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CONFORMED 1.
SECURITIES AND EXCHANGE COMMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 2002
Commission file number 1-7436
HSBC USA INC.
(Exact name of registrant as specified in its charter)
Maryland Corporation
(State or other jurisdiction of
incorporation or organization)
13-2764867
(I.R.S. Employer Identification No.)
452 Fifth Avenue, New York, New York 10018
(Address of principal executive offices)
(212) 525-3735
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months,
and (2) has been subject to such filing requirements for the
past 90 days.
Yes _X_ No ___
All voting stock (704 shares of Common Stock, $5 par value) is
owned by HSBC North America Inc., an indirect wholly owned
subsidiary of HSBC Holdings plc.
This report includes a total of 43 pages.
2.
Part I - FINANCIAL INFORMATION
Item 1 - Financial Statements Page
Consolidated Balance Sheet
September 30, 2002 and December 31, 2001 3
Consolidated Statement of Income
For The Quarter and Nine Months
Ended September 30, 2002 and 2001 4
Consolidated Statement of Changes in
Shareholders' Equity For The Nine Months
Ended September 30, 2002 and 2001 5
Consolidated Statement of Cash Flows
For The Nine Months Ended
September 30, 2002 and 2001 6
Notes to Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Item 3 - Quantitative and Qualitative Disclosures
About Market Risk 29
Item 4 - Controls and Procedures 32
Part II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 36
Signature 37
Certifications 38
3.
HSBC USA Inc.
- --------------------------------------------------------------------
C O N S O L I D A T E D B A L A N C E S H E E T
September 30, December 31,
2002 2001
- --------------------------------------------------------------------
in thousands
Assets
Cash and due from banks $ 2,280,792 $ 2,102,756
Interest bearing deposits with banks 761,733 3,560,873
Federal funds sold and securities
purchased under resale agreements 7,246,424 3,744,624
Trading assets 11,429,568 9,088,905
Securities available for sale 14,761,537 15,267,790
Securities held to maturity (fair value
$4,719,176 and $4,839,705) 4,458,960 4,651,329
Loans 42,217,788 40,923,298
Less - allowance for credit losses 541,028 506,366
- --------------------------------------------------------------------
Loans, net 41,676,760 40,416,932
Premises and equipment 728,749 750,041
Accrued interest receivable 354,105 416,545
Equity investments 280,208 271,402
Goodwill 2,766,826 2,777,521
Other assets 3,299,406 4,064,858
- --------------------------------------------------------------------
Total assets $90,045,068 $87,113,576
====================================================================
Liabilities
Deposits in domestic offices
Noninterest bearing $ 5,480,349 $ 5,432,106
Interest bearing 32,839,968 31,695,955
Deposits in foreign offices
Noninterest bearing 426,772 428,252
Interest bearing 17,634,274 18,951,096
- --------------------------------------------------------------------
Total deposits 56,381,363 56,507,409
- --------------------------------------------------------------------
Trading account liabilities 6,611,901 3,799,817
Short-term borrowings 11,897,890 9,202,086
Interest, taxes and other liabilities 3,311,146 6,064,462
Subordinated long-term debt and perpetual
capital notes 2,258,883 2,711,549
Guaranteed mandatorily redeemable securities 748,746 728,341
Other long-term debt 1,495,466 1,050,882
- --------------------------------------------------------------------
Total liabilities 82,705,395 80,064,546
- --------------------------------------------------------------------
Shareholders' equity
Preferred stock 500,000 500,000
Common shareholder's equity
Common stock 4 4
Capital surplus 6,046,089 6,034,598
Retained earnings 577,183 415,821
Accumulated other comprehensive income 216,397 98,607
- --------------------------------------------------------------------
Total common shareholder's equity 6,839,673 6,549,030
- --------------------------------------------------------------------
Total shareholders' equity 7,339,673 7,049,030
- --------------------------------------------------------------------
Total liabilities and shareholders' equity $90,045,068 $87,113,576
====================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
4.
HSBC USA Inc.
- --------------------------------------------------------------------------------
C O N S O L I D A T E D S T A T E M E N T O F I N C O M E
Quarter ended Nine months ended
September 30, September 30,
----------------------- ------------------------
2002 2001 2002 2001
- --------------------------------------------------------------------------------
in thousands
Interest income
Loans $ 631,161 $ 729,316 $ 1,896,893 $ 2,267,117
Securities 226,920 289,788 709,731 990,460
Trading assets 44,224 52,670 118,770 175,797
Short-term investments 34,832 73,080 122,140 288,113
Other interest income 4,957 6,472 16,582 21,684
- --------------------------------------------------------------------------------
Total interest income 942,094 1,151,326 2,864,116 3,743,171
- --------------------------------------------------------------------------------
Interest expense
Deposits 227,123 440,769 735,351 1,532,997
Short-term borrowings 58,467 74,156 177,300 283,029
Long-term debt 61,417 81,750 200,362 256,925
- --------------------------------------------------------------------------------
Total interest expense 347,007 596,675 1,113,013 2,072,951
- --------------------------------------------------------------------------------
Net interest income 595,087 554,651 1,751,103 1,670,220
Provision for credit losses 39,000 47,500 168,750 143,050
- --------------------------------------------------------------------------------
Net interest income, after provision
for credit losses 556,087 507,151 1,582,353 1,527,170
- --------------------------------------------------------------------------------
Other operating income
Trust income 23,561 20,517 71,058 65,360
Service charges 53,860 47,738 152,801 139,177
Mortgage banking revenue (1,855) 3,293 47,614 22,907
Other fees and commissions 103,709 86,753 294,953 245,762
Trading revenues:
Treasury business and
other 9,799 94,173 56,852 191,237
Residential mortgage
business related 11,693 (20,380) (33,859) (15,201)
----------- ------------ ------------ ------------
Total trading revenues 21,492 73,793 22,993 176,036
Security gains, net 16,164 20,891 120,464 146,671
Other income 31,906 22,817 82,238 40,520
- --------------------------------------------------------------------------------
Total other operating income 248,837 275,802 792,121 836,433
- --------------------------------------------------------------------------------
804,924 782,953 2,374,474 2,363,603
- --------------------------------------------------------------------------------
Operating expenses
Salaries and employee
benefits 254,201 243,464 750,165 728,053
Occupancy expense, net 40,184 40,665 114,056 116,865
Goodwill amortization - 42,104 - 127,965
Princeton Note Matter - 575,000 - 575,000
Other expenses 164,660 155,429 519,493 483,946
- --------------------------------------------------------------------------------
Total operating expenses 459,045 1,056,662 1,383,714 2,031,829
- --------------------------------------------------------------------------------
Income (loss) before taxes
and cumulative effect of
accounting change 345,879 (273,709) 990,760 331,774
Applicable income tax expense
(credit) 130,000 (106,500) 367,000 129,700
- --------------------------------------------------------------------------------
Income (loss) before
cumulative effect
of accounting change 215,879 (167,209) 623,760 202,074
- --------------------------------------------------------------------------------
Cumulative effect of accounting
change - implementation of
SFAS 133 - - - (451)
- --------------------------------------------------------------------------------
Net income (loss) $ 215,879 $ (167,209) $ 623,760 $ 201,623
================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
5.
HSBC USA Inc.
- -------------------------------------------------------------------
C O N S O L I D A T E D S T A T E M E N T O F C H A N G E S
I N S H A R E H O L D E R S' E Q U I T Y
Nine months ended September 30,
2002 2001
- -------------------------------------------------------------------
Preferred stock
Balance, January 1, $ 500,000 $ 500,000
- -------------------------------------------------------------------
Balance, September 30, 500,000 500,000
- -------------------------------------------------------------------
Common stock
Balance, January 1, 4 4
- -------------------------------------------------------------------
Balance, September 30, 4 4
- -------------------------------------------------------------------
Capital surplus
Balance, January 1, 6,034,598 6,104,264
Return of capital - (84,939)
Capital contribution from parent 11,491 9,479
- -------------------------------------------------------------------
Balance, September 30, 6,046,089 6,028,804
- -------------------------------------------------------------------
Retained earnings
Balance, January 1, 415,821 612,798
Net income 623,760 201,623
Cash dividends declared:
Preferred stock (17,398) (19,173)
Common stock (445,000) (225,000)
- -------------------------------------------------------------------
Balance, September 30, 577,183 570,248
- -------------------------------------------------------------------
Accumulated other comprehensive income (loss)
Balance, January 1, 98,607 116,851
Net change in unrealized gains
on securities 61,915 (15,655)
Net change in unrealized gain (loss) on
derivatives classified as cash flow
hedges 57,788 (36,563)
Unrealized net transitional gain related
to initial adoption of SFAS 133 - 2,853
Amortization of net unrealized
transitional SFAS 133 gains credited
to current income - (2,140)
Foreign currency translation adjustment (1,913) (14,125)
- -------------------------------------------------------------------
Other comprehensive income (loss),
net of tax 117,790 (65,630)
- -------------------------------------------------------------------
Balance, September 30, 216,397 51,221
- -------------------------------------------------------------------
Total shareholders' equity, September 30,$ 7,339,673 $ 7,150,277
===================================================================
Comprehensive income
Net income $ 623,760 $ 201,623
Other comprehensive income (loss) 117,790 (65,630)
- -------------------------------------------------------------------
Comprehensive income $ 741,550 $ 135,993
===================================================================
The accompanying notes are an integral part of the consolidated
financial statements.
6.
HSBC USA Inc.
- --------------------------------------------------------------------------------
C O N S O L I D A T E D S T A T E M E N T O F C A S H F L O W S
Nine months ended September 30,
2002 2001
- --------------------------------------------------------------------------------
in thousands
Cash flows from operating activities
Net income $ 623,760 $ 201,623
Adjustments to reconcile net income to net cash
(used) by operating activities
Depreciation, amortization and deferred taxes 479,957 166,353
Provision for credit losses 168,750 143,050
Net change in other accrual accounts (832,688) 625,406
Net change in loans originated for sale (1,247,928) (303,443)
Net change in trading assets and liabilities 567,206 (1,307,093)
Other, net (358,099) (317,226)
- --------------------------------------------------------------------------------
Net cash (used) by operating activities (599,042) (791,330)
- --------------------------------------------------------------------------------
Cash flows from investing activities
Net change in interest bearing deposits with banks 2,799,140 1,159,698
Net change in short-term investments (4,606,865) (1,465,052)
Purchases of securities held to maturity (818,517) (113,587)
Proceeds from maturities of securities held to
maturity 1,014,962 842,497
Purchases of securities available for sale (10,497,502) (12,342,474)
Proceeds from sales of securities available
for sale 6,512,916 10,977,134
Proceeds from maturities of securities available
for sale 3,301,123 3,318,574
Net change in credit card receivables 30,620 38,509
Net change in other short-term loans (402,271) 146,780
Net originations and maturities of long-term loans 90,107 (2,350,201)
Sales of loans 189,023 35,092
Expenditures for premises and equipment (57,959) (87,254)
Net cash used in acquisitions, net of
cash acquired - (21,547)
Other, net 174,906 109,986
- --------------------------------------------------------------------------------
Net cash provided (used) by investing
activities (2,270,317) 248,155
- --------------------------------------------------------------------------------
Cash flows from financing activities
Net change in deposits (126,046) 320,950
Net change in short-term borrowings 3,674,875 1,040,596
Issuance of long-term debt 991,917 374,391
Repayment of long-term debt (1,031,159) (645,398)
Return of capital - (84,939)
Dividends paid (462,192) (244,785)
- --------------------------------------------------------------------------------
Net cash provided by financing activities 3,047,395 760,815
- --------------------------------------------------------------------------------
Net change in cash and due from banks 178,036 217,640
Cash and due from banks at beginning of period 2,102,756 1,860,713
- --------------------------------------------------------------------------------
Cash and due from banks at end of period $ 2,280,792 $ 2,078,353
================================================================================
Non-cash activities:
Transfer of securities from held to maturity to
available for sale $ - $ 189,867
Transfer of securities from available for sale
to held to maturity - 1,041,911
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
7.
