruments in the
following table.
18.
- ---------------------------------------------------------------
Nine months ended September 30, 2001 2000
- ---------------------------------------------------------------
(in millions)
Foreign exchange $128.9 $ 79.5
Precious metals (28.0) 2.5
Trading account profits and commissions 75.1 32.6
- ---------------------------------------------------------------
Trading revenues $176.0 $114.6
- ---------------------------------------------------------------
The above table presents trading revenue by category of
financial instruments and is not necessarily indicative of
trading business line results. See the following comments
on precious metals trading.
The increase in trading revenues reflects improved foreign
exchange profits due to an expansion of business activities
and favorable market conditions as well as the impact of
adopting FAS 133. Included in the first nine months of
2000 trading revenues was approximately $12.7 million of
revenue earned by certain non-U.S. entities that were
transferred or sold to other HSBC entities during the first
nine months of 2000. The first nine months 2001 precious
metals results reflect unrealized losses on positions
impacted by lower short term interest rates. These precious
metals losses are offset by unrealized gains recorded in
trading account profits on swaps which appreciated in value,
as well as additional net interest income.
Other Operating Expenses
- ---------------------------------------------------------------
Other operating expenses were $1,056.7 million in the third
quarter of 2001 compared with $472.4 million for the third
quarter of 2000. Other operating expenses were $2,031.8
million for the first nine months of 2001 compared with
$1,417.6 million a year ago. The increase in other
operating expenses reflect the $575.0 million third quarter
2001 expenses related to the Princeton Note Matter (See Note
3). Excluding the Princeton related expenses, other operating
expenses for the third quarter and nine months of 2001 were
$481.7 million and $1,456.8 million, respectively.
Excluding the Princeton related expenses and treasury and
general incentive compensation tied to performance,
operating expenses were flat year to year. During the third
quarter, $3.0 million in specific charges for World Trade
Center related expenses were recognized, including insurance
policy deductibility and contributions made to the American
Red Cross. There may be additional costs in the fourth and
later quarters, however they are not expected to be
material.
Operating expenses for the third quarter of 2001 included
$.6 million of Republic acquisition related integration
costs versus $22.7 million for the same period of 2000.
Republic integration costs for the first nine months of 2001
were $13.0 million compared with $44.3 million for the same
period of 2000. The integration costs do not include the
higher level of equipment and software depreciation incurred
during 2001 on infrastructure investments made during 2000
related to the Republic acquisition.
19.
Income Taxes
- ---------------------------------------------------------------
The effective tax rate was 39% in the third quarter and first
nine months of 2001 compared with 37% in the same periods of
2000. The net deferred tax asset at September 30, 2001 was
$227 million compared with $94 million at December 31, 2000.
Asset Quality
- ---------------------------------------------------------------
The following table provides a summary of the allowance for
credit losses and nonaccruing loans.
- -----------------------------------------------------------------------------------
3rd 3rd 9 Months Year 9 Months
Quarter Quarter Ended Ended Ended
2001 2000 9/30/01 12/31/00 9/30/00
- -----------------------------------------------------------------------------------
(in millions)
Allowance for Credit Losses
Balance at beginning
of period $537.9 $614.6 $ 525.0 $ 638.0 $ 638.0
Allowance related to
acquisitions/transfers - (8.5) (19.0) (11.3) (12.0)
Provision charged to income 47.5 50.6 143.1 137.6 106.6
Net charge offs (44.8) (98.3) (108.3) (238.7) (173.8)
Translation adjustment (.3) (.1) (.5) (.6) (.5)
- ------------------------------------------------------------------------------------
Balance at end of period $540.3 $558.3 $ 540.3 $ 525.0 $ 558.3
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
September 30, December 31, September 30,
2001 2000 2000
- ------------------------------------------------------------------------------------
(in millions)
Nonaccruing Loans
Balance at end of period $394.3 $423.2 $299.1
As a percent of loans outstanding .92% 1.05% .75%
Nonperforming Loans and Assets *
Balance at end of period $410.6 $443.7 $317.6
As a percent of total assets .47% .53% .38%
Allowance Ratios
Allowance for credit losses as
a percent of:
Loans 1.26% 1.30% 1.40%
Nonaccruing loans 137.01 124.06 186.7
- ------------------------------------------------------------------------------------
<FN>
<F1>
* Includes nonaccruing loans, other real estate and other owned assets.
