Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1995 Commission file number 1-2940
HSBC Americas, Inc.
(Exact name of registrant as specified in its charter)
One Marine Midland Center
Buffalo, New York 14203
(Address of principal executive offices)
Telephone (716) 841-2424
IRS Employer Identification No. 22-1093160. State of Incorporation: Delaware
Securities registered pursuant to Section 12(b) of the Act:
A list of HSBC Americas, Inc. securities registered pursuant to Section 12(b)
of the Securities Exchange Act of 1934 is available from the Office of the
Secretary, One Marine Midland Center, Buffalo, New York 14203.
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) had filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to
this Form 10-K. [X]
All voting stock (1,001 shares of Common Stock $5 par value) is owned by HSBC
Holdings B.V., an indirect wholly owned subsidiary of HSBC Holdings plc.
Documents incorporated by reference: None
1
T A B L E O F C O N T E N T S
Page
Part I
1. Business 4
2. Properties 5
3. Legal Proceedings 5
4. Submission of Matters to a Vote of
Security Holders 6
Part II
5. Market for the Registrant's Common Equity
and Related Stockholder Matters 6
6. Selected Financial Data 7
7. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 10
8. Financial Statements and
Supplementary Data 30
9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure 66
Part III
10. Directors and Executive Officers
of the Registrant 66
11. Executive Compensation 69
12. Security Ownership of Certain Beneficial
Owners and Management 71
13. Certain Relationships and Related
Transactions 71
Part IV
14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 72
3
P A R T I
Item 1. Business
HSBC Americas, Inc. (the Company), formerly Marine Midland Banks, Inc., is a
New York State based bank holding company registered under the Bank Holding
Company Act of 1956, as amended. At December 31, 1995, the Company, together
with its subsidiaries, had assets of $20.5 billion and employed approximately
8,300 full and part time employees.
All of the Company's common stock is owned by HSBC Holdings B.V., an indirect
wholly owned subsidiary of HSBC Holdings plc (HSBC). HSBC, the ultimate
parent company of The Hongkong and Shanghai Banking Corporation Limited
(HongkongBank) and Midland Bank plc, is an international banking and financial
services organization with major commercial and investment banking franchises
operating under long established names in Asia, Europe, North America and the
Middle East. Principal executive offices of HSBC are located in London.
HSBC, with assets of $352 billion at December 31, 1995, is one of the world's
largest banking groups.
The Company's principal subsidiary, Marine Midland Bank (the Bank), which had
assets of $20.3 billion and deposits of $16.6 billion at December 31, 1995, is
supervised and routinely examined by the Superintendent of Banks of the State
of New York and the Board of Governors of the Federal Reserve System.
The Bank is a regional bank with a distinctive geographic franchise
encompassing the entire State of New York. Selected banking products are
offered on a national basis. The Bank is engaged in a general commercial
banking business, offering a full range of banking products and services to
corporations, institutions, governments and individuals. Through its
affiliation with HSBC, the Bank offers its customers access to global markets
and services. In turn, the Bank plays a role in the delivery and processing
of other HSBC products.
The Bank is subject to banking laws and regulations which, among other things,
require that reserves be maintained against deposits and currently limit the
establishment of branch banking offices in the U.S. outside its home state.
The Company is also prohibited, with certain exceptions, from engaging,
directly or indirectly, in activities which are not closely related to
banking. In addition, the Federal Reserve Act restricts certain transactions
between banks and their nonbank affiliates.
The FDIC Improvement Act of 1991 (FDICIA) set standards for: addressing the
safety and soundness of the deposit insurance system, supervision of domestic
and foreign depository institutions, accounting, prompt regulatory action and
federal deposit insurance. Pursuant to FDICIA, a well capitalized institution
must have a Tier 1 risk-based capital ratio of at least 6%, a total risk-based
capital ratio of at least 10%, a leverage ratio of at least 5% and not be
subject to a capital directive order. The leverage ratio measures Tier 1
capital against total non-risk weighted assets. The Bank's ratios at
December 31, 1995 exceeded the ratios required for the well capitalized
category. Revisions to the risk-based capital guidelines regarding interest
rate risk have been proposed. As proposed, these guidelines would not
materially affect the Company's risk-based capital ratios.
4
P A R T I Continued
Item 1. Business Continued
In connection with establishing standards to assure the safety and soundness
of financial institutions as required by FDICIA, the Federal Reserve Board
issued guidelines on operations and management and compensation. The Federal
Reserve Board has proposed standards for asset quality and earnings. The
Company does not expect the guidelines and proposed regulations to have a
material effect on its operations.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(IBBEA) authorized interstate acquisitions of banks and bank holding companies
without geographic limitation beginning in 1995. In addition, beginning in
1997, a bank may merge with a bank in another state as long as neither of the
states opt out of interstate branching. Also, IBBEA protects key provisions
of state law, establishes a mechanism for de novo interstate branching, and
includes provisions relating to interstate branching by foreign banks.
The Company and its subsidiaries face competition in all the markets they
serve. Other commercial banks, thrift institutions, consumer finance
companies, mortgage bankers, insurance companies and investment banking firms
are traditional competitors. Many of these institutions are not subject to
the same laws and regulations imposed on the Company and its subsidiaries.
Item 2. Properties
The principal executive offices of the Company and the Bank are located in
Buffalo, New York, in a building under a long-term lease. The Bank has more
than 300 other banking offices in New York State located in approximately 47
counties. More than half of these offices are located in buildings owned by
the Bank and the remaining are located in leased quarters. In addition, there
are branch offices and locations for other activities occupied under various
types of ownership and leaseholds in 9 states other than New York, none of
which is materially important to the respective activities. For information
relating to lease commitments, see Note 17 to the Financial Statements.
Item 3. Legal Proceedings
The Company and its subsidiaries are defendants in a number of legal
proceedings arising out of, and incidental to, their businesses. Management
of the Company, based on its review with counsel of the development of these
matters to date, is of the opinion that the ultimate resolution of these
pending proceedings will not have a material adverse effect on the business or
financial position of the Company.
5
P A R T I Continued
Item 4. Submission of Matters to a Vote of Security Holders
Reference is made to Item 5.
P A R T II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Since all common stock of the Company is owned by HSBC Holdings B.V., shares
of the Company's common stock are not listed or traded on a securities
exchange.