Notes to Consolidated Financial Statements
1. Basis of Presentation
- ------------------------------------------------------------
The accounting and reporting policies of HSBC USA Inc. (the
Company) and its subsidiaries including its principal
subsidiary, HSBC Bank USA (the Bank), conform to accounting
principles generally accepted in the United States of
America and to predominant practice within the banking
industry. Such policies, except as described in Note 4, are
consistent with those applied in the presentation of the
Company's 2001 annual financial statements.
The interim financial information in this report has not
been audited. In the opinion of the Company's management,
all adjustments, all of which are normal and recurring and
necessary for a fair presentation of financial position,
results of operations and cash flows for the interim periods
have been made. The interim financial information should be
read in conjunction with the 2001 Annual Report on Form 10-K
(the 2001 10-K). Certain reclassifications may have been
made to prior period amounts to conform to current period
presentations.
2. Business Segments
- ------------------------------------------------------------
The Company reports and manages its business segments
consistently with the line of business groupings used by
HSBC Holdings plc (HSBC), the Company's ultimate parent. As
a result of HSBC line of business changes, the Company
altered its business segments during the fourth quarter of
2001 as reported in the 2001 10-K. Prior period disclosures
as reported in the third quarter 2001 Form 10-Q have been
conformed herein to the presentation of current segments.
The Company has four business segments that it utilizes for
management reporting and analysis purposes. These segments
are based upon products and services offered and are
identified in a manner consistent with the requirements
outlined in Statement of Financial Accounting Standards No.
131, Disclosures about Segments of an Enterprise and Related
Information (SFAS 131). The segment results show the
financial performance of the major business units.
The Personal Financial Services Segment provides an
extensive array of products and services including
installment and revolving term loans, deposits, branch
services, mutual funds and insurance. These products are
marketed to individuals primarily through the branch banking
network. Residential mortgage lending provides loan
financing through direct retail and wholesale origination
channels. Mortgage loans are originated through a network
of brokers, wholesale agents and retail originations
offices. Servicing is performed for the individual mortgage
holder or on a contractual basis for mortgages owned by
third parties.
The Commercial Banking Segment provides a diversified range
of financial products and services. This segment provides
loan and deposit products to small and middle-market
corporations including specialized products such as
equipment and real estate financing. These products and
services are
8.
offered through multiple delivery systems, including the
branch banking network. In addition, various credit and
trade related products are offered such as standby
facilities, performance guarantees, acceptances and accounts
receivable factoring.
The Corporate, Investment Banking and Markets Segment is
comprised of Corporate/Institutional Banking (CIB) and
Investment Banking and Markets (IB&M). CIB provides deposit
and lending functionality to large corporate and multi-
national corporations and banks. U.S. dollar clearing
services are offered for domestic and international wire
transfer transactions. Credit and trade related products
such as standby facilities, performance guarantees and
acceptances are also provided to large corporate entities.
The IB&M component includes treasury and traded markets.
The treasury function maintains overall responsibility for
the investment and borrowing of funds to ensure liquidity,
manages interest rate risk and capital at risk. Traded
markets encompasses the trading and sale of foreign
exchange, banknotes, derivatives, precious metals,
securities and emerging markets instruments, both
domestically and internationally.
The Private Banking Segment offers a full range of services
for high net worth individuals including deposit, lending,
trading, trust and investment management.
Other segment for 2001 includes the expense associated with
the Princeton Note settlement and related liabilities
recorded in September of 2001 and paid in January of 2002.
Detailed reviews comparing September 30, 2002 quarterly and
nine month segment results with prior year periods are
included in the management's discussion and analysis of
financial condition and results of operations.
3. New Accounting Standards
- ------------------------------------------------------------
In June 2001, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 143,
Accounting for Asset Retirement Obligations (SFAS 143),
which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-
lived assets and the associated asset retirement costs. The
standard applies to legal obligations associated with the
retirement of long-lived assets.
SFAS 143 requires the fair value of a liability for an asset
retirement obligation be recognized through a charge to
earnings in the period in which it is incurred if a
reasonable estimate of fair value can be made. The fair
value of the liability is netted against the carrying amount
of the associated asset and this adjusted carrying amount is
depreciated over the life of the asset. The liability is
accreted at the end of each period through credits to
operating expense. If the obligation is settled for other
than the carrying amount of the liability, the Company will
recognize a gain or loss on settlement.
9.
The Company is required and plans to adopt the provisions of
SFAS 143 for the quarter ending March 31, 2003. Adoption of
this standard is not expected to have a material effect on
the consolidated financial statements of the Company.
In October 2001, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of (SFAS 144). The
statement supersedes SFAS 121 and is effective for fiscal
years beginning after June 15, 2002 although early adoption
is encouraged. SFAS 144 retains many of the fundamental
principles of SFAS 121 but differs from it in that it
excludes goodwill and intangible assets from its provisions
and provides greater direction relating to the
implementation of its principles. Adoption is not expected
to have a material impact on the consolidated financial
statements of the Company.
The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, Accounting for Exit
or Disposal Activities (SFAS 146) in July 2002, which
prescribes the way in which costs associated with exit or
disposal activities are to be determined and the timing of
their recognition. These activities include the sale or
termination of a line of business and the closure of
business activities at a particular location. The statement
also provides guidance for the reporting and disclosure of
these costs. The Company is currently reviewing the
prospective impact of applying the statement, which will be
effective for disposal activities initiated after December
31, 2002.
In October 2002, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 147,
Acquisitions of Certain Financial Institutions, an amendment
of FASB Statements No. 72 and 144 and FASB Interpretation
No. 9 (SFAS 147). This statement removes acquisitions of
financial institutions from the scope of both Statement No.
72 and Interpretation No. 9 and requires that those
transactions, which constitute a business, be accounted for
in accordance with SFAS No. 141 and SFAS No. 142. Thus, the
requirement in paragraph 5 of Statement No. 72 to recognize
(and subsequently amortize) any excess of the fair value of
liabilities assumed over the fair value of tangible and
identifiable intangible assets acquired as an unidentifiable
intangible asset no longer applies to acquisitions within
the scope of SFAS 147.
SFAS 147 also clarifies that an acquisition that does not
meet the definition of a business combination because the
transferred net assets and activities do not constitute a
business is an acquisition of net assets. Those
acquisitions should be accounted for in the same manner as
any other net asset acquisition and do not give rise to
goodwill.
10.
SFAS 147 is effective for acquisitions on or after
October 1, 2002 with mandatory implementation effective
January 1, 2001 for existing intangibles. The Company has
concluded that its acquisition of East River Savings Bank
is within the scope of SFAS 147. As of December 31, 2001,
the unamortized amount of unidentifiable intangible assets
(i.e. excess premium SFAS 72) was $64.6 million. During the
fourth quarter, this intangible asset will be reclassified
retroactively to January 1, 2002 to goodwill and no longer
be amortized but subject to annual impairment testing. The
amortization expense on this intangible asset recorded for
the nine months ended September 30, 2002 was $5.1 million.
This expense will be reversed through restatement of prior
quarter results.
4. Goodwill and Intangible Assets
- ------------------------------------------------------------
The Company adopted the provisions of Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible
Assets (SFAS 142), on January 1, 2002. Under SFAS 142,
goodwill is no longer amortized, but is reviewed for
impairment at least annually at the reporting unit level.
Identifiable intangible assets acquired in a business
combination are amortized over their useful lives unless
their useful lives are indefinite, in which case those
intangible assets are tested for impairment annually. In
accordance with SFAS 142, the Company has completed its
transitional goodwill impairment test and its annual
impairment test and determined that the fair value of each
of the reporting units exceeded its carrying value at both
test dates. As a result, no impairment loss was recognized
as of January 1, 2002 and September 30, 2002.
The following table presents the consolidated results of
operations adjusted as though the adoption of SFAS 142
occurred as of January 1, 2001.
- ------------------------------------------------------------
Nine months ended September 30, 2002 2001
- ------------------------------------------------------------
in thousands
Reported net income $623,760 $201,623
Goodwill amortization add-back - 127,965
- -------------------------------------------------------------
Adjusted net income $623,760 $329,588
=============================================================
The following table presents the changes in the carrying
amount of goodwill for each of the reported business
segments for the nine months ended September 30, 2002.
- -------------------------------------------------------------------------------------------
Goodwill
- -------------------------------------------------------------------------------------------
Corporate,
Personal Investment
Financial Commercial Banking & Private
Services Banking Markets Banking Total
- -------------------------------------------------------------------------------------------
in thousands
Balance December 31, 2001 $1,189,536 $543,052 $637,627 $407,306 $2,777,521
Goodwill ajustments and
other (3,069) (1,741) (4,834) (1,051) (10,695)
- -------------------------------------------------------------------------------------------
Balance September 30, 2002 $1,186,467 $541,311 $632,793 $406,255 $2,766,826
===========================================================================================
11.
The following table presents all acquired intangibles of the
Company that are being amortized. Annual amortization of
mortgage servicing rights is expected to be approximately
$120 million for the year ended December 31, 2002 and $72
million for the years ended December 31, 2003 through 2006.
At September 30, 2002 acquired intangible assets are as
follows.
- ---------------------------------------------------------------------------
Acquired Intangibles
- ---------------------------------------------------------------------------
Amortization
Expense
Gross Carrying Accumulated 9 Months Ended
Amount Amortization 9/30/02
- ---------------------------------------------------------------------------
in thousands
Mortgage servicing rights $505,544 $170,757 $102,460
Favorable lease arrangements 62,767 12,300 2,977
Excess premium (SFAS 72) 101,940 42,475 5,097
- ---------------------------------------------------------------------------
Total $670,251 $225,532 $110,534
===========================================================================
As discussed in Note 3, New Accounting Standards, SFAS 147
addresses intangible assets arising from acquisitions of
certain financial institutions. When the Company adopts the
provisions of SFAS 147 during the fourth quarter, the above
excess premium (SFAS 72) will become goodwill effective
January 1, 2002 and be accounted for in accordance with SFAS
142.