</FN>
During the first nine months of 2001, credit quality
remained relatively stable, notwithstanding a more volatile
business and credit environment. However, it is still too
early to determine what effect, if any, the events of
September 11 and the general economic slowdown will have on
the credit portfolio.
Provisions for credit losses were $47.5 million in the third
quarter of 2001 compared with $50.6 million in the third
quarter of 2000. Provisions for credit losses for the first
nine months of 2001 were $143.1 million compared
20.
with $106.6 million during the first nine months of 2000.
Net charge offs in the credit card portfolio were $44.0
million and $45.8 million in the first nine months of 2001
and 2000, respectively. The delinquency rate for the credit
card portfolio was 3.92% at September 30, 2001 compared with
3.75% at December 31, 2000 and 3.64% at September 30, 2000.
Net charge offs on commercial loans were $54.8 million and
$121.2 million in the first nine months of 2001 and 2000,
respectively.
The Company identified impaired loans totaling $194 million
at September 30, 2001, of which $116 million had a specific
credit loss allowance of $59 million. At December 31, 2000,
impaired loans were $224 million of which $109 million had a
specific credit loss allowance of $46 million.
Derivative Instruments and Hedging Activities
- ---------------------------------------------------------------
The Company is party to various derivative financial
instruments as an end user (1) for asset and liability
management purposes; (2) in order to offset the risk
associated with changes in the value of various assets and
liabilities accounted for in the trading account; (3) to
protect against changes in value of its mortgage servicing
rights portfolio, and (4) for speculative trading in its own
account. The Company is also an international dealer in
derivative instruments denominated in U.S. dollars and other
currencies which include futures, forwards, swaps and
options related to interest rates, foreign exchange rates,
equity indices and commodity prices, focusing on structuring
of transactions to meet clients' needs.
Types of Derivatives
Derivative instruments are contracts whose value is derived
from that of an underlying instrument, physical commodity or
market index and generally do not involve the exchange of
principal but may involve the payment of a fee or receipt of
a premium at inception of a contract. Certain instruments
such as futures and forward contracts commit the Company to
buy or sell a specified financial instrument, currency,
precious metal or other commodity at a future date. Futures
contracts are exchange-trading instruments that settle
through an independent clearinghouse and require daily cash
settlement. Forward contracts are customized transactions
that require no cash settlement until the end of the
contract.
Other contracts, such as interest rate swaps, involve
commitments to make periodic cash settlements based upon the
differential between specified rates or indices applied to a
stated notional amount. Purchased option contracts give the
right, but do not obligate the holder, to acquire or sell
for a limited time a financial instrument, precious metal or
commodity at a designated price upon payment for assuming
the risk of unfavorable changes in the price of the
underlying instrument or index.
Within the context of its overall balance sheet risk
management strategy, derivatives are utilized to protect
against changes in fair values and cash flows associated
with certain balance sheet assets, liabilities, forecasted
transactions and firm commitments in order to maintain net
interest margin
21.
within a range that management considers acceptable. To
achieve this objective, the Company has identified and
currently pursues two qualifying FAS 133 fair value hedge
strategies and one qualifying cash flow hedge strategy.
Fair Value Hedges
Specifically, interest rate swaps that call for the receipt
of a variable market rate and the payment of a fixed rate
are utilized under fair value strategies to hedge the risk
associated with changes in the risk free rate component of
the value of certain fixed rate investment securities.
Interest rate swaps that call for the receipt of a fixed
rate and payment of a variable market rate are utilized to
hedge the risk associated with changes in the risk free rate
component of certain fixed rate debt obligations.
