Back to GetFilings.com
CONFORMED 1.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
or
(___) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number 1-7436
HSBC USA INC.
(Exact name of registrant as specified in its charter)
Maryland
(State of Incorporation)
13-2764867
(IRS 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
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No ___
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act).
Yes ___ No _X_
At July 31, 2003, all voting stock (704 shares of Common Stock,
$5 par value) was owned by HSBC North America Inc., an indirect
wholly owned subsidiary of HSBC Holdings plc.
2.
Part I - FINANCIAL INFORMATION
- ------------------------------------------------------------------
Page
----
Item 1 - Financial Statements
Consolidated Balance Sheet 3
Consolidated Statement of Income 4
Consolidated Statement of Changes in
Shareholders' Equity 5
Consolidated Statement of Cash Flows 6
Notes to Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of
Operations (MD&A)
Performance Overview 11
Consolidated Average Balances and Interest Rates 12, 13
Net Interest Income 14
Other Operating Income 15
Operating Expenses 20
Income Taxes 21
Credit Quality 22
Business Segments 24
Derivative Instruments and Hedging Activities 30
Liquidity Management 31
Off-Balance Sheet Arrangements 32
Capital 35
Market Risk 36
Trading Activities 38
Recently Issued Accounting Standards 39
Item 3 - Quantitative and Qualitative Disclosures
About Market Risk 40
Item 4 - Controls and Procedures 40
Part II - OTHER INFORMATION
- -----------------------------------------------------------------
Item 1 - Legal Proceedings 42
Item 5 - Other Information 42
Item 6 - Exhibits and Reports on Form 8-K 42
Signature 43
3.
HSBC USA Inc.
- --------------------------------------------------------------------
C O N S O L I D A T E D B A L A N C E S H E E T
June 30, December 31,
2003 2002
- --------------------------------------------------------------------
in thousands
Assets
Cash and due from banks $ 2,285,580 $ 2,081,279
Interest bearing deposits with banks 1,308,963 1,048,294
Federal funds sold and securities
purchased under resale agreements 5,082,847 2,742,943
Trading assets 12,601,499 13,408,215
Securities available for sale 14,911,593 14,694,115
Securities held to maturity (fair value
$4,905,716 and $4,905,162) 4,628,270 4,628,482
Loans 43,246,796 43,635,872
Less - allowance for credit losses 475,830 493,125
- --------------------------------------------------------------------
Loans, net 42,770,966 43,142,747
Premises and equipment 684,655 726,457
Accrued interest receivable 290,347 328,595
Equity investments 284,210 278,270
Goodwill 2,815,774 2,829,074
Other assets 5,325,374 3,517,730
- --------------------------------------------------------------------
Total assets $92,990,078 $89,426,201
====================================================================
Liabilities
Deposits in domestic offices
Noninterest bearing $ 5,843,976 $ 5,731,442
Interest bearing 35,612,929 34,902,431
Deposits in foreign offices
Noninterest bearing 433,537 397,743
Interest bearing 18,490,543 18,798,723
- --------------------------------------------------------------------
Total deposits 60,380,985 59,830,339
- --------------------------------------------------------------------
Trading account liabilities 7,232,698 7,710,010
Short-term borrowings 7,172,008 7,392,368
Interest, taxes and other liabilities 6,765,573 3,422,047
Subordinated long-term debt and perpetual
capital notes 2,118,433 2,109,163
Guaranteed mandatorily redeemable securities 1,053,354 1,050,942
Other long-term debt 601,147 514,739
- --------------------------------------------------------------------
Total liabilities 85,324,198 82,029,608
- --------------------------------------------------------------------
Shareholders' equity
Preferred stock 500,000 500,000
Common shareholder's equity
Common stock 4 4
Capital surplus 6,020,848 6,056,307
Retained earnings 838,407 578,083
Accumulated other comprehensive income 306,621 262,199
- --------------------------------------------------------------------
Total common shareholder's equity 7,165,880 6,896,593
- --------------------------------------------------------------------
Total shareholders' equity 7,665,880 7,396,593
- --------------------------------------------------------------------
Total liabilities and shareholders' equity $92,990,078 $89,426,201
====================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
4.
HSBC USA Inc.
- -------------------------------------------------------------------------------
C O N S O L I D A T E D S T A T E M E N T O F I N C O M E
Quarter ended June 30, Six months ended June 30,
2003 2002 2003 2002
- -------------------------------------------------------------------------------
in thousands
Interest income
Loans $ 585,336 $ 630,720 $ 1,195,718 $ 1,265,732
Securities 211,614 235,095 452,237 482,812
Trading assets 34,318 41,290 74,505 74,545
Short-term investments 22,281 42,166 42,922 87,308
Other 6,759 6,194 13,622 11,625
- -------------------------------------------------------------------------------
Total interest income 860,308 955,465 1,779,004 1,922,022
- -------------------------------------------------------------------------------
Interest expense
Deposits 172,844 257,180 360,677 529,071
Short-term borrowings 20,585 65,742 58,499 118,833
Long-term debt 57,278 58,540 105,674 118,103
- -------------------------------------------------------------------------------
Total interest expense 250,707 381,462 524,850 766,007
- -------------------------------------------------------------------------------
Net interest income 609,601 574,003 1,254,154 1,156,015
Provision for credit losses 31,250 56,250 87,500 129,750
- -------------------------------------------------------------------------------
Net interest income, after
provision for credit losses 578,351 517,753 1,166,654 1,026,265
- -------------------------------------------------------------------------------
Other operating income
Trust income 23,409 22,598 46,396 47,497
Service charges 51,658 51,520 103,067 98,941
Mortgage banking revenue (18,417) 32,188 613 49,469
Other fees and commissions 117,834 98,707 227,136 191,243
Other income 58,437 25,271 95,463 50,331
Trading revenues:
Treasury business and other 90,873 3,799 160,697 47,053
Residential mortgage business
related (3,990) (34,236) (29,662) (45,551)
----------- ----------- ----------- -----------
Total trading revenues 86,883 (30,437) 131,035 1,502
Security gains, net 38,508 66,300 65,045 104,301
- -------------------------------------------------------------------------------
Total other operating income 358,312 266,147 668,755 543,284
- -------------------------------------------------------------------------------
936,663 783,900 1,835,409 1,569,549
- -------------------------------------------------------------------------------
Operating expenses
Salaries and employee benefits 277,784 242,669 556,573 495,964
Occupancy expense, net 37,003 37,967 75,206 73,872
Other expenses 176,960 190,615 345,629 351,434
- -------------------------------------------------------------------------------
Total operating expenses 491,747 471,251 977,408 921,270
- -------------------------------------------------------------------------------
Income before taxes and
minority interest 444,916 312,649 858,001 648,279
Applicable income tax expense 172,100 114,029 331,100 238,257
Minority interest in net income
of subsidiary (11) - (348) -
- -------------------------------------------------------------------------------
Net income $ 272,805 $ 198,620 $ 526,553 $ 410,022
===============================================================================
The accompanying notes are an integral part of the consolidated
financial statements.
5.
HSBC USA Inc.
- --------------------------------------------------------------------
C O N S O L I D A T E D S T A T E M E N T O F C H A N G E S
I N S H A R E H O L D E R S' E Q U I T Y
Six months ended June 30,
2003 2002
- --------------------------------------------------------------------
in thousands
Preferred stock
Balance, January 1, $ 500,000 $ 500,000
- --------------------------------------------------------------------
Balance, June 30, 500,000 500,000
- --------------------------------------------------------------------
Common stock
Balance, January 1, 4 4
- --------------------------------------------------------------------
Balance, June 30, 4 4
- --------------------------------------------------------------------
Capital surplus
Balance, January 1, 6,056,307 6,034,598
Capital contribution from parent 8,446 7,562
Return of capital (43,905) -
- --------------------------------------------------------------------
Balance, June 30, 6,020,848 6,042,160
- --------------------------------------------------------------------
Retained earnings
Balance, January 1, 578,083 415,821
Net income 526,553 410,022
Cash dividends declared:
Preferred stock (11,229) (11,576)
Common stock (255,000) (260,000)
- --------------------------------------------------------------------
Balance, June 30, 838,407 554,267
- --------------------------------------------------------------------
Accumulated other comprehensive income
Balance, January 1, 262,199 98,607
Net change in unrealized gains
on securities (37,731) (5,623)
Net change in unrealized gains on
derivatives classified as cash flow
hedges 59,542 12,334
Foreign currency translation adjustment 22,611 1,418
- --------------------------------------------------------------------
Other comprehensive income,
net of tax 44,422 8,129
- --------------------------------------------------------------------
Balance, June 30, 306,621 106,736
- --------------------------------------------------------------------
Total shareholders' equity, June 30, $ 7,665,880 $ 7,203,167
====================================================================
Comprehensive income
Net income $ 526,553 $ 410,022
Other comprehensive income 44,422 8,129
- --------------------------------------------------------------------
Comprehensive income $ 570,975 $ 418,151
====================================================================
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
Six months ended June 30,
2003 2002
- --------------------------------------------------------------------------------
in thousands
Cash flows from operating activities
Net income $ 526,553 $ 410,022
Adjustments to reconcile net income to net cash
used by operating activities
Depreciation, amortization and deferred taxes 322,514 260,725
Provision for credit losses 87,500 129,750
Net change in other accrual accounts 223,386 (1,130,610)
Net change in loans originated for sale (245,928) (712,917)
Net change in trading assets and liabilities (821,900) (4,615)
Other, net (455,245) (258,056)
- --------------------------------------------------------------------------------
Net cash used by operating activities (363,120) (1,305,701)
- --------------------------------------------------------------------------------
Cash flows from investing activities
Net change in interest bearing deposits with banks (361,925) 1,769,198
Net change in short-term investments (1,296,711) (3,307,526)
Purchases of securities held to maturity (1,086,890) (26,528)
Proceeds from maturities of securities held
to maturity 1,454,923 698,937
Purchases of securities available for sale (6,878,633) (7,399,715)
Proceeds from sales of securities available
for sale 2,826,298 5,506,583
Proceeds from maturities of securities available
for sale 5,753,211 2,049,680
Net change in credit card receivables 7,023 87,672
Net change in other short-term loans (61,638) (337,580)
Net originations and maturities of long-term loans 277,691 (47,426)
Sales of loans 238,039 188,792
Expenditures for premises and equipment (18,975) (39,285)
Other, net (226,944) 337,473
- --------------------------------------------------------------------------------
Net cash provided (used) by investing activities 625,469 (519,725)
- --------------------------------------------------------------------------------
Cash flows from financing activities
Net change in deposits 830,600 (949,324)
Net change in short-term borrowings (709,951) 2,558,818
Issuance of long-term debt 102,240 365,589
Repayment of long-term debt (14,602) (164,427)
Dividends paid (266,335) (271,327)
- --------------------------------------------------------------------------------
Net cash provided (used) by financing activities (58,048) 1,539,329
- --------------------------------------------------------------------------------
Net change in cash and due from banks 204,301 (286,097)
Cash and due from banks at beginning of period 2,081,279 2,102,756
- --------------------------------------------------------------------------------
Cash and due from banks at end of period $ 2,285,580 $ 1,816,659
================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
Pending settlement receivables/payables related to securities and trading assets
and liabilities are treated as non cash items for cash flows reporting.