5. Pledged Assets
- ------------------------------------------------------------
The following table presents pledged assets included in the
consolidated balance sheet.
- ----------------------------------------------------------------------
Pledged Assets
- ----------------------------------------------------------------------
September 30, December 31,
2002 2001
- ----------------------------------------------------------------------
in thousands
Interest bearing deposits with banks $ 65,000 $ 65,000
Trading assets 2,474,742 135,982
Securities available for sale 4,928,327 5,938,639
Securities held to maturity 1,775,270 2,111,949
Loans 387,098 343,127
- ----------------------------------------------------------------------
Total $9,630,437 $8,594,697
======================================================================
6. Litigation
- ------------------------------------------------------------
The Company is named in and is defending legal actions in
various jurisdictions arising from its normal business.
None of these proceedings is regarded as material
litigation. In addition, there are certain proceedings
relating to the "Princeton Note Matter" that are described
below.
In relation to the Princeton Note Matter, as disclosed in
the Company's 2001 Annual Report on Form 10-K, the Company
has settled civil law suits brought by 51 of the 53 Japanese
plaintiffs. It has also resolved all of the previously
reported regulatory and criminal investigations arising from
the Princeton Note Matter. Two of the noteholders, whose
civil suits seek
12.
damages arising from unpaid Princeton Notes with face
amounts totaling approximately $125 million, were not
included in the settlement and their civil suits will
continue. The U.S. Government excluded one of them from the
restitution order because a senior officer of the noteholder
was being criminally prosecuted in Japan for his conduct
relating to its Princeton Notes, and excluded the other
because the sum it is likely to recover from the Princeton
Receiver exceeds its losses attributable to its funds
transfers with Republic New York Securities Corporation as
calculated by the U.S. Government. The senior officer in
question was convicted of various criminal charges related
to the sale of the Princeton Notes during September 2002.
As previously reported, there is pending a purported class
action entitled Ravens v. Republic New York Corporation, et
al., that was filed in the United States District Court for
the Eastern District of Pennsylvania on October 7, 1999 on
behalf of former shareholders of Republic New York
Corporation (Republic) who acquired their common stock
between May 10, 1999 (when signing of the merger agreement
between Republic and HSBC was announced) and September 15,
1999. On October 16, 2000 an amended complaint in the
Ravens action was filed, alleging that the defendants
violated the federal securities laws in the merger
transaction between Republic and HSBC by failing to
disclose facts relating to potential liabilities with
respect to the Princeton Note Matter. The amended
complaint seeks unspecified damages on behalf of the class.
On January 16, 2001, defendants filed a motion to dismiss
the Ravens action. On April 24, 2002, the court denied in
part the Company's motion to dismiss. The Company intends
to defend vigorously against these claims.
13.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
The Company reported third quarter 2002 net income of $215.9
million, compared with a net loss of $167.2 million in the
third quarter of 2001. For the first nine months of 2002,
net income was $623.8 million compared with $201.6 million
for the first nine months of last year. The third quarter
2001 net loss and the lower year-to-date net income
reflected the recognition of a $575 million provision
related to the Princeton Note Matter. Excluding the
Princeton related provision, net income for the third
quarter and nine months of 2001 was $183.8 million and
$552.6 million, respectively.
Net Interest Income
- ------------------------------------------------------------
2002 Compared to 2001
Net interest income for the third quarter of 2002 was $595.1
million compared with $554.7 million for the third quarter
of 2001. This 7.3% increase in net interest income was
driven by a 17 basis point increase in the net yield on
average total assets. For the first nine months of 2002,
net interest income was $1,751.1 million compared with
$1,670.2 million for the first nine months of 2001. The
4.8% increase in net interest income for the first nine
months of 2002 compared to 2001 reflects the impact of a
larger average balance sheet and a wider net interest
margin.
The Federal Reserve lowered short-term interest rates eleven
times during 2001 with three rate cuts occurring after
September 30, 2001. The lower interest rate environment
continued to impact the Company in the first nine months of
2002 and led to lower gross yields earned on assets and to
lower gross rates paid on liabilities compared to 2001. The
short-term rate cuts led to wider interest margins in the
residential mortgage business and treasury investment
operations.
Interest income was $942.1 million in the third quarter of
2002 compared with $1,151.4 million in the third quarter of
2001. Average earning assets were $77.6 billion for the
third quarter of 2002 compared with $78.1 billion a year
ago. The average rate earned on earning assets was 4.85%
for the third quarter of 2002 compared with 5.90% a year
ago. Interest income was $2,864.1 million for the first
nine months of 2002 compared with $3,743.2 million in the
first nine months of 2001. Average earning assets were
$78.3 billion for the first nine months of 2002 compared
with $77.3 billion for the first nine months of 2001. The
average rate earned on earning assets was 4.92% for the
first nine months of 2002 compared with 6.52% a year ago.
Interest expense for the third quarter of 2002 was $347.0
million compared with $596.7 million in the third quarter of
2001. Average interest bearing liabilities for the third
quarter of 2002 were $66.3 billion, compared with $67.2
billion a year ago. The average rate paid on interest
bearing
14.
liabilities for the third quarter of 2002 was 2.08% compared
with 3.52% a year ago. Interest expense for the first nine
months of 2002 was $1,113.0 million compared with $2,073.0
million in the first nine months of 2001. Average interest
bearing liabilities for the first nine months of 2002 were
$67.9 billion, compared with $66.8 billion a year ago. The
average rate paid on interest bearing liabilities was 2.19%
for the first nine months of 2002 compared with 4.15% a year
ago.
The taxable equivalent net yield on average total assets for
the third quarter of 2002 was 2.76%, compared with 2.59% a
year ago. The taxable equivalent net yield on average total
assets for the first nine months of 2002 was 2.71%, compared
with 2.64% a year ago.
Average residential mortgages grew $1.7 billion compared to
the third quarter of 2001, as the mortgage banking division
experienced strong levels of production in the later part of
2001 which continued into the first nine months of 2002, due
to a lower rate environment. Through the first nine months
of 2002 total mortgage loan originations increased 42% to
$14.9 billion compared to $10.5 billion for the first nine
months of 2001. Average investment securities decreased $.8
billion compared to the third quarter of 2001 as the Company
sold securities, including mortgage backed, U.S. Treasury
and Latin American securities during the first nine months
of 2002 to adjust to interest rate changes and to reduce its
credit risk. The Company invested additional amounts in
shorter term trading assets. A more profitable funding mix
consisting of higher levels of savings deposits and lower
levels of certificate of deposit products also contributed
to the increase in net interest income for the third quarter
and first nine months of 2002 as compared to 2001.
Forward Outlook
The Company will continue to pursue modest growth in high
quality commercial loans, residential mortgages and core
personal and commercial deposits. Some less profitable
commercial lending relationships are expected to be exited.
Although the overall level of rates has dropped and the
steeper yield curve which benefited the Company in the later
part of 2001 and the early part of 2002 has flattened, the
Company is expected to continue to benefit from the steep
yield curve established in previous periods for the
remainder of 2002. However, if low rates and a flattening
yield curve persist into 2003, interest margins are likely
to shrink. (See Quantitative and Qualitative Disclosures
About Market Risk). This margin shrinkage may be dampened
by balance sheet growth or other management actions.
Other Operating Income
- ------------------------------------------------------------
Total other operating income was $248.8 million in the third
quarter of 2002, compared with $275.8 million in the third
quarter of 2001. For the first nine months of 2002, total
other operating income was $792.1 million compared with
$836.4 million for the first nine months of 2001.
15.
2002 Compared to 2001 - Nontrading Income
The quarter to quarter and year to date increases in other
fees and commissions were driven by increases in brokerage
revenues due primarily to increases in sale of annuity
products. Revenues related to the sale of annuity products
increased $5.6 million and $22.2 million for the third
quarter and first nine months, respectively, compared with
the same periods of 2001. Higher bankcard, trade service
and commercial loan related fees also contributed to the
above noted increases in other fees.
Mortgage banking revenue (defined as gain on sale of
mortgages plus net mortgage servicing fees) was down $5.1
million for the third quarter of 2002 compared to the third
quarter of 2001. The decrease was primarily the result of
increased amortization and a $47.0 million impairment of
mortgage servicing rights (MSRs) recorded during the third
quarter of 2002. Both were driven by the decline in
mortgage interest rates during the third quarter of 2002.
The impairment recognized in the third quarter is recorded
in a valuation reserve. This decrease was partially offset
by a period to period increase in gain on sale of mortgages
due primarily to higher mortgage origination volumes. On a
year to date basis, mortgage banking revenue was up $24.7
million. The increase was driven by higher gains on sale of
mortgages due to higher mortgage origination volumes. This
was partially offset by the above noted higher levels of
MSRs amortization and the third quarter 2002 MSRs impairment
associated with higher prepayment activity due to the low
rate environment.
The increase in service charges for the third quarter and
year to year of 2002 compared with the same periods of 2001
reflects growth in personal and commercial deposit service
charges.
The quarter to quarter and year to date increases in other
income reflect higher levels of insurance revenues.
Insurance revenues increased $4.8 million and $12.2 million
or 60.8% and 56.0% compared to the third quarter and first
nine months of 2001, respectively. Over 1,500 professionals
are now licensed to sell insurance and certain annuity
products through our retail network. Higher earnings on
investments, accounted for under the equity method of
accounting, also contributed to the increase in other income
for the third quarter and first nine months of 2002 compared
with the same periods of 2001.
Security gains for the first nine months of 2002 included
gains on sales of mortgage backed, U.S. Treasury and Latin
American securities. The Company sold the securities to
adjust to interest rate changes and reduce its credit risk.
During the first nine months of 2001 the Company sold
securities to adjust to interest rate changes and to
reconfigure exposure to residential mortgages. Also during
the first quarter of 2001, a $19.3 million one-time security
gain was realized on the sale of shares in Canary Wharf, a
retail/office development project in London, England.
16.
Forward Outlook - Nontrading Income
During the remainder of 2002, the Company will continue its
focus on growth in brokerage, insurance, trust, asset
management, private banking and trade service related fees.
The Company will utilize its strong retail distribution
network, its improving branch visibility in the United
States as well as its HSBC Group linkage to pursue revenue
growth despite an uncertain economy. The Company faces
strong competitive challenges from other banks and financial
service providers to maintain and grow market share in key
customer segments, but expects to see continued growth.