For the nine months ended September 30, 2001, the Company
recognized a net gain of $.1 million (reported as other
income in the consolidated statement of income), which
represented the ineffective portion of all fair value
hedges. Only the time value component of these derivative
contracts has been excluded from the assessment of hedge
effectiveness.
Cash Flow Hedges
Similarly, interest rate swaps that call for the receipt of
a variable market rate and the payment of a fixed rate are
utilized under the cash flow strategy to hedge the
forecasted repricing of certain deposit liabilities.
For the nine months ended September 30, 2001, the Company
recognized a net gain of $2.9 million (reported as other
income in the consolidated statement of income), which
represented the total ineffectiveness of all cash flow
hedges. Only the time value component of the change in the
fair value of these derivative contracts has been excluded
from the assessment of hedge effectiveness.
Gains or losses on derivative contracts that are
reclassified from accumulated other comprehensive income to
current period earnings pursuant to this strategy, are
included in interest expense on deposit liabilities during
the periods that net income is impacted by the repricing.
As of September 30, 2001, $7.1 million of deferred net
losses on derivative instruments accumulated in other
comprehensive income are expected to be charged to earnings
during the remainder of 2001.
Trading and Other Activities
The Company enters into certain derivative contracts for
purely speculative trading purposes in order to realize
profits from short-term movements in interest rates,
commodity prices and foreign exchange rates. In addition,
certain contracts do not qualify as FAS 133 hedges and are
accounted for on a full mark to market basis through current
earnings even though they were not acquired for trading
purposes.
22.
For example, in conjunction with managing the risks
associated with its mortgage banking business, the Company
purchases interest rate floors. Although these derivative
contracts do not qualify as hedges under FAS 133,
they have the economic impact of largely offsetting the
erosion in value of the mortgage servicing rights portfolio
in declining rate environments. The changes in value of
these and all such "economic hedges" are recognized in
current period earnings as if they were trading positions.
Credit and Market Risks
By using derivative instruments, the Company is exposed to
credit and market risk. If the counterparty fails to
perform, credit risk is equal to the fair value gain in a
derivative. When the fair value of a derivative contract is
positive, this generally indicates that the counterparty
owes the Company, and, therefore, creates a repayment risk
for the Company. When the fair value of a derivative
contract is negative, the Company owes the counterparty and,
therefore, it has no repayment risk.
The Company minimizes the credit (or repayment) risk in
derivative instruments by entering into transactions with
high quality counterparties including other members of the
HSBC Group. Exposures are reviewed periodically by the
Company's credit committee. Counterparties generally
include financial institutions including banks, other
government agencies, both foreign and domestic, and
insurance companies. The Company also maintains a policy of
requiring that all derivative contracts be governed by an
International Swaps and Derivatives Association Master
Agreement; depending on the nature of the derivative
transaction, bilateral collateral arrangements may be
required as well.
When the Company has more than one outstanding derivative
transaction with a counterparty, and there exists a legally
enforceable master netting agreement, the "net" mark to
market exposure represents the netting of the positive and
negative exposure with the same counterparty. When there is
a net negative exposure, the Company considers its exposure
to be zero.
The net mark to market position with a particular
counterparty represents a reasonable measure of credit risk
when there is a legally enforceable master netting agreement
(i.e., a legal right of set off of receivable and payable
derivative contracts) between the Company and a counterparty.
The Company's policy is to use master netting agreements with
all counterparties.
Market risk is the adverse effect that a change in interest
rates, currency, or implied volatility rates has on the
value of a financial instrument. The Company manages the
market risk associated with interest rate and foreign
exchange contracts by establishing and monitoring limits as
to the types and degree of risk that may be undertaken. The
Company periodically measures this risk by using a value at
risk methodology.
The Company's Asset and Liability Policy Committee is
responsible for implementing various hedging strategies that
are developed through its
23.