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 (GAAP) and to predominant practice within the
banking industry. Such policies are consistent with those
applied in the presentation of the Company's 2002 annual
financial statements. In the first six months of 2003,
certain 2002 promulgations of the Financial Accounting
Standards Board and its Emerging Issues Task Force became
effective for the Company. Their adoption had no material
effect on the Company's financial statements.
The preparation of financial statements requires the use of
estimates and assumptions that affect reported amounts and
disclosures. Actual results could differ from those
estimates. Interim results should not be considered
indicative of results in future periods.
The interim financial information in this report has not
been audited. In the opinion of the Company's management,
all adjustments, which are normal and recurring, 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 Company's 2002 Annual Report on Form
10-K. Certain reclassifications have been made to prior
period amounts to conform to the current period presentations.
Interim financial statement disclosures required by GAAP
regarding segments and off-balance sheet arrangements are
included in the Management's Discussion and Analysis of
Financial Condition and Results of Operations (MD&A) section
of this Form 10-Q.
During the fourth quarter of 2002, the Company adopted
Statement of Financial Accounting Standards No. 147,
Acquisitions of Certain Financial Institutions (SFAS 147).
As a result of adopting SFAS 147, $65 million of intangible
assets that were previously reported as identifiable
intangible assets were reclassified retroactively to
January 1, 2002 to goodwill and are no longer amortized.
The amortization previously recorded during the first three
quarters of 2002 was also reversed retroactively in
accordance with SFAS 147. The net effect of this reversal
was not material to the results of the Company.
8.
2. Goodwill and Intangible Assets
- ------------------------------------------------------------
During the second quarter of 2003, the Company completed its
annual impairment test of goodwill and determined that the
fair value of each of the reporting units exceeded its
carrying value. As a result, no impairment loss was
required to be recognized.
The following table presents all intangible assets of the
Company that are being amortized. Given current market
conditions relative to interest rates and prepayments,
annual mortgage servicing rights (MSRs) amortization for the
years ended December 31, 2003 through 2006 would be
approximately $150 million to $180 million. Actual annual
levels of MSR amortization could either increase or decrease
dependent upon changes in interest rates, prepayment
activity, salable production levels and associated levels of
mortgage servicing right assets. At June 30, 2003
intangible assets are as follows.
- --------------------------------------------------------------------------------
Intangible Assets
- --------------------------------------------------------------------------------
Amortization
Gross Expense
Carrying Accumulated 6 Months Ended
Amount Amortization 6/30/03
- -------------------------------------------------------------------------------
in thousands
Mortgage servicing rights $714,028 $339,561 * $143,666 **
Favorable lease arrangements 66,519 15,865 2,511
- -------------------------------------------------------------------------------
Total $780,547 $355,426 $146,177
===============================================================================
* Includes an $84.9 million impairment valuation reserve.
** Includes $58.4 million of provision for temporary impairment.
3. Related Party Transactions
- ----------------------------------------------------------------
The Company is owned by HSBC North America Inc. (HNAI), an
indirect wholly owned subsidiary of HSBC Holdings plc
(HSBC). In the normal course of business, the Company
conducts transactions with HSBC, including its 25% or more
owned subsidiaries (HSBC Group). These transactions occur
at prevailing market rates and terms. The following table
presents related party balances and the total income and
expense generated by those transactions.
- ---------------------------------------------------------------------
June 30, December 31,
2003 2002
- ---------------------------------------------------------------------
in millions
Assets:
Interest bearing deposits with banks $ 112 $ 130
Loans 261 338
Other 34 38
- ---------------------------------------------------------------------
Total assets $ 407 $ 506
- ---------------------------------------------------------------------
Liabilities:
Deposits $6,091 $6,140
Short-term borrowings 519 267
Other 396 349
- ---------------------------------------------------------------------
Total liabilities $7,006 $6,756
- ---------------------------------------------------------------------
9.
- ---------------------------------------------------------------------
Six months ended June 30, 2003 2002
- ---------------------------------------------------------------------
in millions
Interest income $10 $15
Interest expense 48 42
- ---------------------------------------------------------------------
At June 30, 2003 and December 31, 2002, the aggregate
notional amounts of all derivative contracts with other HSBC
affiliates were $112 billion and $88 billion, respectively.
Extensions of credit by the Company to other HSBC affiliates
are legally required to be secured by eligible collateral.
Employees of the Company participate in one or more stock
option plans sponsored by HSBC. The Company's share of the
expense of the plans for the first six months of 2003 and
2002 was $8.4 million and $7.6 million, respectively.
The Company also provides awards to key employees in the
form of restricted shares. These awards require the
achievement of certain performance targets and vest from one
to three years from the date of the award. Total expense
recognized for the plan for the first six months of 2003 and
2002 was $19.2 million and $11.2 million, respectively.
4. Pledged Assets
- ---------------------------------------------------------------------
The following table presents pledged assets included in the
consolidated balance sheet.
- ---------------------------------------------------------------------
Pledged Assets
- ---------------------------------------------------------------------
June 30, December 31,
2003 2002
- ---------------------------------------------------------------------
in millions
Interest bearing deposits with banks $ 65 $ 65
Trading assets 806 1,770
Securities available for sale 3,873 6,083
Securities held to maturity 1,329 1,607
Loans 389 343
- ---------------------------------------------------------------------
Total $6,462 $9,868
=====================================================================
5. 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
related to the "Princeton Note Matter" that are described
below.
In relation to the Princeton Note Matter, as disclosed in
the Company's 2002 Annual Report on Form 10-K, two of the
noteholders were not included in the settlement and their
civil suits are continuing. The U.S. Government excluded
one of them from the restitution order (Yakult Honsha Co.,
Ltd.) because a senior officer of the noteholder was being
criminally prosecuted in
10.
Japan for his conduct relating to its Princeton Notes. The
senior officer in question was convicted during September
2002 of various criminal charges related to the sale of the
Princeton Notes. The U.S. Government excluded the
other noteholder (Maruzen Company, Limited) 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. Both of these civil suits seek compensatory,
punitive, and treble damages pursuant to RICO and assorted
fraud and breach of duty claims arising from unpaid
Princeton Notes with face amounts totaling approximately
$125 million. No amount of compensatory damages is
specified in either complaint. These two complaints name
the Company, HSBC Bank USA, and Republic New York Securities
Corporation as defendants. The Company and HSBC Bank USA
have moved to dismiss both complaints. The motion is fully
briefed and sub judice. Mutual production of documents took
place in 2001, but additional discovery proceedings have
been suspended pending the Court's resolution of the motions
to dismiss.
As previously reported, a purported class action entitled
Ravens v. Republic New York Corporation, et al., was filed
on October 7, 1999 in the United States District Court for
the Eastern District of Pennsylvania on behalf of former
shareholders of Republic New York Corporation (Republic) who
acquired common stock between May 10, 1999 (when the signing
of the merger agreement between Republic and the Company was
announced) and September 15, 1999. On January 16, 2003, the
Court denied plaintiff's motion for class certification and
also denied a motion by the plaintiff to provide notice to
the proposed class that the named plaintiff wished to
withdraw from the case. The Court required plaintiff's
counsel to provide a substitute plaintiff by February 15,
2003. When plaintiff's counsel failed to do so, the Company
moved to dismiss for this and other reasons. Plaintiff's
counsel then agreed to stipulate to dismiss the action with
prejudice; and the Court entered an order to that effect on
April 7, 2003.
11.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
- ------------------------------------------------------------
Performance Overview: 2003 Compared to 2002
The Company reported second quarter 2003 net income of
$272.8 million, compared with $198.6 million in the second
quarter of 2002. For the first six months of 2003, net
income was $526.6 million, compared with $410.0 million for
the first six months of last year. The increase in net
income for the second quarter and for the first six months
of 2003 as compared to the comparable periods in 2002
reflects growth in net interest income, improved trading
results as well as lower provisions for credit losses. The
net interest income growth was driven by a larger balance
sheet, a more favorable balance sheet mix, as well as strong
treasury and mortgage banking interest spreads resulting
from historically low interest rates and a steep yield
curve. The increase in trading revenues includes solid
growth in the derivatives business and improved results in
the foreign exchange business. Provisions for credit losses
declined as credit quality continued to improve during the
second quarter of 2003.
Higher levels of operating expenses partially offset the
above noted quarterly and year to date income growth. The
increase in operating expenses for 2003 is due primarily to
higher levels of salaries and employee benefit costs,
reflecting costs associated with the wealth and tax advisory
services business, which commenced activity during the third
quarter of 2002, increased pension and fringe benefit costs
and higher levels of performance related incentive
compensation. An increase in the effective tax rate also
adversely impacted net income as compared to last year.
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.
12.
HSBC USA Inc.