6
<TABLE>
<CAPTION>
Item 6. Selected Financial Data
- ----------------------------------------------------------------------------------------------------
Year Ended December 31, 1995 1994 (1) 1993 (1) 1992 (1) 1991 (1)
- ----------------------------------------------------------------------------------------------------
in millions
<S> <C> <C> <C> <C> <C>
Net interest income $ 875.2 $ 765.3 $ 710.1 $ 694.6 $ 711.3
Securities transactions 12.3 7.9 6.5 128.0 (27.8)
Other operating income 303.7 290.0 113.6 295.4 416.1
Operating expenses 669.4 777.2 839.3 851.3 920.8
Provision for loan losses 167.0 150.6 85.3 271.6 322.4
- ----------------------------------------------------------------------------------------------------
Income (loss) before taxes and cumulative effect
of change in accounting principle and
extraordinary item 354.8 135.4 (94.4) (4.9) (143.6)
Applicable income tax expense 63.1 118.2 16.5 29.3 25.5
- ----------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of change
in accounting principle and extraordinary item 291.7 17.2 (110.9) (34.2) (169.1)
Cumulative effect of change in accounting principle
and extraordinary item (2) - - 40.0 29.9 -
- ----------------------------------------------------------------------------------------------------
Net income (loss) $ 291.7 $ 17.2 $ (70.9) $ (4.3) $(169.1)
- ----------------------------------------------------------------------------------------------------
Balances at year end
Total assets $ 20,519 $18,698 $19,663 $18,522 $19,117
Long-term debt 710 713 1,704 2,201 1,731
Common shareholder's equity 1,567 1,402 1,341 1,217 1,127
Total shareholders' equity 1,665 1,500 1,439 1,315 1,225
Ratio of shareholders' equity to assets 8.12 % 8.02 % 7.32 % 7.10 % 6.41 %
- ----------------------------------------------------------------------------------------------------
Selected Financial Ratios (3)
Rate of return on:
Total assets 1.57 % 0.10 % (0.38)% (0.02)% (0.85)%
Total shareholders' equity 17.83 1.20 (5.19) (0.34) (14.59)
Total shareholders' equity to assets 8.79 7.96 7.37 6.91 5.80
- ----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Quarterly Results of Operations
1995 1994
- ----------------------------------------------------------------------------------------------------------
4th Q 3rd Q 2nd Q 1st Q 4th Q (1)3rd Q(1) 2nd Q(1)1stQ(1)
- ----------------------------------------------------------------------------------------------------------
in millions
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income $225.5 $220.6 $ 214.7 $ 214.4 $ 196.2 $ 189.1 $ 193.0 $187.0
Securities transactions 0.9 4.8 4.6 2.0 2.9 1.1 2.1 1.8
Other operating income 75.4 76.7 77.2 74.4 76.6 76.8 68.1 68.5
Operating expenses 170.0 171.6 164.7 163.1 210.0 190.0 186.0 191.2
Provision for loan losses (recovery) 12.0 18.0 12.0 125.0 (4) 13.4 (0.9) 135.6(4) 2.5
- ----------------------------------------------------------------------------------------------------------
Income (loss) before taxes 119.8 112.5 119.8 2.7 52.3 77.9 (58.4) 63.6
Applicable income taxes 39.0 35.9 51.5 (63.3) 32.0 29.7 31.7 24.8
- ----------------------------------------------------------------------------------------------------------
Net income (loss) $ 80.8 $ 76.6 $ 68.3 $ 66.0 $ 20.3 $ 48.2 $ (90.1) 38.8
==========================================================================================================
(1) Restated to reflect merger with Concord Leasing, Inc. which was accounted for similar
to a pooling of interest.
(2) Includes the cumulative effect of change in method of accounting for income taxes of $40.0 million
in 1993 and extraordinary item for utilization of operating loss carryforwards in 1992.
(3) Based on average daily balances.
(4) See discussion on page 25.
</TABLE>
7
<TABLE>
<CAPTION>
CONSOLIDATED AVERAGE BALANCES AND INTEREST RATES - THREE YEARS
The following table shows the average balances of the principal components
of assets, liabilities and shareholders' equity, together with their
respective interest amounts and rates earned or paid on a taxable
equivalent basis.
1995
- -----------------------------------------------------------------------------
Balance Interest Rate
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Assets
Interest bearing deposits with banks,
primarily foreign $ 954 $ 58.5 6.13 %
Federal funds sold and securities purchased
under resale agreements 579 34.9 6.03
Trading assets 496 34.2 6.89
Securities 2,351 143.6 6.11
Loans:
Domestic:
Commercial 6,387 561.6 8.79
Consumer
Residential mortgages 2,898 216.3 7.47
Other consumer 3,167 389.8 12.31
- -----------------------------------------------------------------------------
Total domestic 12,452 1,167.7 9.38
International 540 37.8 7.00
- -----------------------------------------------------------------------------
Total loans 12,992 1,205.5 9.28
- -----------------------------------------------------------------------------
Total earning assets 17,372 $1,476.7 8.50 %
- -----------------------------------------------------------------------------
Allowance for loan losses (503)
Cash and due from banks 910
Other assets 836
- -----------------------------------------------------------------------------
Total assets $ 18,615
=============================================================================
Liabilities and Shareholders' Equity
Interest bearing demand deposits $ 1,582 $ 29.7 1.88 %
Consumer savings deposits 3,749 121.8 3.25
Other consumer time deposits 3,076 169.0 5.50
Commercial and public savings and other time deposits 1,693 71.3 4.21
Deposits in foreign offices, primarily banks 1,470 73.2 4.98
- -----------------------------------------------------------------------------
Total interest bearing deposits 11,570 465.0 4.02
- -----------------------------------------------------------------------------
Federal funds purchased and securities sold
under repurchase agreements 602 34.5 5.72
Other short-term borrowings 718 47.0 6.54
Long-term debt 711 50.4 7.08
- -----------------------------------------------------------------------------
Total interest bearing liabilities 13,601 $ 596.9 4.39 %
- -----------------------------------------------------------------------------
Interest rate spread 4.11 %
- -----------------------------------------------------------------------------
Noninterest bearing deposits 3,019
Other liabilities 359
Total shareholders' equity 1,636
- -----------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 18,615
=============================================================================
Average earning assets - Domestic $ 15,844
- International 1,528
- -----------------------------------------------------------------------------
- Total $ 17,372
- -----------------------------------------------------------------------------
Net interest revenue - Domestic $ 833.7
- International 46.1
- -----------------------------------------------------------------------------
- Total $ 879.8
- -----------------------------------------------------------------------------
Net yield on average earning assets - Domestic 5.26 %
- International 3.02
- Total 5.06
- -----------------------------------------------------------------------------
Net yield on average total assets 4.73
=============================================================================
Total weighted average rate earned on earning assets is interest and fee
earnings divided by daily average amounts of total interest earning assets,
including the daily average amount on nonperforming loans. Loan fees
included were $14 million for 1995, $14 million for 1994 and $28 million
for 1993.
(1) Restated to reflect merger with Concord Leasing, Inc. which was
accounted for similar to a pooling of interest.