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
- ---------------------------------------------------------------
The Company maintains a strong liquidity position. The size
and stability of its deposit base are complemented by its
maintenance of a surplus borrowing capacity in the money markets,
including the ability to issue additional commercial paper and
access unused lines of credit of $500 million at September 30,
2001. Wholesale liabilities were $19.9 billion at September 30,
2001 compared with $18.5 billion at December 31, 2000. The
Company also has strong liquidity as a result of a high level
of immediately saleable or pledgeable assets including its
available for sale securities portfolio, trading assets,
mortgages and other assets.
Capital
- ---------------------------------------------------------------
Total common shareholder's equity was $6.7 billion at
September 30, 2001, compared with $6.8 billion as December 31,
2000.
Under risk-based capital guidelines, the Company's capital
ratios were 7.92% at the Tier 1 level and 12.60% at the
total capital level at September 30, 2001. These ratios
compared with 8.39% at the Tier 1 level and 13.56% at the
total capital level at December 31, 2000.
Under guidelines for leverage ratios, the Company's ratio of
Tier 1 capital to quarterly average total assets was 5.66%
at September 30, 2001 compared with 5.73% at December 31,
2000.
Quantitative and Qualitative Disclosures About Market Risk
- ---------------------------------------------------------------
In consideration of the degree of interest rate risk
inherent in the banking industry, the Company has interest
rate risk management policies designed to meet performance
objectives within defined risk/safety parameters. In the
course of managing interest rate risk, a combination of risk
assessment techniques, including dynamic simulation
modeling, gap analysis, 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 September 30, 2001 was
plus or minus $4.7 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
24.
than $4.7 million. As of September 30, 2001, the Company
had a position of $(3.3) million PVBP reflecting the impact
of a one basis point increase in interest rates. Mortgage
servicing rights are excluded from the PVBP determination as
their interest rate risk is significantly different from
other balance sheet items. The mortgage servicing rights
risk is to lower interest rates, which is managed through
the purchase of various financial instruments including
interest rate floors and mortgage backed securities.
The Company also monitors changes in value of the balance
sheet for large movements in interest rates with an overall
limit of +/- 10%, after tax, change from the base case
valuation for a 200 basis point gradual rate movement. As
of September 30, 2001, for a gradual 200 basis point
increase in rates, the value was projected to drop by 4.6%
and for a 200 basis point gradual decrease in rates, value
was projected to drop by 7.5% if there were no management
actions taken to manage exposures to the changing
environment.
In addition to the above mentioned limits, the Company's
Asset and Liability Policy Committee particularly monitors,
on a monthly basis, 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%, pretax, of base case earnings over a
twelve month period. Simulations are also performed for
other relevant interest rate scenarios including immediate
rate movements and changes in the shape of the yield curve
or in competitive pricing policies. Net interest income
under the various scenarios is reviewed over a twelve month
period, as well as over a three year period. The
simulations capture the effects of the timing of the
repricing of all on-balance sheet assets and liabilities, as
well as 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 October 1,
2001 would cause projected net interest income for the next
twelve months to decrease by $31 million and
25.
increase by $20 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
October 1, 2001, would cause projected net interest
income for the next twelve months to decrease by $40 million
and $19 million, respectively. An immediate 200 basis point
parallel rise or fall would decrease projected net interest
income for the next twelve months by $90 million and $43
million, respectively.
The projections noted above do not take into consideration
possible complicating factors such as the effect of changes
in interest rates on the credit quality, size and
composition of the balance sheet. Therefore, although this
provides a reasonable estimate of interest rate sensitivity,
actual results will vary from these estimates, possibly by
significant amounts.
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, 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
and given a certain confidence level. VaR calculations are
performed for all material trading and investment portfolios
and for market risk-related treasury activities. The VaR is
calculated using the historical simulation or the
variance/covariance (parametric) method.
A VaR report broken down by trading business and on a
consolidated basis is distributed daily to management. To
measure the accuracy of the VaR model output, the daily VaR
is compared to the actual result from trading activities.
26.