Trading Revenues
Trading revenues are generated by the Company's participation
in the foreign exchange, credit derivative and precious metal
markets, from trading derivative contracts, including interest
rate swaps and options, from trading securities, and as a
result of certain residential mortgage banking activities
classified as trading revenue due to the adoption of SFAS 133
effective January 1, 2001.
The following table presents trading revenues by business.
The data in the table includes net interest income
earned/(paid) on trading instruments, as well as an
allocation by management to reflect the funding benefit or
cost associated with the trading positions because trading
activities are managed to maximize total revenue. The
trading related net interest income component is not
included in other operating income; it is included in net
interest income.
- --------------------------------------------------------------------------
3rd 3rd 9 Months 9 Months
Quarter Quarter Ended Ended
2002 2001 9/30/02 9/30/01
- --------------------------------------------------------------------------
in millions
Trading revenues -
treasury business and other $ 9.8 $ 94.2 $ 56.9 $191.2
Net interest income * 22.8 7.2 51.9 34.0
- --------------------------------------------------------------------------
Trading related revenues -
treasury business and other $ 32.6 $101.4 $108.8 $225.2
==========================================================================
Business:
Derivatives and treasury $ 31.9 $ 13.4 $ 67.7 $ 28.5
Foreign exchange 16.8 25.5 14.9 62.5
Precious metals 14.8 8.1 50.6 38.0
Other trading (30.9) 54.4 (24.4) 96.2
- --------------------------------------------------------------------------
Trading related revenues -
treasury business and other $ 32.6 $101.4 $108.8 $225.2
==========================================================================
Trading revenues (loss) -
residential mortgage
business related $ 11.7 $(20.4) $(33.9) $(15.2)
===========================================================================
* Included in net interest income on the consolidated income
statement.
17.
Treasury Business and Other: 2002 Compared to 2001
Total treasury business and other trading related revenues
were $32.6 million in the third quarter of 2002 compared to
$101.4 million in the third quarter of 2001. The decline in
other trading revenue in the third quarter of 2002 compared
to 2001 results from mark to market losses on
derivative instruments used to protect against rising
interest rates and also from widening spread relationships
that took place at various times during the quarter,
including early in the third quarter. The reduction in
foreign exchange trading revenue for the third quarter of
2002 compared to 2001 reflects lower levels of proprietary
trading due primarily to reduced volatility in the foreign
exchange markets. Offsetting these declines were increased
trading revenues in credit and interest rate derivatives and
precious metals resulting from increased customer activity
and proprietary trading positions which profited from
movements in credit, interest rate and precious metals
spreads.
Total treasury business and other trading related revenues
were $108.8 million for the first nine months of 2002
compared to $225.2 million for 2001. The decline in other
trading revenue in 2002 resulted from losses on derivative
instruments used to protect against rising interest rates
and also from widening spread relationships that took place
at various times during the third quarter. The lower
foreign exchange related revenue for the first nine months
of 2002 compared to 2001 is due primarily to a weakening
U.S. dollar and adverse rate exchange movements during the
first six months of 2002. Offsetting these declines were
increased trading revenues in credit and interest rate
derivatives and precious metals resulting from increased
customer activity and proprietary trading positions which
profited from movements in credit, interest rate and
precious metals spreads.
Treasury Business and Other: Forward Outlook
The Company expects to build on its expanded capabilities in
foreign exchange, credit and interest rate derivatives and
precious and base metals to grow related revenues. However,
these revenues are subject to market factors, among other
things, and may vary significantly from quarter to quarter.
Residential Mortgage Business Related
In conjunction with the adoption of the Statement of
Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities (SFAS 133) on
January 1, 2001, certain derivative financial instruments
including interest rate lock commitments granted to
customers, forward loan sales commitments (FLSC) associated
with originated mortgage loans held for sale, and derivative
instruments used to protect against the decline in economic
value of mortgage servicing rights, are recorded as trading
positions. The mark to market of these instruments were as
follows.
18.
- -------------------------------------------------------------------------
3rd 3rd 9 Months 9 Months
Quarter Quarter Ended Ended
2002 2001 9/30/02 9/30/01
- -------------------------------------------------------------------------
in millions
SFAS 133 FLSC/Rate locks $(42.3) $(33.3) $(90.4) $(28.1)
Derivative instruments used
to protect value of MSRs 54.0 12.9 56.5 12.9
- -------------------------------------------------------------------------
Trading revenues (loss) -
residential mortgage
business related $11.7 $(20.4) $(33.9) $(15.2)
=========================================================================
Mortgage loans held for sale are accounted for at the lower
of aggregate cost or market value and as a result do not
reflect unrealized gains that exist in the portfolio at
September 30, 2002. Gains will be recognized upon the
actual sale of these loans during the fourth quarter,
subject to variability due to changes in subsequent market
conditions. The derivatives used by management to manage
the risk of changes in market value of the underlying
mortgage loans held for sale are accounted for on a mark to
market basis with changes in market value reflected
currently in income.
The nine month year to year increase in the market value of
the derivative instruments used to protect the value of MSRs
of $43.7 million out paced the year to date increase in MSRs
amortization and impairment valuation allowance, included in
mortgage banking revenues, of $38.4 million.
Forward Outlook
The Company is pursuing hedge accounting treatment under
SFAS 133 for the closed loans in the mortgage pipeline.
This treatment would eliminate a significant portion of the
timing differences and earnings volatility associated with
current SFAS 133 mark to market accounting treatment for the
pipeline.
Operating Expenses
- ------------------------------------------------------------
2002 Compared to 2001
Operating expenses were $459.0 million in the third quarter
of 2002 compared with $1,056.7 million for the third quarter
of 2001. Operating expenses were $1,383.7 million for the
first nine months of 2002 compared with $2,031.8 million a
year ago. Operating expenses for the third quarter and
first nine months of 2001 included a $575.0 million expense
related to the Princeton Note Matter. Excluding the
Princeton Note Matter, operating expenses for the third
quarter and first nine months of 2001 were $481.7 million
and $1,456.8 million, respectively.
The decrease in operating expenses for the third quarter and
first nine months of 2002 reflects the adoption of SFAS 142.
See Note 4 for a discussion of SFAS 142. Under SFAS 142,
goodwill is no longer being amortized through operating
expenses. The increases in salaries and employee benefits
for the third quarter and first nine months of 2002
19.
compared to 2001 reflect higher fringe benefit costs,
primarily related to health care and pension costs. Also,
contributing to the above noted increases are personnel
costs related to the newly formed wealth and tax advisory
services business, which commenced activity during the third
quarter of 2002. This business employs approximately 25
former partners and principals of Arthur Andersen LLP's U.S.
Private Client Service Practice. The year to date increase
in other expenses is primarily due to the second quarter
2002 charges related to reserves for letters of credit and
for a leveraged lease which is fully reserved.
Forward Outlook
The Company continues to position itself to operate in an
uncertain economy. Improving efficiencies and maintaining
strict cost disciplines will remain a priority. Over the
last few months, the Company has been re-examining the
employee benefits offered to ensure that they are
competitive when measured against other employers and that
they meet the needs of our employees both now and going
forward. This process includes taking steps necessary to
reduce the impact of higher health care costs which are
rapidly rising for both the Company and its employees.
As a member of a global organization, the Company has the
opportunity to gain significant cost advantages through the
utilization of human, technology and operation resources in
low cost environments. The HSBC Group currently operates
global processing centers in India and China and plans to
open additional sites in Asia in the next year. The Company
has commenced the migration of certain operational and
customer service activities to India and intends to continue
to do so over the next few years. A qualified team is in
place to manage the transition of the work ensuring no
negative customer impact and the sensitive handling of
affected employees.
Income Taxes
- ------------------------------------------------------------
The effective tax rate was 38% in the third quarter of 2002
compared with 39% in the same period of 2001. The effective
tax rate was 37% in the first nine months of 2002 compared
with 39% in the same period of 2001. The decrease in the
effective tax rate was primarily attributable to the effect
of excluding nontaxable goodwill amortization expense,
offset in part by the decline in tax advantaged income
associated with certain liquidated investments. The net
deferred tax asset at September 30, 2002 was $69 million
compared with $328 million at December 31, 2001. The
decrease in the net deferred tax asset was attributable
primarily to settlement payments made during the first
quarter of 2002 related to the Princeton Note litigation and
the tax effect of items accounted for on a mark to market
basis.
20.
Business Segments
- ------------------------------------------------------------
The Company reports and manages its business segments
consistently with the line of business groupings used by
HSBC Holdings plc (HSBC), the Company's ultimate parent. As
a result of HSBC line of business changes, the Company
altered its business segments during the fourth quarter of
2001 as reported in the 2001 10-K. Prior period disclosures
as reported in the third quarter 2001 Form 10-Q have been
conformed herein to the presentation of current segments.
The Company has four business segments that it uses for
management reporting: personal financial services;
commercial banking; corporate, investment banking and
markets; and private banking. A description of each segment
and the methodologies used to measure financial performance
are included in Note 2, Business Segments. The following
summarizes the results for each segment.
- ---------------------------------------------------------------------------------------------
Corporate,
Personal Investment
Financial Commercial Banking and Private
Services Banking Markets Banking Other Total
- ---------------------------------------------------------------------------------------------
in millions
Third Quarter 2002
- ------------------
Net interest income (1) $ 288 $ 158 $ 121 $ 28 $ - $ 595
Other operating income 102 40 74 33 - 249
- ---------------------------------------------------------------------------------------------
Total income 390 198 195 61 - 844
Operating expenses (2) 214 95 102 48 - 459
- ---------------------------------------------------------------------------------------------
Working contribution 176 103 93 13 - 385
Provision for credit losses (3) 16 35 (12) - - 39
- ---------------------------------------------------------------------------------------------
CMBT * 160 68 105 13 - 346
- ---------------------------------------------------------------------------------------------
Average assets 25,074 14,539 44,397 2,282 89 86,381
Average liabilities/equity (4) 30,785 11,613 36,473 7,510 - 86,381
- ---------------------------------------------------------------------------------------------
Third Quarter 2001
- ------------------
Net interest income (1) $ 278 $ 167 $ 78 $ 32 $ - $ 555
Other operating income 62 40 139 35 - 276
- ---------------------------------------------------------------------------------------------
Total income 340 207 217 67 - 831
Operating expenses (2) * 206 99 99 36 575 1,015
- ---------------------------------------------------------------------------------------------
Working contribution 134 108 118 31 (575) (184)
Provision for credit losses (3) 16 37 (6) 1 - 48
- ---------------------------------------------------------------------------------------------
CMBT * 118 71 124 30 (575) (232)
- ---------------------------------------------------------------------------------------------
Average assets 24,202 15,739 42,224 4,299 - 86,464
Average liabilities/equity (4) 31,454 11,986 30,973 12,051 - 86,464
=============================================================================================
* Contribution margin before tax represents pretax income
(excluding goodwill amortization in the 2001 period).