8
</TABLE>
<TABLE>
<CAPTION>
1994 (1) 1993 (1)
----------------------------- -----------------------------
Balance Interest Rate Balance Interest Rate
---------------------------------------------------------------------
in millions
<C> <C> <C> <C> <C> <C>
$ 1,014 $ 43.9 4.33 % $ 1,115 $ 38.2 3.43 %
669 30.3 4.53 445 14.5 3.25
953 54.0 5.67 710 44.6 6.29
1,790 98.1 5.48 2,791 154.5 5.53
6,441 471.6 7.32 6,861 440.7 6.42
2,654 168.7 6.36 2,092 158.6 7.58
2,766 343.8 12.43 2,588 319.8 12.35
---------------------------------------------------------------------
11,861 984.1 8.30 11,541 919.1 7.96
549 34.2 6.23 548 32.4 5.91
---------------------------------------------------------------------
12,410 1,018.3 8.21 12,089 951.5 7.87
---------------------------------------------------------------------
16,836 $1,244.6 7.39 % 17,150 $1,203.3 7.02 %
---------------------------------------------------------------------
(512) (528)
932 947
753 955
---------------------------------------------------------------------
$18,009 $18,524
=====================================================================
$ 1,581 $ 26.5 1.68 % $ 1,526 $ 26.4 1.73 %
3,938 105.7 2.68 4,047 101.5 2.51
2,306 105.8 4.59 2,272 105.9 4.66
1,386 41.2 2.97 1,515 40.3 2.66
722 28.6 3.96 502 16.1 3.20
---------------------------------------------------------------------
9,933 307.8 3.10 9,862 290.2 2.94
------------------------------------------------------------------
511 19.4 3.79 674 25.8 3.83
1,273 61.6 4.84 1,178 57.2 4.86
1,290 85.9 6.65 1,941 115.3 5.94
---------------------------------------------------------------------
13,007 $ 474.7 3.65 % 13,655 $ 488.5 3.58 %
---------------------------------------------------------------------
3.74 % 3.44 %
---------------------------------------------------------------------
3,065 3,076
503 427
1,434 1,366
---------------------------------------------------------------------
$18,009 $18,524
=====================================================================
$15,160 $15,284
1,676 1,866
---------------------------------------------------------------------
$16,836 $17,150
---------------------------------------------------------------------
$ 740.5 $ 691.7
29.4 23.1
---------------------------------------------------------------------
$ 769.9 $ 714.8
---------------------------------------------------------------------
4.88 % 4.53 %
1.76 1.24
4.57 4.17
---------------------------------------------------------------------
4.28 3.86
=====================================================================
9
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The Company reported net income for 1995 of $291.7 million compared with $17.2
million in 1994 and a loss of $70.9 million in 1993 after the cumulative
effect of an accounting change which increased income for 1993 by $40 million.
The Company's reported results are consolidated with Concord Leasing, Inc.
(Concord). Concord, which provides equipment financing through secured loan
and finance lease transactions, had assets of $1.5 billion at December 31,
1994. Concord was merged with the Company on January 1, 1995 through the
contribution of Concord's outstanding common stock held by HSBC Holdings, B.V.
to the Company. The merger transaction was accounted for as a transfer of
assets between companies under common control, with the assets and liabilities
of Concord combined with those of the Company at their historical carrying
values. The Company's consolidated financial statements reflect a restatement
of all prior periods to include the accounts and results of operations of
Concord as though the merger transaction occurred as of the beginning of the
earliest period presented.
A detailed review comparing 1995 operations with 1994 and 1993 follows. It
should be read in conjunction with the consolidated financial statements of
the Company which begin on page 33.
E A R N I N G S P E R F O R M A N C E R E V I E W
Net Interest Income
Net interest income is the total interest income on earning assets less the
interest expense on deposits and borrowed funds. In the discussion that
follows, interest income and rates are presented and analyzed on a taxable
equivalent basis, i.e., an amount equivalent to tax-exempt benefits is
included in both interest income and applicable income taxes.
<TABLE>
<CAPTION>
Increase(Decrease) Increase(Decrease)
1995 Amount % 1994 Amount % 1993
in millions
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income $1,476.7 $232.1 18.6 $1,244.6 $ 41.4 3.4 $1,203.2
Interest expense 596.9 122.2 25.7 474.7 (13.8) (2.8) 488.5
Net interest income -
taxable equivalent basis 879.8 109.9 14.3 769.9 55.2 7.7 714.7
Taxable equivalent
adjustment 4.6 - (1.4) 4.6 - .6 4.6
Net interest income $ 875.2 $109.9 14.4 $ 765.3 $ 55.2 7.8 $ 710.1
Average earning assets $ 17,372 $ 536 3.2 $ 16,836 $ (314) (1.8) $ 17,150
Average nonearning assets 1,243 70 6.0 1,173 (201) (14.6) 1,374
Average total assets $ 18,615 $ 606 3.4 $ 18,009 $ (515) (2.8) $ 18,524
Net yield on:
Average earning assets 5.06% .49% 10.7 4.57% .40% 9.6 4.17%
Average total assets 4.73 .45 10.5 4.28 .42 10.9 3.86
</TABLE>
Net interest income of $879.8 million in 1995 improved from $769.9 million in
1994 due to a number of factors, including an increase in the volume of
10
accruing commercial and consumer loans, a higher prime rate and lower
nonaccruing loans. The following table presents net interest income
components on a taxable equivalent basis, using marginal tax rates of 35%,
and quantifies the changes in the components according to "volume and rate".
<TABLE>
<CAPTION>
Net Interest Income Components Including Volume/Rate Analysis
1995 Compared to 1994 1994 Compared to 1993
Increase(Decrease) Increase(Decrease)
1995 Volume Rate 1994 Volume Rate 1993
in millions
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Interest bearing deposits with banks$ 58.5 $ (2.7) $ 17.3 $ 43.9 $ (3.7) $ 9.4 $ 38.2
Federal funds sold and securities
purchased under resale agreements 34.9 (4.4) 9.0 30.3 10.3 5.5 14.5
Trading assets 34.2 (29.8) 10.0 54.0 14.1 (4.7) 44.6
Securities 143.6 33.4 12.1 98.1 (54.9) (1.5) 154.5
Loans:
Domestic:
Commercial 561.6 (4.0) 94.0 471.6 (28.1) 59.0 440.7
Consumer 606.1 63.3 30.3 512.5 71.8 (37.7) 478.4
International 37.8 (.5) 4.1 34.2 .1 1.7 32.4
Total interest income 1,476.7 55.3 176.8 1,244.6 9.6 31.7 1,203.3
Interest expense:
Interest bearing demand deposits 29.7 - 3.2 26.5 .9 (.8) 26.4
Consumer savings and
other time deposits 290.8 21.0 58.3 211.5 (2.5) 6.6 207.4
Commercial and public savings
and other time deposits 71.3 10.5 19.6 41.2 (3.6) 4.5 40.3
Deposits in foreign offices 73.2 35.7 8.9 28.6 8.1 4.4 16.1
Short-term borrowings 81.5 (24.2) 24.7 81.0 (3.1) 1.1 83.0
Long-term debt 50.4 (40.7) 5.2 85.9 (42.1) 12.7 115.3
Total interest expense 596.9 2.3 119.9 474.7 (42.3) 28.5 488.5
Net interest income -
taxable equivalent basis $ 879.8 $ 53.0 $ 56.9 $ 769.9 $ 51.9 $ 3.2 $714.8
</TABLE>
The changes in interest income and interest expense due to both rate and
volume have been allocated in proportion to the absolute amounts of the change
in each.
