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Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 2000
Commission file number 1-7436
HSBC USA Inc.
(Exact name of registrant as specified in its charter)
452 Fifth Avenue
New York, New York 10018
(Address of principal executive offices)
Telephone: (212) 525-6100
IRS Employer Identification No.: State of Incorporation:
13-2764867 Maryland
Securities registered on the New York Stock Exchange pursuant to Section 12(b)
of the Act:
Depositary Shares, each representing a one-fourth interest in a share of
Adjustable Rate Cumulative Preferred Stock, Series D
$1.8125 Cumulative Preferred Stock
$2.8575 Cumulative Preferred Stock
7% Subordinated Notes due 2006
8.375% Debentures due 2007
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) had 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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K. [X]
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.
Documents incorporated by reference: None
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2
TABLE OF CONTENTS
Page
Part I
- --------------------------------------------------------------------------------
1. Business 4
2. Properties 6
3. Legal Proceedings 6
4. Submission of Matters to a Vote of Security Holders 6
Part II
- --------------------------------------------------------------------------------
5. Market for the Registrant's Common Equity and
Related Stockholder Matters 6
6 Selected Financial Data 7
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
7A. Quantitative and Qualitative Disclosures About
Market Risk 31
8. Financial Statements and Supplementary Data 37
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 79
Part III
- --------------------------------------------------------------------------------
10. Directors and Executive Officers of the Registrant 79
11. Executive Compensation 83
12. Security Ownership of Certain Beneficial Owners
and Management 85
13. Certain Relationships and Related Transactions 86
Part IV
- --------------------------------------------------------------------------------
14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 87
3
PART I
Item 1. Business
HSBC USA Inc. (the Company) is a New York State based bank holding company
registered under the Bank Holding Company Act of 1956, as amended. At December
31, 2000, the Company had assets of $83.0 billion and employed approximately
14,200 full and part time employees.
All of the Company's common stock is owned by HSBC North America Inc. (HNAI), an
indirect wholly owned subsidiary of HSBC Holdings plc (HSBC). HSBC, the ultimate
parent company of HSBC Bank plc, The Hongkong and Shanghai Banking Corporation
Limited (HongkongBank), and other financial services companies, is an
international banking and financial services organization with major commercial
and investment banking franchises operating in the Asia-Pacific region, Europe,
the Americas, the Middle East and Africa. The principal executive offices of
HSBC are located in London, England. HSBC, with assets of $674 billion at
December 31, 2000, is one of the world's largest banking and financial services
organizations.
The Company's principal subsidiary HSBC Bank USA (the Bank), had assets of $80.1
billion and deposits of $56.9 billion at December 31, 2000. The Company also is
a participant in a joint venture, Wells Fargo HSBC Trade Bank.
The Bank's domestic operations encompass the State of New York as well as two
branches in Pennsylvania, seven branches in Florida and three branches in
California. Selected commercial and consumer banking products are offered on a
national basis. The Bank is engaged in a general commercial banking business,
offering a full range of banking products and services to individuals, including
high-net-worth individuals, corporations, institutions and governments. Through
its affiliation with HSBC, the Bank offers its customers access to global
markets and services. In turn, the Bank plays a role in the delivery and
processing of other HSBC products. In addition to its domestic offices, the Bank
maintains foreign branch offices, subsidiaries and/or representative offices in
the Caribbean, Europe, Panama, Asia and Latin America.
On August 1, 2000, the Company purchased the banking operations of Chase
Manhattan Bank, Panama (Chase Panama). The transaction was accounted for as a
purchase. Accordingly, the results of Chase Panama are included with those of
the Company for the period subsequent to the date of acquisition. The branch
operations had over $750 million in assets and $720 million in deposit
liabilities.
On December 31, 1999, HSBC acquired Republic New York Corporation (Republic),
which it subsequently merged with the Company, and Safra Republic Holdings S.A.,
subsequently renamed HSBC Republic Holdings (Luxembourg) S.A. (HRH). As part of
the integration of Republic into HSBC, various transactions have either taken
place, or are planned to take place in 2001. Certain operations of non-U.S.
branches and subsidiaries of the Company have been transferred to foreign
operations of HSBC, such as the sale of a branch in Tokyo to the Asia Pacific
operations of HSBC. Such plans also involve the reorganization of much of the
international private banking business of HSBC outside the Americas (including
operations owned by the Company and other HSBC members) to operate through one
global private banking organization based in Switzerland and operating in
various locations throughout the world.
4
PART I Continued
Item 1. Business Continued
The Bank had a 49% investment in HRH, a holding company, principally engaged in
international private banking and commercial banking with assets of $24.4
billion at December 31, 1999. HSBC held the remaining 51% ownership interest in
HRH. In connection with HSBC's internal international private banking operations
reorganization in December 2000, the Company distributed its interest in HRH to
HNAI, its parent. The distribution, in the form of a return of capital in the
amount of $2.8 billion, included its investment in a Bahamian subsidiary in
addition to the $2.5 billion investment in HRH.
The Bank is supervised and routinely examined by the State of New York Banking
Department and the Board of Governors of the Federal Reserve System (the Federal
Reserve), and it is subject to banking laws and regulations which place various
restrictions on and requirements regarding its operations and administration,
including the establishment and maintenance of branch offices, capital and
reserve requirements, deposits and borrowings, investment and lending
activities, payment of dividends and numerous other matters. The Federal Reserve
Act restricts certain transactions between banks and their nonbank affiliates.
The deposits of the Bank are insured by the Federal Deposit Insurance
Corporation (FDIC) and subject to relevant FDIC regulations.
The enactment of the Gramm-Leach-Bliley Act of 1999 (GLB Act), effective March
11, 2000, provides expanded opportunities for banks, other depository
institutions, insurance companies and securities firms to enter into
combinations that permit a single financial services organization to offer a
more complete line of financial products and services. Further competitive
pressures are anticipated from industry consolidations in the wake of the
passage of the GLB Act. The GLB Act also requires banks, securities firms and
insurance companies to adopt written privacy policies, which are designed to
safeguard consumers' privacy, and to provide copies of those policies to their
customers on or before July 1, 2001. The Company will be devoting significant
resources in 2001 to this endeavor.
The Company and the Bank are subject to risk-based capital and leverage
guidelines issued by the Federal Reserve. The Federal Reserve is required by law
to take specific prompt actions with respect to financial institutions that do
not meet minimum capital standards. Five capital standards have been identified,
the highest of which is well-capitalized. A well-capitalized bank must have a
Tier 1 risk-based capital ratio of at least 6%, a total risk-based capital ratio
of at least 10% and a leverage ratio of at least 5% and not be subject to a
capital directive order. The Company and the Bank's ratios at December 31, 2000
exceeded all ratios required for the well-capitalized category.
The Company and its subsidiaries face competition in all the markets they serve,
competing with other financial institutions, including commercial banks,
investment banks, savings and loan associations, credit unions, consumer finance
companies, money market funds and other non-banking institutions such as
insurance companies, major retailers, brokerage firms and investment companies.
Many of these institutions are not subject to the same laws and regulations
imposed on the Company and its subsidiaries.
5
Item 2. Properties
The principal executive offices of the Company are located at 452 Fifth Avenue,
New York, New York 10018, which is owned by the Bank. The principal executive
offices of the Bank are located at One HSBC Center, Buffalo, New York 14203, in
a building under a long-term lease. The Bank has more than 420 other banking
offices in New York State located in 50 counties, two branches in Pennsylvania,
seven branches in Florida and three branches in California. Approximately 38% of
these offices are located in buildings owned by the Bank and the remaining are
located in leased quarters. In addition, there are branch offices and locations
for other activities occupied under various types of ownership and leaseholds in
states other than New York, none of which is materially important to the
respective activities. The Bank owns properties in: Buenos Aires, Argentina;
Santiago, Chile; Panama City, Panama; Montevideo, Uruguay; Mexico City, Mexico
and London, England.
Item 3. Legal Proceedings
The information contained in Note 26 to the Financial Statements on page 68 of
this report is incorporated herein by reference.
Item 4. Submission of Matters to a Vote of Security Holders
Reference is made to Item 5.
P A R T II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Since all common stock of the Company is owned by HSBC North America Inc.,
shares of the Company's common stock are not listed or traded on a securities
exchange.
6
Item 6. Selected Financial Data
HSBC acquired Republic New York Corporation (Republic) and merged it with the
Company on December 31, 1999. The acquisition was accounted for as a purchase by
the Company so that the fair value of the assets and liabilities of Republic are
included in balances at year end 1999. Accordingly, the results of operations of
Republic are included with those of the Company for the period subsequent to the
acquisition.
Year Ended December 31, 2000 1999 1998 1997 1996
--------- --------- --------- --------- --------
in millions
Net interest income $ 2,119.1 $ 1,225.9 $ 1,165.3 $ 1,173.4 $ 961.8
--------- --------- --------- --------- --------
Securities transactions 28.8 10.1 13.8 17.4 7.9
Interest on Brazilian tax settlement - 13.1 32.7 - -
Other operating income 803.6 440.8 413.6 342.0 303.0
--------- --------- --------- --------- --------
Total other operating income 832.4 464.0 460.1 359.4 310.9
--------- --------- --------- --------- --------
Other operating expenses 1,905.9 827.9 780.2 781.4 656.8
Provision for credit losses 137.6 90.0 80.0 87.4 64.7
--------- --------- --------- --------- --------
Income before taxes 908.0 772.0 765.2 664.0 551.2
Applicable income tax expense 340.5 308.3 238.1 193.0 171.0
--------- --------- --------- --------- --------
Net income $ 567.5 $ 463.7 $ 527.1 $ 471.0 $ 380.2
--------- --------- --------- --------- --------
Balances at year end (1)
Total assets $ 83,032 $ 87,253 $ 33,944 $ 31,518 $ 23,630
Goodwill and other acquisition intangibles 3,233 3,307 335 370 158
Long-term debt 5,097 5,885 1,748 1,708 1,080
Common shareholder's equity 6,843 6,728 2,228 2,039 1,875
Total shareholders' equity 7,343 7,228 2,228 2,039 1,973
Ratio of shareholders' equity to total assets 8.84% 8.28% 6.56% 6.47% 8.35%
--------- --------- --------- --------- --------
Selected financial data (1)(2)
Rate of return on
Total assets 0.69% 1.35% 1.60% 1.62% 1.83%
Total common shareholder's equity 8.19 20.31 24.93 22.93 21.33
Total shareholders' equity to total assets 8.56 6.67 6.44 7.14 8.90
--------- --------- --------- --------- --------
Quarterly Results of Operations
2000 1999
---------------------------------------- ---------------------------------------
4th Q 3rd Q(3) 2nd Q(3) 1st Q(3) 4th Q 3rd Q 2nd Q 1stQ
------- ------- -------- -------- ------- ------- ------- -------
in millions
Net interest income $ 523.9 $ 539.6 $ 527.5 $ 528.1 $ 302.2 $ 305.5 $ 306.9 $ 311.3
------- ------- -------- ------- ------- ------- ------- -------
Securities transactions 18.4 9.1 3.7 (2.4) 2.9 (0.1) 4.9 2.4
Interest on Brazilian tax settlement - - - - 13.1 - - -
Other operating income 194.0 202.5 193.7 213.4 109.4 108.2 104.0 119.2
------- ------- -------- ------- ------- ------- ------- -------
Total other operating income 212.4 211.6 197.4 211.0 125.4 108.1 108.9 121.6
------- ------- -------- ------- ------- ------- ------- -------
Other operating expenses 483.8 475.5 473.8 472.8 217.2 200.3 203.8 206.6
Provision for credit losses 31.0 50.6 28.0 28.0 22.5 22.5 22.5 22.5
------- ------- -------- ------- ------- ------- ------- -------
Income before taxes 221.5 225.1 223.1 238.3 187.9 190.8 189.5 203.8
Applicable income tax expense 83.0 84.4 83.7 89.4 74.0 75.9 76.0 82.4
------- ------- -------- ------- ------- ------- ------- -------
Net income $ 138.5 $ 140.7 $ 139.4 $ 148.9 $ 113.9 $ 114.9 $ 113.5 $ 121.4
======= ======= ======== ======= ======= ======= ======= =======
(1) Balances for 1999 were restated to exclude investments to HSBC North America
Inc. during 2000. See Note 1 for further discussion.
(2) Based on average daily balances.
(3) The 2000 quarterly results of operations as reported in the respective Form
10-Q's were restated to exclude investments transferred to HSBC North
America Inc. during 2000. See Note 1 for further discussion.
7
CONSOLIDATED AVERAGE BALANCES AND INTEREST RATES - THREE YEARS
The following table shows the average balances of the principal components of
assets, liabilities and shareholders' equity, together with their respective
interest amounts and rates earned or paid on a taxable equivalent basis. Average
balances for 1999 were restated to exclude investments transferred to HSBC North
America Inc. during 2000. See Note 1 for further discussion.
2000
---------------------------
Balance Interest Rate
-------- --------- ----
Assets
Interest bearing deposits with banks $ 4,425 $ 308.7 6.98%
Federal funds sold and securities purchased
under resale agreements 3,260 215.0 6.59
Trading assets 5,504 140.5 2.55
Securities 22,158 1,605.2 7.24
Loans
Domestic
Commercial 18,105 1,359.4 7.51
Consumer
Residential mortgages 14,543 1,086.3 7.47
Other consumer 3,189 366.4 11.49
-------- --------- ----
Total domestic 35,837 2,812.1 7.85
International 3,129 261.7 8.37
-------- --------- ----
Total loans 38,966 3,073.8 7.89
-------- --------- ----
Total earning assets 74,313 $ 5,343.2 7.19%
-------- --------- ----
Allowance for loan losses (606)
Cash and due from banks 1,794
Other assets 7,288
-------- --------- ----
Total assets $ 82,789
======== ========= ====
Liabilities and Shareholders' Equity
Interest bearing demand deposits $ 676 $ 8.0 1.18%
Consumer savings deposits 12,462 313.5 2.52
Other consumer time deposits 9,048 466.9 5.16
Commercial, public savings and other time deposits 7,188 358.3 4.98
Deposits in foreign offices 19,586 1,186.8 6.06
-------- --------- ----
Total interest bearing deposits 48,960 2,333.5 4.77
-------- --------- ----
Federal funds purchased and securities sold
under repurchase agreements 2,082 123.8 5.95
Other short-term borrowings 6,575 320.9 4.88
Long-term debt 5,771 420.3 7.28
-------- --------- ----
Total interest bearing liabilities 63,388 $ 3,198.5 5.05%
-------- --------- ----
Interest rate spread 2.14%
-------- --------- ----
Noninterest bearing deposits 6,063
Other liabilities 6,248
Total shareholders' equity 7,090
-------- --------- ----
Total liabilities and shareholders' equity $ 82,789
======== ========= ====
Net yield on average earning assets 2.89%
-------- --------- ----
Net yield on average total assets 2.59
======== ========= ====
Total weighted average rate earned on earning assets is interest and fee
earnings divided by daily average amounts of total interest earning assets,
including the daily average amount on nonperforming loans. Loan fees included
were $38 million for 2000, $36 million for 1999 and $28 million for 1998.
8
SCHEDULE CONTINUED
1999 1998
------------------------------ ------------------------------
Balance Interest Rate Balance Interest Rate
-------- --------- ---- -------- --------- ----
in millions
Assets
Interest bearing deposits with banks $ 1,795 $ 97.0 5.40% $ 2,377 $ 136.6 5.75%
Federal funds sold and securities purchased
under resale agreements 2,238 116.5 5.21 2,299 128.0 5.57
Trading assets 919 50.8 5.52 851 51.0 5.99
Securities 3,654 214.7 5.88 3,930 232.6 5.92
Loans
Domestic
Commercial 10,496 825.3 7.86 8,569 738.3 8.62
Consumer
Residential mortgages 9,382 656.9 7.00 9,531 684.7 7.18
Other consumer 2,432 285.6 11.74 2,652 319.8 12.06
-------- --------- ---- -------- --------- ----
Total domestic 22,310 1,767.8 7.92 20,752 1,742.8 8.40
International 1,075 75.4 7.02 640 44.6 6.96
-------- --------- ---- -------- --------- ----
Total loans 23,385 1,843.2 7.88 21,392 1,787.4 8.36
-------- --------- ---- -------- --------- ----
Total earning assets 31,991 $ 2,322.2 7.26% 30,849 $ 2,335.6 7.57%
-------- --------- ---- -------- --------- ----
Allowance for loan losses (379) (404)
Cash and due from banks 1,046 1,128
Other assets 1,572 1,274
-------- --------- ---- -------- --------- ----
Total assets $ 34,230 $ 32,847
======== ========= ==== ======== ========= ====
Liabilities and Shareholders' Equity
Interest bearing demand deposits $ 248 $ 2.3 0.91% $ 274 $ 3.0 1.09%
Consumer savings deposits 7,620 172.9 2.27 7,321 183.1 2.50
Other consumer time deposits 6,808 308.4 4.53 6,369 336.1 5.28
Commercial, public savings and other time deposits 4,265 153.3 3.59 3,244 134.2 4.13
Deposits in foreign offices 4,584 216.0 4.71 4,074 211.0 5.18
-------- --------- ---- -------- --------- ----
Total interest bearing deposits 23,525 852.9 3.63 21,282 867.4 4.08
-------- --------- ---- -------- --------- ----
Federal funds purchased and securities sold
under repurchase agreements 951 45.2 4.75 917 48.1 5.24
Other short-term borrowings 1,618 84.4 5.21 2,717 156.1 5.74
Long-term debt 1,867 111.7 5.98 1,469 96.1 6.54
-------- --------- ---- -------- --------- ----
Total interest bearing liabilities 27,961 $ 1,094.2 3.91% 26,385 $ 1,167.7 4.45%
-------- --------- ---- -------- --------- ----
Interest rate spread 3.35% 3.11%
-------- --------- ---- -------- --------- ----
Noninterest bearing deposits 3,111 3,665
Other liabilities 873 683
Total shareholders' equity 2,285 2,114
-------- --------- ---- -------- --------- ----
Total liabilities and shareholders' equity $ 34,230 $ 32,847
======== ========= ==== ======== ========= ====
Net yield on average earning assets 3.84% 3.79%
-------- --------- ---- -------- --------- ----
Net yield on average total assets 3.59 3.56
======== ========= ==== ======== ========= ====
9
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Company reported pretax income of $908.0 million for 2000 compared with
$772.0 million in 1999. Pretax income after adding back goodwill amortization
was $1,084.2 million in 2000 compared with $805.3 million in 1999. Return on
average common shareholder's equity was 8.19% in 2000 and 20.31% in 1999.
The largest factor contributing to the increased net income between 2000 and
1999 was the acquisition of Republic New York Corporation (Republic) on December
31, 1999. The acquisition was accounted for as a purchase by the Company. The
fair value of the assets and liabilities of Republic were included in the
balance sheet of the Company as of December 31, 1999. Accordingly, the results
of operations of Republic are included with those of the Company for the period
subsequent to the acquisition.
Republic engaged in five principal lines of business: private banking; consumer
financial services; lending; treasury; and markets. Republic National Bank of
New York (Republic Bank) had 83 branches in the greater New York metropolitan
area, where it was the third-largest deposit taking institution, and 7 branches
in Florida, as well as 36 branches, representative offices or wholly owned
subsidiaries in Latin America, the Caribbean, Europe and Asia. Republic was a
world leader in banknotes and bullion trading and provided the fifth-largest
factoring service in the United States. In addition, it had significant
international private banking operations in New York, Miami, Los Angeles and
Asia. At December 31, 1999 Republic had total assets of $46.9 billion, deposits
of $29.9 billion and common shareholders' equity of $2.9 billion. Republic's net
income for 1999 was $418 million. See page 30 for additional analysis of
Republic.
In December 2000, as part of an internal international reorganization of the
HSBC Group's global private banking operations, the Company distributed its 49%
interest in HSBC Republic Holdings (Luxembourg) S.A. (HRH) from the Bank to its
parent HSBC North America Inc. (HNAI). The distribution, in the form of a return
of capital of $2.8 billion, included its investment in HSBC Investments
(Bahamas) Limited in addition to the $2.5 billion investment in HRH. The assets
transferred were acquired as a part of the acquisition and merger of Republic
New York Corporation (Republic) on December 31, 1999. See Note 2, Acquisitions.
The divestitures were accounted for as transfers of assets between companies
under common control at historical cost. The entities involved were acquired in
conjunction with the Republic merger. The accompanying consolidated financial
statements and related notes reflect a restatement of the December 31, 1999
consolidated balance sheets of the Company and the Bank to exclude the
transferred assets and liabilities as though they had not been acquired
(depooling). Restatement of the 1999 income statement was not required as no
income or expenses from Republic were included in the reported results.
This report includes forward-looking statements that involve inherent risks and
uncertainties. Statements that are not historical facts, including statements
about management's beliefs and expectations, are forward-looking statements. 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; cost savings and
revenue enhancements as well as the nature, costs and timing of integration of
businesses relating to the acquisition;
10
technology changes; significant changes in accounting, tax or regulatory
requirements; and competition in the geographic and business areas in which the
Company conducts its operations.
A detailed review comparing 2000 operations with 1999 and 1998 follows. It
should be read in conjunction with the consolidated financial statements of the
Company which begin on page 37.
11
EARNINGS PERFORMANCE REVIEW
Net Interest Income
Net interest income is the total interest income on earning assets less the
interest expense on deposits and borrowed funds. In the discussion that follows,
interest income and rates are presented and analyzed on a taxable equivalent
basis, in order to permit comparisons of yields on tax-exempt and taxable
assets.
Increase(Decrease) Increase(Decrease)
--------------------------------- ------------------------------------------
2000 Amount % 1999 Amount % 1998
-------- -------- ------- -------- ------ ---- --------
in millions
Interest income $5,343.2 $3,021.0 130.1 $2,322.2 $(13.4) (.6) $2,335.6
Interest expense 3,198.5 2,104.3 192.3 1,094.2 (73.5) (6.3) 1,167.7
-------- -------- ------- -------- ------ ---- --------
Net interest income -
taxable equivalent basis 2,144.7 916.7 74.6 1,228.0 60.1 5.1 1,167.9
Taxable equivalent
adjustment 25.6 23.5 1,102.6 2.1 (.5) (17.5) 2.6
-------- -------- ------- -------- ------ ---- --------
Net interest income $2,119.1 $ 893.2 72.9 $1,225.9 $ 60.6 5.2 $1,165.3
-------- -------- ------- -------- ------ ---- --------
Average earning assets $ 74,313 $ 42,322 132.3 $ 31,991 $1,142 3.7 $ 30,849
Average nonearning assets 8,476 6,237 278.6 2,239 241 12.0 1,998
-------- -------- ------- -------- ------ ---- --------
Average total assets $ 82,789 $ 48,559 141.9 $ 34,230 $1,383 4.2 $ 32,847
-------- -------- ------- -------- ------ ---- --------
Net yield on:
Average earning assets 2.89% (.95)% (24.7) 3.84% .05% 1.3 3.79%
Average total assets 2.59 (1.00) (27.9) 3.59 .03 .8 3.56
======== ======== ======= ======== ====== ==== ========
Net interest income was $2,144.7 million in 2000 compared with $1,228.0 million
in 1999. The Republic acquisition was the principal factor contributing to the
increase in net interest income and average assets. The decrease in net yield in
2000 from 1999 was primarily due to a higher concentration of lower yielding
treasury assets and higher costing foreign deposits as a result of the Republic
acquisition.
The following table presents net interest income components on a taxable
equivalent basis, using marginal tax rates of 35%, and quantifies the changes in
the components according to "volume and rate".
12
Net Interest Income Components Including Volume/Rate Analysis
2000 Compared to 1999 1999 Compared to 1998
Increase(Decrease) Increase(Decrease)
------------------------------- ---------------------------------------
2000 Volume Rate 1999 Volume Rate 1998
-------- -------- ------- -------- ------ ------- --------
in millions
Interest income:
Interest bearing deposits
with banks $ 308.7 $ 176.6 $ 35.1 $ 97.0 $(31.8) $ (7.8) $ 136.6
Federal funds sold and
securities purchased under
resale agreements 215.0 62.1 36.4 116.5 (3.3) (8.2) 128.0
Trading assets 140.5 130.3 (40.6) 50.8 3.9 (4.1) 51.0
Securities 1,605.2 1,329.4 61.1 214.7 (16.2) (1.7) 232.6
Loans:
Domestic:
Commercial 1,359.4 572.9 (38.8) 825.3 155.6 (68.6) 738.3
Consumer
Residential mortgages 1,086.3 382.8 46.6 656.9 (10.6) (17.2) 684.7
Credit card receivables 180.1 (1.3) (5.5) 186.9 (21.0) (4.2) 212.1
Other consumer 186.3 72.3 15.3 98.7 (6.7) (2.3) 107.7
International 261.7 169.3 17.0 75.4 30.5 .3 44.6
-------- -------- ------- -------- ------ ------- --------
Total interest income 5,343.2 2,894.4 126.6 2,322.2 100.4 (113.8) 2,335.6
-------- -------- ------- -------- ------ ------- --------
Interest expense:
Interest bearing demand deposits 8.0 4.9 .8 2.3 (.2) (.5) 3.0
Consumer savings and
other time deposits 780.4 253.8 45.3 481.3 27.0 (64.9) 519.2
Commercial and public savings
and other time deposits 358.3 131.1 73.9 153.3 38.3 (19.2) 134.2
Deposits in foreign offices 1,186.8 892.8 78.0 216.0 25.0 (20.0) 211.0
Short-term borrowings 444.7 312.6 2.5 129.6 (55.2) (19.4) 204.2
Long-term debt 420.3 279.5 29.1 111.7 24.3 (8.7) 96.1
-------- -------- ------- -------- ------ ------- --------
Total interest expense 3,198.5 1,874.7 229.6 1,094.2 59.2 (132.7) 1,167.7
-------- -------- ------- -------- ------ ------- --------
Net interest income -
taxable equivalent basis $2,144.7 $1,019.7 $(103.0) $1,228.0 $ 41.2 $ 18.9 $1,167.9
======== ======== ======= ======== ====== ======= ========
The changes in interest income and interest expense due to both rate and volume
have been allocated in proportion to the absolute amounts of the change in each.