- -------------------------------------------------------------------------------
CONSOLIDATED AVERAGE BALANCES AND INTEREST RATES*
Second Quarter 2003 Second Quarter 2002
Balance Interest Rate Balance Interest Rate
- --------------------------------------------------------------------------------
in millions
Assets
Interest bearing deposits
with banks $ 1,870 $ 7.0 1.50% $ 2,365 $ 16.2 2.75%
Federal funds sold and
securities purchased under
resale agreements 4,626 15.3 1.33 5,626 26.0 1.85
Trading assets 11,723 34.3 1.17 10,815 41.3 1.53
Securities 18,618 216.8 4.67 17,960 241.1 5.38
Loans
Domestic
Commercial 16,733 200.3 4.80 16,302 200.5 4.93
Consumer
Residential mortgages 20,662 293.1 5.67 19,107 320.0 6.70
Other consumer 2,980 61.6 8.29 3,000 67.6 9.04
- -------------------------------------------------------------------------------
Total domestic 40,375 555.0 5.51 38,409 588.1 6.14
International 3,167 30.5 3.86 3,275 42.8 5.24
- --------------------------------------------------------------------------------
Total loans 43,542 585.5 5.39 41,684 630.9 6.07
- --------------------------------------------------------------------------------
Other ** 6.8 ** ** 6.2 **
- --------------------------------------------------------------------------------
Total earning assets 80,379 $865.7 4.32% 78,450 $961.7 4.92%
- --------------------------------------------------------------------------------
Allowance for credit losses (502) (528)
Cash and due from banks 2,402 1,910
Other assets 7,528 7,464
- --------------------------------------------------------------------------------
Total assets $89,807 $87,296
================================================================================
Liabilities and Shareholders' Equity
Deposits in domestic offices
Savings deposits $24,462 $ 50.6 0.83% $21,027 $ 53.0 1.01%
Other time deposits 10,291 56.5 2.20 13,555 96.6 2.86
Deposits in foreign offices 19,135 65.7 1.38 19,022 107.6 2.27
- --------------------------------------------------------------------------------
Total interest bearing deposits 53,888 172.8 1.29 53,604 257.2 1.92
- --------------------------------------------------------------------------------
Short-term borrowings 8,850 20.6 0.93 11,084 65.8 2.38
Long-term debt 3,741 57.3 6.14 3,946 58.5 5.95
- --------------------------------------------------------------------------------
Total interest bearing
liabilities 66,479 $250.7 1.51% 68,634 $381.5 2.23%
- --------------------------------------------------------------------------------
Interest rate spread 2.81% 2.69%
- --------------------------------------------------------------------------------
Noninterest bearing deposits 6,197 5,359
Other liabilities 9,608 6,151
Total shareholders' equity 7,523 7,152
- ---------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $89,807 $87,296
================================================================================
Net yield on average earning assets 3.07% 2.97%
Net yield on average total assets 2.75 2.67
================================================================================
* Interest and rates are presented on a taxable equivalent basis.
** Other relates to interest earned on Federal Reserve Bank and Federal Home
Loan Bank stock included in other assets.
13.
HSBC USA Inc.
- ----------------------------------------------------------------------------
CONSOLIDATED AVERAGE BALANCES AND INTEREST RATES*
Six Months 2003 Six Months 2002
Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------
in millions
Assets
Interest bearing deposits
with banks $ 1,545 $ 12.7 1.66% $ 2,974 $ 39.2 2.65%
Federal funds sold and
securities purchased under
resale agreements 4,496 30.2 1.36 5,270 48.1 1.84
Trading assets 12,727 74.5 1.17 10,078 74.6 1.48
Securities 18,909 463.0 4.94 18,494 495.0 5.40
Loans
Domestic
Commercial 16,449 409.1 5.02 16,487 407.8 4.99
Consumer
Residential mortgages 20,783 598.6 5.76 18,931 631.8 6.68
Other consumer 2,978 125.7 8.51 3,025 137.6 9.17
- ----------------------------------------------------------------------------
Total domestic 40,210 1,133.4 5.68 38,443 1,177.2 6.18
International 3,162 62.7 4.00 3,450 89.0 5.20
- ----------------------------------------------------------------------------
Total loans 43,372 1,196.1 5.56 41,893 1,266.2 6.10
- ----------------------------------------------------------------------------
Other ** 13.6 ** ** 11.6 **
- ----------------------------------------------------------------------------
Total earning assets 81,049 $1,790.1 4.45% 78,709 $1,934.7 4.96%
- ----------------------------------------------------------------------------
Allowance for credit losses (502) (522)
Cash and due from banks 2,352 1,980
Other assets 7,478 7,586
- ----------------------------------------------------------------------------
Total assets $90,377 $87,753
============================================================================
Liabilities and Shareholders' Equity
Deposits in domestic offices
Savings deposits $23,810 $ 100.1 0.85% $20,617 $ 104.6 1.02%
Other time deposits 11,004 121.3 2.22 13,724 204.4 3.00
Deposits in foreign offices 19,124 139.3 1.47 19,384 220.1 2.29
- ----------------------------------------------------------------------------
Total interest bearing deposit 53,938 360.7 1.35 53,725 529.1 1.99
- ----------------------------------------------------------------------------
Short-term borrowings 9,745 58.4 1.21 11,048 118.8 2.17
Long-term debt 3,708 105.7 5.75 4,016 118.1 5.93
- ----------------------------------------------------------------------------
Total interest bearing
liabilities 67,391 $ 524.8 1.57% 68,789 $ 766.0 2.25%
- ----------------------------------------------------------------------------
Interest rate spread 2.88% 2.71%
- ----------------------------------------------------------------------------
Noninterest bearing deposits 6,074 5,497
Other liabilities 9,486 6,315
Shareholders' equity 7,426 7,152
- ----------------------------------------------------------------------------
Total liabilities and
shareholders' equity $90,377 $87,753
============================================================================
Net yield on average earning assets 3.15% 2.99%
Net yield on average total assets 2.82 2.69
============================================================================
* Interest and rates are presented on a taxable equivalent basis.
** Other relates to interest earned on Federal Reserve Bank and Federal Home
Loan Bank stock included in other assets.
14.
Net Interest Income
- ------------------------------------------------------------
2003 Compared to 2002
Net interest income for the second quarter of 2003 was
$609.6 million compared with $574.0 million for the second
quarter of 2002, an increase of $35.6 million. For the
first six months of 2003, net interest income was $1,254.2
million compared with $1,156.0 million for the first six
months of 2002, an increase of $98.2 million. A better
yielding mix of loans, securities and deposits on the
balance sheet and lower funding costs contributed to the
increases in net interest income. Average residential
mortgages outstanding grew $1.6 billion and $1.9 billion for
second quarter and the first six months of 2003,
respectively as compared with the same periods of 2002. The
low interest rate environment continued to stimulate
consumers to refinance mortgages and purchase residential
property. There has also been a decrease in lower margin
large corporate loans. The Company experienced over $3
billion in growth in average savings deposits for second
quarter and the first six months of 2003, as compared with
the same periods of 2002. Due to the low interest rate
environment and the current uncertainty of the equity
markets many customers have shown a preference to place
funds in savings deposits as opposed to time deposits and
mutual funds. The steep yield curve and historically low
interest rates have led to increased interest margins on
treasury investments and in our mortgage banking business.
Forward Outlook
The Company will continue to pursue modest growth in high
quality commercial loans and residential mortgages.
Corporate clients remain generally cautious about the near
term economic outlook. While some signs of a sustainable
recovery have emerged within certain sectors, there appears
to be little conviction that a material economic rebound
will be achieved in 2003. For this reason, incremental
resource investments by our major clients remain fairly
subdued. Interest margins for commercial middle market
loans are expected to be stable in the near term. The
returns relative to larger corporate and institutional
clients are anticipated to improve, the result of a more
favorable pricing environment and enhanced cross sale
success. The ultimate level of activity in the residential
mortgage portfolio will depend on the interest rate
environment and the Company's appetite for additional
mortgage products on the balance sheet. Lending activity
should benefit from HSBC Group initiatives, specifically our
cross-border business is expected to continue to benefit
from the HSBC Group's North American alignment initiative.
The goal of this initiative is to increase HSBC brand
awareness and to provide seamless North American service
propositions to customers of the Company and HSBC Bank
Canada.
The acquisition of Household International, Inc. by HSBC
completed during the first quarter of 2003, will provide an
opportunity for future business growth. The Company is
exploring opportunities to acquire certain consumer loan
assets from Household International, Inc. It is also
working with Household to develop a customer referral
program.
15.
The Company is expected to continue to benefit from the
historically steep yield curve for the remainder of 2003.
However, if the yield curve flattens, 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
- ------------------------------------------------------------
2003 Compared to 2002
Trust Income
Trust income was $23.4 million in the second quarter of 2003
compared to $22.6 million in the second quarter of 2002.
For the first six months of 2003, trust income was $46.4
million, a decrease of $1.1 million compared with $47.5
million for the first six months of 2002. The decrease for
the first six months of 2003 was primarily due to decreases
in the value of assets managed in personal and employee
benefit accounts due to general equity market conditions.
In most cases, the Company's fees are based on the value of
assets managed and/or held.
Service Charges
Service charges were $51.7 million in the second quarter of
2003 compared with $51.5 million in the second quarter of
2002. For the first six months of 2003, service charges
increased 4.2% to $103.1 million compared with $98.9 million
for the first six months of 2002. These fees charged on
deposit accounts reflect higher rates on certain customer
accounts and business growth in the New York City region.
16.
Mortgage Banking Revenue
The following table presents the components of mortgage
banking revenue.
- ------------------------------------------------------------------------------
2nd 2nd 6 Months 6 Months
Quarter Quarter Ended Ended
2003 2002 6/30/03 6/30/02
- ------------------------------------------------------------------------------
in millions
Servicing fee income $ 17.0 $ 18.7 $ 34.6 $ 36.0
MSRs amortization and impairment
charges (1) (94.2) (19.7) (143.7) (35.5)
Gain on sale of mortgages 59.4 33.2 110.3 49.0
Fair value hedge activity (2) (.6) - (.6) -
- ------------------------------------------------------------------------------
Total mortgage banking revenue (3) $(18.4) $ 32.2 $ .6 $ 49.5
==============================================================================
(1) Includes a $46.9 million and a $3.2 million
provision for impairment for the second quarter of 2003
and 2002, respectively. Includes a $58.4 million and a
$3.2 million provision for impairment for the first six
months of 2003 and 2002, respectively. The impairment
was recorded in a valuation reserve which has a balance
of $84.9 million and $3.2 million at June 30, 2003 and
June 30, 2002, respectively.
(2) Includes SFAS 133 qualifying fair value adjustments
related to residential mortgage banking warehouse fair
value hedging activity. In December 2002, the Company
established a qualifying hedge strategy using forward
sales contracts to offset the fair value changes of
conventional closed mortgage loans originated for sale.
(3) Does not include residential mortgage business
related trading revenue or net interest income impact of
the mortgage business.