(1) Net interest income of each segment represents the
difference between actual interest earned on assets and
interest paid on liabilities of the segment adjusted for
a funding charge or credit. Segments are charged a cost
to fund assets (e.g. customer loans) and receive a
funding credit for funds provided (e.g. customer
deposits) based on equivalent market rates.
(2) Expenses for the segments include fully apportioned
corporate overhead expenses.
(3) The provision apportioned to the segments is based on
the segments' net charge offs and the change in
allowance for credit losses. Credit loss reserves are
established at a level sufficient to absorb the losses
considered to be inherent in the portfolio.
(4) Common shareholder's equity and earnings on common
shareholder's equity are allocated back to the segments
based on the percentage of capital assigned to the
business.
21.
Personal Financial Services
This segment contributed $160 million to CMBT in the third
quarter of 2002. Growth in CMBT over the same period of
2001 was $42 million or 35.6%. This increase was driven by
a $40 million improvement in other operating income,
reflecting growth in brokerage, insurance revenue and
deposit service charges. The $10 million increase in net
interest income is the result of residential mortgage
growth, driven by the low interest rate environment, as well
as the improved spread earned on residential mortgages. A
more profitable funding mix consisting of higher levels of
savings deposits and lower levels of certificate of deposit
products also contributed to the increase in net interest
income. The increase in operating expenses reflects higher
levels of incentive based compensation as well as higher
fringe benefit related costs.
Commercial Banking
This segment contributed $68 million to CMBT in the third
quarter of 2002 compared with $71 million in the same period
of 2001. The exit of less profitable commercial lending
relationships in this segment contributed to lower average
asset levels which led to lower net interest income.
Corporate, Investment Banking and Markets
This segment contributed $105 million to CMBT in the third
quarter of 2002 compared with $124 million in the same
period of 2001. The $43 million increase in net interest
income reflects higher levels of wholesale treasury related
assets and liabilities and an improved interest spread
earned on wholesale treasury related balances. The $65
million decrease in other operating income is due primarily
to lower trading revenues. Mark to market losses on
derivative instruments used to protect against rising
interest rates and widening spread relationships that took
place at various times during the third quarter accounted
for the majority of the decline in other trading revenue. A
reduction in foreign exchange trading revenue reflects lower
levels of proprietary trading due primarily to reduced
volatility in the foreign exchange markets. Offsetting
these declines were increased trading revenues in credit and
interest rate derivatives and precious metals resulting from
increased customer activity and proprietary trading
positions which profited from movements in credit, interest
rate and precious metals spreads. Pay downs on large
commercial credits favorably impacted the provision for
credit losses as compared to 2001.
Private Banking
This segment contributed $13 million to CMBT in the third
quarter of 2002 compared with $30 million in the same period
of 2001. The disposal of higher yielding Latin American
securities during 2002, to reduce the Company's credit risk,
was the primary reason for the reduction in net interest
income as compared to 2001. The increase in operating
expenses was driven by personnel costs related to the newly
formed wealth and tax advisory service business, which
commenced activity during the third quarter of 2002.
22.
Other
This segment for 2001 includes the expense associated with
the Princeton Note settlement and related liabilities
recorded in September of 2001 and paid in January of 2002.
- ------------------------------------------------------------------------------------------------
Corporate,
Personal Investment
Financial Commercial Banking and Private
Services Banking Markets Banking Other Total
- ------------------------------------------------------------------------------------------------
in millions
Nine months ended September 30, 2002
- ------------------------------------
Net interest income (1) $ 889 $ 472 $ 301 $ 89 $ - $ 1,751
Other operating income 293 120 286 93 - 792
- ------------------------------------------------------------------------------------------------
Total income 1,182 592 587 182 - 2,543
Operating expenses (2) 662 308 283 130 - 1,383
- ------------------------------------------------------------------------------------------------
Working contribution 520 284 304 52 - 1,160
Provision for credit losses (3) 54 102 9 4 - 169
- ------------------------------------------------------------------------------------------------
CMBT * 466 182 295 48 - 991
- ------------------------------------------------------------------------------------------------
Average assets 25,706 14,721 44,039 2,734 89 87,289
Average liabilities/equity (4) 31,397 12,181 35,028 8,660 23 87,289
- ------------------------------------------------------------------------------------------------
Nine months ended September 30, 2001
- ------------------------------------
Net interest income (1) $ 832 $ 497 $ 243 $ 98 $ - $ 1,670
Other operating income 231 126 380 100 - 837
- ------------------------------------------------------------------------------------------------
Total income 1,063 623 623 198 - 2,507
Operating expenses (2) * 629 302 278 120 575 1,904
- ------------------------------------------------------------------------------------------------
Working contribution 434 321 345 78 (575) 603
Provision for credit losses (3) 54 46 39 4 - 143
- ------------------------------------------------------------------------------------------------
CMBT * 380 275 306 74 (575) 460
- ------------------------------------------------------------------------------------------------
Average assets 23,413 15,313 42,798 4,210 - 85,734
Average liabilities/equity (4) 31,402 12,158 30,266 11,908 - 85,734
================================================================================================
* Contribution margin before tax represents pretax income
(excluding goodwill amortization in the 2001 period).
(1) Net interest income of each segment represents the
difference between actual interest earned on assets and
interest paid on liabilities of the segment adjusted for
a funding charge or credit. Segments are charged a cost
to fund assets (e.g. customer loans) and receive a
funding credit for funds provided (e.g. customer
deposits) based on equivalent market rates.
(2) Expenses for the segments include fully apportioned
corporate overhead expenses.
(3) The provision apportioned to the segments is based on
the segments' net charge offs and the change in
allowance for credit losses. Credit loss reserves are
established at a level sufficient to absorb the losses
considered to be inherent in the portfolio.
(4) Common shareholder's equity and earnings on common
shareholder's equity are allocated back to the segments
based on the percentage of capital assigned to the
business.
Personal Financial Services
This segment contributed $466 million to CMBT in the first
nine months of 2002. Growth in CMBT over the same period of
2001 was $86 million or 22.6%. The $62 million increase in
other operating income reflects growth
23.
in brokerage fees, insurance revenue and deposit service
charges. The $57 million increase in net interest income
for 2002 is the result of residential mortgage growth,
driven by the low rate environment, as well as the improved
spread earned on residential mortgages. A more profitable
funding mix consisting of higher levels of savings deposits
and lower levels of certificate of deposit products also
contributed to the increase in net interest income. The
increase in operating expenses reflects higher levels of
incentive based compensation as well as higher fringe
benefit related costs.
Commercial Banking
This segment contributed $182 million to CMBT in the first
nine months of 2002 compared with $275 million in 2001.
Credit quality deterioration that began in the second half
of 2001 and continued into the first half of 2002 resulted
in the $56 million increase in provision for credit losses.
The exit of less profitable commercial lending relationships
in this segment contributed to lower average asset levels
which led to lower net interest income.
Corporate, Investment Banking and Markets
This segment contributed $295 million to CMBT in the first
nine months of 2002 compared with $306 million in the same
period of 2001. The $58 million increase in net interest
income reflects higher levels of wholesale treasury related
assets and liabilities and an improved interest spread
earned on wholesale treasury related balances. The $94
million decrease in other operating income is due primarily
to lower trading revenues. Losses on derivative instruments
used to protect against rising interest rates and widening
spread relationships that took place at various times during
the third quarter accounted for the majority of the decline
in other trading revenue. Lower foreign exchange related
revenue was due primarily to a weakening U.S. dollar and
adverse rate exchange movements during the first six months
of 2002. Offsetting these declines were increased trading
revenues in credit and interest rate derivatives and
precious metals resulting from increased customer activity
and proprietary trading positions which profited from
movements in credit, interest rate and precious metals
spreads. Paydowns on large commercial credits favorably
impacted the provision for credit losses as compared to
2001.
Private Banking
This segment contributed $48 million to CMBT in the first
nine months of 2002, compared with $74 million in the same
period of 2001. The disposal of higher yielding Latin
American securities during 2002, to reduce the Company's
credit risk, was the primary reason for the reduction in net
interest income as compared to 2001. Lower trading related
profits were responsible for the reduction in other
operating income period to period. The increase in
operating expenses was driven by personnel costs related to
the newly formed wealth and tax advisory service business,
which commenced activity during the third quarter of 2002.
24.
Other
This segment for 2001 includes the expense associated with
the Princeton Note settlement and related liabilities
recorded in September of 2001 and paid in January of 2002.
Credit Quality
- ------------------------------------------------------------
The following table provides a summary of the allowance for
credit losses.
- ------------------------------------------------------------------------------------
3rd 3rd 9 Months Year 9 Months
Quarter Quarter Ended Ended Ended
2002 2001 9/30/02 12/31/01 9/30/01
- ------------------------------------------------------------------------------------
in millions
Balance at beginning of period $540.3 $537.9 $506.4 $525.0 $525.0
Other (.3) - (2.3) (19.0) (19.0)
Provision charged to income 39.0 47.5 168.8 238.4 143.1
Charge offs:
Commercial 22.4 31.7 92.1 188.0 75.6
Consumer 18.0 18.7 57.4 80.0 59.7
International 4.6 2.4 10.3 12.5 4.1
- ------------------------------------------------------------------------------------
Total charge offs 45.0 52.8 159.8 280.5 139.4
- ------------------------------------------------------------------------------------
Recoveries on loans charged off:
Commercial 3.8 5.0 18.1 29.0 20.8
Consumer 2.9 2.9 9.5 13.7 10.2
International .6 .1 .8 .1 .1
- ------------------------------------------------------------------------------------
Total recoveries 7.3 8.0 28.4 42.8 31.1
- ------------------------------------------------------------------------------------
Total net charge offs 37.7 44.8 131.4 237.7 108.3
- ------------------------------------------------------------------------------------
Translation adjustment (.3) (.3) (.5) (.3) (.5)
- ------------------------------------------------------------------------------------
Balance at end of period $541.0 $540.3 $541.0 $506.4 $540.3
- ------------------------------------------------------------------------------------
The following table provides a summary nonperforming assets.
- --------------------------------------------------------------------------------
September 30, December 31, September 30,
2002 2001 2001
- --------------------------------------------------------------------------------
in millions
Nonaccruing Loans
- -----------------
Balance at end of period $399.0 $416.8 $394.3
As a percent of loans outstanding .95% 1.02% .92%
Nonperforming Loans and Assets *
- ------------------------------
Balance at end of period $412.5 $434.5 $410.6
As a percent of total assets .46% .50% .47%
Allowance Ratios
- ----------------
Allowance for credit losses as
a percent of:
Loans 1.28% 1.24% 1.26%
Nonaccruing loans 135.59 121.50 137.01
- --------------------------------------------------------------------------------
* Includes nonaccruing loans, other real estate and other
owned assets.