Average Balances and Interest Rates
Average balances and interest rates earned or paid for the past three years are
reported on pages 8 and 9. The Republic acquisition was the principal factor
contributing to the increase in net interest income, average assets and
liabilities and shareholders' equity for 2000. The favorable volume variance for
residential mortgages also reflects loan growth achieved for 2000. The overall
rate environment for 2000 was higher than 1999, with an approximate 1.2%
increase in average prime rate and a 1.1% increase in average LIBOR rate
year-to-year. The unfavorable rate variances for trading assets, domestic
commercial loans and credit card receivables for 2000 compared to 1999 reflect
the impact of lower yielding Republic assets. The rate variance for short-term
borrowings for 2000 compared to 1999 similarly reflects the impact of lower rate
Republic liabilities.
13
Other Operating Income
Other operating income was $832.4 million in 2000 compared with $464.0 million
in 1999 and $460.1 million in 1998.
Increase(Decrease) Increase(Decrease)
----------------------------- ---------------------------------------
2000 Amount % 1999 Amount % 1998
------ ------ ------- ------ ------ ----- ------
in millions
Trust income $ 84.9 $ 32.7 62.6 $ 52.2 $ 4.9 10.4 $ 47.3
Service charges 172.3 43.7 33.9 128.6 13.2 11.5 115.4
Mortgage banking revenue 32.5 2.0 6.7 30.5 (12.6) (29.4) 43.1
Letter of credit fees 53.5 21.0 64.6 32.5 6.6 25.5 25.9
Credit card fees 56.0 9.4 20.4 46.6 2.3 5.1 44.3
Other fee-based income 131.8 75.7 134.9 56.1 7.5 15.5 48.6
Investment product fees 59.0 26.6 82.1 32.4 5.7 21.3 26.7
Interest on Brazilian
tax settlement - (13.1) - 13.1 (19.6) (59.8) 32.7
Other income 73.4 21.5 41.5 51.9 (6.7) (11.4) 58.6
------ ------ ------- ------ ------ ----- ------
Nontrading income 663.4 219.5 49.5 443.9 1.3 .3 442.6
------ ------ ------- ------ ------ ----- ------
Trading revenues 140.2 130.2 1,300.0 10.0 6.3 170.6 3.7
Securities transactions 28.8 18.7 185.6 10.1 (3.7) (27.1) 13.8
------ ------ ------- ------ ------ ----- ------
Total other operating income $832.4 $368.4 79.4 $464.0 $ 3.9 .8 $460.1
====== ====== ======= ====== ====== ===== ======
Nontrading Income
Nontrading income was $663.4 million in 2000 compared with $443.9 million in
1999. The Republic acquisition was the principal factor contributing to the
increase. In addition, increases in trust income, investment product fees and
insurance income reflect growth achieved in our domestic wealth management
business. Mortgage banking revenue for 2000 increased only slightly as a result
of lower gains on sale of mortgages due to the higher interest rate environment
and competitive pricing pressures. The Company received interest of $13.1
million and $32.7 million in 1999 and 1998, respectively, as a result of the
settlement of previously disallowed income tax credits on Brazilian debt. Other
income in 1999 included a gain on the sale of a student loan business of $15.0
million.
14
Total 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 trading securities. The following table
presents the components of total trading revenues. The product diversification
data in the table below 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. The Republic acquisition
was the principal factor contributing to the increase for 2000. Overall market
conditions for 2000 were stable. During the second half of 2000, the flatter
yield curve reduced opportunities in some markets.
2000 1999 1998
------ ----- -----
in millions
Trading revenues $140.2 $10.0 $ 3.7
Net interest income 52.1 4.6 8.0
------ ----- -----
Total trading related revenues $192.3 $14.6 $11.7
====== ===== =====
Product diversification:
Foreign exchange $ 94.9 $ 6.2 $ 5.5
Precious metals 51.7 - -
Trading account profits and commissions 45.7 8.4 6.2
------ ----- -----
Total trading related revenues $192.3 $14.6 $11.7
====== ===== =====
Securities Transactions
Securities transactions during 2000 resulted in net gains of $28.8 million
compared with net gains of $10.1 million in 1999. These gains resulted from the
sale of investments classified as available for sale and from the redemption of
certain held to maturity securities. Securities were sold as a result of the
rationalization of portfolios in light of the Republic acquisition.
Other Operating Expenses
Increase(Decrease) Increase(Decrease)
------------------------------- ---------------------------------------
2000 Amount % 1999 Amount % 1998
-------- -------- ----- ------ ------ ---- ------
in millions
Salaries and employee benefits $ 979.6 $ 558.3 132.5 $421.3 $11.0 2.7 $410.3
Net occupancy 169.0 80.0 89.9 89.0 (.4) (.5) 89.4
Equipment and software 121.1 67.4 125.6 53.7 2.3 4.4 51.4
Goodwill amortization 176.2 142.9 428.6 33.3 (4.4) (11.7) 37.7
Marketing 34.3 9.9 40.9 24.4 3.0 13.7 21.4
Outside services 105.4 56.3 114.9 49.1 (1.7) (3.5) 50.8
Professional fees 38.4 16.3 73.7 22.1 2.4 12.5 19.7
Other real estate and
owned asset expense (.5) 13.4 96.1 (13.9) 3.2 19.1 (17.1)
Other 282.4 133.5 89.7 148.9 32.3 27.7 116.6
-------- -------- ----- ------ ----- ---- ------
Total other operating expenses $1,905.9 $1,078.0 130.2 $827.9 $47.7 6.1 $780.2
-------- -------- ----- ------ ----- ---- ------
Personnel - average number 14,415 5,509 61.9 8,906 (32) (.4) 8,938
======== ======== ===== ====== ===== ==== ======
Other operating expenses were $1,905.9 million in 2000 compared with $827.9
million in 1999. The increase over 1999 was due primarily to the Republic
acquisition. Included in total other operating expenses for 2000 were $85.0
million of restructuring costs related to the Republic acquisition compared with
$26.7 million in 1999. See Note 2, Acquisitions, on pages 47 through 49 for
further discussion. Additional expenses were also incurred in 2000 to
15
support growth in our domestic wealth management business, as well as
information technology related initiatives including a comprehensive internet
banking product for personal banking customers. Average staffing levels (full
time equivalents) were 14,415 in 2000 compared with 8,906 in 1999. Other real
estate and owned asset expense in 2000 and 1999 benefited from gains on
disposals of properties.
Provision for Credit Losses
Provision for credit losses was $137.6 million in 2000 compared with $90.0
million in 1999. Net charge offs in the credit card portfolio were $60.2 million
and $74.9 million in 2000 and 1999, respectively. Commercial loan net charge
offs were $166.3 million in 2000 compared with $8.7 million in 1999. Although
the overall quality of the portfolio remains sound, there was some deterioration
in the quality of leveraged credits in 2000. These constitute a small portion of
total loans.
An analysis of the allowance for credit losses and the provision for credit
losses begins on page 26.
Income Taxes
The Company recognized income tax expense of $340.5 million and $308.3 million
in 2000 and 1999, respectively.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss carryforwards. The Company has a valuation allowance
for the portion of the Company's net deductible temporary differences which are
not expected to be realized. At December 31, 2000, the Company had a net
deferred tax asset of $92.4 million, as compared with a net deferred tax asset
of $120.7 million at December 31, 1999.
Business Segments
As a result of the Republic acquisition, the Company altered its business
segments that it uses to manage operations as of January 1, 2000. Prior year
disclosures have been conformed to the presentation of current segments. The
Company has four distinct segments that it uses for management reporting:
commercial banking, corporate and institutional banking, personal banking and
investment banking and markets. A description of each segment and the
methodologies used to measure financial performance are included in Note 24,
Business Segments, to the financial statements. The following summarizes the
results for each segment.
Average Liabilities/
Average Assets Equity Pretax Income
----------------------------- ---------------------------- ----------------------
2000 1999 1998 2000 1999 1998 2000 1999 1998
------- ------- ------- ------- ------- ------- ----- ---- ----
Segments: in millions
Commercial banking $14,219 $ 7,411 $ 6,782 $ 9,715 $ 6,065 $ 5,495 $ 249 $215 $216
Corporate/institutional
banking 5,703 3,799 1,940 4,814 2,258 1,440 113 132 78
Personal banking 20,527 12,452 12,835 27,931 16,169 15,852 503 374 392
Investment banking/
markets 38,990 8,401 9,323 30,922 6,816 7,160 310 25 26
Other 3,350 2,167 1,967 9,407 2,922 2,900 (267) 26 53
------- ------- ------- ------- ------- ------- ----- ---- ----
Total $82,789 $34,230 $32,847 $82,789 $34,230 $32,847 $ 908 $772 $765
======= ======= ======= ======= ======= ======= ===== ==== ====
16
The principal factor contributing to the increase in total average assets,
liabilities and equity and pretax income for 2000 was the Republic acquisition.
The decrease in pretax income for corporate/institutional banking segment
compared with 1999 reflects a higher provision for credit losses. The increase
in pretax income for personal banking segment compared with 1999 reflects growth
achieved in our domestic wealth management business. The pretax loss for 2000 in
the other segment includes $85.0 million of restructuring costs and $146.1
million of goodwill amortization related to the Republic acquisition.
The acquisition of commercial loans from the HongkongBank late in 1998
contributed to the increase in 1999 pretax income for the corporate/
institutional banking segment compared with 1998. Pretax income for 1999 in the
personal banking segment included a gain of $15.0 million on the sale of a
student loan business while 1998 included gains of $28.1 million from the sale
of certain credit card portfolios. Pretax income for 1999 in the other segment
included a $13.1 million Brazilian tax settlement compared with a $32.7 million
settlement for 1998.
17
BALANCE SHEET REVIEW
Risk Management
The Company's organizational structure includes a Risk Management Committee
comprised of senior officers to oversee the risk management process. This
committee is charged with the review of the internal control framework which
identifies, measures, monitors and controls the risks undertaken by the various
business and support units and the Company as a whole. It is responsible for the
review of all risks associated with significant new products and activities and
their primary internal controls prior to implementation. The spectrum of risks
includes, but is not limited to, liquidity, market, credit, operational, legal
and reputational risk. The Asset and Liability Policy Committee manages the
details of liquidity and interest rate risk. The management of credit risk is
further discussed on page 22.
Asset/Liability Management
The principal objectives of asset/liability management are to ensure adequate
liquidity and to manage exposure to interest rate, currency and other market
risks. In managing these risks, the Company seeks to protect both its income
stream and the value of its assets.
Liquidity management requires maintaining funds to meet customers' borrowing and
deposit withdrawal requirements as well as funding anticipated growth. Interest
rate exposure management seeks to control both the near term and longer term
effects of interest rate movements on net interest income and other correlated
income.
The Company has a variety of available techniques for implementing asset/
liability management decisions. Overall balance sheet strategy is centralized
under the Asset and Liability Policy Committee, comprised of senior officers.
Authority and responsibility for implementation of the Committee's broad
strategy is controlled under a framework of defined balance sheet position
limits.
The Company employs a combination of market rate risk assessment techniques,
principally dynamic simulation modeling, capital at risk analysis, gap analysis
and Value at Risk (VaR) to assess the sensitivity of its earnings and capital
positions to changes in interest rates. In addition, VaR, stress testing and
other analyses are used for trading activities. These techniques take into
consideration all on-balance sheet and off-balance sheet items. In dynamic
simulation modeling, the primary technique currently used, reactions to a range
of possible future positive and negative interest rate movements are projected
with consideration given to known activities and to the behavioral patterns of
specific pools of assets and liabilities in the corresponding rate environments.
The optionality of some instruments such as mortgage backed securities and the
mortgage loan portfolio is taken into consideration. VaR attempts to capture the
potential loss resulting from unfavorable market developments within a given
time horizon (typically 10 days) and given a certain confidence level (99%).
Management of market risk is further discussed on page 31.
18
The Company maintains a strong liquidity position. The size and stability of the
deposit base are complemented by the 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 December 31, 2000.
Wholesale liabilities increased to $18,498 million at December 31, 2000 from
$17,237 million a year ago. The Company also has strong liquidity as a result of
a high level of assets available for immediate sale or pledge including
securities available for sale, trading assets, mortgages and other assets.
Diversification is also a principle employed in asset/liability management. The
Company is an active participant in international banking markets. Managing this
activity requires diversification of the risks among many countries and
counterparties throughout the world. Liabilities, which are primarily interest
bearing deposits and other purchased funds, are obtained from both domestic and
international sources. These sources of funds represent a wide range of
depositors, mostly individuals, and product types. The stability of the funding
base is enhanced by the diversification of the funding sources.
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 requires that all
derivative financial instruments be recognized at fair value on the balance
sheet. To the extent these derivatives qualify for special hedge accounting
under FAS 133, changes in their value may be offset by the corresponding mark to
market of hedged assets, liabilities or firm commitments or for forecasted
transactions, deferred as component of shareholder's equity until the
transaction occurs. The ineffective portion of the change in value of a
derivative in a qualifying hedge relationship and derivative contracts that do
not qualify for hedge accounting under FAS 133 are recognized currently in
earnings.
Increased earnings volatility will result from the on-going mark to market of
certain economically viable derivative contracts that did not satisfy the
requirements of FAS 133, as well as from the hedge ineffectiveness associated
with the qualifying contracts. The Company expects however that it will be able
to continue to pursue its overall asset and liability risk management objectives
using a combination of derivatives and cash instruments.
Interest Rate Sensitivity
The Company is subject to interest rate risk associated with the repricing
characteristics of its balance sheet assets and liabilities. Specifically, as
interest rates change, interest earning assets reprice at intervals that do not
correspond to the maturities or repricing patterns of interest bearing
liabilities. This mismatch between assets and liabilities in repricing
sensitivity results in shifts in net interest income as interest rates move.
To help manage the risks associated with changes in interest rates, and to
optimize net interest income within ranges of interest rate risk that management
considers acceptable, the Company uses off-balance sheet derivative instruments
such as interest rate swaps, options, futures and forwards as hedges to modify
the repricing characteristics of specific on-balance sheet assets and
liabilities.
The following table shows the repricing structure of assets and liabilities as
of December 31, 2000. For assets and liabilities whose cash flows are subject to
change due to movements in interest rates, such as the sensitivity of
19
mortgage loans to prepayments, data is reported based on the earlier of expected
repricing or maturity. The resulting "gaps" are reviewed to assess the potential
sensitivity to earnings with respect to the direction, magnitude and timing of
changes in market interest rates. Data shown is as of one day, and one day
figures can be distorted by temporary swings in assets or liabilities.
Interest Bearing Funds
Noninterest ------------------------------------------
Bearing 0-90 91-180 181-365 Over 1
December 31, 2000 Funds Days Days Days Year Total
----------- ------- ------ ------- ------- -------
in millions
Assets $ 8,221 $37,697 $3,252 $ 4,422 $29,440 $83,032
Liabilities and shareholders'
equity 15,970 43,431 4,173 5,159 14,299 83,032
------- ------- ------ ------- ------- -------
Effect of derivative contracts - 1,329 4,137 (3,336) (2,130) -
------- ------- ------ ------- ------- -------
Gap position $(7,749) $(4,405) $3,216 $(4,073) $13,011 -
======= ======= ====== ======= ======= =======
Liabilities and shareholders' equity at year-end 2000 include time deposits of
$100,000 or more with maturity dates as follows: $2,880 million, 0-90 days; $799
million, 91-180 days; $613 million, 181-365 days, and $228 million over 1 year.
The Company does not use the static "gap" measurement of interest rate risk
reflected in the table above as a primary management tool. See pages 31 through
33 for further description of earnings at risk measurements and dynamic
simulation modeling employed by the Company to manage interest rate risk.
Commercial Loan Maturities and Sensitivity to Changes in Interest Rates
One Over One Over
Year Through Five
December 31, 2000 or Less Five Years Years
------- ---------- ------
in millions
Domestic:
Construction and mortgage loans $ 965 $2,584 $2,097
Other business and financial 7,972 4,309 270
International 2,945 318 251
------- ------ ------
Total $11,882 $7,211 $2,618
======= ====== ======
Loans with fixed interest rates $ 6,156 $2,603 $2,576
Loans having variable interest rates 5,726 4,608 42
------- ------ ------
Total $11,882 $7,211 $2,618
======= ====== ======
The table presents the contractual maturity and interest sensitivity of domestic
commercial and international loans at year-end 2000.
Securities Portfolios
Debt securities that the Company has the ability and intent to hold to maturity
are reported at amortized cost. Securities acquired principally for the purpose
of selling them in the near term are classified as trading securities and
reported at fair value, with unrealized gains and losses included in earnings.
All other securities are classified as available for sale and carried at fair
value, with unrealized gains and losses included in accumulated other
comprehensive income and reported as a separate component of shareholders'
equity.
20
The following table is an analysis of the carrying values of the securities
portfolios at the end of each of the last three years. The Company did not hold
any securities in the held to maturity category at December 31, 1998.
Held to
Available for Sale Maturity
-------------------------------- --------------------
December 31, 2000 1999 1998 2000 1999
------- ------- ------ ------ ------
in millions
U.S. Treasury $ 323 $ 1,522 $1,580 $ - $ -
U.S. Government agency obligations 9,119 16,383 1,913 3,530 4,092
Obligations of U.S. states and
political subdivisions - - - 718 666
Other domestic debt securities 4,653 4,435 569 12 12
Foreign debt securities 2,555 1,805 - - -
Equity securities 687 472 176 - -
------- ------- ------ ------ ------
Total $17,337 $24,617 $4,238 $4,260 $4,770
======= ======= ====== ====== ======
Equity securities in the table above include Federal Reserve Bank and Federal
Home Loan Bank stock totaling $463 million at December 31, 2000, $238 million at
December 31, 1999 and $156 million at December 31, 1998.
The following table reflects the distribution of maturities of debt securities
held at year-end 2000 together with the approximate taxable equivalent yield of
the portfolio. The yields shown are calculated by dividing annual interest
income, including the accretion of discounts and the amortization of premiums,
by the fair value of securities outstanding at December 31, 2000. Yields on
tax-exempt obligations have been computed on a taxable equivalent basis using
applicable statutory tax rates.
Securities - Contractual Final Maturities and Yield
Within After One After Five After
One but Within but Within Ten
Taxable Year Five Years Ten Years Years
equivalent --------------- --------------- --------------- ---------------
basis Amount Yield Amount Yield Amount Yield Amount Yield
- -------------------------- ------ ----- ------ ----- ------ ----- ------ -----
in millions
Available for sale:
U.S. Treasury $ 11 6.11% $ 150 5.16% $ 161 4.34% $ 1 6.65%
U.S. Government agency 85 6.66 1,507 6.08 305 6.92 7,222 6.93
Foreign debt securities 381 3.50 778 6.99 963 8.98 433 7.61
Other debt securities 419 5.25 1,332 6.69 885 6.91 2,017 7.25
---- ---- ------ ---- ------ ---- ------ ----
Total fair value $896 4.65% $3,767 6.45% $2,314 7.59% $9,673 7.03%
---- ---- ------ ---- ------ ---- ------ ----
Total amortized cost $896 $3,768 $2,291 $9,523
==== ==== ====== ==== ====== ==== ====== ====
Held to maturity:
U.S. Government agency $ 11 7.86% $ 54 7.97% $ 566 7.32% $3,027 7.64%
Obligations of U.S.
states and political
subdivisions 22 3.48 46 5.07 118 5.21 561 5.56
Other debt securities - - - - 1 7.50 11 6.57
---- ---- ------ ---- ------ ---- ------ ----
Total fair value $ 33 4.94% $ 100 6.62% $ 685 6.96% $3,599 7.31%
---- ---- ------ ---- ------ ---- ------ ----
Total amortized cost $ 33 $ 99 $ 662 $3,466
==== ==== ====== ==== ====== ==== ====== ====
The maturity distribution of U.S. Government agency obligations and other
securities which include asset-backed securities, primarily mortgages, are based
on the contractual due date of the final payment. These securities have an
anticipated cash flow that includes contractual principal payments and estimated
prepayments generally resulting in shorter average lives than those based on
contractual maturities.
21
Credit Risk Management
The credit approval and policy function is centralized under the control of the
Chief Credit Officer. The structure is designed to emphasize credit decision
accountability, optimize credit quality, facilitate control of credit policies
and procedures and encourage consistency in the approach to, and management of,
the credit process throughout the Company.
The Risk Management Committee is responsible for oversight of the credit risk
profile of the loan portfolio. The Chief Credit Officer is responsible for the
design and management of the credit function including monitoring and making
changes, where appropriate, to written credit policies.
In addition to active supervision and evaluation by lending officers, periodic
reviews of the loan portfolio are made by internal auditors, independent
auditors, the Board of Directors and regulatory agency examiners. These reviews
cover selected borrowers' current financial position, past and prospective
earnings and cash flow, and realizable value of collateral and guarantees. These
reviews also serve as an early identification of problem credits.
Loans Outstanding
The following table provides a breakdown of major loan categories as of year end
for the past five years.
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
in millions
Domestic:
Commercial:
Construction and mortgage loans $ 5,646 $ 5,648 $ 3,096 $ 2,235 $ 2,085
Other business and financial 12,551 12,002 7,803 5,811 5,094
Consumer:
Residential mortgages 15,836 13,241 9,467 10,008 3,632
Credit card receivables 1,232 1,290 1,291 1,780 1,939
Other consumer loans 1,640 1,231 1,319 1,179 1,433
------- ------- ------- ------- -------
36,905 33,412 22,976 21,013 14,183
------- ------- ------- ------- -------
International:
Government and official institutions 302 444 331 345 359
Banks and other financial institutions 852 727 622 65 95
Commercial and industrial 2,359 3,747 120 199 55
------- ------- ------- ------- -------
3,513 4,918 1,073 609 509
------- ------- ------- ------- -------
Total loans $40,418 $38,330 $24,049 $21,622 $14,692
======= ======= ======= ======= =======
In the fourth quarter of 2000, HSBC acquired Credit Commercial de France. As
part of the consolidation of HSBC's commercial banking activities in the U.S.,
the Company acquired a commercial loan portfolio of approximately $500 million
of the New York office of Credit Commercial de France. Additionally, $2.4
billion of commitments to lend were assumed as part of the acquisition.
In the third quarter of 2000, the Company purchased the banking operations of
Chase Manhattan Bank, Panama. Approximately $390 million of consumer and $220
million of commercial loans were acquired from Chase Panama.
As a result of the Republic acquisition, loans increased approximately $14
billion at December 31, 1999 comprised of $6 billion commercial loans, $4
billion residential mortgages and $4 billion international loans. In 1998 the
Company acquired $1.7 billion of commercial loans from the U.S. corporate
22
banking unit of the HongkongBank completing the consolidation of HSBC's
commercial banking activities in the U.S. Credit card portfolios of
approximately $370 million were sold in 1998. Acquisitions in 1997 included a
commercial mortgage portfolio of approximately $400 million and a residential
mortgage portfolio of $5.1 billion.
During 2000, certain operations of non-U.S. branches and subsidiaries of the
Company were transferred to foreign operations of HSBC. Over $1 billion of
international loans were transferred or sold to other HSBC entities.
International loans to banks and other financial institutions included $297
million and $107 million at year ends 2000 and 1999, respectively, to the HSBC
Group. With respect to other business and financial commercial loans, no single
industry group's aggregate borrowings from the Company exceeded 10% of the total
loan portfolio at December 31, 2000.
Problem Loan Management
Borrowers who experience difficulties in meeting the contractual payment terms
of their loans receive special attention. Depending on circumstances, decisions
may be made to cease accruing interest on such loans.
The Company complies with regulatory requirements which mandate that interest
not be accrued on commercial loans with principal or interest past due for a
period of ninety days unless the loan is both adequately secured and in process
of collection. In addition, commercial loans are designated as nonaccruing when,
in the opinion of management, reasonable doubt exists with respect to
collectibility of all interest and principal based on certain factors, including
adequacy of collateral.
Interest that has been recorded but unpaid on loans placed on nonaccruing status
generally is reversed and reduces current income at the time loans are so
categorized. Interest income on these loans may be recognized to the extent of
cash payments received. In those instances where there is doubt as to
collectibility of principal, any cash interest payments received are applied as
principal reductions. Loans are not reclassified as accruing until interest and
principal payments are brought current and future payments are reasonably
assured.