Mortgage banking revenue decreased $50.6 million for the
second quarter of 2003 as compared to the second quarter of
2002 and was down $48.9 million for the first six months of
2003 compared with the first six months of 2002. Both
decreases were driven by an increase in the amortization of
mortgage servicing rights (MSRs) and additional provisions
for impairment. These decreases were partially offset by
higher gains on sale of mortgages into the secondary market.
Also offsetting this impairment was revenue associated with
derivative instruments used to protect against a decline in
the value of MSRs included in trading revenue, and gains
related to the sale of certain mortgage backed securities
available for resale included in security gains in the
consolidated statement of income. The impairment was
recorded in a valuation reserve which has a balance of $84.9
million as of June 30, 2003. The higher levels of MSRs
amortization are attributable to the low rate environment
and associated higher level of mortgage prepayment activity
for the second quarter and first six months of 2003 as
compared to same periods of 2002. As of June 30, 2003, the
serviced for others portfolio had an annualized prepayment
rate of 47% compared to a 17% annualized rate as of June 30,
2002.
Other Fees and Commissions
Other fees and commissions increased approximately $19.1
million in the second quarter of 2003 as compared to the
second quarter of 2002, mainly due to the inclusion of $11.7
million of revenue from wealth and tax advisory services, a
business that commenced activity during the third quarter of
2002. For the first six months of 2003, other fees and
commissions increased $35.9 million to $227.1 million
compared with $191.2 million for the first
17.
six months of 2002. The six month increase includes $22.5
million of revenue from the wealth and tax advisory services
business. Additionally, quarterly and year to date
increases totaling approximately $4 million and $10 million,
respectively were realized in commercial loan, letter of
credit, trade services and bankcard fees because of
increased activity. In the area of wealth management, there
was some slowdown in sales of annuities and mutual funds
associated with the uncertainties affecting the stock market
and lower levels of interest rates.
Other Income
Other income increased by $33.2 million in the second
quarter of 2003 to $58.4 million and included $20.7 million
received from the Internal Revenue Service (IRS) for
settlement of interest compensation on a corporate tax
refund for prior years. A $6 million increase in insurance
revenues and a $3 million increase in earnings from equity
investments account for the majority of the remainder of the
quarter to quarter increase. Over 1,600 professionals are
now licensed to sell insurance and certain annuity products
through the Bank's retail network. For the first six months
of 2003, other income was $95.5 million, compared with $50.3
million for the first six months of 2002. In addition to
the above noted $20.7 million IRS settlement, insurance
revenues increased $13 million and earnings from equity
investments increased $7 million as compared to the first
six months of 2002.
Forward Outlook - Trust, Service Charges, Mortgage, Fees
and Other Income
The Company will continue to utilize its extensive retail
distribution network, its HSBC Group linkage and its high
quality sales and service culture to pursue revenue growth
despite an uncertain economy. Efforts to maximize the
"cross-sell" potential of the existing customer base have
shown positive results to date and will continue to be a key
business development theme for the upcoming year. The
Company is expecting to earn increased fee income from the
wealth and tax advisory services business, which commenced
activity during the third quarter of 2002. Expansion of the
Company's reinsurance business will also remain a strategic
initiative. Mortgage banking will continue to develop its
strong NYS and national presence by leveraging its multi-
channeled originations network to position the mortgage
business for maximum originations opportunities in any type
of housing market or rate environment. Mortgage banking
will continue to utilize its well developed secondary
marketing strategy to sell loans to the "Agencies" (FNMA,
FHLMC, GNMA), private investors and conduits on a servicing
retained basis. They will also pursue selective flow and
bulk purchases of mortgages should market conditions
warrant.
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.
18.
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 of the funding benefit or cost associated with
the trading positions. The trading related net interest
income component is not included in other operating income;
it is included in net interest income.
- -----------------------------------------------------------------------------------
2nd 2nd 6 Months 6 Months
Quarter Quarter Ended Ended
2003 2002 6/30/03 6/30/02
- -----------------------------------------------------------------------------------
in millions
Trading revenues -
treasury business and other $ 90.9 $ 3.8 $160.7 $ 47.1
Net interest income 20.0 15.6 45.8 29.0
- -----------------------------------------------------------------------------------
Trading related revenues -
treasury business and other $110.9 $ 19.4 $206.5 $ 76.1
===================================================================================
Business:
Derivatives and treasury $ 66.0 $(11.4) $115.3 $ 13.4
Foreign exchange 17.4 6.9 39.2 10.4
Precious metals 20.6 16.7 38.6 35.7
Other trading 6.9 7.2 13.4 16.6
- -----------------------------------------------------------------------------------
Trading related revenues -
treasury business and other $110.9 $ 19.4 $206.5 $ 76.1
===================================================================================
Trading revenues (loss) - residential
mortgage business related $ (4.0) $(34.2) $(29.7) $(45.6)
===================================================================================
Treasury Business and Other: 2003 Compared to 2002
Total treasury business and other trading related revenues
were $110.9 million in the second quarter of 2003 compared
to $19.4 million in the second quarter of 2002. Derivative
and treasury trading revenue increases in the second quarter
of 2003 are the result of increased client activity in
interest rate and credit derivatives, higher proprietary
trading profits and mark to market gains on "non SFAS 133
qualifying" economic hedges of the Company's investment
portfolio as opposed to mark to market losses in the prior
year's quarter. The increase in foreign exchange trading
revenue in the second quarter of 2003 is due to increased
client activity and the absence of trading losses that
impacted the prior year's quarter. The increase in precious
metals trading revenue in the second quarter of 2003 is also
the result of increased client activity as well as higher
revenues earned by profiting from favorable movements in
precious metals prices.
Total treasury business and other trading related revenues
were $206.5 million for the six months ended June 30, 2003
as compared to $76.1 million for the six months ended June
30, 2002. The increase in derivatives and treasury trading
revenue in the first half of 2003 is due to increased client
activity in interest rate and credit derivatives, higher net
interest income of the Company's investment portfolio,
higher proprietary trading revenue and mark to market gains
on "non SFAS 133 qualifying" economic hedges of the
19.
Company's investment portfolio as opposed to mark to market
losses in the six months ended June 30, 2002. The increase
in foreign exchange trading revenue for the first six months
of 2003 is due to increased client activity and proprietary
trading gains as opposed to foreign exchange trading losses
in the first six months of 2002. The increase in precious
metals trading revenue in the first six months of 2003 is
principally due to increased client activity and proprietary
trading gains, primarily in gold markets.
Treasury Business and Other: Forward Outlook
The Company expects to continue to build and improve its
capabilities in foreign exchange, credit and interest rate
derivatives and precious and base metals to expand its
client franchise and grow related revenues. However, these
revenues are subject to market factors, among other things,
and may vary significantly from reporting period to
reporting period. During the first quarter of 2003, HSBC
acquired Household International, Inc. The Company has
entered into certain derivative contracts with Household
subsequent to the acquisition in support of its treasury and
capital markets needs. These transactions are included in
trading related revenues above and the related party
disclosures in Note 3. The Company is exploring
opportunities to expand its derivatives business with
Household.
Residential Mortgage Business Related: 2003 Compared to
2002
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 instruments used to protect against
the decline in economic value of mortgage servicing rights,
are recorded as trading positions. The components of
trading revenue (loss) related to these instruments were as
follows.
- ----------------------------------------------------------------------------------
2nd 2nd 6 Months 6 Months
Quarter Quarter Ended Ended
2003 2002 6/30/03 6/30/02
- ----------------------------------------------------------------------------------
in millions
SFAS 133 FLSC/Rate locks $(23.5) $(39.4) $(43.8) $(48.1)
Derivative instruments used to
protect value of MSRs 19.5 5.2 14.1 2.5
- ----------------------------------------------------------------------------------
Trading revenues (loss) - residential
mortgage business related $ (4.0) $(34.2) $(29.7) $(45.6)
==================================================================================
The $14.3 million quarterly and $11.6 million year to date
increases in trading revenue relate to derivative
instruments used to protect the value of MSRs which
partially offset the provision for impairment included as a
component of mortgage banking revenue for 2003. The value
of these derivatives increased as interest rates decreased.
Also, during the second quarter and first six months of
2003, $5.3 million and $15.9 million, respectively of
security gains were recorded on the sale of mortgage backed
securities available for sale that were used as "on-balance
sheet" economic hedges of MSRs. See commentary on Security
Gains, Net.
20.
Residential Mortgage Business Related: Forward Outlook
The Company will continue to employ a well developed risk
management strategy to reduce interest rate and prepayment
risk by utilizing derivative instruments to economically
hedge both (a) the mortgage pipeline and (b) MSRs values
through different economic cycles and rate environments and
within established guidelines.
Security Gains, Net
Security gains for the second quarter and first six months
of 2003 included $5.3 million and $15.9 million,
respectively of gains related to mortgage backed securities
sold that were acting as "on-balance sheet" economic hedges
of MSRs. Sales of Latin American securities to reduce the
credit risk of the Company also resulted in $6.9 million and
$17.6 million, respectively of gains for the second quarter
and first six months of 2003. The remainder of the security
gains generated in 2003 primarily related to transactions
that adjusted the average life and interest rate profile of
the Company's available for sale security holdings.
Security gains for the first half 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/or reduce its credit risk.
Operating Expenses
- ------------------------------------------------------------
2003 Compared to 2002
Total operating expenses increased $20.5 million and $56.1
million for the second quarter of 2003 and six months ended
June 30, 2003 as compared to the same periods for 2002.
These increases were driven by higher costs associated with
salaries and employee benefits as noted below. Personnel
costs related to the wealth and tax advisory services
business, which commenced activity during the third quarter
of 2002, accounted for $13.1 million and $25.5 million of
the increases for the second quarter and first six months of
2003 as compared to the same periods of 2002. Fringe
benefit costs also increased $5.9 million and $13.0 million
for the second quarter and year to date, primarily due to
higher pension and health care costs. Higher costs related
to certain volume driven and revenue driven incentive
compensation programs also contributed to the overall
increase in personnel costs. Other expenses are lower in
the second quarter of 2003 as compared to 2002, as 2002
charges included approximately $26 million related to
reserves for letters of credit and for a leveraged lease.
Other expenses related to the Company's insurance business
increased approximately $3 million for the second quarter
and $6 million year to date as compared to 2002.
21.