Average Balances and Interest Rates
Average balances and interest rates earned or paid for the past three years
are reported on pages 8 and 9. Interest rates earned on assets generally rose
faster than interest rates paid on interest bearing liabilities resulting in
increased net yields on average earning assets to 5.06% in 1995 from 4.57% in
1994.
Yields on commercial loans increased from 7.32% in 1994 to 8.79% in 1995 as a
result of several factors. Outstanding loans to middle sized and smaller
sized businesses increased where rates are generally higher than larger
commercial customers. The prime rate on which loan rates are generally based
averaged 8.83% in 1995 compared with 7.63% in 1994. The level of nonaccruing
loans decreased from $855 million at year-end 1994 to $381 million at year-end
1995.
11
Average residential mortgages increased to $2,898 million in 1995 from $2,654
million in 1994 and $2,092 million in 1993. In addition, the yield on these
loans increased from 6.36% in 1994 to 7.47% in 1995 as a result of higher
interest rates. Other consumer loans include credit card receivables and
installment loans such as automobile loans. Average credit card receivables
increased to $1,720 million in 1995 from $1,516 million in 1994.
Domestic time deposits, including NOW accounts, and consumer, commercial and
public savings and other time deposits averaged $10.1 billion during 1995,
compared with $9.2 billion in 1994. Average effective rates on these types of
deposits were 3.88% in 1995, compared with 3.03% in 1994. This increase is
reflective of a higher interest rate environment in 1995 in comparison to
1994.
<TABLE>
<CAPTION>
Other Operating Income
Other operating income was $316.0 million in 1995 compared with $297.9 million
in 1994 and $120.1 million in 1993.
Increase(Decrease) Increase(Decrease)
1995 Amount % 1994 Amount % 1993
in millions
<S> <C> <C> <C> <C> <C> <C> <C>
Trust income $ 46.7 $ (.8) (1.7) $ 47.5 $ (.4) (.8) $ 47.9
Service charges 85.1 .6 .7 84.5 1.0 1.1 83.5
Mortgage servicing
income (expense) 16.2 (2.9) (14.9) 19.1 222.4 109.4 (203.3)
Letter of credit fees 18.6 (.4) (2.2) 19.0 1.7 10.2 17.3
Credit card fees 43.2 (2.0) (4.4) 45.2 7.5 20.0 37.7
Other fee-based income 60.3 (3.7) (5.9) 64.0 (20.3) (24.1) 84.3
Other income 28.2 3.6 15.0 24.6 (24.5) (50.1) 49.1
Nontrading income 298.3 (5.6) (1.8) 303.9 187.4 160.7 116.5
Trading asset revenue (loss) 1.6 19.1 108.9 (17.5) (7.3) (71.8) (10.2)
Foreign exchange revenue 3.8 .2 6.1 3.6 (3.7) (50.2) 7.3
Trading revenues (loss) 5.4 19.3 138.9 (13.9) (11.0) (377.4) (2.9)
Securities transactions 12.3 4.4 56.1 7.9 1.4 21.4 6.5
Total other operating income $316.0 $18.1 6.1 $ 297.9 $ 177.8 147.9 $120.1
</TABLE>
Nontrading Income
Nontrading income was $298.3 million or $5.6 million lower than 1994. The
increase in nontrading income between 1994 and 1993 relates primarily to
mortgage servicing income (expense) which had been negatively impacted by
accelerated mortgage prepayments due to the high volume of mortgage
refinancings occurring within the industry during 1993 and 1992. Mortgage
servicing rights amortization and write downs were $259.4 million in 1993
compared with $16.5 million in 1994 and $17.4 million in 1995. The carrying
value of mortgage servicing rights at December 31, 1995 was $37 million
compared with an estimated market value of $65 million.
12
Trading Revenues
Trading revenue includes securities trading gains and losses, commissions
earned from distributing municipal obligations, and foreign exchange fees from
transactions with corporate clients and correspondent banks. It does not
include interest income from these activities (included as a component of net
interest income), which is usually substantial. The following is an analysis
of the average balance outstanding, interest income (on a taxable equivalent
basis) and trading revenue related to trading assets. This analysis excludes
foreign exchange revenue which is separately disclosed in the table relating
to other operating income.
<TABLE>
<CAPTION>
Mortgage
and Other
U.S. Asset-Backed Other
Government Securities Securities Derivatives Total
in millions
<S> <C> <C> <C> <C>
1995
Average balance
outstanding $ 12 $ 463 $ 23 $ (2) $ 496
Interest income .7 32.8 .7 - 34.2
Trading revenue (2.3) 5.7 1.2 (3.0) 1.6
1994
Average balance
outstanding 123 781 56 (7) 953
Interest income 7.8 43.3 2.9 - 54.0
Trading revenue (6.4) (19.7) (.8) 9.4 (17.5)
1993
Average balance
outstanding 215 311 190 (6) 710
Interest income 13.8 16.6 14.2 - 44.6
Trading revenue 7.1 (4.9) 9.5 (21.9) (10.2)
</TABLE>
In 1994, the Company lowered its risk positions as a result of instability in
the money markets driven by volatile interest rates. As interest rates
stabilized in 1995, the Company increased its trading portfolio during the
fourth quarter of 1995 to $617 million at year-end 1995 compared with $404
million at year-end 1994.
Securities Transactions
Securities transactions during 1995 resulted in net gains of $12.3 million
compared with net gains of $7.9 million in 1994 and $6.5 million in 1993. The
gains realized relate to equity investments classified as available for sale,
primarily highly leveraged partnership interests.