23
Risk Elements in the Loan Portfolio at Year End
2000 1999 1998 1997 1996
------ ---- ----- ----- -----
in millions
Nonaccruing loans:
Domestic:
Construction and other commercial
real estate $ 35 $ 83 $ 104 $ 129 $ 176
Other domestic loans 372 255 233 181 181
------ ---- ----- ----- -----
Subtotal 407 338 337 310 357
International 16 6 - 1 -
------ ---- ----- ----- -----
Total nonaccruing loans 423 344 337 311 357
Other real estate and owned assets 21 14 9 12 14
------ ---- ----- ----- -----
Total nonaccruing loans, other real estate
and owned assets $ 444 $358 $ 346 $ 323 $ 371
====== ==== ===== ===== =====
Ratios:
Nonaccruing loans to total loans 1.05% .90% 1.40% 1.44% 2.43%
Nonaccruing loans, other real estate
and owned assets to total assets .53 .41 1.02 1.02 1.57
------ ---- ----- ----- -----
Accruing loans contractually past due 90 days or
more as to principal or interest (all domestic):
Residential real estate mortgages $ - $ 13 $ 2 $ 1 $ 12
Credit card receivables 1 1 5 33 35
Other consumer loans 12 3 10 10 12
All other 29 23 13 13 16
------ ---- ----- ----- -----
Total accruing loans contractually past
due 90 days or more $ 42 $ 40 $ 30 $ 57 $ 75
====== ==== ===== ===== =====
In certain situations where the borrower is experiencing temporary cash flow
problems, and after careful examination by management, the interest rate and
payment terms may be adjusted from the original contractual agreement. When this
occurs and the revised terms at the time of renegotiation are less than the
Company would be willing to accept for a new loan with comparable risk, the loan
is separately identified as restructured.
Nonaccruing loans at December 31, 2000 totaled $423 million compared with $344
million a year ago. Of the nonaccruing loans at December 31, 2000 over 34% are
less than 30 days past due as to cash payment of principal and interest.
Nonaccruing loans that have been restructured but remain in nonaccruing status
amounted to $8 million, $32 million and $21 million at December 31, 2000, 1999
and 1998, respectively. Cash payments received on loans on nonaccruing status
during 2000, or since loans were placed on nonaccruing status, whichever was
later, totaled $47 million, $24 million of which was recorded as interest income
and $23 million as reduction of loan principal.
Residential mortgages are generally designated as nonaccruing when delinquent
for more than ninety days. Loans to credit card customers that are past due more
than ninety days are designated as nonaccruing if the customer has agreed to
credit counseling. Other consumer loans are generally not designated as
nonaccruing and are charged off against the allowance for credit losses
according to an established delinquency schedule.
The Company identified impaired loans totaling $224 million at December 31, 2000
of which $109 million had an allocation from the allowance of $46 million. At
December 31, 1999, identified impaired loans were $216 million, of which $110
million had an allocation from the allowance of $64 million.
24
Cross-Border Net Outstandings
The following table presents total cross-border net outstandings in accordance
with Federal Financial Institutions Examination Council (FFIEC) guidelines.
Cross-border net outstandings are amounts payable to the Company by residents of
foreign countries regardless of the currency of claim and local country claims
in excess of local country obligations. Excluded from cross-border net
outstandings are, among other things, the following: local country claims funded
by non-local country obligations (U.S. dollar or other non-local currencies),
principally certificates of deposits issued by a foreign branch, where the
providers of funds agree that, in the event of the occurrence of a sovereign
default or the imposition of currency exchange restrictions in a given country,
they will not be paid until such default is cured or currency restrictions
lifted or, in certain circumstances, they may accept payment in local currency
or assets denominated in local currency (hereinafter referred to as constraint
certificates of deposits); and cross-border claims that are guaranteed by cash
or other external liquid collateral. The Company's cross-border net outstandings
excluded $682 million and $545 million of Brazilian assets funded by constraint
certificates of deposit, at December 31, 2000 and 1999, respectively.
Cross-border net outstandings include deposits in other banks, loans,
acceptances, securities available for sale, trading securities, revaluation
gains on foreign exchange and derivative contracts and accrued interest
receivable.
Cross-Border Net Outstandings Which Exceed .75% of Total Assets at Year End
Banks and Other Government and Commercial
Financial Official and
Institutions Institutions Industrial(1) Total
--------------- -------------- ------------ -----
in millions
December 31, 2000:
France $500 $15 $135 $650
Germany 889 6 77 972
United Kingdom 443 8 208 659
December 31, 1999:
Germany 853 15 60 928
United Kingdom 523 1 265 789
December 31, 1998:
France 345 - - 345
United Kingdom 52 - 641 693
==== === ==== ====
(1) Includes excess of local country claims over local country obligations.
25
Allowance for Credit Losses and Charge Offs
At year-end 2000, the allowance was $525 million, or 1.30% of total loans,
compared with $638 million, or 1.66% of total loans, a year ago. The ratio of
the allowance to nonaccruing loans was 124.06% at December 31, 2000 compared
with 185.72% a year earlier.
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
in millions
Total loans at year end $40,418 $38,330 $24,049 $21,622 $14,692
Average total loans 38,966 23,385 21,392 20,049 13,905
Allowance for credit losses:
Balance at beginning of year $ 638.0 $ 379.7 $ 409.4 $ 418.2 $ 477.5
Allowance related to acquired
(sold) businesses (11.3) 268.6 - 40.3 3.4
Charge offs:
Commercial:
Construction and mortgage loans 11.2 - - - -
Other business and financial 173.0 27.0 27.9 28.3 69.8
Consumer:
Residential mortgages 5.2 12.1 10.2 7.7 2.6
Credit card receivables 70.9 86.5 105.0 137.2 97.9
Other consumer loans 10.9 9.5 9.5 13.5 11.2
International 1.8 - - - -
------- ------- ------- ------- -------
Total charge offs 273.0 135.1 152.6 186.7 181.5
------- ------- ------- ------- -------
Recoveries on loans charged off:
Commercial:
Construction and mortgage loans 3.3 - - - 1.1
Other business and financial 14.6 18.3 22.9 31.3 38.3
Consumer:
Residential mortgages 1.0 1.0 .8 1.0 .5
Credit card receivables 10.7 11.6 14.9 14.1 10.2
Other consumer loans 4.5 3.9 4.3 3.8 4.0
International .2 - - - -
------- ------- ------- ------- -------
Total recoveries 34.3 34.8 42.9 50.2 54.1
------- ------- ------- ------- -------
Total net charge offs 238.7 100.3 109.7 136.5 127.4
------- ------- ------- ------- -------
Translation adjustment .6 - - - -
------- ------- ------- ------- -------
Provision charged to income 137.6 90.0 80.0 87.4 64.7
------- ------- ------- ------- -------
Balance at end of year $ 525.0 $ 638.0 $ 379.7 $ 409.4 $ 418.2
------- ------- ------- ------- -------
Allowance ratios:
Total net charge offs to
average loans .61% .43% .51% .68% .92%
Year-end allowance to:
Year-end total loans 1.30 1.66 1.58 1.89 2.85
Year-end total nonaccruing loans 124.06 185.72 112.74 131.62 116.98
======= ======= ======= ======= =======
Charge offs of individual commercial loans and residential mortgages reflect
management's judgment with respect to the ultimate collectibility of all or part
of the specific loan. Charge offs of consumer loans, excluding residential
mortgages, occur according to an established delinquency schedule.
The allowance for credit losses is evaluated based on an assessment of the
losses inherent in the loan portfolio. This assessment results in an allowance
consisting of allocated and unallocated components.
The allocated component of the allowance includes specific reserves resulting
from the analysis of individual loans and formula-based reserves assigned to
pools of similar loans based on historical loss experience for each loan
category. The specific reserves are based on a regular analysis of all
26
significant commercial credits where the internal credit rating is at or below a
predetermined classification. All other commercial loans are grouped into pools
by credit facility grade. Formula reserves are established based on historical
one year default rates for each pool using data from the last eight quarters,
adjusted for known changes in the economic environment and management judgment.
The allocated portion of the allowance also includes management's determination
of the amounts necessary for loan concentrations.
Residential mortgage loans which are more than 90 days past due are individually
analyzed and appropriate specific reserves are assigned. Other residential
mortgages are grouped into pools based on delinquency status and formula
reserves are established to cover, at a minimum, twelve months of historical net
charge offs using data from the past twelve months' pool loss rates.
Other consumer loans, including credit card receivables, are grouped into pools
based on product and delinquency status. Formula reserves are established to
cover, at a minimum, twelve months of historical charge offs.
The unallocated portion of the allowance is determined based on management's
assessment of general economic conditions as well as specific economic factors
in the individual markets in which the Company operates. This determination
inherently involves a higher degree of uncertainty and considers current risk
factors that may not have yet manifested themselves in the Company's historical
loss factors used to determine the allocated component of the allowance, and it
recognizes that knowledge of the portfolio may be incomplete.
An allocation of the allowance by major loan categories follows.
Allocation of Allowance for Credit Losses
2000 1999 1998 1997 1996
------------- -------------- --------------- -------------- ---------------
% of % of % of % of % of
Loans Loans Loans Loans Loans
to to to to to
Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
in millions
Domestic:
Commercial:
Construction and
mortgage loans $ 28 14.0 $ 45 14.8 $ 23 12.8 $ 31 10.4 $ 21 14.2
Other business 163 31.0 163 31.3 62 32.4 53 26.9 75 34.7
Consumer:
Residential mortgages 10 39.2 43 34.5 12 39.4 30 46.3 7 24.7
Credit card receivables 62 3.0 40 3.4 45 5.4 60 8.2 55 13.2
Other consumer 31 4.1 17 3.2 12 5.5 17 5.4 9 9.8
International 117 8.7 116 12.8 31 4.5 26 2.8 26 3.4
Unallocated 114 - 214 - 195 - 192 - 225 -
---- ----- ---- ----- ---- ----- ---- ----- ---- -----
Total $525 100.0 $638 100.0 $380 100.0 $409 100.0 $418 100.0
==== ===== ==== ===== ==== ===== ==== ===== ==== =====
27
The allocations in the table are based on management's current allocation
methodologies. The use of other methods to allocate the allowance would change
the assigned allocation.
Management concludes that the allowance for credit losses, including the
unallocated component, is appropriately stated at December 31, 2000. The U.S.
banking industry continues to carefully assess credit risk considering, among
other things, (1) credit issues still remaining in U.S. consumer banking
businesses, (2) the effect that increasing energy prices will have on bank
customers, and (3) the likelihood of continued economic expansion and the effect
on loan portfolios.
Capital Resources
Total common shareholder's equity at year end 2000 was $6,843 million, compared
with $6,728 million at year end 1999. The equity base increased by $568 million
from net income and reduced by $600 million for common shareholder dividends
paid to HSBC and $28 million for dividends to preferred stock shareholders. The
equity base also increased from the change in unrealized gains on securities
available for sale of $175 million and decreased by $7 million for foreign
currency translation adjustments. The other capital contribution from the parent
of $8 million relates to an HSBC stock option plan in which almost all of the
Company's employees are eligible to participate.
The ratio of common shareholder's equity to total year-end assets was 8.24% at
December 31, 2000 compared with 7.71% at December 31, 1999. Although the
acquisition of Republic was effective December 31, 1999, payment to Republic
shareholders of $7,091 million was delayed, as agreed by the parties to the
transaction in advance, until January 7, 2000 in order to avoid settlement
crossing Year 2000. Had the payment been made at December 31, 1999, the ratio of
common shareholder's equity to total year-end assets would have been 8.39%.
Capital Adequacy
The Federal Reserve Board (FRB) has Risk-Based Capital Guidelines for assessing
the capital adequacy of U.S. banking organizations. The guidelines place balance
sheet assets into four categories of risk weights, primarily based on the
relative credit risk of the counterparty. Some off-balance sheet items such as
letters of credit and loan commitments are taken into account by applying
different categories of "credit conversion factors" to arrive at
credit-equivalent amounts, which are then weighted in the same manner as balance
sheet assets involving similar counterparties. For off-balance sheet items
relating to interest rate and foreign exchange rate contracts, the
credit-equivalent amounts are arrived at by estimating both the current
exposure, mark to market value, and the potential exposure over the remaining
life of each contract. The credit-equivalent amount is similarly assigned to the
risk weight category appropriate to the counterparty.
The guidelines include a measure for market risk inherent in the trading
portfolio. Under the market risk requirements, capital is allocated to support
the amount of market risk that relates to the Company's trading activities
including off-balance sheet derivative contracts associated with trading
activities.
The guidelines include the concept of Tier 1 capital and total capital. The
guidelines establish a minimum standard risk-based target ratio of 8%, of
28
which at least 4% must be in the form of Tier 1 capital. The following table
shows the components of the Company's risk-based capital.
December 31,
-----------------------------
2000 1999
------- -------
in millions
Common shareholder's equity $ 6,726 $ 6,778
Preferred stock 375 375
Guaranteed mandatorily redeemable
preferred securities of subsidiaries 712 710
Less: Goodwill and identifiable intangibles (3,233) (3,309)
Foreign currency translation adjustment (7) (1)
------- -------
Tier 1 capital 4,573 4,553
------- -------
Long-term debt qualifying as risk-
based capital 2,285 2,530
Qualifying aggregate allowance for
credit losses 525 638
45% of unrealized gains on available
for sale equity securities 10 2
------- -------
Tier 2 capital 2,820 3,170
------- -------
Total capital $ 7,393 $ 7,723
======= =======
The capital adequacy guidelines establish a limit on the amount of certain
deferred tax assets that may be included in (that is, not deducted from) Tier 1
capital for risk-based and leverage capital purposes. The deferred tax asset
recognized by the Company meets the criteria for capital recognition and has
been included in the calculation of the Company's capital ratios.
The Company's total risk adjusted assets and off-balance sheet items were
approximately $54.5 billion and $51.2 billion at year ends 2000 and 1999,
respectively. Risk adjusted capital ratios were 8.39% at the Tier 1 level and
13.56% at the total capital level. These ratios compared with 8.89% at the Tier
1 level and 15.08% at the total capital level at December 31, 1999 after being
restated.
Banking industry regulators also have guidelines that set forth the leverage
ratios to be applied to banking organizations in conjunction with the risk-based
capital framework. Under these guidelines, strong bank holding companies must
maintain a minimum leverage ratio of Tier 1 capital to quarterly average total
assets of 3%. At December 31, 2000, the Company had a 5.73% leverage ratio
compared with 14.49% at December 31, 1999 based on quarterly averages after
being restated. Based on period end assets, the ratio was 5.42% at December 31,
1999.
From time to time, the bank regulators propose amendments to or issue
interpretations of risk-based capital guidelines. Such proposals or
interpretations could, upon implementation, affect reported capital ratios and
net risk adjusted assets.
29
Republic Acquisition
As mentioned, the Company acquired Republic on December 31, 1999. The pro forma
combined income statement for the year ended December 31, 1999 reflects the
combination of historical operating results of the Company and Republic and
includes the amortization of necessary acquisition adjustments as if the
combination had taken place at the beginning of 1999. Historical adjustments
have been made to reflect restatement of 1999 Republic results to exclude
activity related to HRH and a Bahamian subsidiary divested in 2000 as part of
the reorganization of HSBC's internal international private banking operations.
Historical Amortization
------------------- of
HSBC Republic Historical Acquisition Pro Forma
Year Ended December 31, 1999 USA Inc. NY Corp. Adjustments Adjustments Combined
------- -------- ----------- ----------- ---------
in millions
Net interest income $1,226 $1,044 $ (48) $ 29 $2,251
Provision for credit losses 90 12 - - 102
------ ------ ----- ----- ------
Net interest income after
provision for credit losses 1,136 1,032 (48) 29 2,149
Other operating income 464 628 (208) (4) 880
------ ------ ----- ----- ------
1,600 1,660 (256) 25 3,029
Operating expenses 828 1,086 (12) 150 2,052
------ ------ ----- ----- ------
Income before taxes 772 574 (244) (125) 977
Income tax expense (benefit) 308 156 (83) (6) 375
------ ------ ----- ----- ------
Net income $ 464 $ 418 $(161) $(119) $ 602
====== ====== ===== ===== ======
The pro forma information may not be indicative of the results that actually
would have occurred if the purchase had been consummated on January 1, 1999 or
which may be obtained in the future. While the Company expects to achieve
certain operating cost savings as a result of the combination, no adjustment has
been included in the pro forma amounts for anticipated operating cost savings or
revenue enhancements. No adjustment has been made for the costs of integrating
businesses. Certain other foreign operations, not adjusted for in the pro forma
results above, were transferred to other HSBC Group members or are expected to
be transferred in the future.
Further, both the Company and Republic recognized certain one-time items in
their 1999 operating results. Pretax results for the Company included settlement
with the U.S. Internal Revenue Service on Brazilian tax credits of $13.1 million
and a gain on the sale of a student loan business of $15.0 million partially
offset by an acquisition related restructuring charge of $26.7 million.
Republic's 1999 pretax operating results included restructuring charges of $97.0
million (unrelated to the acquisition by the Company) partially offset by a gain
of $69.8 million relating to a real estate investment. Republic also benefited
in 1999 from securities gains and foreign exchange income related to Russia and
Brazil. These positions have been exited.
See Note 2 for an analysis of Republic goodwill at December 31, 2000. The
projected annual goodwill amortization expense related to Republic going forward
will be $149 million. This projected amortization is subject to change if
Republic assets and liabilities are subsequently sold.
30
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
In consideration of the degree of interest rate risk inherent in the banking
industry, the Company has interest rate risk management policies designed to
meet performance objectives within defined risk/safety parameters. In the course
of managing interest rate risk, a combination of risk assessment techniques,
including dynamic simulation modeling, gap analysis, and capital at risk
analysis are employed. The combination of these tools enables management to
identify and assess the potential impact of interest rate movements and take
appropriate action.
Certain limits and benchmarks that serve as guidelines in determining the
appropriate levels of interest rate risk for the institution have been
established. One such limit is expressed in terms of the Present Value of a
Basis Point (PVBP), which reflects the change in value of the balance sheet for
a one basis point movement in all interest rates. The institutional PVBP limit
as of December 31, 2000 was plus or minus $4.3 million, which includes distinct
limits associated with trading portfolio activities and off-balance sheet
instruments. Thus, for a one basis point change in interest rates, the policy
dictates that the value of the balance sheet shall not change by more than $4.3
million. As of December 31, 2000, the Company had a position of $(3.7) million
PVBP. Mortgage servicing rights are excluded from the PVBP determination as
their interest rate risk is significantly different from other balance sheet
items. The mortgage servicing rights risk is to lower interest rates, which is
managed through the purchase of appropriate hedges.
The Company also monitors changes in value of the balance sheet for large
movements in interest rates with an overall limit of +/- 10%, after tax, change
from the base case for a 200 basis point gradual rate movement. As of December
31, 2000, for a gradual 200 basis point increase in rates, the value was
projected to drop by 6.2% and for a 200 basis point gradual decrease in rates,
value was projected to drop by 8.2% were no management actions ever taken to
manage exposures to the changing environment.
In addition to the above mentioned limits, the Company's Asset and Liability
Policy Committee monitors, on a monthly basis, the impact of a number of
interest rate scenarios on net interest income. These scenarios include both
rate shock scenarios which assume immediate market rate movements of +/- 10% and
200 basis points, as well as rate change scenarios in which rates rise or fall
by 200 basis points over a twelve month period. The individual limit for such
gradual 200 basis point movements is currently +/- 10%, pretax, of base case
earnings over a twelve month period. Simulations are also performed for other
relevant interest rate scenarios including immediate rate movements and changes
in the shape of the yield curve or in competitive pricing policies. Net interest
income under the various scenarios is reviewed over a twelve month period, as
well as over a three year period. The simulations capture the effects of the
timing of the repricing of all on-balance sheet assets and liabilities, as well
as all off-balance sheet positions such as interest rate swaps, futures and
option contracts. Additionally, the simulations incorporate any behavioral
aspects such as prepayment sensitivity under various scenarios.
For purposes of simulation modeling, base case earnings reflect the existing
balance sheet composition, with balances generally maintained at current levels
by the anticipated reinvestment of expected runoff. These balance sheet levels
will however, factor in specific known or likely changes including material
increases, decreases or anticipated shifts in balances due to management
actions. Current rates and spreads are then applied to produce
31
base case earnings estimates on both a twelve month and three year time horizon.
Rate shocks are then modeled and compared to base earnings (earnings at risk),
and include behavioral assumptions as dictated by specific scenarios relating to
such factors as prepayment sensitivity and the tendency of balances to shift
among various products in different rate environments. It is assumed that no
management actions are taken to manage exposures to the changing environment
being simulated.
Utilizing these modeling techniques, a gradual 200 basis point parallel rise and
fall in the yield curve on January 1, 2001 would cause projected 2001 net
interest income to decrease by $19 million and increase by $17 million,
respectively. This +/- 2% change is well within the Company's +/- 10% limit. An
immediate 100 basis point parallel rise and fall in the yield curve on January
1, 2001, would cause projected 2001 net interest income to decrease by $36
million and increase by $5 million, respectively. A 200 basis point parallel
rise and fall would decrease projected net interest income by $23 million and
$78 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.
Management of Primary Market Risk Exposures
The primary market risk to the Company's earnings associated with its investing,
lending and borrowing activities historically lies in exposure to sudden and
drastic shifts in interest rates. Management of these risks is undertaken with
the overall objective of meeting the Company's overall performance objectives
within defined risk and safety parameters. The strategies employed reflect the
goal of minimizing exposure to sudden and drastic upward and downward movements
in rates. These strategies entail the use of both on- and off-balance sheet
instruments to effectively mitigate the risk inherent in the balance sheet.
In addition to interest rate risk, the Company has an exposure to certain other
market risks including fluctuations in foreign currency exchange rates and
changes in global commodity and precious metals prices. Risk management
practices reflect these changes in on- and off-balance sheet positions.
Trading Activities
The trading portfolios have distinct 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 portfolio. 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
32
(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%). It involves historical simulation of the changes
in value of the portfolios based upon scenarios that reflect movements in
various market variables covering each risk asset class dating back two years.
The correlation between different markets and risk factors is implicitly
captured in historical scenarios.
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 will be compared to the actual result from trading
activities.
The VaR model incorporates estimates of the specific risk associated with
certain securities traded by the Company. This includes elements such as spread
risk on sovereign or corporate debt which is modeled through historical
simulation of the relevant portfolio to past changes on spreads of U.S. treasury
securities. Specific risk models are continually tested to alert risk management
immediately to any shift in their relevance.
On a historical simulation approach, trading VaR at December 31, 2000 was $11.7
million compared with $14.5 million at December 31, 1999. The maximum during
2000 was $37.1 million, the minimum $9.3 million and the average $18.8 million.
The scope of the calculation of VaR was refined at June 30, 2000, following a
review of its basis, to be more consistent with that of the rest of HSBC.
The following table presents the maximum, minimum and average on a historical
simulation approach for each half year of 2000.
First Half Second Half
2000 2000
---------- -----------
in millions
Maximum in the half year $37.1 $19.1
Minimum in the half year 12.5 9.3
Average for the half year 22.7 13.6
----- -----
33
Item 8. Financial Statements and Supplementary Data
Page
Report of Management 35
Report of Independent Auditors 36
HSBC USA Inc.:
Consolidated Balance Sheet 37
Consolidated Statement of Income 38
Consolidated Statement of Changes in
Shareholders' Equity 39
Consolidated Statement of Cash Flows 40
HSBC Bank USA:
Consolidated Balance Sheet 41
Summary of Significant Accounting Policies 42
Notes to Financial Statements 47
34
REPORT OF MANAGEMENT
Management of HSBC USA Inc. is responsible for the integrity of the financial
information presented in this annual report. Management has prepared the
financial statements in conformity with accounting principles generally accepted
in the United States of America. In preparing the financial statements,
management makes judgments and estimates of the expected effect of unsettled
transactions and events that are accounted for or disclosed.
The Company's systems of internal accounting control are designed to provide
reasonable but not absolute assurance that assets are safeguarded against loss
from unauthorized acquisition, use or disposition and that the financial records
are reliable for preparing financial statements. The selection and training of
qualified personnel and the establishment and communication of accounting and
administrative policies and procedures are elements of these control systems.
Management believes that the system of internal control, which is subject to
close scrutiny by management and by internal auditors, supports the integrity
and reliability of the financial statements.
The Board of Directors or their committees meet regularly with management,
internal auditors and the independent auditors to discuss internal control,
internal auditing and financial reporting matters, and also the scope of the
annual audit and interim reviews. Both the internal auditors and the independent
auditors have direct access to the Board of Directors.
35
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders of HSBC USA Inc.
We have audited the accompanying consolidated balance sheets of HSBC USA Inc.
and subsidiaries as of December 31, 2000 and 1999, and the related consolidated
statements of income, changes in shareholders' equity, and cash flows for each
of the years in the three year period ended December 31, 2000, and the
accompanying consolidated balance sheets of HSBC Bank USA and subsidiaries as of
December 31, 2000 and 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of HSBC USA Inc. and
subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the years in the three year period
ended December 31, 2000, and the financial position of HSBC Bank USA and
subsidiaries as of December 31, 2000 and 1999, in conformity with accounting
principles generally accepted in the United States of America.