Forward Outlook
Higher fringe benefit costs related to pension and health
care and corporate insurance are expected to continue. The
Company continues to actively take steps necessary to reduce
the impact of higher health care costs which are rapidly
rising for both the Company and its employees. The Company
continues to position itself to operate in an uncertain
economy. Improving efficiencies, lowering the cost of
traditional delivery channels and maintaining strict cost
disciplines will remain a priority. Limited incremental
costs will be incurred for new business initiatives during
the remainder of 2003.
As a member of a global organization, the Company has the
opportunity to gain cost advantages through the utilization
of human, technological and operational resources in low
cost environments. The HSBC Group operates global
processing centers in India and China. 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
- ------------------------------------------------------------
2003 Compared to 2002
The effective tax rate was 38.7% in the second quarter of
2003 compared with 36.5% in the same period of 2002. The
effective tax rate was 38.6% in the first six months of 2003
compared with 36.8% in the first six months of 2002. The
increase in the effective tax rate is primarily attributable
to a substantial increase in taxable income. The net
deferred tax position at June 30, 2003 was a liability of
$307 million compared with a liability of $209 million at
December 31, 2002.
22.
Credit Quality
- ------------------------------------------------------------
The following table provides a summary of the allowance for
credit losses.
- -----------------------------------------------------------------------------------------
2nd 2nd 6 Months Year 6 Months
Quarter Quarter Ended Ended Ended
2003 2002 6/30/03 12/31/02 6/30/02
- -----------------------------------------------------------------------------------------
in millions
Balance at beginning of period $495.9 $518.5 $493.1 $506.4 $506.4
Allowance related to loans sold (3.3) (2.0) (7.8) (2.2) (2.0)
Provision charged to income 31.2 56.3 87.5 195.0 129.8
Charge offs:
Commercial 35.5 20.4 75.2 149.4 69.7
Consumer 19.1 19.6 38.2 77.6 39.4
International 1.8 4.1 3.3 13.9 5.7
- -----------------------------------------------------------------------------------------
Total charge offs 56.4 44.1 116.7 240.9 114.8
- -----------------------------------------------------------------------------------------
Recoveries on loans charged off:
Commercial 4.2 8.4 11.6 20.6 14.3
Consumer 3.2 3.3 6.2 12.5 6.6
International 1.0 .1 1.9 2.1 .2
- -----------------------------------------------------------------------------------------
Total recoveries 8.4 11.8 19.7 35.2 21.1
- -----------------------------------------------------------------------------------------
Total net charge offs 48.0 32.3 97.0 205.7 93.7
- -----------------------------------------------------------------------------------------
Translation adjustment - (.2) - (.4) (.2)
- -----------------------------------------------------------------------------------------
Balance at end of period $475.8 $540.3 $475.8 $493.1 $540.3
- -----------------------------------------------------------------------------------------
The following table provides a summary of credit quality
statistics.
- -----------------------------------------------------------------------------------------
June 30, December 31, June 30,
2003 2002 2002
- -----------------------------------------------------------------------------------------
in millions
Nonaccruing Loans
- -----------------
Balance at end of period $ 393.7 $ 387.4 416.6
As a percent of loans outstanding .91% .89% 1.00%
Allowance Ratios
- ----------------
Allowance for credit losses as
a percent of:
Loans 1.10% 1.13% 1.30%
Nonaccruing loans 120.86 127.28 129.67
Criticized Assets (1)
- ---------------------
Balance at end of period $1,652.1 $2,210.2 $2,478.7
- -----------------------------------------------------------------------------------------
(1) Includes loans graded "special mention", "substandard" or "doubtful".
The provision for credit losses for the quarter ended
June 30, 2003 was $31.2 million compared with $56.3 million
at June 30, 2002. The provision for credit losses for the
first half of 2003 was $87.5 million compared with $129.8
million during the first half of 2002. This decrease
reflects an improvement in the overall credit quality of the
Company's commercial lending portfolios as evidenced by
declining levels of criticized assets, despite continued
concerns about weakness in the domestic economy and
uncertainty with regard to the outcome of certain
significant world events.
Reflecting an improvement in overall credit quality, total
nonaccruing loans decreased by $22.9 million from $416.6
million at June 30, 2002 to $393.7 million at June 30, 2003
and were relatively flat from December 31, 2002 to June 30,
2003, increasing by just $6.3 million. Criticized asset
totals
23.
decreased by $826.6 million to $1,652.1 million at June 30,
2003 from $2,478.7 million at June 30, 2002 and decreased by
$558.1 million from $2,210.2 million at December 31, 2002.
Net charge offs during the second quarter of 2003 were $48.0
million, which is $15.7 million greater than the second
quarter of 2002 net charge offs, which totaled $32.3
million. Net charge offs during the first six months of
2003 were $97.0 million compared with $93.7 million for the
first six months of 2002.
Key coverage ratios declined from the first six months of
2002 to the first six months of 2003, as the allowance for
credit losses represented 1.10% of total loans and 120.86%
of nonaccruing loans at June 30, 2003, versus 1.30% of total
loans and 129.67% of nonaccruing loans at June 30, 2002.
These ratios also declined slightly from December 31, 2002
when the allowance for credit losses represented 1.13% of
total loans and 127.28% of nonaccruing loans, primarily due
to a lower level of required reserves.
The Company identified impaired loans totaling $309 million
at June 30, 2003, of which $193 million had a related
impairment reserve of $120 million. At June 30, 2002, $330
million of impaired loans were identified, of which $190
million had a related impairment reserve of $113 million and
at December 31, 2002 there were $288 million of impaired
loans, $170 million of which had a related impairment
reserve of $89 million.
Forward Outlook
Credit quality in all loan portfolios continues to show
signs of stabilization and improvement. Lingering concerns
resulting from instability in the domestic economy and the
uncertain outcome of world events, however, continue to
mandate a high degree of caution and diligence. Although
the Company is optimistic, it will continue to monitor
closely key economic indicators and trends including
governmental and private sector spending priorities,
consumer confidence, corporate performance and the general
business climate.
Business Segments
- ------------------------------------------------------------
The Company reports and manages its business segments
consistently with the line of business groupings used by
HSBC. As a result of HSBC line of business changes, the
Company altered the business segments that it used in 2002
to reflect the movement of certain domestic private banking
activities from the Personal Financial Services Segment to
the Private Banking Segment. Also activity related to
selected commercial customers was moved from the Commercial
Banking Segment to the Corporate, Investment Banking and
Markets Segment. Prior period disclosures as reported in
the second quarter 2002 Form 10-Q have been conformed herein
to the presentation of current segments, including
methodology changes related to the transfer pricing of
assets and liabilities.
The Company has four distinct segments that it utilizes for
management reporting and analysis purposes. These segments
are based upon products and services offered and are
identified in a manner consistent with the
24.
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.
These results are determined based on the Company's
management accounting process, which assigns balance sheet,
revenue and expense items to each reportable business unit
on a systematic basis. The following describes the
segments.
The Personal Financial Services Segment provides a broad
range of financial products and services including
installment and revolving term loans, deposits, branch
services, mutual funds, investments 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
origination 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 accounts
receivable and real estate financing. In addition, various
credit and trade related products are offered such as
standby facilities, performance guarantees and acceptances.
These products and services are offered through multiple
delivery systems, including the branch banking network.
The Corporate, Investment Banking and Markets Segment is
comprised of Corporate/Institutional Banking (CIB) and
Investment Banking and Markets (IBM). CIB provides deposit
and lending functionality to large 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 IBM component includes treasury and
traded markets. The treasury function maintains overall
responsibility for the investment and borrowing of funds to
ensure liquidity, manage interest rate risk and capital at
risk. Traded markets encompasses the trading and sale of
foreign exchange, banknotes, derivatives, precious metals,
securities and emerging markets instruments, both
domestically and internationally.
The Private Banking Segment offers a full range of services
for high net worth individuals including deposit, lending,
trading, trust and investment management.
Other Segment includes equity investments in Wells Fargo
HSBC Trade Bank and HSBC Republic Bank (Suisse) S.A. For
2002 the segment includes the liability related to the
Princeton Note Matter recorded in September of 2001 and paid
in January of 2002.
25.
The following summarizes the results for each segment.
- ------------------------------------------------------------------------------------------------
Corporate,
Personal Investment
Financial Commercial Banking and Private
Services Banking Markets Banking Other Total
- ------------------------------------------------------------------------------------------------
in millions
Second Quarter 2003
- -------------------
Net interest income (1) $ 302 $ 150 $ 130 $ 30 $ (3) $ 609
Other operating income 84 42 177 51 5 359
- ------------------------------------------------------------------------------------------------
Total income 386 192 307 81 2 968
Operating expenses (2) 232 97 102 61 - 492
- ------------------------------------------------------------------------------------------------
Working contribution 154 95 205 20 2 476
Provision for credit losses (3) 12 8 12 (1) - 31
- ------------------------------------------------------------------------------------------------
Income before taxes 142 87 193 21 2 445
- ------------------------------------------------------------------------------------------------
Average assets 27,713 14,039 44,899 2,873 283 89,807
Average liabilities/equity (4) 31,050 13,540 37,144 8,073 - 89,807
- ------------------------------------------------------------------------------------------------
Second Quarter 2002
- -------------------
Net interest income (1) $ 287 $ 136 $ 116 $ 39 $ (4) $ 574
Other operating income 82 33 116 33 2 266
- -------------------------------------------------------------------------------------------------
Total income (loss) 369 169 232 72 (2) 840
Operating expenses (2) 216 111 94 50 - 471
- -------------------------------------------------------------------------------------------------
Working contribution 153 58 138 22 (2) 369
Provision for credit losses (3) 20 37 (7) 6 - 56
- -------------------------------------------------------------------------------------------------
Income (loss) before taxes 133 21 145 16 (2) 313
- -------------------------------------------------------------------------------------------------
Average assets 25,883 14,520 43,327 3,290 276 87,296
Average liabilities/equity (4) 29,866 12,280 34,668 10,482 - 87,296
- -------------------------------------------------------------------------------------------------
(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.
26.
Personal Financial Services
Income before taxes for the segment increased $9 million
over the second quarter of 2002 as higher net interest
income and lower provisions for credit losses were partially
offset by increased operating expenses. The increase in net
interest income was driven by continued growth in
residential mortgage activity, a better yielding mix of
deposits and lower funding costs. Average residential
mortgages grew $1.6 billion as the low interest rate
environment continued to stimulate consumers to refinance
mortgages and purchase residential property. Other
operating income was up $2 million from prior year as
increases in deposit service charges and bankcard fees
offset a decline in mortgage banking revenue. The decline
in mortgage banking revenue reflects an increase in the
amortization of MSRs and additional provisions for
impairment, due to the low rate environment. The increase
in operating expenses reflects higher pension and health
care costs and increased incentive compensation. The $8
million reduction in provision for credit losses reflects an
improvement in the overall credit quality of the Company.