The provision for credit losses for the quarter ended
September 30, 2002 was $39.0 million compared with $47.5
million a year ago. The provision for credit losses for the
first nine months of 2002 was $168.8 million compared with
$143.1 million during the first nine months of 2001. The
Company has experienced some deterioration in credit quality
during 2002
25.
reflecting the general weakness in the U.S. economy coupled
with specific deterioration in markets and business segments
served by the Company including large corporate and middle
market commercial business and international sites; however,
credit quality, as measured by nonperforming loans and
assets, has improved in the quarter ended September 30,
2002.
Total nonaccruing loans increased by $4.7 million to $399.0
million at September 30, 2002 from $394.3 million at
September 30, 2001. This increase reflects the migration of
$453.6 million of loans into nonaccrual status offset by
$448.9 million of payoffs and paydowns, charge offs, returns
to accrual, loan sales and other movements. Criticized
asset totals increased by $311 million during this twelve
month period, reflecting a deterioration in overall
commercial credit quality. Key credit quality ratios
remained strong with the allowance for credit losses at
September 30, 2002 representing 1.28% of total loans and
135.59% of nonaccruing loans, as compared to 1.26% of total
loans and 137.01% of nonaccruing loans at September 30,
2001.
Total nonaccruing loans decreased by $17.8 million to $399.0
million at September 30, 2002 from $416.8 million at
December 31, 2001. This decrease reflects the migration of
$217.1 million of loans into nonaccrual status offset by
$234.9 million of payoffs and paydowns, charge offs, returns
to accrual and other movements, primarily attributable to
improved consumer domestic and international credit quality,
particularly in residential mortgage. Criticized assets
increased by only $65.9 million at September 30, 2002 as
compared to December 31, 2001, reflecting a decrease of
$212.9 million from June 30, 2002. Key credit quality
ratios strengthened, with the allowance for credit losses of
September 30, 2002 representing 1.28% of total loans and
135.59% of nonaccruing loans, as compared to 1.24% of total
loans and 121.50% of nonaccruing loans at December 31, 2001.
The Company identified impaired loans totaling $295 million
at September 30, 2002, of which $173 million had an
allocation from the allowance for credit losses of $103
million. At December 31, 2001, impaired loans were $243
million of which $151 million had an allocation from the
allowance for credit losses of $83 million.
The Company also maintains a reserve, included in interest,
taxes and other liabilities, for certain off balance sheet
exposures including letters of credit, financial guarantees
and standby facilities. This reserve increased from $39.2
million at September 30, 2001 to $49.4 million at
December 31, 2001 reflecting the reserve established for one
specific financial guarantee. This reserve increased from
$49.4 million at December 31, 2001 to $55.5 million at
September 30, 2002 reflecting increased reserve factors and
downgrades associated with certain off balance sheet
exposures.
26.
Forward Outlook
As regards to credit, the Company has experienced some
improvement in overall credit quality during the third
quarter as measured by nonperforming loans and assets but
remains cautious in light of recent world events; the issues
facing numerous large U.S. corporates; and the overall
uncertainty with regard to domestic and foreign economies.
The impact on credit quality that may result from these
issues, as well as from changes in government and corporate
spending priorities, consumer confidence and the general
business climate as a result of these events and conditions,
is uncertain.
Derivative Instruments and Hedging Activities
- ------------------------------------------------------------
The Company is party to various derivative financial
instruments as an end user (1) for asset and liability
management purposes; (2) in order to offset the risk
associated with changes in the value of various assets and
liabilities accounted for in the trading account; (3) to
protect against changes in value of its mortgage servicing
rights portfolio, and (4) for 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,
commodity prices and credit, focusing on structuring of
transactions to meet clients' needs.
The Company enters into certain derivative contracts for
purely trading purposes in order to realize profits from
short-term movements in interest rates, commodity prices,
foreign exchange rates and credit spreads. In addition,
certain contracts do not qualify as SFAS 133 hedges and are
accounted for on a full mark to market basis through current
earnings even though they were not acquired for trading
purposes.
By using derivative instruments, the Company is exposed to
credit and market risk. If the counterparty fails to
perform, credit risk is equal to the fair value gain in a
derivative. When the fair value of a derivative contract is
positive, this generally indicates that the counterparty
owes the Company, and, therefore, creates a repayment risk
for the Company. When the fair value of a derivative
contract is negative, the Company owes the counterparty and,
therefore, it has no repayment risk.
The Company minimizes the credit (or repayment) risk in
derivative instruments by entering into transactions with
high quality counterparties including other members of the
HSBC Group. Counterparties generally include financial
institutions including banks, other government agencies,
both foreign and domestic, and insurance companies. These
counterparties are subject to regular credit review by the
Company's credit risk
27.
management department. The Company also maintains a policy
of requiring that all derivative contracts be governed by an
International Swaps and Derivatives Association Master
Agreement; depending on the nature of the derivative
transaction, bilateral collateral arrangements may be
required as well.
Market risk is the adverse effect that a change in interest
rates, currency, or implied volatility rates has on the
value of a financial instrument. The Company manages the
market risk associated with interest rate and foreign
exchange contracts by establishing and monitoring limits
as to the types and degree of risk that may be undertaken.
The Company measures this risk daily by using Value at Risk
(VaR) and other methodologies.
The Company's Asset and Liability Policy Committee is
responsible for monitoring and defining the scope and nature
of various strategies utilized to manage interest rate risk
that are developed through its analysis of data from
financial simulation models and other internal and industry
sources. The resulting hedge strategies are then
incorporated into the Company's overall interest rate risk
management and trading strategies.
Liquidity Management
- ------------------------------------------------------------
Liquidity is managed to provide the ability to generate cash
to meet lending, deposit withdrawal and other commitments at
a reasonable cost in a reasonable amount of time, while
maintaining routine operations and market confidence. The
Asset and Liability Policy Committee is responsible for the
development and implementation of related policies and
procedures to ensure that the minimum liquidity ratios and a
strong overall liquidity position are maintained.
In carrying out this responsibility, the Asset and Liability
Policy Committee projects cash flow requirements and
determines the optimal level of liquid assets and available
funding sources to have at the Company's disposal, with
consideration given to anticipated deposit and balance sheet
growth, contingent liabilities, and the ability to access
short-term wholesale funding markets. In addition, the
Committee must monitor deposit and funding concentrations in
terms of overall mix and to avoid undue reliance on
individual funding sources and large deposit relationships.
They must also maintain a liquidity management contingency
plan, which identifies certain potential early indicators of
liquidity problems, and actions which can be taken both
initially and in the event of a liquidity crisis to minimize
the long-term impact on the Company's business and customer
relationships.
Deposit accounts from a diverse mix of "core" retail,
commercial and public sources represent a significant, cost-
effective source of liquidity under normal operating
conditions. The Company's ability to regularly attract
wholesale funds at a competitive cost is enhanced by strong
ratings from
28.
the major credit ratings agencies. As of September 30,
2002, the Company and its principal operating subsidiary,
HSBC Bank USA, maintained the following long and short-term
debt ratings.
Short-Term Debt Long-Term Debt
------------------- -------------------
Moody's S&P Fitch Moody's S&P Fitch
------- --- ----- ------- --- -----
HSBC USA Inc. P-1 A-1 F1+ A1 A+ AA-
HSBC Bank USA P-1 A-1+ F1+ Aa3 AA- AA-
The Company issued $300 million of floating rate medium term
notes in September 2002. The Company's shelf registration
statement filed with the Securities and Exchange Commission
has $825 million available under which it may issue debt and
equity securities and has ready access to the capital
markets for long-term funding through the issuance of
registered debt. In addition, the Company maintains an
unused $500 million bank line of credit with HSBC, and as
member of the New York Federal Home Loan Bank, a secured
borrowing facility in excess of $5 billion collateralized by
residential mortgage loan assets. Off-balance sheet special
purpose vehicles or other off-balance sheet mechanisms are
not utilized as a source of liquidity or funding.
Assets, principally consisting of a portfolio of highly
rated investment securities in excess of $19 billion,
approximately $7 billion of which is scheduled to mature
within the next twelve months, a liquid trading portfolio of
approximately $11 billion, and residential mortgages are a
primary source of liquidity to the extent that they can be
sold or used as collateral for borrowing. The economics and
long-term business impact of obtaining liquidity from assets
must be weighed against the economics of obtaining liquidity
from liabilities, along with consideration given to the
associated capital ramifications of these two alternatives.
Currently, assets would be used to supplement liquidity
derived from liabilities, only in a crisis scenario.
It is the policy of the Bank to maintain both primary and
secondary collateral in order to ensure precautionary
borrowing availability from the Federal Reserve. Primary
collateral is that which is physically maintained at the
Federal Reserve, and serves as a safety net against any
unexpected funding shortfalls that may occur. Secondary
collateral is collateral that is acceptable to the Federal
Reserve, but is not maintained there. If unutilized
borrowing capacity were to be low, secondary collateral
would be identified and maintained as necessary.
The Company projects, as part of normal ongoing contingency
planning, that in the event of a severe liquidity problem
there would be sources of cash exceeding projected uses of
cash by over $10 billion. This also assumes that the
Company no longer has access to the wholesale funds market.
In addition, the Company maintains residential mortgages and
eligible collateral at the Federal Reserve that could
provide additional liquidity if needed.
29.
Capital
- ------------------------------------------------------------
Total common shareholder's equity was $6.8 billion at
September 30, 2002, compared with $6.5 billion as
December 31, 2001.
The following table presents the capital ratios of the
Company. To be categorized as well-capitalized under the
Federal Reserve Board guidelines, a banking institution must
have a minimum total risk-based capital ratio of at least
10%, a Tier 1 risk-based ratio of at least 6%, and Tier 1
leverage ratio of at least 5%.
- -------------------------------------------------------------------------
September 30, December 31,
2002 2001
- -------------------------------------------------------------------------
Total capital (to risk weighted assets) 14.15% 13.31%
Tier 1 capital (to risk weighted assets) 9.01 8.34
Tier 1 capital (to average assets) 5.80 5.48
- -------------------------------------------------------------------------
Quantitative and Qualitative Disclosures About Market Risk
- ------------------------------------------------------------
In consideration of the degree of interest rate risk
inherent in the banking industry, the Company has interest
rate risk management policies designed to meet performance
objectives within defined risk/safety parameters. In the
course of managing interest rate risk, a combination of risk
assessment techniques, including dynamic simulation
modeling, gap analysis, Value at Risk (VaR) and capital at
risk analysis are employed. The combination of these tools
enables management to identify and assess the potential
impact of interest rate movements and take appropriate
action.
Certain limits and benchmarks that serve as guidelines in
determining the appropriate levels of interest rate risk for
the institution have been established. One such limit is
expressed in terms of the Present Value of a Basis Point
(PVBP), which reflects the change in value of the balance
sheet for a one basis point movement in all interest rates.