The trading VaR at September 30, 2001 was $25.0 million
compared with $20.3 million at December 31, 2000. The
maximum trading VaR during the third quarter of 2001 was
$39.3 million, the minimum $11.1 million and the average
$22.9 million.
The following summary illustrates the Company's daily
revenue earned from market risk-related activities during
the third quarter of 2001. Market risk-related revenues
include realized and unrealized gains (losses) related to
treasury and trading activities but excludes the related net
interest income. The analysis of the frequency distribution
of daily market risk-related revenues shows that there were
13 days with negative revenue during the third quarter of
2001. The most frequent result was a daily revenue of
between zero and $2 million with 35 occurrences. The
highest daily revenue was $7.9 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 2 11 35 8 4 3
- ----------------------------------------------------------------------------------------------
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.
27.
HSBC USA Inc.
- ---------------------------------------------------------------------------------------
CONSOLIDATED AVERAGE BALANCES AND INTEREST RATES*
Third Quarter 2001 Third Quarter 2000**
Balance Interest Rate Balance Interest Rate
- ---------------------------------------------------------------------------------------
in millions
Assets
Interest bearing deposits
with banks $ 4,762 $ 40.7 3.39 % $ 4,006 $ 71.1 7.06 %
Federal funds sold and
securities purchased under
resale agreements 3,594 32.4 3.57 3,638 60.1 6.57
Trading assets 8,773 52.7 2.40 5,698 37.7 2.65
Securities 19,191 305.8 6.32 21,883 408.4 7.43
Loans
Domestic
Commercial 17,140 260.2 6.02 16,031 314.0 7.79
Consumer
Residential mortgages 17,593 317.0 7.21 15,028 285.3 7.59
Other consumer 3,221 84.5 10.41 3,215 93.8 11.61
- ---------------------------------------------------------------------------------------
Total domestic 37,954 661.7 6.92 34,274 693.1 8.05
International 4,255 67.8 6.32 4,803 90.5 7.49
- ---------------------------------------------------------------------------------------
Total loans 42,209 729.5 6.86 39,077 783.6 7.98
- ---------------------------------------------------------------------------------------
Total earning assets 78,529 $ 1,161.1 5.87 % 74,302 $ 1,360.9 7.29 %
- ---------------------------------------------------------------------------------------
Allowance for credit losses (539) (610)
Cash and due from banks 1,914 1,969
Other assets 6,560 7,029
- ---------------------------------------------------------------------------------------
Total assets $ 86,464 $ 82,690
=======================================================================================
Liabilities and Shareholders' Equity
Interest bearing demand
deposits $ 361 $ 0.5 0.53 % $ 741 $ 2.3 1.27 %
Consumer savings deposits 13,293 58.7 1.75 12,374 80.4 2.58
Other consumer time deposits 11,097 118.7 4.24 8,808 117.7 5.31
Commercial, public savings
and other time deposits 7,656 62.0 3.21 7,228 88.2 4.85
Deposits in foreign offices 19,542 200.9 4.08 19,973 315.8 6.29
- ---------------------------------------------------------------------------------------
Total interest bearing deposits 51,949 440.8 3.37 49,124 604.4 4.89
- ---------------------------------------------------------------------------------------
Federal funds purchased and
securities sold under
repurchase agreements 2,968 23.8 3.20 1,828 28.5 6.21
Other short-term borrowings 7,410 50.4 2.70 6,684 81.0 4.82
Long-term debt 4,840 81.7 6.70 5,742 101.1 7.00
- ---------------------------------------------------------------------------------------
Total interest bearing
liabilities 67,167 $ 596.7 3.52 % 63,378 $ 815.0 5.12 %
- ---------------------------------------------------------------------------------------
Interest rate spread 2.35 % 2.17 %
- ---------------------------------------------------------------------------------------
Noninterest bearing deposits 5,398 6,119
Other liabilities 6,501 6,181
Shareholders' equity 7,398 7,012
- ---------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 86,464 $ 82,690
=======================================================================================
Net yield on average earning assets 2.85 % 2.92 %
Net yield on average total assets 2.59 2.63
=======================================================================================
<FN>
<F1>
* Interest and rates are presented on a taxable equivalent basis.