/s/ KPMG LLP
February 13, 2001
New York, New York
36
HSBC USA Inc. 2000
CONSOLIDATED BALANCE SHEET
December 31, 2000 1999*
------------ ------------
in thousands
Assets
Cash and due from banks $ 1,860,713 $ 1,959,213
Interest bearing deposits with banks 5,129,490 4,137,571
Federal funds sold and securities
purchased under resale agreements 1,895,492 2,318,361
Trading assets 5,770,972 4,515,009
Securities available for sale 17,336,832 24,617,319
Securities held to maturity
(fair value $4,417,251 and $4,770,087) 4,260,492 4,770,087
Loans 40,417,847 38,330,464
Less - allowance for credit losses 524,984 637,995
------------ ------------
Loans, net 39,892,863 37,692,469
Premises and equipment 787,721 744,581
Accrued interest receivable 785,287 696,539
Equity investments 55,596 47,931
Goodwill and other acquisition intangibles 3,233,133 3,307,147
Other assets 2,023,221 2,446,674
------------ ------------
Total assets $ 83,031,812 $ 87,252,901
============ ============
Liabilities
Deposits in domestic offices
Noninterest bearing $ 5,114,668 $ 5,979,189
Interest bearing 30,631,511 29,393,957
Deposits in foreign offices
Noninterest bearing 282,737 187,099
Interest bearing 20,004,300 20,864,209
------------ ------------
Total deposits 56,033,216 56,424,454
------------ ------------
Trading account liabilities 2,766,825 2,437,315
Short-term borrowings 8,562,363 5,210,708
Interest, taxes and other liabilities 3,230,103 2,976,590
Payable to shareholders of acquired company - 7,091,209
Subordinated long-term debt and perpetual
capital notes 3,027,014 3,427,649
Guaranteed mandatorily redeemable securities 711,737 710,259
Other long-term debt 1,357,904 1,747,131
------------ ------------
Total liabilities 75,689,162 80,025,315
------------ ------------
Shareholders' equity
Preferred stock 500,000 500,000
Common shareholder's equity
Common stock, $5 par; Authorized - 1,100 shares
Issued - 704 shares 4 4
Capital surplus 6,114,484 6,106,538
Retained earnings 611,343 671,578
Accumulated other comprehensive income (loss) 116,819 (50,534)
------------ ------------
Total common shareholder's equity 6,842,650 6,727,586
------------ ------------
Total shareholders' equity 7,342,650 7,227,586
------------ ------------
Total liabilities and shareholders' equity $ 83,031,812 $ 87,252,901
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
*Restated to exclude investments transferred to HSBC North America Inc. during
2000. See Note 1 for further discussion.
37
HSBC USA Inc. 2000
CONSOLIDATED STATEMENT OF INCOME
Year Ended December 31, 2000 1999 1998
----------- ----------- -----------
in thousands
Interest income
Loans $ 3,072,830 $ 1,841,396 $ 1,785,122
Securities 1,580,606 214,480 232,440
Trading assets 140,455 50,627 50,843
Other short-term investments 523,693 213,536 264,576
----------- ----------- -----------
Total interest income 5,317,584 2,320,039 2,332,981
----------- ----------- -----------
Interest expense
Deposits 2,333,503 852,875 867,391
Short-term borrowings 444,718 129,604 204,171
Long-term debt 420,298 111,654 96,079
----------- ----------- -----------
Total interest expense 3,198,519 1,094,133 1,167,641
----------- ----------- -----------
Net interest income 2,119,065 1,225,906 1,165,340
Provision for credit losses 137,600 90,000 80,000
----------- ----------- -----------
Net interest income, after
provision for credit losses 1,981,465 1,135,906 1,085,340
----------- ----------- -----------
Other operating income
Trust income 84,906 52,212 47,290
Service charges 172,257 128,598 115,382
Mortgage banking revenue 32,484 30,455 43,153
Other fees and commissions 300,388 167,595 145,505
Trading revenues 140,192 10,014 3,700
Security gains, net 28,839 10,098 13,855
Interest on Brazilian tax
settlement - 13,143 32,700
Other income 73,372 51,854 58,512
----------- ----------- -----------
Total other operating income 832,438 463,969 460,097
----------- ----------- -----------
2,813,903 1,599,875 1,545,437
----------- ----------- -----------
Other operating expenses
Salaries and employee benefits 979,638 421,334 410,323
Occupancy expense, net 168,950 88,950 89,423
Goodwill amortization 176,162 33,328 37,747
Other expenses 581,149 284,251 242,777
----------- ----------- -----------
Total other operating expenses 1,905,899 827,863 780,270
----------- ----------- -----------
Income before taxes 908,004 772,012 765,167
Applicable income tax expense 340,500 308,300 238,100
----------- ----------- -----------
Net income $ 567,504 $ 463,712 $ 527,067
=========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
38
HSBC USA Inc. 2000
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
2000 1999 1998
----------- ----------- -----------
in thousands
Preferred stock
Balance, January 1, $ 500,000 $ - $ -
Stock assumed in acquisition - 500,000 -
----------- ----------- -----------
Balance, December 31, 500,000 500,000 -
----------- ----------- -----------
Common stock
Balance, January 1, 4 5 5
Redemption of stock - (1) -
----------- ----------- -----------
Balance, December 31, 4 4 5
----------- ----------- -----------
Capital surplus
Balance, January 1, 6,106,538 1,806,563 1,804,527
Capital contribution from parent
Related to Republic acquisition* - 7,088,108 -
Related to other merger - 22,145 -
Return of capital* - (2,813,575) -
Other 7,946 3,297 2,036
----------- ----------- -----------
Balance, December 31, 6,114,484 6,106,538 1,806,563
----------- ----------- -----------
Retained earnings
Balance, January 1, 671,578 377,179 205,112
Net income 567,504 463,712 527,067
Accumulated deficit assumed in other merger - (14,313) -
Cash dividends declared:
Preferred stock (27,739) - -
Common stock (600,000) (155,000) (355,000)
----------- ----------- -----------
Balance, December 31, 611,343 671,578 377,179
----------- ----------- -----------
Accumulated other comprehensive income
Balance, January 1, (50,534) 44,506 29,309
Other comprehensive income (loss) 167,353 (95,040) 15,197
----------- ----------- -----------
Balance, December 31, 116,819 (50,534) 44,506
----------- ----------- -----------
Total shareholders' equity, December 31, $ 7,342,650 $ 7,227,586 $ 2,228,253
=========== =========== ===========
Comprehensive income
Net income $ 567,504 $ 463,712 $ 527,067
Other comprehensive income (loss) 167,353 (95,040) 15,197
----------- ----------- -----------
Comprehensive income $ 734,857 $ 368,672 $ 542,264
=========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
*See Notes 1 and 2 for further discussion.
39
HSBC USA Inc. 2000
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31, 2000 1999* 1998
------------ ------------ ------------
in thousands
Cash flows from operating activities
Net income $ 567,504 $ 463,712 $ 527,067
Adjustments to reconcile net income to
net cash provided (used) by operating
activities
Depreciation, amortization and
deferred taxes 374,400 68,063 85,752
Provision for loan losses 137,600 90,000 80,000
Net change in other accrual accounts (5,975) 118,406 (60,602)
Net change in loans originated for sale (1,345,756) 698,978 (789,258)
Net change in trading assets and
liabilities (913,046) (193,731) 10,663
Other, net (113,572) (92,693) (107,775)
------------ ------------ ------------
Net cash provided (used) by operating
activities (1,298,845) 1,152,735 (254,153)
------------ ------------ ------------
Cash flows from investing activities
Net change in interest bearing deposits
with banks (813,245) 653,135 269,460
Net change in short-term investments 422,869 (2,571,317) 411,073
Purchases of securities held to maturity (58,720) -- --
Proceeds from maturities of securities
held to maturity 580,539 -- --
Purchases of securities available for
sale (14,624,091) (2,437,512) (2,423,032)
Proceeds from sales of securities
available for sale 8,795,549 2,061,740 1,421,318
Proceeds from maturities of securities
available for sale 13,042,069 1,160,406 803,463
Payment to shareholders of acquired
company (7,091,209) -- --
Net change in credit card receivables 24,768 (25,200) 37,422
Net change in other short-term loans 152,205 168,130 (212,732)
Net originations and maturities of
long-term loans (156,955) (298,541) (253,219)
Sales of loans 169,234 -- 395,148
Expenditures for premises and equipment (108,157) (30,898) (21,255)
Net cash provided (used) in acquisitions,
net of cash acquired (585,756) 810,714 (1,619,278)
Other, net 626,105 (53,579) (35,359)
------------ ------------ ------------
Net cash provided (used) by investing
activities 375,205 (562,922) (1,226,991)
------------ ------------ ------------
Cash flows from financing activities
Net change in deposits (1,115,254) 964,029 3,357,242
Net change in short-term borrowings 3,351,655 (692,644) (1,103,060)
Issuance of long-term debt 659,338 400,407 500,000
Repayment of long-term debt (1,448,855) (409,815) (459,306)
Dividends paid (621,744) (155,000) (480,000)
------------ ------------ ------------
Net cash provided by financing activities 825,140 106,977 1,814,876
------------ ------------ ------------
Net change in cash and due from banks (98,500) 696,790 333,732
Cash and due from banks at beginning of
year 1,959,213 1,262,423 928,691
------------ ------------ ------------
Cash and due from banks at end of year $ 1,860,713 $ 1,959,213 $ 1,262,423
============ ============ ============
Cash paid for: Interest $ 3,238,257 $ 1,115,201 $ 1,136,748
Income taxes 444,058 222,765 208,191
Non-cash activities:
Fair value of assets acquired 851,930 48,328,158 1,711,227
Fair value of liabilities
assumed 764,438 44,033,905 91,949
------------ ------------ ------------
Net assets acquired 87,492 4,294,253 1,619,278
------------ ------------ ------------
The accompanying notes are an integral part of the consolidated financial
statements.
* Restated to exclude investments transferred to HSBC North America Inc. during
2000. See Note 1 for further discussion.
40
HSBC Bank USA 2000
CONSOLIDATED BALANCE SHEET
December 31, 2000 1999*
------------ ------------
in thousands
Assets
Cash and due from banks $ 1,856,372 $ 1,952,552
Interest bearing deposits with banks 4,402,749 3,709,683
Federal funds sold and securities
purchased under resale agreements 1,895,492 2,318,361
Trading assets 5,468,281 4,194,067
Securities available for sale 16,372,529 17,046,153
Securities held to maturity
(fair value $4,252,601 and $4,633,923) 4,102,701 4,633,923
Loans 40,209,326 38,229,738
Less - allowance for credit losses 499,234 624,450
------------ ------------
Loans, net 39,710,092 37,605,288
Premises and equipment 773,407 735,997
Accrued interest receivable 777,765 686,932
Equity investments 22,618 19,038
Goodwill and other acquisition intangibles 2,530,111 2,761,339
Other assets 2,145,870 2,248,481
------------ ------------
Total assets $ 80,057,987 $ 77,911,814
============ ============
Liabilities
Deposits in domestic offices
Noninterest bearing $ 4,903,846 $ 5,849,039
Interest bearing 30,631,511 29,393,958
Deposits in foreign offices
Noninterest bearing 282,737 187,099
Interest bearing 21,077,831 23,444,749
------------ ------------
Total deposits 56,895,925 58,874,845
------------ ------------
Trading account liabilities 2,780,237 2,424,556
Short-term borrowings 7,799,277 4,236,681
Interest, taxes and other liabilities 2,728,396 2,419,419
Subordinated long-term debt and perpetual
capital notes 1,539,070 1,648,278
Other long-term debt 1,253,641 1,642,063
------------ ------------
Total liabilities 72,996,546 71,245,842
------------ ------------
Shareholder's equity
Common shareholder's equity
Common stock, $100 par;
Authorized - 2,250,000 shares
Issued - 2,050,001 shares 205,000 205,000
Capital surplus 6,377,255 6,369,308
Retained earnings 374,362 144,557
Accumulated other comprehensive income (loss) 104,824 (52,893)
------------ ------------
Total shareholder's equity 7,061,441 6,665,972
------------ ------------
Total liabilities and shareholder's equity $ 80,057,987 $ 77,911,814
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
* Restated to exclude investments transferred to HSBC North America Inc. during
2000. See Note 1 for further discussion.
41
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
HSBC USA Inc. (the Company), is a New York State based bank holding company. All
of the common stock of the Company is owned by HSBC North America Inc. (HNAI),
an indirect wholly owned subsidiary of HSBC Holdings plc (HSBC).
The accounting and reporting policies of the Company and its subsidiaries,
including its principal subsidiary, HSBC Bank USA (the Bank), conform to
generally accepted accounting principles and to predominant practice within the
banking industry. The preparation of financial statements in conformity with
generally accepted accounting principles requires the use of estimates and
assumptions relating principally to unsettled transactions and events as of the
date of the financial statements. Accordingly, upon settlement, actual results
may differ from estimated amounts.
The following is a description of the significant policies and practices.
Principles of Consolidation
The financial statements of the Company and the Bank are consolidated with those
of their respective wholly owned subsidiaries. All material intercompany
transactions and balances have been eliminated. Investments in companies in
which the percentage of ownership is at least 20%, but not more than 50%, are
generally accounted for under the equity method and reported as equity
investments.
Foreign Currency Translation
The accounts of the Company's foreign operations are measured using local
currency as the functional currency. Assets and liabilities are translated into
United States dollars at period end exchange rates. Income and expense accounts
are translated at average monthly exchange rates. Net exchange gains or losses
resulting from such translation are included in accumulated other comprehensive
income and reported as a separate component of shareholders' equity.
Resale and Repurchase Agreements
The Company enters into purchases of securities under agreements to resell
("resale agreements") and sales of securities under agreements to repurchase
("repurchase agreements") of substantially identical securities. Resale
agreements and repurchase agreements are generally accounted for as secured
lending and secured borrowing transactions, respectively.
The amounts advanced under resale agreements and the amounts borrowed under
repurchase agreements are carried on the consolidated balance sheet at the
amount advanced or borrowed. Interest earned on resale agreements and interest
paid on repurchase agreements are reported as interest income and interest
expense, respectively. The Company offsets resale and repurchase agreements
executed with the same counterparty under legally enforceable netting agreements
that meet the applicable netting criteria. The Company takes possession of
securities purchased under resale agreements. The market value of the securities
subject to the resale and repurchase agreements are regularly monitored to
ensure appropriate collateral coverage of these secured financing transactions.
42
Securities
Debt securities that the Company has the ability and intent to hold to maturity
are reported at cost, adjusted for amortization of premiums and accretion of
discounts. Securities acquired principally for the purpose of selling them in
the near term are classified as trading assets and reported at fair value, with
unrealized gains and losses included in earnings. All other securities are
classified as available for sale and carried at fair value, with unrealized
gains and losses, net of related income taxes, included in accumulated other
comprehensive income and reported as a separate component of shareholders'
equity.
Realized gains and losses on sales of securities are computed on a specific
identified cost basis and are reported within other income in the consolidated
statement of income. Adjustments of trading assets to fair value and gains and
losses on the sale of such securities are recorded in trading revenues.
Loans
Loans are stated at their principal amount outstanding, net of unearned income,
purchase premium or discount, unamortized nonrefundable fees and related direct
loan origination costs. Loans held for sale are carried at the lower of
aggregate cost or market value. Interest income is recorded based on methods
that result in level rates of return over the terms of the loans.
Commercial loans are categorized as nonaccruing when, in the opinion of
management, reasonable doubt exists with respect to collectibility of interest
or principal based on certain factors including period of time past due
(principally ninety days) and adequacy of collateral. At the time a loan is
classified as nonaccruing, any accrued interest recorded on the loan is
generally reversed and charged against income. Interest income on these loans is
recognized only to the extent of cash received. In those instances where there
is doubt as to collectibility of principal, any interest payments received are
applied to principal. Loans are not reclassified as accruing until interest and
principal payments are brought current and future payments are reasonably
assured.
Residential mortgages are generally designated as nonaccruing when delinquent
for more than ninety days. Loans to credit card customers that are past due more
than ninety days are designated as nonaccruing if the customer has agreed to
credit counseling. Other consumer loans are generally not designated as
nonaccruing and are charged off against the allowance for credit losses
according to an established delinquency schedule.
Loans, other than those included in large groups of smaller balance homogenous
loans, are considered impaired when, based on current information, it is
probable that the Company will be unable to collect all amounts due according to
the contractual terms of the loan agreement. Impaired loans are valued at the
present value of expected future cash flows, discounted at the loan's original
effective interest rate or, as a practical expedient, at the loan's observable
market price or the fair value of the collateral if the loan is collateral
dependent.
Restructured loans are loans for which the original contractual terms have been
modified to provide for terms that are less than the Company would be willing to
accept for new loans with comparable risk because of a deterioration in the
borrowers' financial condition. Interest on these loans is accrued at the
renegotiated rates.
43
Loan Fees
Nonrefundable fees and related direct costs associated with the origination or
purchase of loans are deferred and netted against outstanding loan balances. The
amortization of net deferred fees and costs are recognized in interest income,
generally by the interest method, based on the estimated lives of the loans.
Nonrefundable fees related to lending activities other than direct loan
origination are recognized as other income over the period the related service
is provided. This includes fees associated with the issuance of loan commitments
where the likelihood of the commitment being exercised is considered remote. In
the event of the exercise of the commitment, the remaining unamortized fee is
recognized in interest income over the loan term using the interest method.
Other credit-related fees, such as standby letter of credit fees, loan
syndication and agency fees and annual credit card fees are recognized as other
operating income over the period the related service is performed.
Allowance for Credit Losses
The allowance for credit losses is that amount believed adequate to absorb
estimated credit losses in the loan portfolios based on management's evaluation
of various factors including overall growth in the portfolios, an analysis of
individual credits, adverse situations that could affect a borrower's ability to
repay (including the timing of future payments), prior and current loss
experience, and current economic conditions. A provision for credit losses is
charged to operations based on management's periodic evaluation of these and
other pertinent factors.
Mortgage Servicing Rights
Mortgage servicing rights (MSRs) represent the right to service loans for
others, whether acquired directly or in conjunction with the acquisition of
mortgage loan assets. As originated or purchased loans are sold or securitized,
their total cost is allocated between MSRs and the loans, based on relative fair
values.
MSRs are amortized over the expected life of the loans serviced, including
expected prepayments, using a method that approximates the level yield method.
As interest rates decline, prepayments generally accelerate, thereby reducing
future net servicing cash flows from the mortgage portfolio. The carrying value
of the MSRs is periodically evaluated for impairment based on the difference
between the carrying value of such rights and their current fair value. For
purposes of measuring impairment, which is recorded through the use of a
valuation reserve, MSRs are stratified based upon interest rates and whether
such rates are fixed or variable and other loan characteristics. The evaluation
of future net servicing income is based on a discounted and disaggregated
(individual portfolio) methodology.
Goodwill and Other Acquisition Intangibles
Goodwill, representing the excess of purchase price over the fair value of net
assets acquired, results from purchase acquisitions made by the Company.
Goodwill and other acquisition intangibles are amortized over the estimated
periods to be benefited, under the straight-line method, not exceeding 20 years.
44
The Company reviews its goodwill and other acquisition intangibles periodically
for other than temporary impairment. If such impairment is indicated,
recoverability of the asset is assessed based on expected undiscounted net cash
flows.
Income Taxes
The Company and its subsidiaries file a consolidated federal income tax return.
Taxes of each subsidiary of the Company are generally determined on the basis of
filing separate returns.
Deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, as well as the estimated future tax consequences attributable to net
operating loss and tax credit carryforwards. A valuation allowance is
established if, based on available evidence, it is more likely than not that
some portion or all of the deferred tax asset will not be realized. Foreign
taxes paid are applied as credits to reduce federal income taxes payable.
Derivative Financial Instruments
Derivatives used by the Company include futures, forwards, swaps, caps, floors
and options in the interest rate, foreign exchange and precious metals markets.
The Company uses these instruments for trading purposes and as part of its asset
and liability management activities.
Derivatives that are used for trading purposes or are linked to other trading
instruments are carried on a mark to market basis with the resultant gains and
losses from trading and foreign exchange activities aggregated as trading
revenue. Unrealized gains and the balances of unamortized option premiums paid
are included in trading account assets while unrealized losses and the
unamortized balances of option premiums received are included in trading account
liabilities.
Foreign exchange trading positions are revalued daily by pricing spot foreign
exchange and forward contracts for foreign exchange at prevailing rates.
The Company is involved in various precious metals activities including
arbitrage, purchases and sales of precious metals for forward delivery, options
on precious metals and precious metals lending and borrowing. Precious metals
inventory, outstanding open positions in contracts for forward delivery, options
contracts and precious metals loans and borrowings will be revalued monthly at
prevailing market rates. Precious metals interest arbitrage balances are
recorded at cost, with the difference between the fixed forward contract price
and cost to be accreted into trading revenue ratably over the life of the
contracts.
The Company uses a variety of derivative instruments to manage interest rate
risk in conjunction with its asset and liability management process. Risk is
managed by achieving a mix of derivative instruments and balance sheet assets
and liabilities deemed consistent with expectations of interest rate movements,
balance sheet changes and risk management strategies.
These instruments follow either the synthetic alteration or hedge model of
accounting with cash flows recognized on an accrual basis as an adjustment to
the interest income or interest expense associated with the balance sheet items
being synthetically altered or hedged. Derivatives hedging available for sale
investment securities are marked to market through other
45
comprehensive income on a basis consistent with the underlying hedged item.
Under both the synthetic alteration and hedge accounting models, derivative
instruments are linked to specific individual assets or liabilities or pools of
similar assets or liabilities by the notional and interest rate characteristics
of the associated instruments.
Under the hedge accounting model, it must be demonstrated that the hedged asset,
liability or event being hedged exposes the enterprise to price or interest rate
risk and that the related derivative reduces that risk. Accordingly there must
be high correlation between changes in the market value of the derivative and
the market value or cash flows associated with the hedged items so that it is
probable that the results of the derivative will substantially offset the
effects of price or interest rate movement on the hedged item.
Derivatives that cease to qualify for synthetic alteration or hedge accounting
are marked to market prospectively through current period earnings with any
unrealized gains or losses at that time being deferred and amortized over the
life of the original hedge. When the altered or hedged position is liquidated,
any deferred amounts are immediately recognized in earnings. Gains or losses
realized on terminated derivatives that were used as hedges are deferred and
amortized over the life of the hedged item.
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 requires that all
derivative financial instruments be recognized at fair value on the balance
sheet. To the extent these derivatives qualify for special hedge accounting
under FAS 133, changes in their value may be offset by the corresponding mark to
market of hedged assets, liabilities or firm commitments or for forecasted
transactions, deferred as component of shareholder's equity until the
transaction occurs. The ineffective portion of the change in value of a
derivative in a qualifying hedge relationship and derivative contracts that do
not qualify for hedge accounting under FAS 133 are recognized currently in
earnings.
The Company will record an aftertax one-time transitional charge of $.5 million
in its consolidated statement of income and record an aftertax unrealized
transitional loss of $7.7 million as a component of accumulated other
comprehensive income as a result of the initial adoption. This includes a $10.5
million unrealized loss related to the transfer of $189.9 million of held to
maturity investment securities reclassified to available for sale investment
securities on January 1, 2001, as was permitted upon transition to FAS 133.
46
NOTES TO FINANCIAL STATEMENTS
Note 1. Divestitures
In December 2000, as part of an internal international reorganization of the
HSBC Group's global private banking operations, the Company distributed its 49%
interest in HSBC Republic Holdings (Luxembourg) S.A. (HRH) from the Bank to its
parent HSBC North America Inc. (HNAI). The distribution, in the form of a return
of capital of $2.8 billion, included its investment in HSBC Investments
(Bahamas) Limited in addition to the $2.5 billion investment in HRH. The assets
transferred were acquired as a part of the acquisition and merger of Republic
New York Corporation (Republic) on December 31, 1999. See Note 2, Acquisitions.
The divestitures were accounted for as transfers of assets between companies
under common control at historical cost. The accompanying consolidated financial
statements and related notes reflect a restatement of the December 31, 1999
consolidated balance sheets of the Company and the Bank to exclude the
transferred assets and liabilities as though they had not been acquired
(depooling). Restatement of the 1999 income statement was not required as no
income or expenses from Republic were included in the reported results.
Note 2. Acquisitions
On August 1, 2000, the Company purchased the banking operations of Chase
Manhattan Bank, Panama (Chase Panama). The transaction was accounted for as a
purchase. Accordingly, the results of operations of Chase Panama are included
with those of the Company for the period subsequent to the date of the
acquisition. The branch operations had over $750 million in assets and $720
million in deposit liabilities. The excess of cost over acquired net
identifiable assets (goodwill) was $60 million and is being amortized on a
straight-line basis over 20 years.
On December 31, 1999, HSBC acquired Republic New York Corporation (Republic).
Also on December 31, 1999, following the acquisition, HSBC merged Republic with
the Company. The purchase price of the transaction was approximately $7.1
billion and was paid to Republic's shareholders on January 7, 2000. Republic had
consolidated total assets of $46.9 billion, deposits of $29.9 billion and common
shareholders' equity of $2.9 billion on December 31, 1999.
The merger was accounted for as a purchase transaction. Accordingly, the results
of operations of Republic are included with those of the Company for the period
subsequent to the date of acquisition. Assets acquired and liabilities assumed
were recorded at their estimated fair values. The fair value of the assets and
liabilities of Republic are included in the financial statements of the Company
as of December 31, 1999. The fair value of net identifiable assets acquired was
$4.1 billion. The purchase price allocation resulted in an excess of cost over
acquired net identifiable assets (goodwill) of approximately $2.9 billion, which
is being amortized on a straight-line basis over 20 years. Liabilities assumed
at acquisition date included employee termination costs of $133.9 million and
other costs such as contract termination costs of $23.7 million associated with
merging Republic's operations with those of the Company.