13
<TABLE>
<CAPTION>
Other Operating Expenses
Increase(Decrease) Increase(Decrease)
1995 Amount % 1994 Amount % 1993
in millions
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries $283.6 $ (4.0) (1.4) $287.6 $ (9.2) (3.1) $296.8
Pension and other
employee benefits 70.6 (5.6) (7.3) 76.2 .3 .3 75.9
Total personnel 354.2 (9.6) (2.6) 363.8 (8.9) (2.4) 372.7
Net occupancy 76.4 5.1 7.1 71.3 (5.9) (7.6) 77.2
Equipment 31.8 (3.5) (9.9) 35.3 (7.4) (17.4) 42.7
Amortization of intangibles 11.2 (4.6) (28.9) 15.8 1.9 13.3 13.9
FDIC assessment 14.6 (14.4) (49.7) 29.0 (2.3) (7.2) 31.3
Marketing 22.8 (2.2) (8.6) 25.0 9.4 60.2 15.6
Outside services 24.8 .4 1.7 24.4 (2.9) (10.7) 27.3
Professional fees 17.3 (4.0) (18.9) 21.3 (6.7) (23.7) 28.0
Other real estate (ORE) and
owned asset (income) expense (3.9) (24.8) (118.8) 20.9 (66.6) (76.2) 87.5
Other 114.3 (56.1) (32.9) 170.4 27.3 19.1 143.1
Total other operating expenses 663.5 (113.7) (14.6) 777.2 (62.1) (7.4) 839.3
Provision for ORE and
owned assets 5.9 5.9 100.0 - - - -
Total other operating expenses
after provision for ORE and
owned assets $669.4 $(107.8) (13.9) $777.2 $(62.1) (7.4) $839.3
Personnel - average number 8,301 (135) (1.6) 8,436 (507) (5.7) 8,943
</TABLE>
Personnel Expense
Personnel expense was $354.2 million in 1995 compared with $363.8 million in
1994 and $372.7 million in 1993. Average staffing levels have declined during
the three year period from 8,943 in 1993 to 8,301 in 1995. During 1994, the
Company offered a voluntary retirement program. The charge for this program
was included in other expenses.
Other Operating Expenses
Other operating expenses excluding personnel, have been reduced through
operating efficiency programs as well as decreases in costs associated with
problem credits. ORE and owned asset expenses were credits of $3.9 million
in 1995 compared with expenses of $20.9 million in 1994 and expenses of $87.5
million in 1993. The years 1994 and 1993 include $10.5 million and $80.5
million, respectively, of revaluation adjustments related to ORE and owned
assets. During 1995, these revaluations are considered in the level of
provision provided for ORE and owned assets.
In mid-1995, the Federal Deposit Insurance Corporation (FDIC) lowered the
insurance premium rate the Bank is assessed on deposits resulting in a $14.4
million expense reduction from 1994.
Marketing and other expenses in 1995 continued to include amounts associated
with a multi-faceted image campaign which included a statewide advertising
campaign and, in 1994, the adoption of a new logo.
14
In 1994, other expenses include $29.8 million as provision to cover the costs
of an early retirement program. Other expenses in 1993 included a charge of
$25.0 million relating to the planned disposition of excess space as a result
of continuing centralization of operations.
Provision for Loan Losses
Provision for loan losses was $167.0 million in 1995 compared with $150.6
million in 1994 and $85.3 million in 1993. Upon merger of Concord into the
Company, management adopted an aggressive strategy of accelerating the timing
of disposal of a troubled aircraft portfolio. This strategy resulted in an
increased provision in 1995. Nonaccruing loans were 56% less at December 31,
1995 than one year ago. An analysis of the loan loss allowance and the
provision for loan losses begins on page 28.
Income Taxes
Effective January 1, 1993, the Company prospectively adopted Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes (FAS 109),
and reported the cumulative effect of the change at January 1, 1993 (a benefit
of $40 million) separately in the consolidated statement of income for 1993.
The recognition of the $40 million net deferred tax asset was based on the
Company's forecast that it would generate taxable income of at least $118
million during 1993 and thus realize the benefit of a portion of its net
reported operating loss carryforwards, which totaled approximately $300
million at January 1, 1993. The net operating loss carryforwards resulted
from substantial loan losses in 1991 and 1990.
As of December 31, 1994, recognition of the $40 million deferred tax asset was
based on the forecast that net temporary deductible differences of
approximately $114 million will reverse during the years 1995 through 1997 and
thus, be available for carryback to offset the Company's 1994 taxable income.
For the years ended December 31, 1993, 1994 and 1995 the Company generated
taxable income at a rate that was well in excess of that required to support
the $40 million asset.
As of December 31, 1995, the Company had net deferred tax assets of $88.2
million, $73.5 million of which relates to a Federal net operating loss
carryforward resulting from the merger of Concord into the Company. The
recognition of the Federal net operating loss carryforward in 1995 was based
on the Company's forecast that it would generate taxable income of at least
$210.0 million during 1996 and thus realize the benefit of the net operating
loss carryforward. Also as of December 31, 1995, recognition of the remaining
$14.7 million of net deferred tax assets was based on a forecast that net
temporary differences in excess of $42 million will reverse during the years
1996 through 1998 and, thus, be available for carryback to offset the
Company's 1995 taxable income.
15
B A L A N C E S H E E T R E V I E W
Asset-Liability Management
The principal objectives of asset-liability management are to ensure adequate
liquidity and to manage exposure to interest rate risk. Liquidity management
requires maintaining funds to meet customers' borrowing and deposit withdrawal
requirements as well as funding anticipated growth. Interest rate exposure
management seeks to control both near term and longer term interest rate risk
in order to provide a more stable base of net interest income.
The Bank, as both a large retail and commercial bank with a well established
franchise in New York State with access to domestic and international money
markets, has a wide range of available techniques for implementing
asset-liability management decisions. The asset-liability management process
is designed to take advantage of the Company's strengths in managing
diversified financial businesses. Overall balance sheet strategy is
centralized under the Asset and Liability Management Policy Committee,
comprised of senior officers. Authority and responsibility for implementation
of the Committee's broad strategy is controlled under a framework of defined
trading and balance sheet position limits.
The Company maintains a strong liquidity position. The size and stability of
its New York State deposit base are complemented by its maintenance of a
surplus borrowing capacity in the money markets, including the ability to
issue additional commercial paper and access unused lines of credit of $100
million at December 31, 1995. Wholesale liabilities increased to $4,205
million at December 31, 1995 from $3,175 million a year ago primarily as a
result of increased money market activities. Deposits at December 31, 1995
were 111.1% of loans compared with 106.7% at December 31, 1994.
The Company is subject to interest rate risk associated with the repricing
characteristics of its balance sheet assets and liabilities. Specifically, as
interest rates change, interest earning assets reprice at intervals that do
not correspond to the maturities or repricing patterns of interest bearing
liabilities. This mismatch between assets and liabilities in repricing
sensitivity results in shifts in net interest income as interest rates move.
To help manage the risks associated with the effects of changes in interest
rates, and to optimize net interest income within the ranges of interest rate
risk that the Company's management considers acceptable, the Company maintains
a portfolio of off-balance sheet financial instruments. Consisting
principally of interest rate swaps and forward rate agreements, these
derivative instruments mitigate interest rate risk by altering the repricing
characteristics of certain on-balance sheet assets.