Commercial Banking
Income before taxes for this segment increased $66 million
over the second quarter of 2002, driven by a lower provision
for credit losses, higher levels of net interest income and
lower operating expenses. The $29 million decrease in the
provision for credit losses reflects the better overall
credit quality of the Company's commercial lending
portfolios as evidenced by declining levels of criticized
assets. The increase in net interest income reflects lower
funding costs and loan and fee income growth achieved by the
Company's real estate lending unit. This net interest
income growth was partially offset by revenue declines in
the restructured commercial finance receivables and
equipment financing units. The restructuring of the
commercial finance receivables and equipment financing units
led to lower operating costs.
Corporate, Investment Banking and Markets
Income before taxes for the segment increased $48 million
over the second quarter of 2002 driven by improved trading
related results and higher levels of net interest income.
The improvement in trading revenue primarily relates to
derivative and treasury trading and foreign exchange trading
revenue. Derivative and treasury trading revenue increases
in the second quarter of 2003 are the result of increased
client activity in interest rate and credit derivatives,
higher proprietary trading profits and mark to market gains
on "non SFAS 133 qualifying" economic hedges of the
Company's investment portfolio as opposed to mark to market
losses in the prior year's quarter. The increase in foreign
exchange trading revenue in the second quarter of 2003 is
due to increased client activity and the absence of trading
losses that impacted the prior year's quarter. The above
noted increases in trading revenue were partially offset by
lower profits from the sale of available for sale investment
securities. The net interest income growth in this segment
was driven by a larger balance sheet and improved interest
spreads resulting
27.
from historically low interest rates and a steep yield
curve. The increase in operating expenses reflects higher
levels of performance driven incentive compensation and
higher fringe benefit costs.
Private Banking
Income before taxes for the segment increased $5 million
over the second quarter of 2002. The increase in other
operating income includes $12 million of revenue from wealth
and tax advisory services, a business that commenced
activity during the third quarter of 2002. Also
contributing to the operating income growth was increased
levels of global private banking fees. The increase in
operating expenses as compared to 2002 includes $13 million
related to the wealth and tax advisory service business.
Other
Other segment includes equity investments in Wells Fargo
HSBC Trade Bank and HSBC Republic Bank (Suisse) S.A. For
2002 this segment includes the liability related to the
Princeton Note Matter recorded in September of 2001 and paid
in January of 2002.
28.
- ------------------------------------------------------------------------------------------------
Corporate,
Personal Investment
Financial Commercial Banking and Private
Services Banking Markets Banking Other Total
- ------------------------------------------------------------------------------------------------
in millions
Six months ended June 30, 2003
- ------------------------------
Net interest income (1) $ 598 $ 306 $ 298 $ 61 $ (8) $ 1,255
Other operating income 176 82 301 96 13 668
- ------------------------------------------------------------------------------------------------
Total income 774 388 599 157 5 1,923
Operating expenses (2) 463 195 200 119 - 977
- ------------------------------------------------------------------------------------------------
Working contribution 311 193 399 38 5 946
Provision for credit losses (3) 33 37 17 1 - 88
- ------------------------------------------------------------------------------------------------
Income before taxes 278 156 382 37 5 858
- ------------------------------------------------------------------------------------------------
Average assets 27,896 14,165 45,198 2,835 283 90,377
Average liabilities/equity (4) 30,744 13,472 38,079 8,082 - 90,377
- ------------------------------------------------------------------------------------------------
Goodwill at June 30, 2003 1,223 533 632 428 - 2,816
- ------------------------------------------------------------------------------------------------
Six months ended June 30, 2002
- ------------------------------
Net interest income (1) $ 549 $ 284 $ 261 $ 68 $ (6) $ 1,156
Other operating income 180 76 226 55 6 543
- ------------------------------------------------------------------------------------------------
Total income 729 360 487 123 - 1,699
Operating expenses (2) 430 216 186 89 - 921
- ------------------------------------------------------------------------------------------------
Working contribution 299 144 301 34 - 778
Provision for credit losses (3) 38 75 11 6 - 130
- ------------------------------------------------------------------------------------------------
Income before taxes 261 69 290 28 - 648
- ------------------------------------------------------------------------------------------------
Average assets 25,738 14,680 43,716 3,344 275 87,753
Average liabilities/equity (4) 30,133 12,920 34,316 10,353 31 87,753
- ------------------------------------------------------------------------------------------------
Goodwill at June 30, 2002 1,224 544 635 428 - 2,831
- ------------------------------------------------------------------------------------------------
(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
Income before taxes for the segment increased $17 million
over the first six months of 2002 as gains in net interest
income were partially offset by a higher level of operating
expenses. The increase in net interest income was driven by
continued growth in residential mortgage activity, a better
yielding mix of deposits and lower funding costs. Average
residential mortgages grew over $1.9 billion as the low
interest rate environment continued to stimulate consumers
to refinance mortgages and purchase new and existing
residential property. Other operating income was down
slightly from last year as lower levels of mortgage banking
revenue was partially offset by higher levels of deposit
service charges and bankcard fees. The increase in
operating expenses reflects higher pension and health
insurance costs and increased incentive compensation.
29.
Commercial Banking
Income before taxes for this segment increased $87 million
over last year reflecting increased net interest income, a
lower level of operating expenses and improved credit
quality. The increase in net interest income reflects lower
funding costs and loan and fee income growth achieved by the
Company's real estate lending unit. This net interest
income growth was partially offset by revenue declines in
the restructured commercial finance receivables and
equipment financing units. The restructuring of the
commercial finance receivables and equipment financing units
led to lower operating costs and a lower provision for
credit losses. The decrease in the provision for credit
losses also reflects the better overall credit quality of
the Company's commercial lending portfolios as evidenced by
declining levels of criticized assets.
Corporate, Investment Banking and Markets
Income before taxes for the segment increased $92 million
over the first six months of 2002 driven by higher levels of
trading revenue and increases in net interest income. The
year to date improvement in trading revenue primarily
relates to derivative and treasury trading and foreign
exchange trading revenue. The increase in derivatives and
treasury trading revenue in the first half of 2003 is due to
increased client activity in interest rate and credit
derivatives, higher net interest income of the Company's
investment portfolio, higher proprietary trading revenue and
mark to market gains on "non SFAS 133 qualifying" economic
hedges of the Company's investment portfolio as opposed to
mark to market losses in the six months ended June 30, 2002.
The increase in foreign exchange trading revenue for the
first six months of 2003 is due to increased client activity
and proprietary trading gains as opposed to foreign exchange
trading losses in the first six months of 2002. The above
noted increases in trading revenue were partially offset by
lower profits from the sale of available for sale investment
securities. The net interest income growth in this segment
was driven by a larger balance sheet and improved interest
spreads resulting from historically low interest rates and a
steep yield curve. The increase in operating expenses reflects
higher levels of performance driven incentive compensation and
higher fringe benefit costs.
Private Banking
This segment contributed $37 million to income before taxes
in the first six months of 2003 compared with $28 million in
the same period of 2002. The pretax increase reflects an
increase in other operating income partially offset by
higher levels of operating expenses. The increase in other
operating income includes $23 million of revenue from wealth
and tax advisory services, a business that commenced
activity during the third quarter of 2002. Other increases
in other operating income relate to improved foreign
exchange results in the International Private Banking unit
and higher
30.
investment fees earned. The increase in operating expenses
as compared to 2002 includes $29 million related to the
wealth and tax advisory services business.
Other
Other segment includes equity investments in Wells Fargo
HSBC Trade Bank and HSBC Republic Bank (Suisse) S.A. For
2002 this segment includes the liability related to the
Princeton Note Matter recorded in September of 2001 and paid
in January of 2002.
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 include financial institutions,
government agencies, both foreign and domestic,
corporations, funds (mutual funds, hedge funds, etc.),
insurance companies and private clients. These
counterparties are subject to regular credit review by the
Company's credit risk management department. The Company
also requires that most derivative contracts be governed by
an International Swaps and Derivatives Association Master
Agreement. Depending on the type of counterparty and the
level of expected activity, bilateral collateral
arrangements may be required as well.
31.
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.
It must also maintain a liquidity management contingency
plan, which identifies certain potential early indicators of
liquidity problems, and actions which can be taken both
initially and in the event of a liquidity crisis, to
minimize the long-term impact on the Company's business and
customer relationships.
Deposit accounts from a diverse mix of "core" retail,
commercial and public sources represent a significant, cost-
effective source of liquidity under normal operating
conditions. The Company's ability to regularly attract
wholesale funds at a competitive cost is enhanced by strong
ratings from the major credit ratings agencies. At June 30,
2003, 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-
32.
The Company's shelf registration statement filed with the
United States 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 has an unused $500 million line of
credit with HSBC Bank plc and, as a member of the New York
Federal Home Loan Bank, has a potential secured borrowing
facility in excess of $5 billion. 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 $9 billion of which is scheduled to mature
within the next twelve months, a liquid trading portfolio of
approximately $13 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 more than $10 billion, assuming that the Company
would not have access to the wholesale funds market. In
addition, the Company maintains residential mortgages and
other eligible collateral at the Federal Reserve that could
provide additional liquidity if needed.
Off-Balance Sheet Arrangements
- ------------------------------------------------------------
Standby Letters of Credit
A standby letter of credit is issued to third parties for
the benefit of a customer and is essentially a guarantee
that the customer will perform, or satisfy some obligation,
under a contract. It irrevocably obligates the Company to
pay a third-party beneficiary when a customer either: (1) in
the case of a performance standby letter of credit, fails to
perform some contractual non-financial obligation or, (2) in
the case of a financial standby letter of credit, fails to
repay an outstanding loan or debt instrument. The issuance
of a standby letter of credit is subject to the Company's
credit approval process and collateral requirements.
33.
Fees are charged for issuing letters of credit commensurate
with the customer's credit evaluation and the nature of any
collateral. Deferred fees, representing the fair value of
the Company's "stand ready obligation to perform" under
these guarantees, included in other liabilities at June 30,
2003 were $7.0 million. Also included in other liabilities
at June 30, 2003 and December 31, 2002 was an allowance for
credit losses relating to unfunded standby letters of credit
of $28.9 million and $37.4 million, respectively.