47
The following table is an analysis of Republic's goodwill, reflecting
adjustments for transferred and liquidated companies as well as the finalization
of items estimated at December 31, 1999, as permitted by generally accepted
accounting principles.
2000
----------
in thousands
Balance at beginning of year $2,922,863
Adjustments:
Asset valuations 19,718
Transferred and liquidated companies (7,019)
Employee terminations 31,726
Taxes (97,040)
Princeton note matter (See Note 26) 79,252
Other legal fees and provisions 9,494
Other 10,718
----------
Total adjustments 46,849
----------
Less: amortization expense 146,143
----------
Balance at end of year $2,823,569
----------
The following pro forma financial information presents the combined results of
the Company and Republic as if the acquisition had occurred as of the beginning
of 1999 after giving effect to certain adjustments. The pro forma financial
information may not be indicative of the results that actually would have
occurred if the purchase had been consummated on January 1, 1999 or which may be
obtained in the future. While the Company expects to achieve certain operating
cost savings as a result of the combination, no adjustment has been included in
the pro forma amounts for anticipated operating cost savings or revenue
enhancements. No adjustment has been made for the costs of integrating
businesses. Certain other foreign operations, not adjusted for in the pro forma
results below, were transferred to other HSBC Group members or are expected to
be transferred in the future.
Further, both the Company and Republic recognized certain one-time items in
their 1999 operating results. Pretax results for the Company included settlement
with the U.S. Internal Revenue Service on Brazilian tax credits of $13.1 million
and a gain on the sale of a student loan business of $15.0 million partially
offset by an acquisition related restructuring charge of $26.7 million.
Republic's 1999 pretax operating results included restructuring charges of $97.0
million (unrelated to the acquisition by the Company) partially offset by a gain
of $69.8 million relating to a real estate investment. Republic's results in
1999 also benefited from securities gains and foreign exchange income related to
Russia and Brazil. These positions have been exited.
Pro forma
Year Ended December 31, 1999
------------
(unaudited)
in millions
Net interest income after provision for credit losses $2,149
Other operating expenses 2,052
Income taxes 375
Net income 602
------
In connection with the acquisition of Republic, restructuring costs relating to
the planned severance of employees and exiting of businesses of the Company of
$26.7 million were recognized in other operating expenses in the fourth quarter
of 1999. Costs totalling $21.0 million were recognized relating to occupancy
including cancellation of lease payments for specific lease premises that are to
be vacated. Employee termination costs of $5.7 million include severance
payments, related benefits and out placement services for employees terminated
in connection with the acquisition.
48
During 2000, the Company refined its initial estimates of liabilities related to
the acquisition. Additional accruals were recorded with an increase to goodwill,
primarily for severance costs including payments to be made to certain former
key executives of Republic. The Company also reversed a fourth quarter 1999
other operating expense accrual of $10.8 million during 2000, as a result of a
negotiated settlement with a landlord involving certain primary office space in
New York City. The landlord accepted a payment significantly less than the
remaining lease obligation in order to open the space to a new tenant.
The following table presents the activity in these reserves through December 31,
2000.
Severance
Related Premises Other Total
------- ------- ----- ------
in millions
Liabilities assumed $133.9 $ 9.7 $14.0 $157.6
Restructuring charges 5.7 21.0 - 26.7
------ ------ ----- ------
Balance December 31, 1999 139.6 30.7 14.0 184.3
Change in estimates 83.7 (17.8) 2.5 68.4
Less: Payments 71.5 2.1 11.2 84.8
------ ------ ----- ------
Balance December 31, 2000 $151.8 $ 10.8 $ 5.3 $167.9
------ ------ ----- ------
During 2000, $85.0 million of restructuring costs were expensed as systems and
operations were combined. Although consolidation of most systems and operations
took place in 2000 it is anticipated that some further restructuring costs will
be incurred in 2001.
On December 31, 1999 HSBC Asset Management Americas Inc. (HAMI), an indirect
wholly owned subsidiary of HSBC, was merged with the Company. HAMI's outstanding
stock was contributed to the Company. HAMI, an SEC registered investment
advisor, had assets of $11.8 million and shareholder's equity of $7.8 million at
December 31, 1999.
Note 3. Cash and Due from Banks
The Bank is required to maintain noninterest bearing balances at Federal Reserve
Banks as part of its membership requirements in the Federal Reserve System.
These balances averaged $224.6 million in 2000 and $128.0 million in 1999.
Note 4. Trading Assets and Liabilities
An analysis of trading assets and liabilities follows.
December 31, 2000 1999
---------- ----------
in thousands
Trading assets:
U.S. Government securities $ 372,615 $ 464,482
Mortgage and other asset backed securities 1,721,609 818,375
Other securities 973,705 891,926
Unrealized gains on derivatives 1,876,732 1,773,249
Precious metals 826,311 566,977
---------- ----------
$5,770,972 $4,515,009
---------- ----------
Trading liabilities:
Securities sold, not yet purchased $ 217,830 $ 213,809
Payables for precious metals 487,905 407,540
Unrealized losses on derivatives 2,061,090 1,815,966
---------- ----------
$2,766,825 $2,437,315
---------- ----------
49
Trading revenues are generated by the Company's participation in the foreign
exchange and precious metals markets, trading activities in other derivative
contracts, including interest rate swaps, and from trading securities. The
Company reports the net revenues from these activities, which include mark to
market adjustments and any related direct trading expenses, as trading revenues
in the consolidated statement of income. Trading revenues are summarized by
categories of financial instruments in the following table.
Year Ended December 31, 2000 1999 1998
-------- ------- -------
in thousands
Foreign exchange $104,138 $ 6,140 $ 5,455
Precious metals 6,685 - -
Trading account profits (losses) and commissions 29,369 3,874 (1,755)
-------- ------- -------
Trading revenues $140,192 $10,014 $ 3,700
-------- ------- -------
Note 5. Securities
At December 31, 2000, the Company held no securities of any single issuer
(excluding the U.S. Treasury and federal agencies) with a book value that
exceeded 10% of shareholders' equity.
The amortized cost and fair value of the securities available for sale and
securities held to maturity portfolios follow.
2000 1999
----------------------------------------------------- --------------------------
Gross Gross
Amortized Unrealized Unrealized Fair Amortized Fair
December 31, Cost Gains Losses Value Cost Value
----------- ---------- ---------- ----------- ----------- -----------
in thousands
U.S. Treasury $ 318,378 $ 5,654 $ 1,445 $ 322,587 $ 1,554,263 $ 1,521,996
U.S. Government agency 8,943,188 242,444 66,442 9,119,190 16,428,949 16,383,416
Domestic debt securities 4,673,487 36,524 57,223 4,652,788 4,438,921 4,434,200
Foreign debt securities 2,542,658 31,825 19,182 2,555,301 1,805,447 1,805,447
Equity securities 665,648 21,318 - 686,966 468,630 472,260
----------- -------- -------- ----------- ----------- -----------
Securities available
for sale $17,143,359 $337,765 $144,292 $17,336,832 $24,696,210 $24,617,319
----------- -------- -------- ----------- ----------- -----------
U.S. Government agency $ 3,530,285 $127,155 $ 54 $ 3,657,386 $ 4,091,875 $ 4,091,875
Obligations of U.S.
states and political
subdivisions 718,499 30,278 1,067 747,710 665,958 665,958
Domestic debt securities 11,708 456 9 12,155 12,254 12,254
----------- -------- -------- ----------- ----------- -----------
Securities held to
maturity $ 4,260,492 $157,889 $ 1,130 $ 4,417,251 $ 4,770,087 $ 4,770,087
----------- -------- -------- ----------- ----------- -----------
At December 31, 1999, with regard to securities available for sale, the Company
had gross unrealized gains of $1.7 million, $.6 million and $5.0 million and
gross unrealized losses of $33.9 million, $46.1 million and $6.2 million related
to U.S. Treasury, U.S. Government agency and other securities, respectively. At
December 31, 1999, the cost and fair values of securities held to maturity were
the same because they were acquired in the Republic purchase.
The following table presents the components of investment securities
transactions attributable to securities available for sale and securities held
to maturity.
50
Year Ended December 31, 2000 1999 1998
------------------------------ ---------------------------- --------------------------
Gross Net Gross Net Gross Net
------------------- Gains ----------------- Gains ----------------- Gains
Gains (Losses) (Losses) Gains (Losses) (Losses) Gains (Losses) (Losses)
------- -------- ------- ------- ------- ------- ------- ------- -------
in thousands
Securities available
for sale $54,030 $(27,189) $26,841 $19,532 $(9,434) $10,098 $15,923 $(2,068) $13,855
Securities held to
maturity:
Maturities, calls
and mandatory
redemptions 2,205 (207) 1,998 - - - - - -
------- -------- ------- ------- ------- ------- ------- ------- -------
$56,235 $(27,396) $28,839 $19,532 $(9,434) $10,098 $15,923 $(2,068) $13,855
======= ======== ======= ======= ======= ======= ======= ======= =======
The amortized cost and fair values of securities available for sale and
securities held to maturity at December 31, 2000, by contractual maturity are
shown in the following tables. Expected maturities differ from contractual
maturities because borrowers have the right to prepay obligations without
prepayment penalties in certain cases. The amounts exclude $666 million cost
($687 million fair value) of equity securities that do not have fixed
maturities.
Amortized Fair
December 31, 2000 Cost Value
----------- ------------
in thousands
Within one year $ 895,635 $ 896,793
After one but within five years 3,768,391 3,766,916
After five but within ten years 2,291,131 2,313,992
After ten years 9,522,554 9,672,165
----------- ------------
Securities available for sale $16,477,711 $16,649,866
----------- ------------
Within one year $ 33,267 $ 33,387
After one but within five years 98,590 99,713
After five but within ten years 662,530 684,557
After ten years 3,466,105 3,599,594
----------- ------------
Securities held to maturity $ 4,260,492 $ 4,417,251
----------- ------------
Note 6. Loans
A distribution of the loan portfolio follows.
December 31, 2000 1999
----------- ------------
in thousands
Domestic:
Commercial:
Construction and mortgage loans $ 5,645,641 $ 5,647,703
Other business and financial 12,550,766 12,002,029
Consumer:
Residential mortgages 15,835,374 13,240,843
Credit card receivables 1,232,054 1,290,339
Other consumer loans 1,640,260 1,231,443
International 3,513,752 4,918,107
----------- ------------
$40,417,847 $38,330,464
----------- ------------
Residential mortgages include $1,874.4 million and $504.4 million of mortgages
held for sale at December 31, 2000 and 1999, respectively. Other consumer loans
include $368.5 million and $380.3 million of higher education loans also held
for sale at December 31, 2000 and 1999, respectively.
51
International loans include certain bonds issued by the governments of Mexico
and Venezuela as part of debt renegotiations (Brady bonds). These bonds had an
aggregate carrying value of $355.8 million (face value $368.3 million) and an
aggregate fair value of $306.7 million at year end 2000, compared with a year
end 1999 fair value of $271.7 million. The Company's intent is to hold these
instruments until maturity. The bonds are fully secured as to principal by
zero-coupon U.S. Treasury securities with face value equal to that of the
underlying bonds.
At December 31, 2000 and 1999, the Company's nonaccruing loans were $423.2
million and $343.5 million, respectively. At December 31, 2000 and 1999, the
Company had commitments to lend additional funds of $45.8 million and $7.6
million, respectively, to borrowers whose loans are classified as nonaccruing. A
significant portion of these commitments include clauses that provide for
cancellation in the event of a material adverse change in the financial position
of the borrower.
Year Ended December 31, 2000 1999 1998
------- ------- -------
in thousands
Interest revenue on nonaccruing loans which
would have been recorded had they been
current in accordance with their original terms $28,004 $22,879 $19,802
Interest revenue recorded on nonaccruing loans 23,986 29,084 34,824
------- ------- -------
Other real estate and owned assets included in other assets amounted to $20.6
million and $14.0 million at December 31, 2000 and 1999, respectively.
The Company identified impaired loans totaling $223.5 million at December 31,
2000, of which $108.7 million had an allocation from the allowance of $46.3
million. At December 31, 1999, the Company had identified impaired loans of
$215.6 million of which $110.2 million had an allocation from the allowance of
$64.5 million. The average recorded investment in such impaired loans was $192.2
million, $184.9 million and $169.9 million in 2000, 1999 and 1998, respectively.
The Company has loans outstanding to certain executive officers and directors.
The loans were made on substantially the same terms, including interest rates
and collateral, as those prevailing at the same time for comparable transactions
with other persons and do not involve more than normal risk of collectibility.
The aggregate amount of such loans did not exceed 5% of shareholders' equity at
December 31, 2000 and 1999.
Note 7. Allowance for Credit Losses
An analysis of the allowance for credit losses follows.
2000 1999 1998
--------- --------- ---------
in thousands
Balance at beginning of year $ 637,995 $ 379,652 $ 409,409
Allowance related to acquired (sold) businesses (11,302) 268,617 -
Provision charged to income 137,600 90,000 80,000
Recoveries on loans charged off 34,248 34,825 42,908
Loans charged off (272,975) (135,099) (152,665)
Translation adjustment (582) - -
--------- --------- ---------
Balance at end of year $ 524,984 $ 637,995 $ 379,652
--------- --------- ---------
Note 6 provides information on impaired loans and the related specific credit
loss allowance.
52
Note 8. Mortgage Servicing Rights
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The outstanding principal balances of these loans
were $19.52 billion and $19.31 billion at December 31, 2000 and 1999,
respectively. Custodial balances maintained in connection with the foregoing
loan servicing, and included in noninterest bearing deposits in domestic offices
were $293.5 million and $282.3 million at December 31, 2000 and 1999,
respectively.
An analysis of MSRs, reported in other assets, follows.
2000 1999 1998
-------- -------- --------
in thousands
Balance at beginning of year $269,774 $133,804 $111,501
Additions 39,695 166,179 48,765
Amortization (42,404) (30,209) (26,462)
-------- -------- --------
Balance at end of year $267,065 $269,774 $133,804
-------- -------- --------
Additions to MSRs in 1999 include $115.1 million obtained in the acquisition of
Republic. No valuation reserve has been established against MSRs. The fair value
of MSRs as of December 31, 2000 and 1999 was approximately $355.8 million and
$344.1 million, respectively.
Note 9. Deposits
The aggregate amount of time deposit accounts (primarily certificates of
deposits) each with a minimum of $100,000 included in domestic office deposits
were $4.82 billion and $4.83 billion at December 31, 2000 and 1999,
respectively. The scheduled maturities of all domestic time deposits at December
31, 2000 follows.
in thousands
2001 $11,759,682
2002 1,532,240
2003 221,048
2004 150,430
2005 50,233
Later years 22,809
-----------
$13,736,442
53
Note 10. Short-Term Borrowings
The following table shows detail relating to short-term borrowings in 2000, 1999
and 1998. Average interest rates during each year are computed by dividing total
interest expense by the average amount borrowed.
2000 1999 1998
------------------ ----------------- -------------------
Average Average Average
Amount Rate Amount Rate Amount Rate
--------- ---- --------- ---- --------- ----
in thousands
Federal funds purchased (day to day):
At December 31 $1,974,589 4.90% $ 368,089 5.08% $ 607,124 4.59%
Average during year 985,215 6.31 502,595 4.87 617,542 5.20
Maximum month-end balance 2,122,030 840,849 908,542
Securities sold under
repurchase agreements:
At December 31 893,567 5.13 1,046,984 6.23 206,048 4.41
Average during year 1,096,989 5.62 448,745 4.62 299,588 5.34
Maximum month-end balance 1,746,506 1,046,984 832,312
Commercial paper:
At December 31 1,472,586 6.70 1,121,377 5.42 909,261 5.05
Average during year 1,131,819 6.36 838,739 5.18 826,650 5.49
Maximum month-end balance 1,629,704 1,121,377 1,002,479
Precious metals:
At December 31 1,899,747 .95 1,679,118 2.45 - -
Average during year 2,127,067 1.32 4,600 - - -
Maximum month-end balance 2,684,805 1,679,118 -
All other short-term borrowings:
At December 31 2,321,874 7.44 995,141 5.56 1,163,576 4.57
Average during year 3,137,950 7.73 718,570 5.29 1,726,174 5.86
Maximum month-end balance 6,789,254 1,225,000 2,826,177
--------- ---- --------- ---- --------- ----
At December 31, 2000, the Company had unused lines of credit with HSBC
aggregating $500 million. These lines of credit do not require compensating
balance arrangements and commitment fees are not significant.
Note 11. Income Taxes
Total income taxes were allocated as follows.
Year Ended December 31, 2000 1999 1998
-------- -------- --------
in thousands
To income before income taxes $340,500 $308,300 $238,100
To shareholders' equity as tax charge (benefit):
Net unrealized gains and losses on
securities available for sale 95,322 (51,546) 8,426
Foreign currency translation, net (4,033) - -
-------- -------- --------
$431,789 $256,754 $246,526
-------- -------- --------
The components of income tax expense follow.
Year Ended December 31, 2000 1999 1998
-------- -------- --------
in thousands
Current:
Federal $219,610 $240,180 $209,729
State and local 12,000 59,017 56,487
Foreign 26,151 - -
-------- -------- --------
Total current 257,761 299,197 266,216
Deferred, primarily federal 82,739 9,103 (28,116)
-------- -------- --------
Total income taxes $340,500 $308,300 $238,100
-------- -------- --------
54
The following table is an analysis of the difference between effective rates
based on the total income tax provision attributable to pretax income and the
statutory U.S. Federal income tax rate.
Year Ended December 31, 2000 1999 1998
---- ---- ----
Statutory rate 35.0% 35.0% 35.0%
Increase (decrease) due to:
State and local income taxes .9 4.7 4.8
Goodwill amortization 6.3 .9 1.2
Change in valuation allowance
for deferred tax assets - - (5.9)
Tax exempt interest income (1.5) (.2) (.2)
Brazilian tax credit settlement - - (3.1)
Other items (3.2) (.5) (.7)
---- ---- ----
Effective income tax rate 37.5% 39.9% 31.1%
---- ---- ----
The components of the net deferred tax asset are summarized below.
December 31, 2000 1999
-------- --------
in thousands
Deferred tax assets:
Allowance for credit losses $181,919 $219,557
Deferred charge offs 11,305 11,305
Accrued expenses not currently deductible 134,825 145,799
Investment securities 108,655 201,315
Other 107,928 105,826
-------- --------
544,632 683,802
Less valuation allowance 28,329 28,329
-------- --------
Total deferred tax assets 516,303 655,473
-------- --------
Less deferred tax liabilities:
Lease financing income accrued 48,319 35,800
Accrued pension cost 46,093 43,704
Accrued income on foreign bonds 20,094 20,518
Deferred net operating loss recognition 90,018 90,018
Domestic tax on overseas income - 135,768
Depreciation and amortization 81,052 83,320
Interest and discount income 82,062 82,061
Other 56,229 43,542
-------- --------
Total deferred tax liabilities 423,867 534,731
-------- --------
Net deferred tax asset $ 92,436 $120,742
-------- --------
Realization of deferred tax assets is contingent upon the generation of future
taxable income or the existence of sufficient taxable income within the
carryback period. A valuation allowance is provided when it is more likely than
not that some portion of the deferred tax assets will not be realized. In
assessing the need for a valuation allowance, management considers the scheduled
reversal of the deferred tax liabilities, the level of historical taxable
income, and projected future taxable income over the periods in which the
temporary differences comprising the deferred tax assets will be deductible.
Based upon the level of historical taxable income and the scheduled reversal of
the deferred tax liabilities over the periods which the deferred tax assets are
deductible, management believes it is more likely than not the Company will
realize the benefits of these deductible differences, net of the existing
valuation allowance.
55
Note 12. Subordinated Long-Term Debt and Perpetual Capital Notes
The following is a summary of subordinated long-term debt and perpetual capital
notes. Interest rates shown are based on the face values of the instruments.
Face Value Book Value
------------------------- -------------------------
December 31, 2000 1999 2000 1999
---------- ---------- ---------- ----------
in thousands
9.50-9.75% Subordinated notes due 2000 $ - $ 200,000 $ - $ 203,581
Floating rate subordinated notes due 2000 - 200,000 - 200,000
7.875-8.875% Subordinated notes due 2001 350,000 350,000 351,727 355,241
7.25-7.75% Subordinated notes due 2002 400,000 400,000 399,889 399,866
Floating rate subordinated notes due 2002
(6.689%, 6.696%) 245,700 245,700 243,798 242,670
7% Subordinated notes due 2006 300,000 300,000 298,530 298,278
5.875% Subordinated notes due 2008 250,000 250,000 222,766 219,252
6.625-9.70% Subordinated notes due 2009 550,000 550,000 565,198 567,081
Floating rate subordinated notes due 2009
(6.688%) 124,320 124,320 124,320 124,320
7% Subordinated notes due 2011 100,000 100,000 94,038 93,451
9.50% Subordinated debentures due 2014 150,000 150,000 166,663 167,921
9.125-9.30% Subordinated notes due 2021 200,000 200,000 218,494 219,402
7.20% Subordinated debentures due 2097 250,000 250,000 214,443 214,075
Perpetual Capital Notes (7.188%) 129,000 129,000 127,148 122,511
---------- ---------- ---------- ----------
$3,049,020 $3,449,020 $3,027,014 $3,427,649
---------- ---------- ---------- ----------
The above table excludes $1,550 million of debt issued by the Bank or its
subsidiaries payable to the Company. Of this amount, the earliest note to mature
is in 2006 and the latest note to mature is in 2097.
Interest rates on floating rate notes are determined periodically by formulas
based on certain money market rates or, in certain instances, by minimum
interest rates as specified in the agreements governing the issues. Interest
rates on the floating rate notes in effect at December 31, 2000 are shown in
parentheses.
The Perpetual Capital Notes (PCNs) are a component of total qualifying capital
under applicable risk-based capital rules. The PCNs may be exchanged for
securities that constitute permanent primary capital securities for regulatory
purposes. The principal amount of each PCN will be payable as follows: (1) at
the option of the holder on the put date in each year commencing in 2012, (2) at
the option of the Company on 90 days prior notice, the PCNs may be either (i)
redeemed on the specified redemption date, in whole, for cash and at par, but
only with the proceeds of a substantially concurrent sale of capital securities
issued for the purpose of such redemption or (ii) exchanged, in whole, for
capital securities having a market value equal to the principal amount of the
PCNs, and, in each case, the payment of accrued interest in cash or (3) in the
event that the sum of the Company's retained earnings and surplus accounts
becomes less than zero, the PCNs will automatically be exchanged, in whole, for
capital securities having a market value equal to the principal amount of the
PCNs and the payment of accrued interest in cash.
Contractual scheduled maturities for the subordinated debt over the next five
years are as follows: 2001, $350 million; 2002, $646 million; and none in 2003,
2004 and 2005.
56
Note 13. Guaranteed Mandatorily Redeemable Securities
The following table presents the guaranteed mandatorily redeemable securities
outstanding. Interest rates shown are based on the face values of the
instruments.
Face Value Book Value
---------- ----------------------
December 31, 2000/1999 2000 1999
---------- -------- --------
in thousands
7.808% Capital Securities due 2026 $200,000 $200,000 $200,000
8.38% Capital Securities due 2027 200,000 200,000 200,000
7.75% Capital Securities due 2026 150,000 135,789 135,239
7.53% Capital Securities due 2026 200,000 175,948 175,020
-------- -------- --------
$750,000 $711,737 $710,259
-------- -------- --------
The guaranteed mandatorily redeemable securities (Capital Securities) are issued
by trusts all of whose outstanding common securities are owned by the Company.
The Capital Securities represent preferred beneficial interests in the assets of
the trusts and are guaranteed by the Company. The sole assets of the trusts
consist of junior subordinated debentures of the Company. The Capital Securities
qualify as Tier 1 capital under the risk-based capital guidelines of the Federal
Reserve Board.
The Capital Securities are redeemable at the option of the Company in the case
of a tax event or regulatory capital event at the prepayment price equal to the
greater of (i) 100% of the principal amount of the Capital Securities or (ii)
the sum of the present values of the stated percentage of the principal amount
of the Capital Securities plus the remaining scheduled payments of interest
thereon from the prepayment date. Tax event refers to notice that the interest
payable on the Capital Securities would not be deductible. Regulatory capital
event refers to notice that the Capital Securities would not qualify as Tier 1
capital.
In the absence of a tax or regulatory capital event, the Capital Securities are
redeemable at the option of the Company. The 7.808% Capital Securities are
redeemable on December 15, 2006 at a premium of 3.904% in the first twelve
months after December 15, 2006 and varying lesser amounts thereafter and without
premium if redeemed after December 15, 2016. The 8.38% Capital Securities are
redeemable on May 15, 2007 at a premium of 4.19% in the first twelve months
after May 15, 2007 and varying lesser amounts thereafter and without premium if
redeemed after May 15, 2017. The 7.75% Capital Securities are redeemable on
November 15, 2006 at a premium of 3.66% in the first twelve months after
November 15, 2006 and varying lesser amounts thereafter and without premium if
redeemed after November 15, 2016. The 7.53% Capital Securities are redeemable on
December 4, 2006 at a premium of 3.765% in the first twelve months after
December 4, 2006 and varying lesser amounts thereafter and without premium if
redeemed after December 4, 2016.