The Company employs a combination of risk assessment techniques, principally
gap analysis and dynamic simulation modeling, to analyze the sensitivity of
its earnings to changes in interest rates. These risk assessment techniques
are comprehensive, in that they include all on-balance sheet and off-balance
sheet items. In dynamic simulation modeling, reaction to a range of positive
and negative interest rate movements is projected with consideration given to
known activities and to the behavioral patterns of individual assets and
liabilities in the corresponding rate environments. As a financial
institution, patterns of certain asset and liability movements can
16
be reasonably estimated based upon available historical data. Gap analysis
assumes static conditions in that the effect of interest rate changes is
calculated with consideration basically given to only known, as opposed to
projected, maturity and repricing patterns.
<TABLE>
<CAPTION>
Interest Rate Sensitivity
The following table, which is based upon dynamic simulation modeling as of
December 31, 1995, demonstrates the impact of a 100 basis point positive and
negative movement in interest rates on the Company's net interest income for
the next twelve months and illustrates the effectiveness of the risk
management positions at reducing overall interest rate sensitivity.
Changes in net interest income attributable to: +100 basis point -100 basis point
in millions
<S> <C> <C>
Balance sheet assets and liabilities $ 10 $(17)
Risk management positions in derivative
off-balance sheet instruments (13) 13
$ (3) $(4)
</TABLE>
Management has primarily utilized interest rate swaps and forward rate
agreements to alter the repricing characteristics of balance sheet assets,
thereby decreasing the Company's overall sensitivity to changes in interest
rates.
In addition to utilizing derivative positions to manage overall repricing
risk, the Company also utilizes these instruments to manage basis risk
associated with the potential divergence of market interest rate indices.
Specifically, the variable component of the majority of the Company's overall
interest rate risk management derivatives are based upon the London Interbank
Offered Rate (LIBOR). Given that the majority of rate sensitive loan assets
are prime based, consistent with risk management philosophy, the Company
enters into certain interest rate swaps whereby the LIBOR and prime interest
streams are exchanged. Derivative financial instruments are also utilized to
a lesser extent to manage the risk associated with the cash flows generated by
certain specific balance sheet positions. A further discussion of derivative
activities can be found in Note 19 to the Financial Statements.
The following table shows the repricing structure of assets and liabilities as
of December 31, 1995, with each maturity interval referring to the earliest
repricing opportunity for each asset and liability, that is, the earlier of
its actual maturity or its expected rate reset date. The resulting "gaps"
indicate the sensitivity of earnings with respect to the direction, magnitude
and timing of changes in market interest rates.
17
<TABLE>
<CAPTION>
Interest Rate Sensitivity
Noninterest
Bearing 0-90 91-180 181-365 Over 1
December 31, 1995 Funds Days Days Days Year Total
in millions
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest bearing deposits
with banks $ - $ 1,260 $228 $ - $ - $ 1,488
Securities - 83 - 302 2,229 2,614
Loans - 7,986 748 892 4,178 13,804
Other earning assets - 1,135 - - - 1,135
Other assets, net 1,478 - - - - 1,478
Total assets $ 1,478 $10,464 $976 $1,194 $6,407 $20,519
Sources of funds:
Interest bearing deposits:
Domestic offices $ - $ 3,482 $797 $ 885 $5,290 $10,454
Foreign offices - 1,398 6 39 - 1,443
Other interest bearing
liabilities - 2,488 51 126 583 3,248
Noninterest bearing deposits 3,434 - - - - 3,434
Other liabilities 275 - - - - 275
Shareholders' equity 1,665 - - - - 1,665
Total sources of funds $ 5,374 $ 7,368 $854 $1,050 $5,873 $20,519
Effect of interest rate swaps - (1,680) (6) 456 1,230
Interest sensitivity gap $(3,896) $ 1,416 $116 $ 600 $1,764
</TABLE>
Data shown is as of one day, and one day figures can be distorted by temporary
swings in assets or liabilities.
<TABLE>
<CAPTION>
Commercial Loan Maturities and Sensitivity to Changes in Interest Rates
One Over One Over
Year Through Five
December 31, 1995 or Less Five Years Years
in millions
<S> <C> <C> <C>
Domestic:
Construction loans $ 269 $ 37 $ 10
Mortgage loans 787 123 89
Lease financing 14 15 4
Other business and financial 4,389 794 136
International 445 - 296
Total $5,904 $969 $535
Loans with fixed or predetermined
interest rates $1,262 $965 $519
Loans having floating or adjustable
interest rates 4,642 4 16
Total $5,904 $969 $535
</TABLE>
18
The table provides approximate maturities of outstanding loans at year-end
1995. Maturities of outstanding loans are generally extended with the same
credit approval process required of new credits. The table also shows the
breakdown of the maturities which are at fixed or adjustable rates. Loans are
considered to be rate sensitive, i.e., have floating or adjustable interest
rates, when rates change within 100 days of fluctuations in key money market
rates; otherwise, the loans are treated as fixed or predetermined interest
rate obligations.
Securities Portfolios
Effective January 1, 1994, the Company prospectively adopted Statement of
Financial Accounting Standards No. 115, Accounting for Certain Investments in
Debt and Equity Securities (FAS 115), which specifies the accounting and
reporting for all investments in debt securities and for investments in equity
securities that have readily determinable fair values. Under FAS 115, debt
securities that the Company has the ability and intent to hold to maturity are
reported at amortized cost. Securities acquired principally for the purpose
of selling them in the near term are classified as trading securities and
reported at fair value, with unrealized gains and losses included in earnings.
All other securities are classified as available for sale and carried at fair
value, with unrealized gains and losses excluded from earnings and reported as
a separate component of shareholders' equity.
In November 1995, the Financial Accounting Standards Board issued a Special
Report, "A Guide to Implementation of Statement 115 on Accounting for Certain
Investments in Debt and Equity Securities" which provided a one-time
opportunity for companies to reassess the appropriateness of the designations
of all securities held upon the initial application of the Special Report.
The Company reassessed the classifications of its securities held and, during
December 1995 transferred securities with an amortized cost of $2,491 million
and a fair value of $2,535 million from held to maturity to available for
sale. The resulting redesignations were accounted for at fair value resulting
in a net unrealized gain, net of tax of $29.4 million recorded in
shareholders' equity.
<TABLE>
<CAPTION>
The following table is an analysis of securities at the end of each of the
last three years.
December 31, 1995 1994 1993
in millions
<S> <C> <C> <C>
Held to maturity:
U.S. Treasury $ - $1,065 $ 792
U.S. Government agency obligations - 751 827
Other debt securities - 152 364
$ - $1,968 $1,983
Available for sale:
U.S. Treasury $1,715 $ - $ -
U.S. Government agency obligations 618 - -
Other debt securities 202 - -
Equity securities 79 80 -
$2,614 $ 80 $ -
</TABLE>
19
The following table reflects the distribution of maturities of the available
for sale portfolio at year-end 1995 together with the approximate taxable
equivalent yield of the portfolio. The yields shown are calculated by
dividing annual interest income, including the accretion of discounts and the
amortization of premiums, by the fair value of securities outstanding at
December 31, 1995. Yields on tax-exempt obligations have been computed on a
taxable equivalent basis using applicable statutory tax rates. The table
excludes securities with total fair value of $79 million, including $43
million in Federal Reserve Bank stock, without fixed maturities which had a
weighted average yield of 4.35%.