Loan Sales with Recourse
The Company securitizes and sells assets, generally without
recourse. In prior years, the Company's mortgage banking
subsidiary has sold residential mortgage loans with recourse
to it upon borrower default, with partial indemnification
from third parties.
Credit Derivatives
The Company enters into credit derivative contracts to
provide value-added solutions to the risk management and
investment needs of its customers, as well as on its own
behalf. Credit derivatives are arrangements that allow one
party (the "beneficiary") to transfer the credit risk of a
"reference asset," to another party (the "guarantor"). This
arrangement allows the guarantor to assume the credit risk
associated with the reference asset without directly
purchasing it. The beneficiary agrees to pay the guarantor
a specified fee. In return, the guarantor agrees to pay the
beneficiary an agreed upon amount if there is a default
during the term of the contract.
In accordance with its policy, the Company offsets virtually
all of the market risk it assumes in selling credit
guarantees through a credit derivative contract with another
counterparty. Credit derivatives, although having
characteristics of guarantees, are accounted for as
derivative instruments and are carried at fair value. The
commitment amount included in the following table is the
maximum amount that the Company could be required to pay,
without consideration of the approximately equal amount
receivable from third parties.
Securities Lending Indemnifications
In securities lending transactions, the Company lends
customers securities as an agent to third party borrowers.
The Company indemnifies the customer against the risk of
loss if the third party borrower fails to return the
securities. The Company obtains collateral from the
borrower with a market value exceeding the value of the
loaned securities.
The following table summarizes, at June 30, 2003, the
maximum potential amount of future payments the Company
could be required to make under the various transactions
discussed above if there were a total default by the
guaranteed parties. These amounts do not take into
consideration any recoveries under indemnification
provisions or from collateral held or pledged.
34.
- ----------------------------------------------------------------------------------
One Over One Over
Year Through Five
June 30, 2003 or Less Five Years Years Total
- ----------------------------------------------------------------------------------
in millions
Standby letters of credit, net of
participations $3,602 $ 809 $103 $ 4,514 (1)
Loan sales with recourse - 3 19 22 (2)
Credit derivatives 486 10,513 443 11,442 (3)
Securities lending indemnifications 2,243 - - 2,243 (4)
- ----------------------------------------------------------------------------------
Total $6,331 $11,325 $565 $18,221
==================================================================================
(1) Includes $380 million issued for the benefit of related parties.
(2) $15 million of this amount is indemnified by third parties.
(3) Includes $253 million issued for the benefit of related parties.
(4) The Company holds collateral of $2,292 million to support these
indemnifications.
Special Purpose and Variable Interest Entities
Commercial Paper Conduit
An affiliated member of the HSBC Group (HSBC affiliate)
supports the financing needs of customers by facilitating
their access to the commercial paper markets. These markets
provide an attractive financing alternative for these
customers. Specifically, pools of customers' assets,
typically high-grade corporate and consumer receivables, are
sold to a commercial paper financing entity, which in turn
issues high grade, independently rated short-term asset
backed commercial paper that is collateralized by such
assets. The HSBC affiliate facilitates these transactions
and bills and collects fees from the financing entity for
the services it provides. In its role as administrator of
this specialized financing entity, the HSBC affiliate
structures financing transactions for customers such that
the receivables financed through the financing entity are
appropriately diversified and credit enhanced to support the
issuance of asset backed commercial paper. Neither the HSBC
affiliate nor the Company service the assets or transfer
their own receivables into the financing entity.
The Company and other banks provide committed liquidity
facilities, which mature within one year, in the form of
either loan or asset purchase commitments, in support of
each transaction in the financing entity. In addition, the
Company provides a standby letter of credit as a program
wide credit enhancement to the financing entity. The
Company collects fees from the financing entity for both the
liquidity facility and the standby letter of credit. Credit
risk is managed on these commitments by subjecting them to
the Company's normal underwriting and risk management
processes.
During the second quarter of 2003, the financing entity
issued Capital Notes, risk transferring instruments in an
amount greater than a majority of the expected losses as
defined in Financial Accounting Standards Board (FASB)
Interpretation No. 46, Consolidation of Variable Interest
Entities (FIN 46). 100% of the Capital Notes in the
financing entity were sold to a third party unrelated to the
HSBC Group. These notes carry a fixed rate of return and
entitle the note holders to approval and/or voting rights
with regard to
35.
certain business matters, which may arise in the business of
the financing entity. As a result, the Capital Notes
holders are in the first position to absorb more than a
majority of the expected losses of the financing entity, if
they occur. Therefore, neither the Company nor its
affiliated member is required to consolidate the financing
entity as the primary beneficiary in accordance with FIN 46.
At June 30, 2003 and December 31, 2002, the financing entity
had total commitments to customers of $2,700.0 million and
$1,250.0 million, and total investments of $1,574.0 million
and $792.0 million, respectively. At June 30, 2003 and
December 31, 2002, the Company had liquidity commitments and
standby letters of credit, which also represents the
Company's maximum exposure to loss, to the financing entity
of $1,946.0 million and $685.0 million, respectively. Assets
in the financing entity are principally trade receivables,
auto loans and credit card receivables.
Trust Certificates
The HSBC affiliate also organizes trusts that are special
purpose entities (SPEs) that issue floating rate
certificates backed by the underlying assets of the trusts,
which the SPEs purchase primarily from insurance companies.
The Company's relationship with the SPE is primarily as a
counterparty to derivative transactions (interest rate
swaps) with it. The derivative transactions are accounted
for in accordance with SFAS 133 and are carried at fair
value. At June 30, 2003 and December 31, 2002 the SPEs had
total assets of $401.0 million and $15.0 million,
respectively. At June 30, 2003, the Company's maximum
exposure to loss, which is comprised of investments in the
trusts and the mark to market on the derivative
transactions, was $310 million. These entities have been
determined to be VIEs as defined by FIN 46. The Company is
not required to consolidate these VIEs since it does not
share in the majority of the expected profits or losses of
the VIEs.
Investments in Limited Partnerships
The Company has investments of less than 20% in limited
partnerships, primarily Low Income Housing Tax Credit
Partnerships. The investment in these limited partnerships
was $75.3 million and $75.1 million at June 30, 2003 and
December 31, 2002, respectively. These entities have been
determined to be VIEs as defined by FIN 46. The Company is
not required to consolidate these VIEs since it is not
liable for the majority of the expected losses.
Capital
- ------------------------------------------------------------
Total common shareholder's equity was $7.2 billion at
June 30, 2003 and $6.9 billion at December 31, 2002. The
Company has elected to temporarily delay the declaration of
additional common dividends during 2003 pending the
determination of cash and/or capital requirements related to
possible transactions with Household International, Inc.
currently under consideration.
36.
The following table presents the capital ratios of the
Company. To be categorized as well-capitalized under the
Federal Reserve Board guidelines, a banking institution must
have a minimum total risk-based capital ratio of at least
10%, a Tier 1 risk-based ratio of at least 6%, and Tier 1
leverage ratio of at least 5%.
- --------------------------------------------------------------------
June 30, December 31,
2003 2002
- --------------------------------------------------------------------
Total capital (to risk weighted assets) 13.71% 14.24%
Tier 1 capital (to risk weighted assets) 9.22 9.36
Tier 1 capital (to average assets) 6.25 5.98
- --------------------------------------------------------------------
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 analyses are employed. The combination of these tools
enables management to identify and assess the potential
impact of interest rate movements and take appropriate
action.
Certain limits and benchmarks that serve as guidelines in
determining the appropriate levels of interest rate risk for
the institution have been established. One such limit is
expressed in terms of the Present Value of a Basis Point
(PVBP), which reflects the change in value of the balance
sheet for a one basis point movement in all interest rates.
The institutional PVBP limit as of June 30, 2003 was plus or
minus $4.0 million, which includes distinct limits
associated with trading portfolio activities and financial
instruments. Thus, for a one basis point change in interest
rates, the policy dictates that the value of the balance
sheet shall not change by more than +/- $4.0 million. As of
June 30, 2003, the Company had a position of $2.9 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 June 30,
2003, for a gradual 200 basis point increase in rates, the
value was projected to rise by 1% and for a 100 basis point
gradual decrease in rates, value was projected to drop by
4%. The projected drop in value for a 100 basis point
gradual decrease in rates is primarily related to the
anticipated acceleration of prepayments for the held
mortgage and mortgage backed securities portfolios in this
lower rate environment. This assumes that no management
actions are taken to manage exposures to the changing
interest rate environment.
37.
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%, pretax, of base
case earnings over a twelve month period. Simulations are
also performed for other relevant interest rate scenarios
including immediate rate movements and changes in the shape
of the yield curve or in competitive pricing policies. Net
interest income under the various scenarios is reviewed over
a twelve month period, as well as over a three year period.
The simulations capture the effects of the timing of the
repricing of all 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. This assumes that no
management actions are taken to manage exposures to the
changing environment being simulated.
Utilizing these modeling techniques, a gradual 200 basis
point parallel rise or fall in the yield curve on July 1,
2003 would cause projected net interest income for the next
twelve months to decrease by $61 million (-2%) and to
increase by $19 million (+1%), respectively. These changes
are well within the Company's +/- 10% limit. An immediate
100 basis point parallel rise or fall in the yield curve on
July 1, 2003, would cause projected net interest income for
the next twelve months to decrease by $86 million and $146
million, respectively. An immediate 200 basis point
parallel rise or fall would decrease projected net interest
income for the next twelve months by $185 million and $253
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
were to flatten significantly (i.e. long end of the yield
curve down) over the next twelve months, the projected
margin could shrink by approximately 7 to 8%, assuming no
management actions.
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.
38.
Trading Activities
- ------------------------------------------------------------
The trading portfolios of the Company have defined limits
pertaining to items such as permissible investments, risk
exposures, loss review, balance sheet size and product
concentrations. "Loss review" refers to the maximum amount
of loss that may be incurred before senior management
intervention is required.
The Company relies upon Value at Risk (VAR) analysis as a
basis for quantifying and managing risks associated with the
trading portfolios. Such analysis is based upon the
following two general principles:
(i) VAR applies to all trading positions across all risk
classes including interest rate, equity, commodity,
optionality and global/foreign exchange risks and
(ii) VAR is based on the concept of independent valuations,
with all transactions being repriced by an independent risk
management function using separate models prior to being
stressed against VAR parameters.