57
Note 14. Other Long-Term Debt
The following table reports other long-term debt. Interest rates shown are based
on the face values of the instruments.
Face Value Book Value
--------------------------- --------------------------
December 31, 2000 1999 2000 1999
---------- ---------- ---------- ----------
in thousands
Issued or acquired by the Company or
subsidiaries other than the Bank:
8.375% Debentures due 2007 $ 100,000 $ 100,000 $ 104,262 $ 104,963
Other - 105 - 105
---------- ---------- ---------- ----------
100,000 100,105 104,262 105,068
---------- ---------- ---------- ----------
Issued or acquired by the Bank or
its subsidiaries:
Medium-term floating rate note
due 2040 (6.40%) 24,999 - 24,999 -
Fixed rate Federal Home Loan Bank of
New York advances 232,838 482,779 232,838 482,779
Collateralized mortgage obligations 2,343 3,322 2,343 3,322
Collateralized repurchase agreements
(3.25-7.45%) 936,205 1,113,250 936,205 1,075,506
Other 57,196 80,394 57,257 80,456
---------- ---------- ---------- ----------
1,253,581 1,679,745 1,253,642 1,642,063
---------- ---------- ---------- ----------
$1,353,581 $1,779,850 $1,357,904 $1,747,131
---------- ---------- ---------- ----------
The medium-term floating rate note due 2040 was issued under the Bank's Global
Medium-Term Note Program which provides for the issuance of up to $4 billion of
notes having maturities of 7 days or more from the date of issue.
The fixed rate Federal Home Loan Bank of New York advances have interest rates
ranging from 2.67% to 8.61%.
The mortgage obligations are collateralized by a pledge of FHLMC mortgage-backed
securities. All payments received on the pledged mortgage-backed securities, net
of certain costs, must be applied to repay the bonds. The stated maturity and
stated rate for the two bonds are: September, 2002 at 7.89% and October, 2006 at
7.27%. It is expected that the actual life of the bonds will be less than their
stated maturity.
Collateralized repurchase agreements consist of securities repurchase agreements
with initial maturities exceeding one year.
Contractual scheduled maturities for the debt over the next five years are as
follows: 2001, $378 million; 2002, $273 million; 2003, $38 million; 2004, $27
million and $41 million in 2005.
58
Note 15. Preferred Stock
The following table presents information related to the issues of preferred
stock outstanding.
Amount
Shares Dividend Outstanding
Outstanding Rate ---------------------
December 31, 2000 2000 2000 1999
--------- ----- -------- --------
in thousands
$1.8125 Cumulative Preferred Stock
($25 stated value) 3,000,000 7.25% $ 75,000 $ 75,000
6,000,000 Depositary shares each representing
a one-fourth interest in a share of Adjustable
Rate Cumulative Preferred Stock, Series D
($100 stated value) 1,500,000 5.00 150,000 150,000
Dutch Auction Rate Transferable Securities(TM)
Preferred Stock (DARTS)
Series A ($100,000 stated value) 625 4.93 62,500 62,500
Series B ($100,000 stated value) 625 5.041 62,500 62,500
$2.8575 Cumulative Preferred Stock
($50 stated value) 3,000,000 5.715 150,000 150,000
CTUS Inc. Preferred Stock 100 - - -
--------- ----- -------- --------
$500,000 $500,000
--------- ----- -------- --------
The $1.8125 Cumulative Preferred Stock may be redeemed, at the option of the
Company, at $25 per share plus dividends accrued and unpaid to the redemption
date.
The dividend rate on the Adjustable Rate Cumulative Preferred Stock, Series D
(Series D Stock) is determined quarterly, by reference to a formula based on
certain benchmark market interest rates, but will not be less than 4 1/2% or
more than 10 1/2% per annum for any applicable dividend period. The Series D
Stock is redeemable by the Company at $100 per share (or $25 per depositary
share), plus accrued and unpaid dividends to the redemption date.
DARTS of each series are redeemable at the option of the Company, at $100,000
per share, plus accrued and unpaid dividends to the redemption date. Dividend
rates for each dividend period are set pursuant to an auction procedure. The
maximum applicable dividend rates on the shares of DARTS range from 110% to 150%
of the 60 day "AA" composite commercial paper rate. DARTS are also redeemable,
at the option of the Company, on any dividend payment date for such series, at a
redemption price of $100,000 per share plus the payment of accrued and unpaid
dividends, if the applicable rate for such series fixed with respect to the
dividend period for such series ending on such dividend payment date equals or
exceeds the 60 day "AA" composite commercial paper rate on the date of
determination of such rate.
The outstanding shares of $2.8575 Cumulative Preferred Stock have an aggregate
stated value of $150 million. The Preferred Stock may be redeemed at the option
of the Company on or after October 1, 2007, at $50 per share, plus dividends
accrued and unpaid to the redemption date.
The Company acquired CTUS Inc., a unitary thrift holding company in 1997 from CT
Financial Services Inc. (the Seller). CTUS owned First Federal Savings and Loan
Association of Rochester (First Federal). The acquisition agreement provided
that the Company issue preferred shares to the Seller. The preferred shares
provide for, and only for, a contingent dividend or redemption equal to the
amount of recovery, net of taxes and costs, if any, by First Federal resulting
from the pending action against the United States government
59
alleging breaches by the government of contractual obligations to First Federal
following passage of the Financial Institutions Reform, Recovery and Enforcement
Act of 1989. The Company issued 100 preferred shares at a par value of $1.00 per
share in connection with the acquisition.
Note 16. Common Stock
All of the common stock of the Company is owned by HSBC North America Inc., an
indirect wholly owned subsidiary of HSBC. Common shares authorized are 1,100
with a par value of $5.00. Shares issued were 704 at December 31, 2000 and 1999.
Note 17. Retained Earnings
Bank dividends are a major source of funds for payment by the Company of
shareholder dividends and along with interest earned on investments, cover the
Company's operating expenses which consist primarily of interest on outstanding
debt. The approval of the Federal Reserve Board is required if the total of all
dividends declared by the Bank in any year exceed the net profits for that year,
combined with the retained profits for the two preceding years. Under a separate
restriction, payment of dividends is prohibited in amounts greater than
undivided profits then on hand, after deducting actual losses and bad debts. Bad
debts are debts due and unpaid for a period of six months unless well secured,
as defined, and in the process of collection.
Under these rules the Bank can pay dividends to the Company as of December 31,
2000 of approximately $389 million, adjusted by the effect of its net income
(loss) for 2001 up to the date of such dividend declaration.
Note 18. Accumulated Other Comprehensive Income
Accumulated other comprehensive income includes net income as well as certain
items that are reported directly within a separate component of shareholders'
equity. The following table presents changes in accumulated other comprehensive
income balances.
2000 1999 1998
-------- -------- -------
in thousands
Accumulated other comprehensive income (loss)
at beginning of year $(50,534) $ 44,506 $29,309
Fair value adjustments on securities
available for sale:
Change in fair value, net of taxes
of $104,717, $(48,012), $13,275 in
2000, 1999 and 1998, respectively 194,286 (88,476) 24,203
Reclassification adjustment, net
of taxes of $9,395, $3,534 and $4,849
in 2000, 1999 and 1998, respectively (19,444) (6,564) (9,006)
-------- -------- -------
174,842 (95,040) 15,197
-------- -------- -------
Accumulated foreign currency translation adjustment:
Translation loss, net of taxes of
(4,033) in 2000 (7,489) - -
-------- -------- -------
(7,489) - -
-------- -------- -------
Net change in accumulated other
comprehensive income (loss) 167,353 (95,040) 15,197
-------- -------- -------
Total accumulated other comprehensive
income (loss) at end of year $116,819 $(50,534) $44,506
-------- -------- -------
60
Note 19. Impact of Recently Issued Accounting Standards
In September 2000, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 140, Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities (FAS 140). FAS 140
replaces Statement of Financial Accounting Standards No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
(FAS 125). It revises the standards for accounting for securitizations and other
transfers of financial assets and collateral and requires certain disclosures,
but it carries over most of FAS 125's provisions without change.
FAS 140 is effective for transfers and servicing of financial assets and
extinguishments of liabilities of the Company occurring after March 31, 2001.
However, the provisions of FAS 140 concerning the recognition and
reclassification of collateral and disclosures relating to securitization
transactions and collateral are effective for the Company for the year ending
December 31, 2000 and have been reflected in this report. No reclassification of
collateral in the consolidated balance sheet was required at December 31, 2000.
See Summary of Significant Accounting Policies for further discussion of
derivative financial instruments and FAS 133.
Note 20. Regulatory Matters
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, specific capital
guidelines must be met that involve quantitative measures of assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the maintenance of minimum amounts and ratios of total and Tier 1
capital (as defined in the regulations) to risk-weighted assets (as defined) of
8% and 4%, respectively. Also required are ratios of Tier 1 capital (as defined)
to average assets (as defined) of 4% at the Bank level and 3% at the Company
level as long as the Company has a strong supervisory rating.
As of December 31, 2000, the most recent notification from the Federal Reserve
Board (FRB) categorized the Company and the Bank as well-capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, a banking institution must have minimum total risk-based ratio of
at least 10%, Tier 1 risk-based ratio of at least 6%, and Tier 1 leverage ratio
of at least 5%. There are no conditions or events since that notification that
management believes have changed the categories. The capital amounts and ratios
are presented in the table.
61
2000 1999 1999
-------------------- ------------------- ---------------------
As Originally
Actual Restated Reported
-------------------- ------------------- --------------------
December 31, Amount Ratio Amount Ratio Amount Ratio
- ------------ ------ ----- ------ ----- ------ -----
in millions
Total capital
(to risk weighted assets)
Company $7,393 13.56% $7,723 15.08% $8,143 15.53%
Bank 6,458 12.01 6,127 12.86 6,361 13.00
Tier 1 capital
(to risk weighted assets)
Company 4,573 8.39 4,553 8.89 7,370 13.42
Bank 4,420 8.22 3,954 8.30 6,683 13.00
Tier 1 capital
(to average assets)
Company 4,573 5.73 4,553 14.49 7,370 23.41
Bank 4,420 5.69 3,954 12.49 6,683 21.08
Note 21. Transactions with Principal Shareholder and Related Parties
The Company's common stock is owned by HSBC North America Inc., an indirect
wholly owned subsidiary of HSBC. In the normal course of business, the Company
conducts transactions with HSBC, including its 25% or more owned subsidiaries
(HSBC Group). These transactions occur at prevailing market rates and terms and
include deposits taken and placed, short-term borrowings and interest rate
contracts.
At December 31, 2000 and 1999 assets of $927.5 million and $1,562.3 million,
respectively, and liabilities of $3,712.0 million and $3,252.4 million,
respectively, related to such transactions with the HSBC Group were included in
the Company's balance sheet. Income and expense associated with such
transactions was not significant to the Company's financial results of
operation.
Derivative contracts entered into with the HSBC Group are used primarily to
manage interest rate risk. At December 31, 2000 and 1999, the notional amounts
of these contracts with members of the HSBC Group were $6.32 billion and $10.45
billion, respectively.
Legal restrictions on extensions of credit by the Bank to the HSBC Group require
that such extensions be secured by eligible collateral. At December 31, 2000 and
1999, outstanding extensions of credit secured by eligible collateral were
$950.4 million and $614.1 million, respectively.
Refer to Note 1 for a discussion of the Company's distribution of its 49%
interest in HRH and its investment in HSBC Investments (Bahamas) Limited to its
parent, HNAI.
In the fourth quarter of 2000, HSBC acquired Credit Commercial de France. As
part of the consolidation of HSBC's commercial banking activities in the U.S.,
the Company acquired in a cash purchase the commercial loan portfolio of
approximately $500 million of the New York office of Credit Commercial de
France. Additionally, $2.4 billion of commitments to lend were assumed as part
of the acquisition.
62
Note 22. Stock Option Plans
Options have been granted to employees of the Company under the HSBC Holdings
Executive Share Option Scheme (the Executive Plan) and under the HSBC Savings
Related Share Option Contribution Program (the Savings Plan). Compensation
expense associated with such options is recognized over the vesting period based
on the estimated fair value of such options at grant date.
Under the Executive Plan, options have been awarded to certain officers of the
Company to acquire shares of HSBC. The exercise price of each option is equal to
the market price of the stock of HSBC on the date of grant. The maximum term of
the options is ten years and they vest at the end of three years. Additionally,
the Company adopted the Savings Plan effective July 1, 1996 whereby eligible
employees can elect to participate in the Savings Plan through the Company's
401(k) plan and acquire contributions based on HSBC stock at 85% of market value
on date of grant. An employee's agreement to participate is a five year
commitment. At the end of each five year period employees receive the
appreciation of the HSBC stock over the initial exercise price in the form of
stock of HSBC.
Since the shares and contribution commitment have been granted directly by HSBC,
the offset to compensation cost was a credit to capital surplus, representing a
contribution of capital from HSBC. The options granted resulted in compensation
cost of $7.9 million in 2000.
Republic had benefit plans including: (1) Long Term Incentive Stock Plan which
provided for the award of incentive stock options, non-qualified stock options,
stock appreciation rights, restricted stock and other stock-based awards; (2)
the Restricted Stock Election Plan which allowed certain officers who had earned
deferred compensation to elect to receive payment in the form of restricted
stock; (3) the Performance Based Incentive Compensation Plan which was designed
to provide an incentive to officers who served on the Management Executive
Committee and were in a position to make a material contribution to Republic for
which certain awards were paid out in the form of restricted stock under the
Long Term Incentive Plan; and (4) the Long Term Incentive Compensation Plan
which granted deferred restricted cash awards to certain employees. Employees
vested in the assets awarded under the Plans based on the terms of each Plan.
Employees will continue to vest in these Plans under the original terms of the
Plans unless they are terminated, at which time they will become fully vested.
As part of the acquisition, liabilities of $240.3 million were assumed in
connection with the Plans. As a result of the Company's purchase of 100% of
Republic's outstanding common stock, amounts earned under these various Plans
will be satisfied through future payments of cash rather than the issuance of
shares of Republic common stock.
63
Note 23. Postretirement Benefits
The Company, the Bank and certain other subsidiaries maintain noncontributory
pension plans covering substantially all of their employees hired prior to
January 1, 1997 and those who joined the Company through acquisitions. Certain
other HSBC subsidiaries participate in this plan.
The Company also maintains unfunded noncontributory health and life insurance
coverage for all employees who retired from the Company and were eligible for
immediate pension benefits from the Company's retirement plan. Employees
retiring after 1992 will absorb a portion of the cost of these benefits.
Employees hired after that same date are not eligible for these benefits. A
premium cap has been established for the Company's share of retiree medical
cost.
The following table provides data concerning the Company's benefit plans.
Other
Pension Benefits Postretirement Benefits
----------------------- -------------------------
2000 1999 2000 1999
-------- --------- --------- ---------
in thousands
Change in benefit obligation
Benefit obligation, January 1 $687,731 $ 452,105 $ 107,214 $ 77,970
Service cost 26,820 17,900 2,130 2,060
Interest cost 53,090 31,080 8,778 5,479
Participant contributions - - 267 234
Actuarial (gain) loss 14,829 (62,079) 10,602 2,380
Republic acquisition - 263,400 - 26,800
Benefits paid (26,432) (14,675) (10,435) (7,709)
-------- --------- --------- ---------
Benefit obligation, December 31 $756,038 $ 687,731 $ 118,556 $ 107,214
======== ========= ========= =========
Change in plan assets
Fair value of plan assets, January 1 $916,470 $ 520,389 $ - $ -
Actual return on plan assets (69,405) 60,311 - -
Company contribution - - 10,168 7,475
Participant contributions - - 267 234
Republic acquisition - 350,445 - -
Benefits paid (26,432) (14,675) (10,435) (7,709)
-------- --------- --------- ---------
Fair value of plan assets, December 31 $820,633 $ 916,470 $ - $ -
======== ========= ========= =========
Funded status of plan
Funded status, December 31 $ 64,595 $ 228,739 $(118,556) $(107,214)
Unrecognized actuarial (gain) loss 57,123 (116,161) 7,015 (3,587)
Unrecognized prior service cost 5,005 5,947 - -
Unrecognized net transition obligation - - 38,965 42,212
-------- --------- --------- ---------
Recognized amount $126,723 $ 118,525 $ (72,576) $ (68,589)
======== ========= ========= =========
Amount recognized in the consolidated
balance sheet
Prepaid benefit cost $126,723 $ 118,525 $ - $ -
Accrued benefit liability - - (72,576) (68,589)
-------- --------- --------- ---------
Recognized amount $126,723 $ 118,525 $ (72,576) $ (68,589)
======== ========= ========= =========
64
Operating expenses for 2000, 1999 and 1998 included the following components.
Other
Pension Benefits Postretirement Benefits
--------------------------------- -----------------------------------
2000 1999 1998 2000 1999 1998
-------- -------- -------- ------- ------- -------
in thousands
Net periodic benefit
cost (credit)
Service cost $ 26,820 $ 17,900 $ 17,512 $ 2,130 $ 2,060 $ 1,959
Interest cost 53,090 31,080 29,014 8,778 5,479 5,064
Expected return on plan
assets (85,965) (48,748) (40,631) - - -
Prior service cost
amortization 944 959 961 - - -
Actuarial gain (3,087) - - - - -
Transition amount
amortization - - (1,340) 3,247 3,247 3,247
-------- -------- -------- ------- ------- -------
Net periodic benefit cost
(credit) $ (8,198) $ 1,191 $ 5,516 $14,155 $10,786 $10,270
======== ======== ======== ======= ======= =======
Weighted-average assumptions
as of December 31
Discount rate 7.75% 8.00% 7.00% 7.25% 7.75% 6.25%
Expected return on plan
assets 9.50 9.50 9.50 - - -
Rate of compensation
increase 5.15 5.15 4.65 5.15(1) 5.15(1) 4.65(1)
-------- -------- -------- ------- ------- -------
(1) Applicable to life insurance only.
Net periodic pension cost includes none, $1.7 million and $1.9 million for 2000,
1999 and 1998, respectively, recognized in the financial statements of other
HSBC subsidiaries participating in the Company's pension plan.
The Company has assumed a health care cost trend rate of 8% for 2000, decreasing
to 7% in the year 2002. The assumed health care cost trend rate has an effect on
the amounts reported. For example, increasing the assumed health care cost trend
by 1% would increase the aggregate service and interest cost component by $.2
million and the accumulated postretirement benefit obligation by $2.5 million.
Decreasing the health care cost trend rate by 1% would decrease the aggregate
service and interest cost components by $.2 million and the accumulated post
retirement benefit obligation by $2.2 million.
Employees hired after January 1, 1997 become participants in a defined
contribution plan after one year of service. Contributions to the plan are based
on a percentage of employees' compensation. Total expense recognized for the
plan was $2.4 million in 2000, $1.3 million in 1999 and $.4 million in 1998.
The Company maintains a 401(k) plan covering substantially all employees.
Contributions to the plan by the Company are based on employee contributions.
Total expense recognized for the plan was $11.7 million in 2000, $8.9 million in
1999 and $8.5 million for 1998.
Note 24. Business Segments
As a result of the Republic acquisition, the Company altered its business
segments that it uses to manage operations as of January 1, 2000. Prior year
disclosures have been conformed to the presentation of current segments.
65
Segments
----------------------------------------------------
Corporate/ Investment
Commercial Institutional Personal Banking/
Banking Banking Banking Markets Other Total
---------- ------------ ------- --------- ------ -------
2000 in millions
- ----
Net interest income (1) $ 567 $ 141 $ 1,044 $ 405 $ (38) $ 2,119
Other operating income 127 95 362 245 3 832
------- ------ ------- ------- ------ -------
Total income 694 236 1,406 650 (35) 2,951
Operating expenses (2) 338 88 830 342 307 1,905
------- ------ ------- ------- ------ -------
Pretax income (loss) before
provision for credit losses 356 148 576 308 (342) 1,046
Provision for credit losses (3) 107 35 73 (2) (75) 138
------- ------ ------- ------- ------ -------
Pretax income (loss) 249 113 503 310 (267) 908
Taxes/preferred dividends 79 36 160 99 (6) 368
------- ------ ------- ------- ------ -------
Net income (loss) after
preferred dividends 170 77 343 211 (261) 540
------- ------ ------- ------- ------ -------
Average assets 14,219 5,703 20,527 38,990 3,350 82,789
Average liabilities/equity (4) 9,715 4,814 27,931 30,922 9,407 82,789
------- ------ ------- ------- ------ -------
1999
- ----
Net interest income (1) $ 351 $ 123 $ 693 $ 28 $ 31 $ 1,226
Other operating income 87 76 263 5 33 464
------- ------ ------- ------- ------ -------
Total income 438 199 956 33 64 1,690
Operating expenses (2) 183 59 505 8 73 828
------- ------ ------- ------- ------ -------
Pretax income (loss) before
provision for credit losses 255 140 451 25 (9) 862
Provision for credit losses (3) 40 8 77 - (35) 90
------- ------ ------- ------- ------ -------
Pretax income 215 132 374 25 26 772
Taxes 86 53 149 10 10 308
------- ------ ------- ------- ------ -------
Net income 129 79 225 15 16 464
------- ------ ------- ------- ------ -------
Average assets 7,411 3,799 12,452 8,401 2,167 34,230
Average liabilities/equity (4) 6,065 2,258 16,169 6,816 2,922 34,230
------- ------ ------- ------- ------ -------
1998
- ----
Net interest income (1) $ 344 $ 75 $ 690 $ 29 $ 27 $ 1,165
Other operating income 84 52 264 4 56 460
------- ------ ------- ------- ------ -------
Total income 428 127 954 33 83 1,625
Operating expenses (2) 183 44 495 7 51 780
------- ------ ------- ------- ------ -------
Pretax income before provision
for credit losses 245 83 459 26 32 845
Provision for credit losses (3) 29 5 67 - (21) 80
------- ------ ------- ------- ------ -------
Pretax income 216 78 392 26 53 765
Taxes 86 31 156 10 (45) 238
------- ------ ------- ------- ------ -------
Net income 130 47 236 16 98 527
------- ------ ------- ------- ------ -------
Average assets 6,782 1,940 12,835 9,323 1,967 32,847
Average liabilities/equity (4) 5,495 1,440 15,852 7,160 2,900 32,847
------- ------ ------- ------- ------ -------
(1) Net interest income of each segment represents the difference between
actual interest earned on assets and interest paid on liabilities of the
segment adjusted for a funding charge or credit. Segments are charged a
cost to fund assets (e.g. customer loans) and receive a funding credit for
funds provided (e.g. customer deposits) based on equivalent market rates.
(2) Expenses for the segments include fully apportioned corporate overhead
expenses with the exception of non-recurring corporate expenses and
goodwill amortization.
(3) The provision apportioned to the segments is based on the segments' net
charge offs and the change in allowance for credit losses. Credit loss
reserves are established at a level sufficient to absorb the losses
considered to be inherent in the portfolio. The difference between segment
provisions and the Company provision is included in other.
(4) 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. Preferred stock dividends are not allocated to the
segments and are included in other.
66
The Company has four distinct 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. 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. 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. The following describes the four
reportable segments.
The Commercial Banking Segment provides a diversified range of financial
products and services. This segment provides loan and deposit products to small
and middle-market corporations including specialized products such as equipment
and real estate financing. These products and services are offered through
multiple delivery systems, including the branch banking network. In addition,
various credit and trade related products are offered such as standby
facilities, performance guarantees, acceptances and accounts receivable
factoring.
The Corporate and Institutional Banking Segment provides deposit and lending
functionality to large corporate and multi-national corporations. U.S. dollar
clearing services are offered for domestic and international wire transfer
transactions. Corporate trust provides various trustee, agency and custody
products and services for both corporate and municipal customers. Credit and
trade related products such as standby facilities, performance guarantees and
acceptances are also provided to large corporate entities.
The Personal Banking Segment provides an extensive array of products and
services including installment and revolving term loans, deposits, branch
services, mutual funds, insurance, estate planning and other investment
management services. These products are marketed to individuals through the
branch banking network. Residential mortgage lending provides loan financing
through direct retail and wholesale origination channels. Mortgage loans are
originated through a network of brokers, wholesale agents and retail
originations offices. Servicing is performed for the individual mortgage holder
or on a contractual basis for mortgages owned by third parties.
The Investment Banking and Markets Segment comprises treasury, traded markets
and international private banking businesses. The treasury function maintains
overall responsibility for the investment and borrowing of funds to ensure
liquidity, maximize return and manage interest rate risk. Traded markets
encompasses the trading and sale of foreign exchange, banknotes, derivatives,
precious metals, securities and emerging markets instruments, both domestically
and internationally. International private banking offers a full range of
services for high net worth individuals throughout the world including deposit,
lending, trading, trust and investment management.
Other consists of certain non-recurring expenses, including Republic related
restructuring costs, goodwill amortization, preferred stock dividends and the
provision for credit losses not assigned to business units.
Note 25. Commitments and Contingent Liabilities
At December 31, 2000 securities, loans and other assets carried in the
consolidated balance sheet at $11.5 billion were pledged as collateral for
borrowings, to secure governmental and trust deposits and for other purposes.