** Restated to exclude investments in entities transferred to HSBC North America Inc.
during 2001 and 2000.
</FN>
28.
HSBC USA Inc.
- --------------------------------------------------------------------------------------
CONSOLIDATED AVERAGE BALANCES AND INTEREST RATES*
Nine Months 2001 Nine Months 2000**
Balance Interest Rate Balance Interest Rate
- --------------------------------------------------------------------------------------
in millions
Assets
Interest bearing deposits
with banks $ 4,721 $ 174.9 4.95 % $ 4,512 $ 232.9 6.90 %
Federal funds sold and
securities purchased under
resale agreements 3,282 113.1 4.61 3,484 169.9 6.51
Trading assets 8,284 175.9 2.83 5,217 89.9 2.30
Securities 20,193 1,036.9 6.87 22,395 1,207.0 7.20
Loans
Domestic
Commercial 16,909 833.6 6.59 16,496 951.8 7.71
Consumer
Residential mortgages 16,898 937.5 7.40 14,180 786.3 7.39
Other consumer 3,223 269.5 11.18 3,185 270.5 11.35
- --------------------------------------------------------------------------------------
Total domestic 37,030 2,040.6 7.37 33,861 2,008.6 7.92
International 4,244 227.2 7.16 4,777 264.4 7.39
- --------------------------------------------------------------------------------------
Total loans 41,274 2,267.8 7.35 38,638 2,273.0 7.86
- --------------------------------------------------------------------------------------
Total earning assets 77,754 $ 3,768.6 6.48 % 74,246 $ 3,972.7 7.15 %
- --------------------------------------------------------------------------------------
Allowance for credit losses (543) (627)
Cash and due from banks 1,858 1,828
Other assets 6,665 7,280
- --------------------------------------------------------------------------------------
Total assets $ 85,734 $ 82,727
======================================================================================
Liabilities and Shareholders' Equity
Interest bearing demand
deposits $ 369 $ 1.8 0.65 % $ 771 $ 6.7 1.16 %
Consumer savings deposits 12,863 193.5 2.01 12,513 232.5 2.48
Other consumer time deposits 11,381 404.6 4.75 8,327 315.1 5.05
Commercial, public savings
and other time deposits 7,066 186.3 3.53 7,486 290.2 5.18
Deposits in foreign offices,
primarily banks 20,529 746.8 4.86 19,411 866.8 5.97
- --------------------------------------------------------------------------------------
Total interest bearing deposits 52,208 1,533.0 3.93 48,508 1,711.3 4.71
- --------------------------------------------------------------------------------------
Federal funds purchased and
securities sold under
repurchase agreements 2,500 74.3 3.96 1,947 84.3 5.78
Other short-term borrowings 7,139 208.8 3.91 6,879 245.5 4.77
Long-term debt 4,913 256.9 6.99 5,853 317.3 7.24
- --------------------------------------------------------------------------------------
Total interest bearing
liabilities 66,760 $ 2,073.0 4.15 % 63,187 $ 2,358.4 4.99 %
- --------------------------------------------------------------------------------------
Interest rate spread 2.33 % 2.16 %
- --------------------------------------------------------------------------------------
Noninterest bearing deposits 5,552 6,225
Other liabilities 6,064 6,264
Shareholders' equity 7,358 7,051
- --------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 85,734 $ 82,727
======================================================================================
Net yield on average earning assets 2.92 % 2.90 %
Net yield on average total assets 2.64 2.61
======================================================================================
<FN>
<F1>
* Interest and rates are presented on a taxable equivalent basis.
** Restated to exclude investments in entities transferred to HSBC North America Inc.
during 2001 and 2000.
</FN>
29.
Part II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibit
12.01 Computation of Ratio of Earnings to Fixed Charges
12.02 Computation of Ratio of Earnings to Combined Fixed
Charges and Preferred Dividends.