The institutional PVBP limit as of September 30, 2002 was
plus or minus $4.0 million, which includes distinct limits
associated with trading portfolio activities and financial
instruments. Thus, for a one basis point change in interest
rates, the policy dictates that the value of the balance
sheet shall not change by more than +/- $4.0 million. As of
September 30, 2002, the Company had a position of $2.5
million PVBP reflecting the impact of a one basis point
increase in interest rates.
The Company also monitors changes in value of the balance
sheet for large movements in interest rates with an overall
limit of +/- 10%, after tax, change from the base case
valuation for either a 200 basis point gradual rate increase
or a 100 basis point gradual rate decrease. As of
September 30, 2002, for a gradual 200 basis point increase
in rates, the value was projected to drop by .3% and for a
100 basis point gradual decrease in rates, value was
projected to drop by 4.3%. The projected drop in value is
primarily related to changes in the value of balance sheet
30.
products with ascribed maturities beyond three years and
assumes no management actions to either manage exposures to
the changing interest rate environment or reinvesting the
proceeds from any maturing assets or liabilities.
In addition to the above mentioned limits, the Company's
Asset and Liability Policy Committee particularly monitors
the simulated impact of a number of interest rate scenarios
on net interest income. These scenarios include both rate
shock scenarios which assume immediate market rate movements
of 200 basis points, as well as rate change scenarios in
which rates rise or fall by 200 basis points over a twelve
month period. The individual limit for such gradual 200
basis point movements is currently +/- 10%, after tax, of
base case earnings over a twelve month period. Simulations
are also performed for other relevant interest rate
scenarios including immediate rate movements and changes in
the shape of the yield curve or in competitive pricing
policies. Net interest income under the various scenarios
is reviewed over a twelve month period, as well as over a
three year period. The simulations capture the effects of
the timing of the repricing of all assets and liabilities,
including derivative instruments such as interest rate
swaps, futures and option contracts. Additionally, the
simulations incorporate any behavioral aspects such as
prepayment sensitivity under various scenarios.
For purposes of simulation modeling, base case earnings
reflect the existing balance sheet composition, with
balances generally maintained at current levels by the
anticipated reinvestment of expected runoff. These balance
sheet levels will however, factor in specific known or
likely changes including material increases, decreases or
anticipated shifts in balances due to management actions.
Current rates and spreads are then applied to produce base
case earnings estimates on both a twelve month and three
year time horizon. Rate shocks are then modeled and
compared to base earnings (earnings at risk), and include
behavioral assumptions as dictated by specific scenarios
relating to such factors as prepayment sensitivity and the
tendency of balances to shift among various products in
different rate environments. It is assumed that no
management actions are taken to manage exposures to the
changing environment being simulated.
Utilizing these modeling techniques, a gradual 200 basis
point parallel rise or fall in the yield curve on October 1,
2002 would cause projected net interest income for the next
twelve months to decrease by $35 million and increase by $11
million, respectively. This +/- 1% change is well within
the Company's +/- 10% limit. An immediate 100 basis point
parallel rise or fall in the yield curve on October 1, 2002,
would cause projected net interest income for the next
twelve months to decrease by $51 million and $183 million,
respectively. An immediate 200 basis point parallel rise or
fall would decrease projected net interest income for the
next twelve months by $122 million and $269 million,
respectively. In addition, simulations are performed to
analyze the impact associated with various twists and shapes
of the yield curve. If the yield curve continues to
flatten significantly (i.e. long end of the yield curve
down) in 2003, the projected margin could shrink by
approximately 5 to 10%, assuming no management actions.
31.
The projections do not take into consideration possible
complicating factors such as the effect of changes in
interest rates on the credit quality, size and composition
of the balance sheet. Therefore, although this provides a
reasonable estimate of interest rate sensitivity, actual
results will vary from these estimates, possibly by
significant amounts.
Trading Activities
- ------------------------------------------------------------
The trading portfolios of the Company have defined limits
pertaining to items such as permissible investments, risk
exposures, loss review, balance sheet size and product
concentrations. "Loss review" refers to the maximum amount
of loss that may be incurred before senior management
intervention is required.
The Company relies upon Value at Risk (VaR) analysis as a
basis for quantifying and managing risks associated with the
trading portfolios. Such analysis is based upon the
following two general principles:
(i) VaR applies to all trading positions across all risk
classes including interest rate, equity, commodity, credit
derivatives, optionality and global/foreign exchange risks
and
(ii) VaR is based on the concept of independent valuations,
with all transactions being repriced by an independent risk
management function using separate models prior to being
stressed against VaR parameters.
VaR attempts to capture the potential loss resulting from
unfavorable market developments within a given time horizon
(typically ten days) and given a certain confidence level
(99%). VaR calculations are performed for all material
trading and investment portfolios and for market risk-
related treasury activities. The VaR is calculated using
the historical simulation method.
A VaR report broken down by trading business and on a
consolidated basis is distributed daily to management. To
measure the accuracy of the VaR model output, the daily VaR
is compared to the actual result from trading activities.
The following table summarizes trading VaR of the Company.
- -------------------------------------------------------------------------------
3rd Quarter 2002
September 30, --------------------------- December 31,
2002 Minimum Maximum Average 2001
- -------------------------------------------------------------------------------
in millions
Total trading $14.5 $9.2 $27.5 $16.6 $19.2
Commodities .6 .5 3.9 1.4 .3
Credit derivatives 3.3 1.1 3.5 2.2 -
Equities .9 .1 6.0 1.3 2.0
Foreign exchange 5.3 .4 13.3 4.7 4.6
Interest rate 13.5 8.8 20.9 13.9 21.5
- -------------------------------------------------------------------------------
32.
The following summary illustrates the Company's daily
revenue earned from market risk-related activities during
the third quarter of 2002. Market risk-related revenues
include realized and unrealized gains (losses) related to
treasury and trading activities but excludes the related net
interest income. The analysis of the frequency distribution
of daily market risk-related revenues shows that there were
30 days with negative revenue during the third quarter of
2002. The most frequent result was a daily gain of between
$0 and $2 million with 24 occurrences. The highest daily
revenue was $10.0 million and the largest daily loss was
$5.6 million.
- -------------------------------------------------------------------------------------------------
Ranges of daily revenue
earned from market risk-
related activities
(in millions) Less $(4) $(4) to $(2) $(2) to $0 $0 to $2 $2 to $4 Over $4
- -------------------------------------------------------------------------------------------------
Number of trading days
market risk-related
revenue was within the
stated range 3 4 23 24 6 4
- -------------------------------------------------------------------------------------------------
Forward-Looking Statements
- ------------------------------------------------------------
This report includes forward-looking statements. Statements
that are not historical facts, including statements about
management's beliefs and expectations, are forward-looking
statements and involve inherent risks and uncertainties. A
number of important factors could cause actual results to
differ materially from those contained in any forward-
looking statements. Such factors include, but are not
limited to: sharp and/or rapid changes in interest rates;
significant changes in the economic conditions which could
materially change anticipated credit quality trends and the
ability to generate loans; technology changes and
challenges; significant changes in accounting, tax or
regulatory requirements; consumer behavior; marketplace
perceptions of the Company's reputation and competition in
the geographic and business areas in which the Company
conducts its operations.
Controls and Procedures
- ------------------------------------------------------------
Under the direction of the Company's Chief Executive Officer
(CEO) and Chief Financial Officer (CFO), the Company has
enhanced its process of reviewing internal controls to
include and emphasize "disclosure controls and procedures"
as defined by the U. S. Securities and Exchange Commission
(SEC). Under that definition the term means controls and
other procedures designed to ensure that information
required to be disclosed in the Company's reports filed with
the SEC is recorded, processed, summarized and reported by
the due dates specified by the SEC's rules. Such controls
and procedures must be designed to ensure that information
required to be disclosed in reports filed with the SEC, is
accumulated and communicated to the Company's management
personnel to allow timely decisions regarding required
disclosure. Also, this process is the support for the
certifications of the CEO and CFO included in this report.
33.
Since 1993, the CEO and CFO have reported on the Bank's
internal controls over financial reporting pursuant to
FDICIA regulations. The Company's independent auditors have
annually attested, without qualification, to the reports.
Thus management is well acquainted with the process
underlying the attestation to financial reporting controls.
The current enhancement of the review process is building on
the annual review at the Bank for FDICIA purposes as well as
various other internal control processes and procedures
which management has established and monitors. The review
will be conducted quarterly and include all subsidiaries of
the Company.
To monitor the Company's compliance with the new SEC rules
regarding disclosure controls and procedures, the Company
has formed a Disclosure Committee chaired by its CFO. The
Committee is composed of key members of senior management,
who have knowledge of significant portions of the Company's
internal control system as well as the business and
competitive environment in which the Company operates. The
Disclosure Committee covers all of the Company's significant
business and administrative functions. One of the key
responsibilities of each Committee member is to review the
document to be filed with the SEC as it progresses through
the preparation process. Open lines of communication to
financial reporting management exist for Committee members
to convey comments and suggestions.
The Disclosure Committee has designated a preparation
working group that is responsible for providing and/or
reviewing the detail supporting financial disclosures. The
Committee also has designated a business issues working
group that is responsible for the development of forward-
looking disclosures.
The Company's CEO and CFO have concluded that, based on the
deliberations of the Disclosure Committee and input received
from senior business and financial managers, the Company's
disclosure controls and procedures were effective as of
September 30, 2002 (the disclosure control evaluation date)
and that those controls and procedures support the
disclosures in this document. During the nine months ended
September 30, 2002, there were no significant changes in the
Company's internal controls or in other factors that could
significantly affect these controls subsequent to the date
of their evaluation.
34.
HSBC USA Inc.