67
The Company and its subsidiaries are obligated under a number of noncancellable
leases for premises and equipment. Certain leases contain renewal options and
escalation clauses. Rental expense under all operating leases, net of sublease
rentals, was $65.9 million, $43.5 million and $43.2 million in 2000, 1999 and
1998, respectively. Minimum future rental commitments on operating leases in
effect at December 31, 2000 were as follows: 2001, $65 million; 2002, $54
million; 2003, $47 million; 2004, $43 million; 2005, $35 million and $100
million thereafter.
Note 26. 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.
On September 1, 1999, Republic announced that, as a result of an inquiry
received from the Financial Supervisory Agency of Japan, it had commenced an
internal investigation of the Futures Division of its wholly owned subsidiary,
Republic New York Securities Corporation (RNYSC). The investigation focused on
the involvement of the Futures Division of RNYSC with its customers Princeton
Global Management Ltd. and affiliated entities (Princeton) and their Chairman,
Martin Armstrong (the Princeton Note Matter).
Regulatory and law enforcement agencies, including the U.S. Attorney for the
Southern District of New York, the Securities and Exchange Commission and the
Commodity Futures Trading Commission, are continuing to investigate the
Princeton Note Matter, including the activities of Republic and RNYSC with
respect to the Princeton Note Matter. The Company understands that RNYSC is a
target of the federal grand jury investigation being conducted by the U.S.
Attorney for the Southern District of New York.
At the core of both the investigations described above and the civil actions
described below are allegations that Mr. Armstrong and Princeton perpetrated a
fraud in selling $3 billion (face value) of promissory notes to certain Japanese
entities, approximately $1 billion (face value) of which allegedly remain
outstanding. Since 1995, Princeton had maintained accounts at the Futures
Division of RNYSC through which funds, allegedly including proceeds from the
sale in Japan of such promissory notes, were invested and traded by Princeton.
Mr. Armstrong is alleged to have caused employees of the Futures Division of
RNYSC to issue letters containing inflated balances of the net asset values in
the accounts of Princeton, some of which letters allegedly were provided by Mr.
Armstrong and Princeton to at least some of its noteholders.
Eighteen separate civil actions have been brought to date against RNYSC by
Japanese entities in connection with the Princeton Note Matter. All eighteen
actions are pending in the United States District Court for the Southern
District of New York, and allege that Armstrong and Princeton perpetrated a
fraud on the plaintiffs by selling them notes that remain unpaid. The eighteen
complaints allege that employees of RNYSC issued letters concerning the
Princeton accounts that contained material misstatements. All but one of these
actions also assert claims against Republic and Republic National Bank or HSBC
USA Inc. and HSBC Bank USA as their respective successors (together with RNYSC,
the Republic Parties).
The eighteen civil proceedings against one or more of the Republic Parties are
Amada Co. v. Republic New York Securities Corporation, filed November 29, 1999,
Gun-ei Chemical Industry Co., Ltd. v. Princeton Economics International Ltd. et
al., filed December 22, 1999, Chudenko Corp., v. Republic New York
68
Securities Corporation, et al., filed January 20, 2000, Alps Electric Co., Ltd.
v. Republic New York Securities Corporation, et al., filed February 7, 2000,
Itoki Crebio Corp. v. HSBC USA Inc., et al., Kissei Pharmaceutical Co., Ltd. v.
HSBC USA Inc., et al., Maruzen Company, Ltd., v. HSBC USA Inc., et al., SMC
Corporation v. HSBC USA Inc., et al., and Asatsu-DK Inc. v. HSBC USA Inc., filed
February 14, 2000, Starzen Co., Ltd. v. Republic New York Securities
Corporation, et al., filed February 23, 2000, Yakult Honsha Co., Ltd. v.
Republic New York Securities Corp., filed February 25, 2000, Nichimen Europe,
PLC v. Republic New York Securities Corporation, et. al., filed April 10, 2000,
Kita-Hyogo Shinyo-Kumiai v. Republic New York Securities Corporation, et. al.,
filed June 1, 2000, Ozawa Denki Koji Co., et. al. v. Republic New York
Securities Corporation, et. al., filed June 16, 2000, Kofuku Bank Ltd. and
Namihaya Bank Ltd. v. Republic New York Securities Corporation, et. al., filed
April 28, 2000, Eichi Takagi and Koei Shoji, Ltd. v. HSBC USA Inc., et. al.,
filed August 30, 2000, Akio Maruyama v. HSBC USA Inc., et. al., filed January
12, 2001, and Kunio Kanzawa v. HSBC USA Inc., et. al., filed January 12, 2001.
The Amada action alleges unpaid notes in the amount of Yen 12.5 billion
(approximately $109.8 million), the Gun-ei action alleges unpaid notes in the
amount of Yen 11.8 billion (approximately $102.7 million), the Chudenko action,
which is brought by 22 separate Japanese entities, alleges unpaid notes totaling
approximately $360 million, the Alps action alleges unpaid notes in the amount
of approximately $212 million, the Itoki action alleges unpaid notes in the
amount of approximately $4.4 million, the Kissei action alleges unpaid notes of
approximately $24.8 million, the Maruzen action alleges unpaid notes of
approximately $50 million, the SMC action alleges unpaid notes of approximately
$19.5 million, the Asatsu-DK action alleges unpaid notes of approximately $24.6
million, the Starzen action alleges an unpaid note of $28.6 million, the Yakult
action alleges an outstanding note of $120 million of which approximately $25
million remains unpaid, and an unpaid note of approximately $50 million, the
Nichimen action alleges unpaid notes of $15 million, the Kita-Hyogo action
alleges unpaid notes of $21.4 million, the Ozawa action alleges unpaid notes of
$29.6 million, the Kofuku action alleges unpaid notes of $39.5 million, the
Takagi action alleges unpaid notes of approximately $2.1 million and $1.21
million on behalf of an individual and corporation, the Maruyama action alleges
an unpaid note of Yen 200 million (approximately $1.7 million), and the Kanzawa
action alleges unpaid notes of $1.6 million and Yen 250 million (approximately
$2.2 million). All of the actions assert common law claims and claims under the
federal securities laws and/or the federal commodities laws. All but the Amada
and Gun-ei actions seek treble damages under the Racketeer Influenced and
Corrupt Organization Act. Discovery proceedings are under way in all of these
civil actions.
In addition to the eighteen actions arising out of the Princeton Note Matter
described above, on October 7, 1999, a purported class action entitled Ravens v.
Republic New York Corporation, et al., was filed in the United States District
Court for the Eastern District of Pennsylvania on behalf of investors who
acquired common stock of Republic between May 14, 1999 and September 15, 1999.
On October 16, 2000 an amended complaint in the Ravens action was filed,
alleging that the defendants violated the federal securities laws in the merger
transaction between Republic and HSBC by failing to disclose facts relating to
potential liabilities with respect to the Princeton Note Matter. The amended
complaint seeks unspecified damages on behalf of the class. On January 16, 2001,
defendants filed a motion to dismiss the Ravens action.
At the present time it is not possible to assess the outcome of the civil
proceedings described above relating to the Princeton Note Matter. The matter
will be defended vigorously. In addition, in the 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
69
provision of $79 million, the amount of shareholder's equity of RNYSC, has been
taken as part of the goodwill cost of the acquisition. See Note 2 for further
discussion. At the present time it is not possible to estimate what additional
cost may be incurred by the Company as a result of the Princeton Note Matter.
Note 27. Financial Instruments With Off-Balance Sheet Risk
The Company is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers, to
reduce its own exposure to fluctuations in interest rates and to realize
profits. These financial instruments involve, to varying degrees, elements of
credit and market risk in excess of the amount recognized in the consolidated
balance sheet. Credit risk represents the possibility of loss resulting from the
failure of another party to perform in accordance with the terms of a contract.
The Company uses the same credit policies in making commitments and conditional
obligations as it does for balance sheet instruments.
Market risk represents the exposure to future loss resulting from the decrease
in value of an on- or off-balance sheet financial instrument caused by changes
in interest rates. Market risk is a function of the type of financial instrument
involved, transaction volume, tenor and terms of the agreement and the overall
interest rate environment. The Company controls market risk by managing the mix
of the aggregate financial instrument portfolio and by entering into offsetting
positions.
A summary of financial instruments with off-balance sheet risk follows.
December 31, 2000 1999
-------- ---------
in millions
Financial instruments whose contractual amounts represent the associated risk:
Standby letters of credit and financial guarantees (net of risk
participations of $369 and $223) $ 4,892 $ 3,474
Other letters of credit 609 838
Commitments to extend credit 23,957 23,108
Commitments to deliver mortgaged-backed securities 409 210
Financial instruments whose notional or contractual amounts do not represent the
associated risk:
Interest rate contracts 145,599 115,791
Foreign exchange contracts 128,423 102,487
Commodity, equity and other contracts 4,549 42,025
For commitments to extend credit, standby letters of credit and guarantees, the
Company's exposure to credit loss in the event of non-performance by the
counterparty to the financial instrument, is represented by the contractual
amount of those instruments. Management has an allowance for credit loss related
to these instruments of $39.2 million included in interest, taxes and other
liabilities on the consolidated balance sheet at December 31, 2000.
For those financial instruments whose contractual or notional amount does not
represent the amount exposed to credit loss, risk at any point in time
represents the cost, on a present value basis, of replacing these existing
instruments at current interest and exchange rates. Based on this measurement,
$2,762 million was at risk at December 31, 2000. See Note 28 for further
discussion of activities in derivative financial instruments. The Company
controls the credit risk associated with off-balance sheet derivative financial
instruments established for each counterparty through the normal credit approval
process. See Note 21 for contracts entered into with the HSBC Group. Collateral
is maintained on these positions, the amount of which is consistent with the
measurement of exposure used in the risk-based capital ratio calculations under
the banking regulators' guidelines.
70
Note 28. Derivative Financial Instruments
The Company is party to various derivative financial instruments as an end user
to manage its overall interest rate risk within the context of a comprehensive
asset and liability management strategy, to offset the risk associated with
changes in value of various assets and liabilities accounted for on a mark to
market basis including its trading account and available for sale investment
securities portfolio, to protect against impairment in value of its mortgage
servicing rights portfolio, and for 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 customized transactions to meet clients'
needs. Counterparties generally include financial institutions including banks,
central banks, other government agencies, both foreign and domestic, and
insurance companies.
Derivative instruments are contracts whose value is derived from that of an
underlying financial 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 metals or other
commodities at a future date. Futures contracts are exchange traded 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 differentials 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 of an up front fee. The writer of an option receives an up front premium
as payment for assuming the risk of unfavorable changes in the price of the
underlying instrument or index.
The derivative instrument portfolios are actively managed in response to changes
in overall and specific balance sheet positions, cash requirements, and
expectations of future interest rates, market environments and business
strategies. Market risk associated with derivatives arises principally from the
potential for future changes in the prices of underlying securities, commodities
or indices, or the volatility of such prices or rates. The credit risk with
derivatives arises principally from the potential of the counterparty to fail to
meet its obligation to settle the contract on a timely basis. The Company
controls these risks through the establishment and monitoring of approved limits
and by dealing with investment grade counterparties including other members of
the HSBC Group, obtaining collateral where appropriate and by using master
netting agreements where available.
Pursuant to an overall balance sheet risk management strategy, derivative
instruments are used to alter the cash flows and maturity characteristics of
certain of these assets and liabilities and hedge anticipated repricing in order
to maintain net interest margin within a range that management considers
acceptable given assumptions as to changes in interest rates. In addition, the
Company utilizes derivative instruments to mitigate the effects of changes in
interest rates on the market valuation of its available for sale investment
securities portfolio and to protect against the erosion in value of mortgage
71
servicing rights in declining rate environments. Derivatives used for these
purposes are collectively referred to as asset and liability management
positions.
The Company deploys a portion of its excess liquidity by maintaining active
positions in a variety of debt instruments in its trading portfolio. Derivative
instruments are utilized to hedge market and interest rate risk associated with
the on-balance sheet instruments held in this portfolio. The Company also holds
derivative instruments for speculative purposes, as hedges in conjunction with
the acquired precious metals businesses, foreign exchange trading activities and
to facilitate customer transactions. Derivatives used for these purposes are
collectively referred to as trading positions.
The following table summarizes the notional or contractual amounts of derivative
instruments used for both trading and asset and liability management purposes.
These amounts serve as volume indicators to denote the level of activity by
instrument class and include contracts that have both favorable and unfavorable
value to the Company. These notional amounts do not represent the amounts to be
exchanged by the Company, nor do they measure the exposure to credit or market
risk. Asset and liability management positions include intercompany transactions
that are established between independent trading departments of the Company that
act as counterparties. The exposure may be limited by offsetting asset or
liability positions held by the Company or by the use of master netting
agreements.
Contractual/Notional Amounts
-----------------------------------------------------------------
2000 1999
----------------------------- -------------------------------
Asset/Liability Asset/Liability
December 31, Trading Management Trading Management
-------- --------------- -------- ---------------
in millions
Interest rate:
Futures and forwards $ 40,538 $ 3,922 $ 27,545 $ 6,766
Swaps 48,892 11,262 38,191 20,291
Options written 13,057 - 7,232 150
Options purchased 13,066 13,891 6,564 8,182
Other - 971 - 870
-------- ------- -------- -------
$115,553 $30,046 $ 79,532 $36,259
======== ======= ======== =======
Foreign exchange:
Swaps, futures and forwards $103,745 $ 3,752 $ 58,159 $ 1,535
Options written 6,593 - 21,057 -
Options purchased 6,460 - 20,957 -
Spot 7,583 8 772 7
Other 282 - - -
-------- ------- -------- -------
$124,663 $ 3,760 $100,945 $ 1,542
======== ======= ======== =======
Other:
Swaps, futures and forwards $ 3,047 $ 545 $ 27,527 $ 1,242
Options written 300 - 5,969 682
Options purchased 241 127 6,047 537
Other 270 19 21 -
-------- ------- -------- -------
$ 3,858 $ 691 $ 39,564 $ 2,461
======== ======= ======== =======
The net positive fair value of derivative financial instruments held for asset
and liability management purposes was $214 million and $164 million at December
31, 2000 and 1999, respectively. The net negative fair value of derivative
financial instruments held for trading purposes was $111 million and $53 million
at December 31, 2000 and 1999, respectively.
72
Note 29. Concentrations of Credit Risk
The Company enters into a variety of transactions in the normal course of
business that involve both on- and off-balance sheet credit risk. Principal
among these activities is lending to various commercial, institutional,
governmental and individual customers. The Company participates in lending
activity throughout the United States and on a limited basis internationally
with credit risk concentrated in the Northeastern United States. A real estate
portfolio, concentrated in the New York metropolitan area, is secured by
multi-family, commercial and residential properties. See Note 30 for a
geographic distribution of year-end assets.
The ability of individual borrowers to repay is generally linked to the economic
stability of the regions from where the loans originate, as well as the
creditworthiness of the borrower. With emphasis on the Western, Central and
Metropolitan regions of New York State, the Company maintains a diversified
portfolio of loan assets. At December 31, 2000 41% of residential mortgages and
79% of commercial construction and mortgage loans were located within the
Northeastern United States.
In general, the Company controls the varying degrees of credit risk involved in
on- and off-balance sheet transactions through specific credit policies. These
policies and procedures provide for a strict approval, monitoring and reporting
process. It is the Company's policy to require collateral when it is deemed
appropriate. Varying degrees and types of collateral are secured depending upon
management's credit evaluation.
Note 30. International and Domestic Operations
In the following table, international loans are distributed geographically
primarily on the basis of the location of the head office or residence of the
borrowers or, in the case of certain guaranteed loans, the guarantors. Interest
bearing deposits with banks are grouped by the location of the head office of
the bank. Investments and acceptances are distributed on the basis of the
location of the issuers or borrowers.
International Assets by Geographic Distribution and Domestic Assets
December 31, 2000 1999
------- -------
in millions
International:
Asia/Pacific $ 876 $ 1,249
Europe/Middle East/Africa 4,282 4,415
Other Western Hemisphere 2,078 2,518
------- -------
Total international 7,236 8,182
Domestic 75,796 79,071
------- -------
Total international/domestic $83,032 $87,253
------- -------
The following table presents income statement information relating to the
international and domestic operations of the Company. Geographical information
has been classified by the location of the principal operations of the
subsidiary, or in the case of the Bank, by the location of the branch office. As
a result of the Republic acquisition, the Company altered the methodology used
to report international income statement information. Due to the nature of the
Company's structure, the following analysis includes intra-Company items between
geographic regions. Under the new methodology, the international components for
1999 and 1998 were not significant and therefore are not disclosed.
73
Revenues and Earnings - International and Domestic
Total Total Income
Year Ended December 31, 2000 Revenue (1) Expenses (2) Before Taxes
----------- ------------- ------------
in millions
International:
Asia/Pacific $ 339.7 $ 290.3 $ 49.4
Europe 254.4 129.4 125.0
Other Western Hemisphere 158.7 147.8 10.9
-------- -------- ------
Total international 752.8 567.5 185.3
Domestic (3) 5,397.2 4,674.5 722.7
-------- -------- ------
Total international/domestic $6,150.0 $5,242.0 $908.0
-------- -------- ------
(1) Includes net interest income and other operating income. Total revenue for
2000 includes intra-Company income of $264.2 million.
(2) Includes operating expenses and provision for credit losses. Total expenses
for 2000 include intra-Company expenses of $264.2 million.
(3) Includes the Caribbean and Canada.
Note 31. Fair Value of Financial Instruments
The following disclosures represent the Company's best estimate of the fair
value of on- and off-balance sheet financial instruments. The following methods
and assumptions have been used to estimate the fair value of each class of
financial instrument for which it is practicable to do so.
Financial instruments with carrying value equal to fair value - The carrying
value of certain financial assets including cash and due from banks, interest
bearing deposits with banks, federal funds sold and securities purchased under
resale agreements, accrued interest receivable, and customers' acceptance
liability and certain financial liabilities including short-term borrowings,
interest, taxes and other liabilities and acceptances outstanding, as a result
of their short-term nature, are considered to be equal to fair value.
Securities and trading assets and liabilities - Fair value has been based upon
current market quotations, where available. If quoted market prices are not
available, fair value has been estimated based upon the quoted price of similar
instruments.
Loans - The fair value of the performing loan portfolio has been determined
principally based upon a discounted analysis of the anticipated cash flows,
adjusted for expected credit losses. The loans have been grouped to the extent
possible, into homogeneous pools, segregated by maturity and the weighted
average maturity and average coupon rate of the loans within each pool.
Depending upon the type of loan involved, maturity assumptions have been based
on either contractual or expected maturity.
Credit risk has been factored into the present value analysis of cash flows
associated with each loan type, by allocating the allowance for credit losses.
The allocated portion of the allowance, adjusted by a present value factor based
upon the timing of expected losses, has been deducted from the gross cash flows
prior to calculating the present value.
As a result of the allocation of the allowance to adjust the anticipated cash
flows for credit risk, a published interest rate that equates as closely as
possible to a "risk-free" or "low-risk" loan has been selected for the purpose
of discounting the commercial loan portfolio, adjusted for a liquidity factor
where appropriate.
74
Consumer loans have been discounted at the estimated rate of return an investor
would demand for the product, without regard to credit risk. This rate has been
formulated based upon reference to current market rates. The fair value of the
residential mortgage portfolio has been determined by reference to quoted market
prices for loans with similar characteristics and maturities.
Intangible assets - The Company has elected not to specifically disclose the
fair value of certain intangible assets. In addition, the Company has not
estimated the fair value of unrecorded intangible assets associated with its own
portfolio such as core deposits. The fair value of the Company's intangibles is
believed to be significant.
Deposits - The fair value of demand, savings and certain money market deposits
is equal to the amount payable on demand at the reporting date. For deposits
with fixed maturities, fair value has been estimated based upon interest rates
currently being offered on deposits with similar characteristics and maturities.
Long-term debt - Fair value has been estimated based upon interest rates
currently available to the Company for borrowings with similar characteristics
and maturities.
The following, which is provided for disclosure purposes only, provides a
comparison of the carrying value and fair value of the Company's financial
instruments. Fair values have been determined based on applicable requirements
and do not necessarily represent the amount that would be realized upon their
liquidation.
2000 1999
----------------------- -------------------------
Carrying Fair Carrying Fair
December 31, Value Value Value Value
-------- ------- -------- --------
in millions
Financial assets:
Instruments with carrying value
equal to fair value $ 9,910 $ 9,910 $ 9,652 $ 9,652
Related derivatives 2 2 24 (4)
Trading assets 5,771 5,771 4,515 4,515
Related derivatives - - 1,773 1,773
Securities available for sale 17,337 17,337 24,617 24,617
Related derivatives (20) (2) - -
Securities held to maturity 4,260 4,417 4,770 4,770
Loans, net of allowance 39,893 40,406 37,692 37,544
Related derivatives 9 (6) 36 5
Financial liabilities:
Instruments with carrying value
equal to fair value 9,191 9,191 6,711 6,711
Related derivatives 5 4 8 (1)
Deposits:
Without fixed maturities 42,795 42,795 45,604 45,604
Fixed maturities 13,238 13,258 10,820 10,852
Related derivatives 98 112 (3) 5
Trading account liabilities 2,767 2,767 2,437 2,437
Related derivatives - - 1,817 1,817
Long-term debt 5,097 5,248 5,885 5,853
Related derivatives 2 30 (4) 27
Excluded from the above is the $169 million mark to market and the $175 million
of accrued receivables recorded on the December 31, 1999 balance sheet
associated with derivative contracts acquired from Republic that are held for
asset and liability management purposes.
75
The fair value of commitments to extend credit, standby letters of credit and
financial guarantees, is not included in the previous table. These instruments
generate fees which approximate those currently charged to originate similar
commitments. Further detail with respect to off-balance sheet financial
instruments is provided in Note 27, Financial Instruments With Off-Balance Sheet
Risk.
Note 32. Financial Statements of HSBC USA Inc. (parent)
Condensed parent company financial statements follow.
Balance Sheet
December 31, 2000 1999 (1)
----------- -----------
in thousands
Assets:
Cash and due from banks $ 3,600 $ 315
Interest bearing deposits with banks (including
$775,499 and $2,306,481 in banking subsidiary) 840,499 2,371,481
Trading assets 167,564 213,398
Securities available for sale 299,261 6,821,320
Securities held to maturity (fair value $163,742
and $135,212) 156,903 135,212
Loans (net of allowance for credit losses of
$25,732 and $13,208) 114,053 82,903
Receivable from subsidiaries 1,814,832 1,839,346
Investment in subsidiaries at amount of their
net assets
Banking 7,062,066 6,665,972
Other 1,273,465 1,191,268
Goodwill and other acquisition intangibles 703,022 545,808
Other assets 260,075 393,744
----------- -----------
Total assets $12,695,340 $20,260,767
----------- -----------
Liabilities:
Interest, taxes and other liabilities $ 544,084 $ 497,977
Payable to shareholders of acquired company - 7,091,209
Short-term borrowings 892,586 1,135,821
Long-term debt (2) 3,140,736 3,532,612
Long-term debt due to subsidiary (2) 775,284 775,562
----------- -----------
Total liabilities 5,352,690 13,033,181
Shareholders' equity * 7,342,650 7,227,586
----------- -----------
Total liabilities and shareholders' equity $12,695,340 $20,260,767
----------- -----------
* See Consolidated Statement of Changes in Shareholders' Equity, page 39.
(1) Restated to exclude investments transferred to HSBC North America Inc.
during 2000. See Note 1 for further discussion.
(2) Contractual scheduled maturities for the debt over the next five years are
as follows: 2001, $350 million; 2002, $646 million and none for 2003, 2004
and 2005.
76
Statement of Income
Year Ended December 31, 2000 1999 1998
--------- -------- --------
Income: in thousands
Dividends from banking subsidiaries $ 400,000 $450,000 $405,000
Dividends from other subsidiaries 7,501 1,001 7,001
Interest from banking subsidiaries 120,802 96,836 91,405
Interest from other subsidiaries 222 - 241
Other interest income 137,600 15,469 7,641
Securities transactions 6,542 7,800 7,529
Other income 13,218 4,014 2,226
--------- -------- --------
Total income 685,885 575,120 521,043
--------- -------- --------
Expenses:
Interest (including $61,338, $33,378,
and $33,382 paid to subsidiaries) 378,101 123,920 123,053
Goodwill amortization 28,396 - 2,241
Other expenses 72,788 13,831 4,263
--------- -------- --------
Total expenses 479,285 137,751 129,557
--------- -------- --------
Income before taxes and equity in undistributed
income of subsidiaries 206,600 437,369 391,486
Income tax benefit (92,762) (4,360) (5,962)
--------- -------- --------
Income before equity in undistributed income
of subsidiaries 299,362 441,729 397,448
Equity in undistributed income of subsidiaries 268,142 21,983 129,619
--------- -------- --------
Net income $ 567,504 $463,712 $527,067
--------- -------- --------
77
Statement of Cash Flows
Year Ended December 31, 2000 1999 1998
----------- ---------- ---------
in thousands
Cash flows from operating activities:
Net income $ 567,504 $ 463,712 $ 527,067
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 43,236 853 3,128
Net change in other accrued accounts 44,326 33,788 (4,294)
Undistributed income of subsidiaries (268,142) (21,983) (129,619)
Other, net (6,783) (12,879) 116,636
----------- ---------- ---------
Net cash provided by operating
activities 380,141 463,491 512,918
----------- ---------- ---------
Cash flows from investing activities:
Net change in interest bearing
deposits with banks 1,530,982 (298,400) 57,600
Purchases of securities (3,632,912) - -
Sale of securities 10,163,473 13,198 12,366
Payment to shareholders of acquired
company (7,091,209) - -
Net originations and maturities of loans (25,175) (38,912) (180,066)
Other, net (61,629) (19,937) 14,156
----------- ---------- ---------
Net cash provided (used) by
investing activities 883,530 (344,051) (95,944)
----------- ---------- ---------
Cash flows from financing activities:
Net change in short-term borrowings (243,235) (64,125) 63,026
Issuance of long-term debt - 200,000 -
Repayment of long-term debt (400,000) (100,000) -
Dividends paid (621,744) (155,000) (480,000)
Other, net 4,593 - -
----------- ---------- ---------
Net cash used by financing
activities (1,260,386) (119,125) (416,974)
----------- ---------- ---------
Net change in cash and due from banks 3,285 315 -
Cash and due from banks at beginning of year 315 - -
----------- ---------- ---------
Cash and due from banks at end of year $ 3,600 $ 315 $ -
----------- ---------- ---------
Cash paid for:
Interest paid $ 384,883 $ 120,963 $ 121,889
Non-cash activities related to acquisitions:
Preferred stock assumed - 500,000 -
Capital contributed principally in the form
of treasury securities - 7,088,108 -
----------- ---------- ---------
The Bank is subject to legal restrictions on certain transactions with its
nonbank affiliates in addition to the restrictions on the payment of dividends
to the Company (see Note 17).