VAR attempts to capture the potential loss resulting from
unfavorable market developments within a given time horizon
(typically ten days), given a certain confidence level (99%)
and based on a two year observation period.
VAR calculations are performed for all material trading and
investment portfolios and for market risk-related treasury
activities. The VAR is calculated using the historical
simulation or the variance/covariance (parametric) method.
A VAR report broken down by trading business and on a
consolidated basis is distributed daily to management. To
measure the accuracy of the VAR model output, the daily VAR
is compared to the actual result from trading activities.
The following table summarizes trading VAR of the Company.
- ---------------------------------------------------------------------------
2nd Quarter 2003
June 30, -------------------------- December 31,
2003 Minimum Maximum Average 2002
- ---------------------------------------------------------------------------
in millions
Total trading $14.8 $8.3 $23.9 $14.9 $11.4
Commodities 2.2 .3 6.6 2.4 2.6
Credit derivatives 2.0 1.1 7.6 2.9 2.1
Equities 1.0 * 1.1 .1 1.0
Foreign exchange 3.0 2.3 6.0 3.7 3.1
Interest rate 12.5 7.0 19.7 12.0 8.6
- ---------------------------------------------------------------------------
* (Less than $100,000)
39.
The following summary illustrates the Company's daily
revenue earned from market risk-related activities during
the second quarter of 2003. 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 17 days with negative revenue during the
second quarter of 2003. The most frequent result was a
daily revenue of between zero and $2 million with 23
occurrences. The highest daily revenue was $10.2 million
and the largest daily loss was $2.5 million.
- -----------------------------------------------------------------------------------
Ranges of daily revenue
earned from market
risk-related activities
(in millions) Below $(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 1 16 23 11 12
- -----------------------------------------------------------------------------------
Recently Issued Accounting Standards
- ------------------------------------------------------------
In January 2003, the Financial Accounting Standards Board
issued Interpretation No. 46, Consolidation of Variable
Interest Entities (FIN 46). FIN 46 requires a variable
interest entity (VIE) to be consolidated by a company if
that company is subject to a majority of the risk of loss
from the VIE's activities, or is entitled to receive a
majority of the VIE's residual returns, or both. FIN 46
increases required disclosures by a company consolidating a
VIE and also requires disclosures about VIEs that the
company is not required to consolidate, but in which it has
a significant variable interest.
For VIEs established prior to January 31, 2003 the
consolidation requirements take effect in the third quarter
of 2003. The disclosure requirements apply to all financial
statements issued after January 31, 2003, regardless of when
the VIE was established. The Company has no interest in any
VIEs established after January 31, 2003.
The Company has completed a review of the consolidation
requirements of FIN 46 for VIEs existing as of June 30,
2003. Further information regarding the Company's interest
in VIEs is provided under Off-Balance Sheet Arrangements in
this document.
In April 2003, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 149,
Amendment of Statement 133 on Derivative Instruments and
Hedging Activities. This Statement amends and clarifies
financial accounting and reporting for derivative
instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under Statement of
Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities. This
Statement should be
40.
applied prospectively for contracts entered into or modified
after June 30, 2003. Adoption of this standard is not
expected to have a material effect on the financial
statements of the Company.
In May 2003, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 150,
Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity. This
Statement established standards for how an issuer classifies
and measures certain financial instruments with
characteristics of both liabilities and equity. This
Statement is effective at the beginning of the first interim
period beginning after June 15, 2003. Adoption of this
standard is not expected to have a material effect on the
financial statements of the Company.
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
- ------------------------------------------------------------
Refer to the disclosure in Item 2 of the Management's
Discussion and Analysis of Financial Condition and Results
of Operations under the caption "Market Risk."
Item 4. Controls and Procedures
- ------------------------------------------------------------
Under the direction of the Company's Chief Executive Officer
(CEO) and Chief Financial Officer (CFO), the Company has
reviewed its "disclosure controls and procedures". That term
means controls and other procedures designed to ensure that
information required to be disclosed in the Company's
reports filed with the United States Securities and Exchange
Commission (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 as exhibits
to this report.
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 review process is built 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 is conducted
quarterly and includes all subsidiaries of the Company.
To monitor the Company's compliance with the disclosure
controls and procedures, the Company has formed a Disclosure
Committee chaired by its CFO. The Disclosure Committee is
composed of key members of senior management, who
41.
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 they progress through
the preparation process. Open lines of communication to
financial reporting management exist for Disclosure
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
Disclosure 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
June 30, 2003 and that those controls and procedures support
the disclosures in this document. During the six months
ended June 30, 2003, there were no material changes in the
Company's internal controls over financial reporting.
42.
Part II - OTHER INFORMATION
- ------------------------------------------------------------
Item 1 - Legal Proceedings
The disclosures required hereunder are incorporated by
reference to Note 5 to the consolidated financial
statements.
Item 5 - Other Information
On April 30, 2003, the Bank announced that it had
entered into an agreement with the Federal Reserve Bank
of New York and the New York State Banking Department to
enhance its compliance with anti-money laundering
requirements. As set forth in the written agreement,
the Bank has agreed to a number of improvements to its
compliance, reporting, and review systems and
procedures. The written agreement was filed as an
exhibit to the March 31, 2003 Form 10-Q of the Company
and is incorporated herein by reference. The foregoing
discussion of the regulatory agreement is qualified in
its entirety by reference to the text of the agreement.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits -
3 (i) Registrant's Restated Certificate of
Incorporation and Amendments thereto, Exhibit
3(a) to the Company's 1999 Annual Report on Form
10-K incorporated herein by reference.
(ii) Registrant's By-Laws, as Amended to Date, Exhibit
3 to the Company's Form 10-Q for the quarter
ended June 30, 2002 incorporated herein by
reference.
4 Instruments Defining the Rights of Security
Holders, Including Indentures, incorporated by
reference to previously filed periodic reports.
31.1 Certification of Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
32.0 Certification of Chief Executive Officer and
Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
A current report on Form 8-K was filed May 2, 2003
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 quarter ended March 31, 2003 which was
filed with the United States Securities and Exchange
Commission.
A current report on Form 8-K was filed April 28, 2003
furnishing the information required by Item 12 of Form
8-K, "Results of Operation and Financial Condition" by
reference to HSBC USA Inc.'s press release issued on
that date.
43.
SIGNATURE
- ------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto
duly authorized.
HSBC USA Inc.
(Registrant)
Date: August 4, 2003 /s/ Gerald A. Ronning
-----------------------------
Gerald A. Ronning
Executive Vice President &
Controller
(On behalf of Registrant and
as Chief Accounting Officer)
44.
Exhibit 31.1
Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
- ------------------------------------------------------------
I, Youssef A. Nasr, certify that:
1. I have reviewed this report on Form 10-Q for the
quarterly period ended June 30, 2003 of HSBC USA Inc.;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and
other financial information included in this 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
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-15(e) and 15d-15(e)) for the registrant and
have:
a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be
designed under our supervision, 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 report is being
prepared;
b) Evaluated the effectiveness of the registrant's
disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end
of the period covered by this report based on such
evaluation; and
c) Disclosed in this report any change in the
registrant's internal controls over financial
reporting that occurred during the registrant's most
recent fiscal quarter that has materially affected, or
is reasonably likely to materially affect, the
registrant's internal controls over financial
reporting; and
45.
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 the
registrant's board of directors (or persons performing
the equivalent functions):
a) All significant and material weaknesses in the design
or operation of internal controls over financial
reporting which are reasonably likely to adversely
affect the registrant's ability to record, process,
summarize and report financial information; 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 over
financial reporting.
Date: August 4, 2003 /s/ Youssef A. Nasr
-------------------------------------
Youssef A. Nasr
President and Chief Executive Officer
46.
Exhibit 31.2
Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
- ------------------------------------------------------------
I, Roger K. McGregor, certify that:
1. I have reviewed this report on Form 10-Q for the
quarterly period ended June 30, 2003 of HSBC USA Inc.;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and
other financial information included in this 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
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-15(e) and 15d-15(e)) for the registrant and
have:
a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be
designed under our supervision, 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 report is being
prepared;
b) Evaluated the effectiveness of the registrant's
disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end
of the period covered by this report based on such
evaluation; and
c) Disclosed in this report any change in the
registrant's internal controls over financial
reporting that occurred during the registrant's most
recent fiscal quarter that has materially affected, or
is reasonably likely to materially affect, the
registrant's internal controls over financial
reporting; and
47.
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 the
registrant's board of directors (or persons performing
the equivalent functions):
a) All significant and material weaknesses in the design
or operation of internal controls over financial
reporting which are reasonably likely to adversely
affect the registrant's ability to record, process,
summarize and report financial information; 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 over
financial reporting.
Date: August 4, 2003 /s/ Roger K. McGregor
---------------------------
Roger K. McGregor
Executive Vice President and
Chief Financial Officer
48.
Exhibit 32.0
Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
- ------------------------------------------------------------
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002
(subsections (a) and (b) of section 1350, chapter 63 of
title 18, United States Code), each of the undersigned
officers of HSBC USA Inc., a Maryland corporation (the
Company), does hereby certify, to such officer's knowledge,
that:
The Quarterly Report on Form 10-Q for the quarter ended
June 30, 2003 (the Form 10-Q) of the Company fully complies
with the requirements of section 13(a) or 15(d) of the
Securities Exchange Act of 1934 and information contained in
the Form 10-Q fairly presents, in all material respects, the
financial condition and results of operations of the
Company.
Dated: August 4, 2003 /s/ Youssef A. Nasr
-----------------------------
Youssef A. Nasr
President and Chief Executive
Officer
Dated: August 4, 2003 /s/ Roger K. McGregor
-----------------------------
Roger K. McGregor
Executive Vice President and
Chief Financial Officer
The foregoing certification is being furnished solely
pursuant to section 906 of the Sarbanes-Oxley Act of 2002
(subsections (a) and (b) of section 1350, chapter 63 of
title 18, United States Code) and is not being filed as part
of the Form 10-Q or as a separate disclosure document.
A signed original of this written statement required by
Section 906, or other document authenticating,
acknowledging, or otherwise adopting the signature that
appears in typed form within the electronic version of this
written statement required by Section 906, has been provided
to HSBC USA Inc. and will be retained by HSBC USA Inc. and
furnished to the United States Securities and Exchange
Commission or its staff upon request.