<TABLE>
<CAPTION>
Securities - Contractual Final Maturities and Yield
Within After One After Five After
Taxable One but Within but Within Ten
equivalent Year Five Years Ten Years Years
basis Amount Yield Amount Yield Amount Yield Amount Yield
in millions
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available for sale:
U.S. Treasury $305 5.24% $1,256 5.20% $154 5.92% $ - -%
U.S. Gov't agency - - 25 6.06 366 5.95 227 6.80
Other debt securities 2 4.90 200 5.78 - - - -
Total fair value $307 5.24% $1,481 5.29% $520 5.94% $227 6.80%
Total amortized cost $307 $1,452 $517 $215
</TABLE>
The maturity distribution of U.S. Government agency obligations and other
securities which include asset backed securities, primarily mortgages, are
based on the contractual due date of the final payment. These securities have
an anticipated cash flow that includes contractual principal payments and
prepayments. Based on the anticipated cash flows, the total maturity
distributions for the portfolio would be $672 million, $1,628 million, $189
million and $46 million for within one year, after one but within five years,
after five years but within ten years and after ten years, respectively.
<TABLE>
<CAPTION>
20
Loans Outstanding
The following table provides a breakdown of major loan categories as of year
end for the past five years. With respect to commercial loans, no single
industry group's aggregate borrowings from the Company exceeded 10% of the
total loan portfolio at December 31, 1995.
1995 1994 1993 1992 1991
in millions
<S> <C> <C> <C> <C> <C>
Domestic:
Commercial:
Construction loans $ 316 $ 265 $ 403 $ 739 $ 1,020
Mortgage loans 999 931 891 671 766
Loans and advances to affiliates 491 302 160 106 134
Other business and financial 4,861 4,988 5,070 5,610 6,001
Consumer:
Lease financing - 4 58 328 838
Residential mortgages 3,080 2,738 2,356 1,983 1,550
Credit card receivables 1,844 1,656 1,521 822 822
Other consumer loans 1,472 1,402 1,192 1,248 1,928
13,063 12,286 11,651 11,507 13,059
International:
Government and official institutions 373 383 381 453 426
Banks and other financial institutions 284 191 25 25 93
Commercial and industrial 84 54 111 142 93
741 628 517 620 612
Total loans $13,804 $12,914 $12,168 $12,127 $13,671
</TABLE>
Domestic Office Deposits
Certificates of deposit of $100,000 or more issued by domestic offices
which totaled $1,239 million at December 31, 1995, mature as follows:
under 3 months, $971 million; 3 to 6 months, $123 million; 6 to 12 months,
$83 million; and over 12 months, $62 million.
21
<TABLE>
<CAPTION>
Short-Term Borrowings
The following table shows detail relating to short-term borrowings in 1995,
1994 and 1993. Average interest rates during each year are computed by
dividing total interest expense by the average amount borrowed.
1995 1994 1993
Average Average Average
Amount Rate Amount Rate Amount Rate
in millions
<S> <C> <C> <C> <C> <C> <C>
Federal funds purchased
(day to day):
At December 31 $1,013 4.64% $ 469 4.02% $1,115 2.95%
Average during year 297 5.73 309 3.72 384 2.97
Maximum month-end
outstanding during year 1,013 791 1,115
Securities sold under
repurchase agreements:
At December 31 123 5.48 260 5.22 261 2.55
Average during year 305 5.71 202 3.89 290 4.96
Maximum month-end
outstanding during year 988 388 416
Commercial paper:
At December 31 277 5.49 226 5.33 748 3.13
Average during year 228 5.78 789 4.41 739 3.21
Maximum month-end
outstanding during year 277 917 839
All other short-term borrowings:
At December 31 1,125 5.05 1,301 6.09 979 3.06
Average during year 490 6.89 484 5.53 439 6.52
Maximum month-end
outstanding during year 1,125 1,301 979
</TABLE>
All other short-term borrowings include $746 million and $1 billion at year
ends 1995 and 1994, respectively, from HSBC. See Notes 1 and 14 to the
Financial Statements.
22
Capital Resources
Total shareholders' equity at year-end 1995 was $1,665 million, compared with
$1,500 million at year-end 1994. The equity base was increased by $291.7
million from net income and $29.4 million from net unrealized gains on
securities available for sale, and reduced by $150 million for common
shareholder dividends paid to HSBC Holdings B.V. and $5.9 million for
preferred shareholder dividends. The ratio of shareholders' equity to total
year-end assets increased to 8.12% at December 31, 1995 from 8.02% at
December 31, 1994.
Capital Adequacy
The Federal Reserve Board has Risk-Based Capital Guidelines for assessing the
capital adequacy of U.S. banking organizations. The guidelines place balance
sheet assets into four categories of risk weights, primarily based on the
relative credit risk of the counterparty. Some off-balance sheet items such
as letters of credit and loan commitments are taken into account by applying
different categories of "credit conversion factors" to arrive at
credit-equivalent amounts, which are then weighted in the same manner as
balance sheet assets involving similar counterparties. For off-balance sheet
items relating to interest rate and foreign exchange rate contracts, the
credit-equivalent amounts are arrived at by estimating both the current
exposure, mark to market value and the potential exposure over the remaining
life of each contract. The credit-equivalent amount is similarly assigned to
the risk weight category appropriate to the counterparty.
The guidelines include the concept of Tier 1 capital and total capital.
Tier 1 capital is essentially common equity, excluding net unrealized gain
(loss) on securities available for sale and goodwill, plus certain types of
perpetual preferred stock. Total capital includes Tier 1 capital and other
forms of capital such as the allowance for loan losses, subject to
limitations, and subordinated debt. The guidelines establish a minimum
standard risk-based target ratio of 8%, of which at least 4% must be in the
form of Tier 1 capital.
The capital adequacy guidelines establish a limit on the amount of certain
deferred tax assets that may be included in (that is, not deducted from) Tier
1 capital for risk-based and leverage capital purposes. The deferred tax
asset recognized by the Company under FAS 109 meets the criteria for capital
recognition and has been included in the calculation of the Company's capital
ratios.
Under these guidelines, the Company's total risk adjusted assets and
off-balance sheet items at December 31, 1995 was approximately $15.0 billion.
Tier 1 capital was $1.6 billion and total capital was $2.4 billion resulting
in risk adjusted capital ratios of 10.71% at the Tier 1 level and 16.21% at
the total capital level. These ratios compared with 10.93% at the Tier 1
level and 17.25% at the total capital level at December 31, 1994.