(b) Reports on Form 8-K
None
30.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
HSBC USA Inc.
(Registrant)
Date: November 14, 2001 /s/ Gerald A. Ronning
Gerald A.Ronning
Executive Vice President &
Controller
(On behalf of Registrant and
as Chief Accounting Officer)
31.
Exhibit 12.01
HSBC USA Inc.
Computation of Ratio of Earnings to Fixed Charges
(in millions, except ratios)
- -----------------------------------------------------------------
Nine months ended September 30,
2001 2000*
- -----------------------------------------------------------------
Excluding interest on deposits
Income before cumulative effect
of accounting change $ 202 $ 434
Applicable income tax expense 130 257
Less undistributed equity earnings 6 5
Fixed charges:
Interest on:
Borrowed funds 283 330
Long-term debt 257 317
One third of rents, net of income
from subleases 14 16
- -----------------------------------------------------------------
Total fixed charges 554 663
Earnings before taxes and cumulative
effect of accounting change based on
income and fixed charges $ 880 $1,349
- -----------------------------------------------------------------
Ratio of earnings to fixed charges 1.59 2.03
- -----------------------------------------------------------------
Including interest on deposits
Total fixed charges (as above) $ 554 $ 663
Add: Interest on deposits 1,533 1,711
- -----------------------------------------------------------------
Total fixed charges and interest
on deposits $2,087 $2,374
- -----------------------------------------------------------------
Earnings before taxes and cumulative
effect of accounting change based
on income and fixed charges (as above) $ 880 $1,349
Add: Interest on deposits 1,533 1,711
- -----------------------------------------------------------------
Total $2,413 $3,060
- -----------------------------------------------------------------
Ratio of earnings to fixed charges 1.16 1.29
- -----------------------------------------------------------------
<FN>
<F1>
*Restated to exclude investments in entities transferred to
HSBC North America Inc. during 2001 and 2000.
</FN>
32.
Exhibit 12.02
HSBC USA Inc.
Computation of Ratio of Earnings to Combined Fixed Charges
and Preferred Dividends
(in millions, except ratios)
- -----------------------------------------------------------------
Nine months ended September 30,
2001 2000*
- -----------------------------------------------------------------
Excluding interest on deposits
Income before cumulative effect
of accounting change $ 202 $ 434
Applicable income tax expense 130 257
Less undistributed equity earnings 6 5
Fixed charges:
Interest on:
Borrowed funds 283 330
Long-term debt 257 317
One third of rents, net of income
from subleases 14 16
- -----------------------------------------------------------------
Total fixed charges 554 663
Earnings before taxes and cumulative
effect of accounting change based on
income and fixed charges $ 880 $1,349
- -----------------------------------------------------------------
Total fixed charges $ 554 $ 663
Preferred dividends 19 21
Ratio of pretax income to income
before cumulative effect of
accounting change 1.64 1.59
- -----------------------------------------------------------------
Total preferred stock dividend factor 31 33
Fixed charges, including preferred
stock dividend factor $ 585 $ 696
- -----------------------------------------------------------------
Ratio of earnings to combined fixed
charges and preferred dividends 1.50 1.94
- -----------------------------------------------------------------
Including interest on deposits
Total fixed charges, including
preferred stock dividend factor
(as above) $ 585 $ 696
Add: Interest on deposits 1,533 1,711
- -----------------------------------------------------------------
Fixed charges, including preferred
stock dividend factor and interest
on deposits $2,118 $2,407
- -----------------------------------------------------------------
Earnings before taxes and cumulative
effect of accounting change based
on income and fixed charges
(as above) $ 880 $1,349
Add: Interest on deposits 1,533 1,711
- -----------------------------------------------------------------
Total $2,413 $3,060
- -----------------------------------------------------------------
Ratio of earnings to combined fixed
charges and preferred dividends 1.14 1.27
- -----------------------------------------------------------------
<FN>
<F1>
*Restated to exclude investments in entities transferred to
HSBC North America Inc. during 2001 and 2000.
</FN>