- --------------------------------------------------------------------------------
CONSOLIDATED AVERAGE BALANCES AND INTEREST RATES*
Third Quarter 2002 Third Quarter 2001
Balance Interest Rate Balance Interest Rate
- --------------------------------------------------------------------------------
in millions
Assets
Interest bearing deposits
with banks $ 1,110 $ 8.4 2.99% $ 4,762 $ 40.7 3.39%
Federal funds sold and
securities purchased under
resale agreements 5,747 26.5 1.83 3,594 32.4 3.57
Trading assets 11,167 44.2 1.58 8,773 52.7 2.40
Securities 17,959 233.1 5.15 18,716 299.3 6.35
Loans
Domestic
Commercial 16,351 218.7 5.31 17,140 260.2 6.02
Consumer
Residential mortgages 19,319 309.5 6.41 17,593 317.0 7.21
Other consumer 2,899 67.2 9.20 3,221 84.5 10.41
- --------------------------------------------------------------------------------
Total domestic 38,569 595.4 6.12 37,954 661.7 6.92
International 3,065 36.0 4.66 4,255 67.8 6.32
- --------------------------------------------------------------------------------
Total loans 41,634 631.4 6.02 42,209 729.5 6.86
- --------------------------------------------------------------------------------
Other interest ** 4.9 ** ** 6.5 **
- --------------------------------------------------------------------------------
Total earning assets 77,617 $ 948.5 4.85% 78,054 $ 1,161.1 5.90%
- --------------------------------------------------------------------------------
Allowance for credit losses (547) (539)
Cash and due from banks 1,958 1,914
Other assets 7,353 7,035
- --------------------------------------------------------------------------------
Total assets $ 86,381 $ 86,464
================================================================================
Liabilities and Shareholders' Equity
Interest bearing demand
deposits $ 382 $ 0.5 0.49% $ 361 $ 0.5 0.53%
Consumer savings deposits 15,509 44.3 1.13 13,293 58.8 1.75
Other consumer time deposits 8,793 52.7 2.38 11,097 119.9 4.29
Commercial, public savings
and other time deposits 8,532 29.7 1.38 7,483 57.7 3.06
Deposits in foreign offices 17,952 99.9 2.21 19,715 203.9 4.10
- --------------------------------------------------------------------------------
Total interest bearing
deposits 51,168 227.1 1.76 51,949 440.8 3.37
- --------------------------------------------------------------------------------
Short-term borrowings 10,807 58.5 2.15 10,378 74.2 2.84
Long-term debt 4,315 61.4 5.65 4,840 81.7 6.70
- --------------------------------------------------------------------------------
Total interest bearing
liabilities 66,290 $ 347.0 2.08% 67,167 $ 596.7 3.52%
- --------------------------------------------------------------------------------
Interest rate spread 2.77% 2.38%
- --------------------------------------------------------------------------------
Noninterest bearing deposits 5,540 5,398
Other liabilities 7,342 6,501
Total shareholders' equity 7,209 7,398
- --------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 86,381 $ 86,464
================================================================================
Net yield on average earning assets 3.07% 2.87%
Net yield on average total assets 2.76 2.59
================================================================================
* Interest and rates are presented on a taxable equivalent basis.
** Other interest relates to Federal Reserve Bank and Federal Home Loan
Bank stock included in other assets.
35.
HSBC USA Inc.
- --------------------------------------------------------------------------------
CONSOLIDATED AVERAGE BALANCES AND INTEREST RATES*
Nine Months 2002 Nine Months 2001
Balance Interest Rate Balance Interest Rate
- --------------------------------------------------------------------------------
in millions
Assets
Interest bearing deposits
with banks $ 2,346 $ 47.5 2.71% $ 4,721 $ 174.9 4.95%
Federal funds sold and
securities purchased under
resale agreements 5,431 74.6 1.84 3,282 113.1 4.61
Trading assets 10,445 118.8 1.52 8,284 175.9 2.83
Securities 18,314 728.1 5.32 19,721 1,015.2 6.88
Loans
Domestic
Commercial 16,441 626.5 5.09 16,909 838.2 6.63
Consumer
Residential mortgages 19,062 941.4 6.59 16,898 937.5 7.40
Other consumer 2,982 204.7 9.18 3,223 264.9 10.99
- -------------------------------------------------------------------------------
Total domestic 38,485 1,772.6 6.16 37,030 2,040.6 7.37
International 3,320 125.0 5.03 4,244 227.2 7.16
- -------------------------------------------------------------------------------
Total loans 41,805 1,897.6 6.07 41,274 2,267.8 7.35
- -------------------------------------------------------------------------------
Other interest ** 16.6 ** ** 21.7 **
- -------------------------------------------------------------------------------
Total earning assets 78,341 $ 2,883.2 4.92% 77,282 $ 3,768.6 6.52%
- -------------------------------------------------------------------------------
Allowance for credit losses (530) (543)
Cash and due from banks 1,972 1,858
Other assets 7,506 7,137
- -------------------------------------------------------------------------------
Total assets $87,289 $ 85,734
================================================================================
Liabilities and Shareholders' Equity
Interest bearing demand
deposits $ 380 $ 1.3 0.46% $ 388 $ 1.8 0.62%
Consumer savings deposits 15,285 129.1 1.13 12,844 193.2 2.01
Other consumer time deposits 9,238 186.8 2.70 11,381 406.5 4.78
Commercial, public savings
and other time deposits 8,535 98.1 1.54 6,995 170.0 3.25
Deposits in foreign offices,
primarily banks 18,902 320.1 2.26 20,600 761.5 4.94
- --------------------------------------------------------------------------------
Total interest bearing
deposits 52,340 735.4 1.88 52,208 1,533.0 3.93
- --------------------------------------------------------------------------------
Short-term borrowings 10,966 177.3 2.16 9,639 283.1 3.93
Long-term debt 4,640 200.3 5.77 4,913 256.9 6.99
- --------------------------------------------------------------------------------
Total interest bearing
liabilities 67,946 $ 1,113.0 2.19% 66,760 $ 2,073.0 4.15%
- --------------------------------------------------------------------------------
Interest rate spread 2.73% 2.37%
- --------------------------------------------------------------------------------
Noninterest bearing deposits 5,512 5,552
Other liabilities 6,661 6,064
Shareholders' equity 7,170 7,358
- --------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 87,289 $ 85,734
================================================================================
Net yield on average earning assets 3.02% 2.93%
Net yield on average total assets 2.71 2.64
================================================================================
* Interest and rates are presented on a taxable equivalent basis.
** Other interest relates to Federal Reserve Bank and Federal Home Loan
Bank stock included in other assets.
36.
Part II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
12.01 Computation of Ratio of Earnings to Fixed Charges
12.02 Computation of Ratio of Earnings to Combined Fixed
Charges and Preferred Dividends.
(b) Reports on Form 8-K
A current report on Form 8-K was filed August 5, 2002
announcing that HSBC USA Inc. had submitted the
certification required pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 in connection with its Form 10-Q
for the quarterly period ended June 30, 2002 which was
filed with the Securities and Exchange Commission.
37.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HSBC USA Inc.
(Registrant)
Date: November 4, 2002 /s/ Gerald A. Ronning
---------------------------
Gerald A.Ronning
Executive Vice President &
Controller
(On behalf of Registrant and
as Chief Accounting Officer)
38.
Quarterly Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
I, Youssef A. Nasr, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
HSBC USA Inc.;
2. Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit
to state a material fact necessary to make the
statements made, in light of the circumstances under
which such statements were made, not misleading with
respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and
other financial information included in this quarterly
report, fairly present in all material respects the
financial condition, results of operations and cash
flows of the registrant as of, and for, the periods
presented in this quarterly report;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of September 30,
2002 (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of
registrant's board of directors.
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
39.
6. The registrant's other certifying officer and I have
indicated in this quarterly report whether there were
significant changes in internal controls or in other
factors that could significantly affect internal
controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
HSBC USA Inc.
(Registrant)
Date: November 4, 2002 /s/ Youssef A. Nasr
-----------------------
Youssef A. Nasr
President and
Chief Executive Officer
40.
Quarterly Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
I, Robert M. Butcher, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
HSBC USA Inc.;
2. Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit
to state a material fact necessary to make the
statements made, in light of the circumstances under
which such statements were made, not misleading with
respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and
other financial information included in this quarterly
report, fairly present in all material respects the
financial condition, results of operations and cash
flows of the registrant as of, and for, the periods
presented in this quarterly report;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of September 30,
2002 (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of
registrant's board of directors.
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
41.
6. The registrant's other certifying officer and I have
indicated in this quarterly report whether there were
significant changes in internal controls or in other
factors that could significantly affect internal
controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
HSBC USA Inc.
(Registrant)
Date: November 4, 2002 /s/ Robert M. Butcher
-----------------------------------
Robert M. Butcher
Senior Executive Vice President and
Chief Financial Officer
42.
Exhibit 12.01
HSBC USA Inc.
Computation of Ratio of Earnings to Fixed Charges
(in millions, except ratios)
- -----------------------------------------------------------------
Nine months ended September 30,
2002 2001
- -----------------------------------------------------------------
Excluding interest on deposits
Income before cumulative effect
of accounting change $ 624 $ 202
Applicable income tax expense 367 130
Less undistributed equity earnings 17 6
Fixed charges:
Interest on:
Borrowed funds 177 283
Long-term debt 200 257
One third of rents, net of income
from subleases 12 14
- -----------------------------------------------------------------
Total fixed charges 389 554
Earnings before taxes and cumulative
effect of accounting change based
on income fixed charges $1,363 $ 880
- -----------------------------------------------------------------
Ratio of earnings to fixed charges 3.50 1.59
- -----------------------------------------------------------------
Including interest on deposits
Total fixed charges (as above) $ 389 $ 554
Add: Interest on deposits 735 1,533
- -----------------------------------------------------------------
Total fixed charges and interest
on deposits $1,124 $2,087
- -----------------------------------------------------------------
Earnings before taxes and cumulative
effect of accounting change based
on income and fixed charges (as above) $1,363 $ 880
Add: Interest on deposits 735 1,533
- -----------------------------------------------------------------
Total $2,098 $2,413
- -----------------------------------------------------------------
Ratio of earnings to fixed charges 1.87 1.16
- -----------------------------------------------------------------
43.
Exhibit 12.02
HSBC USA Inc.
Computation of Ratio of Earnings to Combined Fixed Charges
and Preferred Dividends
(in millions, except ratios)
- -----------------------------------------------------------------
Nine months ended September 30,
2002 2001
- -----------------------------------------------------------------
Excluding interest on deposits
Income before cumulative effect
of accounting change $ 624 $ 202
Applicable income tax expense 367 130
Less undistributed equity earnings 17 6
Fixed charges:
Interest on:
Borrowed funds 177 283
Long-term debt 200 257
One third of rents, net of income
from subleases 12 14
- -----------------------------------------------------------------
Total fixed charges 389 554
Earnings before taxes and
cumulative effect of accounting
change based on income and
fixed charges $1,363 $ 880
- -----------------------------------------------------------------
Total fixed charges $ 389 $ 554
Preferred dividends 17 19
Ratio of pretax income to income
before cumulative effect of
accounting change 1.59 1.64
- -----------------------------------------------------------------
Total preferred stock dividend factor 28 31
Fixed charges, including preferred
stock dividend factor $ 417 $ 585
- -----------------------------------------------------------------
Ratio of earnings to combined fixed
charges and preferred dividends 3.27 1.50
- -----------------------------------------------------------------
Including interest on deposits
Total fixed charges, including
preferred stock dividend factor
(as above) $ 417 $ 585
Add: Interest on deposits 735 1,533
- -----------------------------------------------------------------
Fixed charges, including preferred
stock dividend factor and interest
on deposits $1,152 $2,118
- -----------------------------------------------------------------
Earnings before taxes and
cumulative effect of accounting
change based on income and
fixed charges (as above) $1,363 $ 880
Add: Interest on deposits 735 1,533
- -----------------------------------------------------------------
Total $2,098 $2,413
- -----------------------------------------------------------------
Ratio of earnings to combined fixed
charges and preferred dividends 1.82 1.14
- -----------------------------------------------------------------