78
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There were no disagreements on accounting and financial disclosure matters
between the Company and its independent accountants during 2000.
PART III
Item 10. Directors and Executive Officers of the Registrant
Directors
Set forth below is certain biographical information relating to the members of
the Company's Board of Directors. Each director is elected annually. There are
no family relationships among the directors.
Sal H. Alfiero, age 63, Founder, Chairman and Chief Executive Officer, Mark IV
Industries, Inc. Mr. Alfiero has been a director of the Bank since 1996. He is
also a director of Phoenix Home Life Mutual Insurance Company, Southwire
Company, Niagara Mohawk Holdings Inc., National Health Care Affiliates, Inc.,
Kaleida Health System and a trustee for the University of Buffalo Foundation.
Elected January, 2000.
Sir John R. H. Bond, age 59, Chairman of the Company and the Bank since 1997 and
Group Chairman of HSBC since 1998. Formerly President and Chief Executive
Officer of the Company and the Bank from 1991 through 1992. Previously Executive
Director Banking, The Hongkong and Shanghai Banking Corporation Limited from
1990 to 1991 and Executive Director Americas from 1988 to 1990. Sir John is
director and Chairman of HSBC Finance (Netherlands), Chairman of HSBC Bank plc,
Chairman of HSBC Bank Middle East and a director of The Hongkong and Shanghai
Banking Corporation Limited, and Ford Motor Company. Elected in 1987.
James H. Cleave, age 58, formerly President and Chief Executive Officer of the
Company and the Bank from 1993 through 1997 and formerly Executive Director from
June 1992 through December 1992. Previously Director, President and Chief
Executive Officer of HSBC Bank Canada since 1987. Mr. Cleave is also a director
and Chairman of HSBC Bank Canada. Elected in 1991.
Frances D. Fergusson, age 56, President, Vassar College since 1986. Formerly
Provost and Vice President for Academic Affairs, Bucknell University.
Dr. Fergusson is a member of the Board of Trustees of the Ford Foundation and
Chair of the Board of the Mayo Foundation, and is a director of C H Energy
Group. She was a director of the Company from 1990 through 1994 and has been a
director of the Bank since 1990. Reelected January, 2000.
Douglas J. Flint, age 45, Group Finance Director, HSBC and an Executive Director
of HSBC since 1995. A director of HSBC Investment Bank Holdings plc, HSBC Bank
Malaysia Berhad, HSBC Argentina Holdings S.A., and a director of the Bank since
1998. Mr. Flint is a member of the Urgent Issues Task Force of the Accounting
Standards Board and a former partner in KPMG. Elected January, 2000.
Martin J. G. Glynn, age 49, Director, President and Chief Executive Officer,
HSBC Bank Canada. He joined HSBC Bank Canada in 1982. He is also a director of
the Bank and Chair of the Canadian Chamber of Commerce since October 2000.
Elected January, 2000.
79
Stephen K. Green, age 52, Executive Director Investment Banking and Markets,
HSBC and an Executive Director of HSBC since 1998. Joined HSBC in 1982. Group
Treasurer from 1992 to 1998. Mr. Green is Chairman of HSBC Investment Bank
Holdings plc and a director of HSBC Bank plc, Credit Commercial de France S.A.,
HSBC Guyerzeller Bank AG, HSBC Private Banking Holdings (Suisse) S.A. and HSBC
Trinkaus & Burkhardt KGaA. A director of the Bank and the Company since January,
2000.
Ulric Haynes, Jr., age 69, Executive Dean for University International
Relations, Hofstra University. Formerly Dean, School of Business, Hofstra
University and a consultant on international business. Mr. Haynes was American
Ambassador to Algeria from 1977 to 1981 and is a director of Pall Corporation,
Reliastar Life of New York, INNCOM International, Inc. and DYNAX Solutions, Inc.
He was a director of the Company from 1981 through 1994 and has been a director
of the Bank since 1981. Reelected January, 2000.
Richard A. Jalkut, age 56, President and Chief Executive of Pathnet. Formerly
President and Group Executive, NYNEX Telecommunications and Executive Vice
President and Chief Operating Officer of New England Telephone and New York
Telephone. He was a director of the Company from 1992 through 1994 and has been
a director of the Bank since 1992. He is a director of Digex Corp., IKON Office
Solution, Birch Telecom and Home Wireless Networks. Reelected January, 2000.
Bernard J. Kennedy, age 69, Chairman and Chief Executive Officer of National
Fuel Gas Company. Also Chairman of National Fuel Gas Distribution Corporation,
National Fuel Gas Supply Corporation and Seneca Resources Corporation. He is a
director of Merchants Mutual Insurance Co., AEGIS Insurance Services Inc.,
Niagara Independence Marketing Company and Seneca Independence Pipeline Company.
Mr. Kennedy was a director of the Company from 1991 through 1994 and has been a
director of the Bank since 1991. Reelected January, 2000.
Peter Kimmelman, age 56, Private Investor. Formerly a director of Republic and
Republic Bank since 1976. A director of the Bank and the Company since January,
2000.
Charles G. Meyer, Jr., age 63, President of Cord Meyer Development Company.
Formerly a director of Republic Bank. A director of the Bank and the Company
since January, 2000.
James L. Morice, age 63, Sole member, J.L. Morice & Company, LLC, a management
consulting firm. Formerly a director of Republic and Republic Bank since 1987. A
director of the Bank and the Company since January, 2000.
Youssef A. Nasr, age 46, President and Chief Executive Officer of the Company
and the Bank since January, 2000 and a director of the Company and the Bank
since 1998. Mr. Nasr is a director of HSBC Bank Canada and was President and
Chief Executive Officer of HSBC Bank Canada from 1998 through 1999. He joined
HSBC in 1976 and was appointed a Group General Manager in 1998. Elected in 1998.
Jonathan Newcomb, age 54, Chairman & CEO, Simon & Schuster, Inc. Prior to that
he held the office of President and Chief Operating Officer. He was previously
President of McGraw Hill Financial & Economic Information Group which included
the business units of Standard & Poor's and Data Resources Inc. He is a director
of the Bank, Edison Schools and LearnX.com. He is also a member of the Board of
Trustees of Dartmouth College and the Board of Overseers for Dartmouth's Amos
Tuck School of Business Administration. Elected January, 2000.
80
Henry J. Nowak, age 65, Attorney, Consultant and a member of the U.S. House of
Representatives from 1974 through 1992. Prior to his service in the U.S. House
of Representatives, he was elected to the office and served as Comptroller of
the County of Erie. Mr. Nowak is a director of A&G Resources Corporation and is
a member of the New York State and Erie County Bar Associations. He was a
director of the Company from 1993 through 1994 and has been a director of the
Bank since 1993. Reelected January, 2000.
Keith R. Whitson, age 57, Group Chief Executive Officer of HSBC since 1998 and a
director of HSBC since 1994. Chief Executive Officer of HSBC Bank plc from 1994
through 1998 and formerly Deputy Chief Executive Officer from 1992 through 1994.
Prior to that he was Executive Director of the Company from 1990 through 1992.
He is also a director of HSBC Argentina Holdings S.A., HSBC Bank plc, HSBC Bank
Canada and HongkongBank. He has been with HSBC since 1961. Elected in 1998.
Directors' Compensation
For their services as directors of both the Company and the Bank, all
nonemployee directors receive an annual retainer of $30,000, plus a fee of
$1,000 for each Board meeting attended. Directors who are employees of HSBC or
other Group affiliates do not receive annual retainers or fees. In addition,
nonemployee directors who are members of any committee of the Board of Directors
other than the Audit and Examining Committee also receive a fee of $1,000 for
attendance at committee meetings except, when a meeting is held on the same day
as a Board meeting or if participation is by conference telephone, the fee is
$500. Additionally, committee chairmen receive annual fees of $2,500 for acting
in that capacity. Members of the Audit and Examining Committee receive an annual
fee which is $9,000 for the chairman and $6,000 for the other members and $500
per meeting for special meetings. Directors are reimbursed for their expenses
incurred in attending meetings. The Company and the Bank have standard
arrangements pursuant to which directors may defer all or part of their fees.
The Directors' Retirement Plan covers nonemployee directors elected prior to
1998 and excludes those serving as directors at the request of HSBC. Eligible
directors with at least five years of service will receive quarterly retirement
benefit payments commencing at the later of age 65 or retirement from the Board,
and continuing for ten years. The annual amount of the retirement benefit is a
percent of the annual retainer in effect at the time of the last Board meeting
the director attended. The percentage is 50 percent after five years of service
and increases by five percent for each additional year of service to 100 percent
upon completion of 15 years of service. If a director who has at least five
years of service dies before his retirement benefit has commenced, his
beneficiary will receive a death benefit calculated as if the director had
retired on the date of his death. If a retired director dies before receiving
retirement benefit payments for the ten year period, the balance of the payments
will be continued to his beneficiary. The Plan is unfunded and payment will be
made out of the general funds of the Company or the Bank.
81
Executive Officers
The table below shows the names and ages of all executive officers of the
Company and the positions held by them as of March 15, 2001 and the dates when
elected an executive officer of the Company or the Bank.
Year
Name Age Elected Present Position with the Company
- ---------------------- --- ------- ---------------------------------
Youssef A. Nasr 46 2000 President and Chief Executive
Officer
Leslie E. Bains 57 2000 Senior Executive Vice President
Robert M. Butcher 57 1988 Senior Executive Vice President
and Chief Financial Officer
Alexander A. Flockhart 49 1999 Senior Executive Vice President
Paul L. Lee 54 2000 Senior Executive Vice President
and General Counsel
Vincent J. Mancuso 54 1996 Senior Executive Vice President
and Group Audit Executive, USA
Robert H. Muth 48 1993 Senior Executive Vice President
Joseph M. Petri 48 2001 Senior Executive Vice President
Gerald A. Ronning 53 1991 Executive Vice President and
Controller
Iain A. Stewart 42 2000 Senior Executive Vice President
Philip S. Toohey 57 1990 Senior Executive Vice President
and Secretary
George T. Wendler 56 2000 Senior Executive Vice President
and Chief Credit Officer
Youssef A. Nasr had been a Director of the Company since 1998. From 1998 through
1999, he had been President and Chief Executive Officer of HSBC Bank Canada. He
has been a member of the HSBC Group since 1976.
Leslie E. Bains managed domestic private banking and investments at Republic.
Ms. Bains joined Republic in 1993.
Alexander A. Flockhart previously was HSBC's Managing Director of the Saudi
British Bank. From 1992 to 1994, he served as the Chief Executive Officer of
HSBC Thailand. He joined HSBC in 1974.
Joseph M. Petri was Executive Managing Director and head of sales for HSBC's
Investment Banking and Markets, Americas from 1999 to 2000. He was President and
Senior Partner of Summit Capital Advisors LLC, a New Jersey based hedge fund
from 1995 to 1998. Prior to that, Mr. Petri held a variety of management
positions with Merrill Lynch.
Iain A. Stewart is an HSBC International Manager who was Group Treasurer in
London from 1994 to 1999 and formerly manager of Group Market Risk. He joined
HSBC in 1981 and was Treasurer USA from 1989 to 1993.
Messrs. Lee and Wendler each served Republic or Republic Bank in executive
capacities for more than five years. Messrs. Butcher, Mancuso, Muth, Ronning and
Toohey each served the Company or the Bank in executive capacities for more than
five years. There are no family relationships among the above officers.
82
Item 11. Executive Compensation
The following table sets forth information as to the compensation earned through
December 31, 2000 by the President and Chief Executive Officer and by the four
most highly compensated officers of the Company and the Bank for their services
on behalf of the Company. Principal position indicates capacity served in 2000.
Summary Compensation Table
Annual Compensation Long Term Compensation
--------------------------------------- -----------------------
Restricted All
Name and Stock LTIP Other
Principal Position Year Salary Bonus Other Awards Payouts Compensation
---- -------- ---------- -------- -------- ---------- ------------
Youssef A. Nasr 2000 $738,461 $1,100,000 $145,172 $441,000 $ - $423,706
President and
Chief Executive Officer
Elias Saal 2000 490,385 2,546,250 7,973 - 1,355,884 11,193
Senior Executive Vice President
Treasury and International
Private Banking
Iain A. Stewart 2000 569,288 2,000,000 80,664 1,466,000 - 243,351
Senior Executive Vice President
Investment Banking and Markets
Robert H. Muth 2000 550,000 550,000 117,241 150,000 - 118,859
Senior Executive Vice President 1999 296,596 275,000 1,469 152,000 - 110,175
Administration 1998 299,593 211,825 5,093 121,000 - 10,400
George T. Wendler 2000 543,269 500,000 9,647 100,000 1,310,000 2,089
Senior Executive Vice President
and Chief Credit Officer
Prior to 2000, Messrs. Nasr and Stewart were compensated by HSBC entities other
than the Company and Messrs. Saal and Wendler were compensated by Republic. Mr.
Muth's 1999 compensation reflects only the amounts paid by the Company and does
not include compensation received while on secondment to another HSBC entity.
Other Annual Compensation for Mr. Nasr includes reimbursement for rental
expenses amounting to $69,567 and related tax gross-ups of $72,552. Other Annual
Compensation for Mr. Stewart includes an executive travel allowance of $22,288
and tax gross-ups of $28,933. Mr. Muth's Other Annual Compensation includes tax
gross-ups of $96,448. Other Annual Compensation for the other named executives
includes health and insurance benefits.
The Restricted Share Awards represent the monetary value at grant date of awards
made under the HSBC Restricted Share Plan for performance in the year indicated.
The number of shares of HSBC Holdings plc common stock corresponding to the 2000
award will not be known until HSBC actually purchases the shares, which is
expected to occur late in the first quarter of 2001. The aggregate number and
value at December 31, 2000 of restricted share holdings through 1999 for each of
the named executives was: Mr. Nasr: 46,326 shares ($681,922); Mr. Saal: none;
Mr. Stewart: 73,446 shares ($1,081,127); Mr. Muth: 26,534 shares ($390,576); and
Mr. Wendler: none. The shares awarded to Messrs. Nasr and Stewart for holdings
through 1999, are for performance while employed by other HSBC entities.
Dividends are paid on all restricted shares.
No stock options on HSBC Holdings plc common stock were granted under the HSBC
Executive Share Option Plan to any of the named executives for the performance
years indicated.
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The Long-Term Incentive Plan payouts to Messrs. Saal and Wendler represent
payments made under Republic's Long-Term Incentive Stock Plan.
All Other Compensation for Mr. Nasr includes reimbursement for moving expenses
of $359,214, unused vacation pay of $57,692 earned while working for another
HSBC entity and the Company's matching contributions to its 401(k) plan. All
Other Compensation for Mr. Stewart represents a reimbursement for moving
expenses. All Other Compensation for Mr. Muth in 2000 consists of moving expense
reimbursement of $104,059, the Company's matching 401(k) plan contribution and
a four percent credit on salary deferred under the Company's deferred salary
plan. Since deferred salary is not eligible for the Company matching
contributions under the 401(k) plan, salary deferrals are increased by four
percent, which is the maximum matching contribution available under the 401(k)
plan. All Other Compensation for Messrs. Saal and Wendler represent payments
from Republic's deferred compensation and profit sharing plans.
Aggregated Stock Option Exercises in 2000 and Option Values as of Year-End 2000
Number of Securities Value of Unexercised
Underlying Unexercised Options In-the-Money Options
as of December 31, 2000 as of December 31, 2000 (1)
Shares Acquired Value ------------------------------- ---------------------------
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ----------------- --------------- -------- ----------- ------------- ----------- -------------
Youssef A. Nasr - $- 81,000 45,000 $725,307 $240,153
Elias Saal - - - - - -
Iain A. Stewart - - 66,000 40,500 551,899 216,137
Robert H. Muth - - 39,000 19,500 330,578 104,066
George T. Wendler - - - - - -
(1) Value based on the closing price per share of HSBC Holdings plc common
stock on December 29, 2000 of 9.85 GBP and a US $ exchange rate of 1.4935
per GBP.
The unexercised stock options included above on HSBC Holdings plc common stock
were granted under the HSBC Executive Share Option Plan for performance years
1997 and prior. The option awards for Messrs. Nasr and Stewart are for
performance while employed by other HSBC entities.
The following table shows the estimated annual retirement benefit payable upon
normal retirement on a straight life annuity basis to participating employees,
including officers, in the compensation and years of service classifications
indicated under the Company's retirement plans which cover most officers and
employees on a non-contributory basis. The amounts shown are before application
of social security reductions. Years of service credited for benefit purposes is
limited to 30 years in the aggregate.
Estimated Annual Retirement Benefits for
Five Year Average Representative Years of Credited Service
Compensation 15 20 25 30 35
- ----------------- -------- -------- -------- -------- --------
$125,000 $ 36,750 $ 49,250 $ 61,750 $ 74,250 $ 74,563
150,000 44,100 59,100 74,100 89,100 89,475
175,000 51,450 68,950 86,450 103,950 104,388
200,000 58,800 78,800 98,800 118,800 119,300
225,000 66,150 88,650 111,150 133,650 134,213
250,000 73,500 98,500 123,500 148,500 149,125
300,000 88,200 118,200 148,200 178,200 178,950
350,000 102,900 137,900 172,900 207,900 208,775
400,000 117,600 157,600 197,600 237,600 238,600
450,000 132,300 177,300 222,300 267,300 268,425
500,000 147,000 197,000 247,000 297,000 298,250
600,000 176,400 236,400 296,400 356,400 357,900
The Pension Plan is a non-contributory defined benefit pension plan under which
the Bank and other participating subsidiaries of the Company make contributions
in actuarially determined amounts. Compensation covered by the
84
Pension Plan includes regular basic earnings (including salary reduction
contributions to the 401(k) plan), but not incentive awards, bonuses, special
payments or deferred salary. The Company maintains supplemental benefit plans
which provide for the difference between the benefits actually payable under the
Pension Plan and those that would have been payable if certain other awards,
special payments and deferred salaries were taken into account and if
compensation in excess of the limitations set by the Internal Revenue Code could
be counted. Payments under these plans are unfunded and will be made out of the
general funds of the Bank or other participating subsidiaries. The calculation
of retirement benefits is based on the highest five-consecutive year
compensation.
Members of the Senior Management Committee of the Bank receive two times their
normal credited service for each year and fraction thereof served as a committee
member in determining pension and severance benefits to a maximum of 30 years of
credited service in total. This additional service accrual is unfunded and
payments will be made from the general funds of the Bank or other subsidiaries.
As of December 31, 2000, the individuals listed in the Summary Compensation
Table, have total years of credited service in determining benefits payable
under the plans as follows: Mr. Nasr, 13.25; Mr. Saal, 19.58; Mr. Muth, 15.5 and
Mr. Wendler, 13.75. Since Mr. Stewart is an HSBC International Manager, he does
not participate in the Company's retirement plan.
In addition to the pension benefits payable under the Company plan, Messrs. Nasr
and Muth are also entitled to receive pension benefits under the plan of HSBC
Bank Canada. Under terms of employment with the Company, they may receive
additional pension benefits which take into account their combined total years
of service with HSBC. Payments under these arrangements are unfunded and any
additional amounts due would be paid out of the general funds of the Bank.
Effective February 28, 2001, Elias Saal resigned his position with the Company.
Mr. Saal will serve the Company as a consultant on Treasury and International
Private Banking issues. In accordance with the terms of an employment agreement
dated April 30, 1999 between Republic (and the Company as successor thereto) and
Mr. Saal, a lump sum payment of $10.6 million representing salary and bonus to
April 30, 2004, the end of his employment period, was made to Mr. Saal on March
7, 2001. In January 2002, a lump sum payment of approximately $7.5 million
representing supplemental executive retirement plan benefits, plus approximately
$4.0 million in excise tax gross-ups on these benefits, will be paid to Mr.
Saal. These payments were provided for in a Republic acquisition reserve, and
are included in the severance related balance at December 31, 2000. See Note 2
for further discussion. For the remainder of Mr. Saal's life and that of his
spouse, the Company will provide medical and dental benefits to Mr. Saal, his
spouse and children under age 25 up to an aggregate amount not to exceed $1
million.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Principal Holder of Securities
The Company is 100 percent owned by HSBC North America Inc. HSBC North America
Inc., is an indirect wholly owned subsidiary of HSBC Holdings plc.
Messrs. Bond, Flint, Green and Whitson are officers and directors of HSBC.
None of the directors or executive officers owned any of the Company's common
stock at December 31, 2000.
85
Item 13. Certain Relationships and Related Transactions
Directors and officers of the Company, members of their immediate families and
HSBC and its affiliates were customers of, and had transactions with, the
Company, the Bank and other subsidiaries of the Company in the ordinary course
of business during 2000. Similar transactions in the ordinary course of business
may be expected to take place in the future.
All loans to executive officers and directors and members of their immediate
families and to HSBC and its affiliates were made on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with other persons and did not involve more than
normal risk of collectibility or present other unfavorable features.
James H. Cleave, director, served as consultant in connection with the
transaction between HSBC and Republic and the integration of the operations of
Republic and the Company. For these services he received compensation from the
Company of approximately $419,000 and $625,000 for 2000 and 1999, respectively.
Also in 2000, for his work on the merger, Mr. Cleave was awarded restricted
shares of HSBC Holdings plc common stock valued at $1,205,000.
86
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
A
1. and 2. Financial Statements and Schedules
The following financial statements and schedules of the Company and its
subsidiaries are included in Item 8:
Report of Independent Auditors
HSBC USA Inc.:
Consolidated Balance Sheet
Consolidated Statement of Income
Consolidated Statement of Changes in Shareholders' Equity
Consolidated Statement of Cash Flows
HSBC Bank USA:
Consolidated Balance Sheet
Summary of Significant Accounting Policies
Notes to Financial Statements
3. Exhibits
3 a Registrant's Restated Certificate of Incorporation and Amendments
Thereto
b Registrant's By-Laws, as Amended to Date
4 Instruments Defining the Rights of Security Holders, Including
Indentures
Registrant has previously filed with the Commission as Exhibits to
various registration statements and periodic reports the Restated
Certificate of Incorporation, as amended, By-Laws and all indentures
and other Instruments Defining the Rights of Security Holders.
12.01 Computation of Ratio of Earnings to Fixed Charges (filed herewith)
12.02 Computation of Ratio of Earnings to Combined Fixed Charges and
Preferred Dividends (filed herewith)
22 Subsidiaries of the Registrant
The Company's only significant subsidiary, as defined, is HSBC Bank
USA, a state bank organized under the laws of New York State.
23 Consent of Independent Accountants
B
Reports on Form 8-K
1. On December 21, 2000 a report on Form 8-K was filed describing a
distribution by the Company to its parent.
87
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
/s/ Philip S. Toohey
- -------------------------------
Philip S. Toohey
Senior Executive Vice President
and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed on March 6, 2001 by the following persons on behalf of the
Registrant and in the capacities indicated:
Sal H. Alfiero* Director
/s/ Robert M. Butcher John R. H. Bond*
- -------------------------------- Chairman of the Board
Robert M. Butcher James H. Cleave* Director
Senior Executive Vice President Frances D. Fergusson* Director
and Chief Financial Officer Douglas J. Flint* Director
(Principal Financial Officer) Martin J. G. Glynn* Director
Stephen K. Green* Director
Ulric Haynes, Jr.* Director
/s/ Gerald A. Ronning Richard A. Jalkut* Director
- -------------------------------- Bernard J. Kennedy* Director
Gerald A. Ronning Peter Kimmelman* Director
Executive Vice President Charles G. Meyer, Jr.* Director
and Controller James L. Morice* Director
(Principal Accounting Officer) Youssef A. Nasr*
Director, President
and Chief Executive Officer
Jonathan Newcomb* Director
Henry J. Nowak* Director
Keith R. Whitson* Director
*
/s/ Philip S. Toohey
--------------------------
Philip S. Toohey
Attorney-in-fact
88