Banking industry regulators also have guidelines that set forth the leverage
ratios to be applied to banking organizations in conjunction with the
risk-based capital framework. Under these guidelines, strong banking
23
organizations are required to maintain a minimum leverage ratio of Tier 1
capital to quarterly average total assets of 3%. At December 31, 1995, the
Company had a 8.32% leverage ratio compared with 8.16% at December 31, 1994.
The regulatory agencies established five capital categories applicable to
banks: well capitalized, adequately capitalized, undercapitalized, signifi-
cantly undercapitalized and critically undercapitalized. A well capitalized
institution must have a Tier 1 capital ratio of at least 6%, a total risk-
based capital ratio of at least 10%, a leverage ratio of at least 5% and not
be subject to a capital directive order. The Bank's ratios at December 31,
1995 exceeded the ratios required for the well capitalized category.
From time to time, the bank regulators propose amendments to or issue
interpretations of risk-based capital guidelines. The Federal Reserve Board
has proposed amendments to the guidelines regarding interest rate risk. As
proposed, this amendment would not materially affect the Company's risk-based
capital.
Credit Management
The credit policy function is centralized under the control of the Chief
Credit Officer. The structure is designed to emphasize credit decision
accountability, optimize credit quality, facilitate improvement in credit
policies and procedures and encourage consistency in the approach to, and
management of, the credit process throughout the Company as it relates to both
on- and off-balance sheet activities.
The Credit Policy Committee, comprised of senior line and credit managers, is
responsible for the design and management of the credit function. The
Committee is charged with the responsibility for monitoring and making
changes, where appropriate, to written credit policies.
In addition to active supervision and evaluation by lending officers, periodic
reviews of the loan portfolio are made by internal auditors, independent
auditors, the Board of Directors' Examining Committee and regulatory agency
examiners. These reviews cover selected borrowers' current financial
position, past and prospective earnings and cash flow, and realizable value of
collateral and guarantees. These reviews also serve as an early
identification of problem credits.
Problem Loan Management
Borrowers who experience difficulties in meeting the contractual payment terms
of their loans receive special attention. Depending on circumstances,
decisions may be made to cease accruing interest on such loans or to record
interest at a reduced rate.
The Company complies with regulatory requirements which mandate that interest
not be accrued on commercial loans with principal or interest past due for a
period of ninety days unless the loan is both adequately secured and in
process of collection. In addition, commercial loans are designated as
nonaccruing when, in the opinion of management, reasonable doubt exists with
respect to collectibility of all interest and principal based on certain
factors, including adequacy of collateral.
24
Interest that has been recorded but unpaid on loans placed on nonaccruing
status is generally reversed and reduces current income at the time loans are
so categorized. Interest income on these loans may be recognized to the
extent of cash payments received. In those instances where there is doubt as
to collectibility of principal, any cash interest payments received are
applied as principal reductions. Loans are not reclassified as accruing until
interest and principal payments are brought current and future payments are
reasonably assured.
In certain situations where the borrower is experiencing temporary cash flow
problems, and after careful examination by management, the interest rate and
payment terms may be adjusted from the original contractual agreement. When
this occurs and the revised terms at the time of renegotiation are less than
the Company would be willing to accept for a new loan with comparable risk,
the loan is separately identified as restructured.
<TABLE>
<CAPTION>
Risk Elements in the Loan Portfolio at Year End
1995 1994 1993 1992 1991
in millions
<S> <C> <C> <C> <C> <C>
Nonaccruing loans:
Domestic:
Construction and other commercial
real estate $ 83 $ 159 $ 258 $ 325 $ 439
Other domestic loans 298 696 525 1,136 1,053
Subtotal 381 855 783 1,461 1,492
International - - - - 2
Total nonaccruing loans 381 855 783 1,461 1,494
Restructured accruing loans 13 10 - - -
Total nonaccruing and restructured loans 394 865 783 1,461 1,494
Other real estate 2 18 37 73 73
Other owned assets 45 8 32 98 32
Total nonaccruing and restructured loans,
other real estate and other owned assets $ 441 $ 891 $ 852 $1,632 $1,599
Ratios:
Nonaccruing and restructured
loans to total loans 2.85% 6.70% 6.43% 12.05% 10.93%
Nonaccruing loans, restructured loans,
other real estate and other owned
assets to total assets 2.15 4.77 4.33 8.81 8.36
Accruing loans contractually past due
90 days or more as to principal or
interest (all domestic): $ 60 $ 55 $ 61 $ 87 $ 60
</TABLE>
Nonaccruing loans at December 31, 1995 totaled $381 million or 2.76% of total
loans, compared with $855 million or 6.62% of total loans, a year ago. The
reduced level of nonaccruing loans resulted from aggressive management of
problem credits as well as improvement in the domestic economy. The merger of
Concord into the Company resulted in an increased level of nonaccruing loans
prior to 1995, primarily aircraft. During 1995 an aggressive strategy of
accelerating the timing of gaining title to and disposing of these assets was
adopted. As a result, provision for loan losses totaling $113 million was
recorded in the first quarter of 1995 to reflect the change in strategy. The
majority of the decline in nonaccruing loans at December 31, 1995 compared
25
with December 31, 1994 occurred in this portfolio. The large provision in the
second quarter of 1994 was made to recognize deterioration in the used
aircraft market.
Nonaccruing loans that have been restructured but remain in nonaccruing status
amounted to $70 million, $11 million and $20 million at December 31, 1995,
1994 and 1993, respectively.
Of the nonaccruing loans at December 31, 1995 over 46% are less than 30 days
past due as to cash payment of principal and interest. Cash payments received
on loans on nonaccruing status during 1995, or since loans were placed on
nonaccruing status, whichever was later, totaled $52 million, $21 million of
which was applied as interest income and $31 million as reduction of loan
principal.
Included in accruing loans contractually past due 90 days or more were
consumer installment loans as follows: 1995, $36 million; 1994, $20 million;
1993, $24 million and residential real estate mortgages past due 90 days or
more as follows: 1995, $15 million; 1994, $18 million; 1993, $12 million.
When consumer loans cease to be accruing, rather than categorizing such loans
as nonaccruing, they are generally charged off according to an established
delinquency schedule.
The Company adopted Statement of Financial Accounting Standards No. 114,
Accounting by Creditors for Impairment of a Loan (FAS 114), as amended by
Statement of Financial Accounting Standards No. 118, Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures (FAS 118)
effective January 1, 1995. FAS 114 provides guidance in defining and
measuring loan impairment. A loan is considered impaired when, based on
current information and events, it is probable that a creditor will be unable
to collect all amounts due according to the contractual terms of the loan
agreement. Impaired loans so identified are valued at the present value of
expected future cash flows, discounted at the loan's original effective
interest rate or, as a practical expedient, at the loan's observable market
price or the fair value of the collateral if the loan is collateral dependent.
The adoption of this statement did not result in any significant change in the
Company's allowance for loan losses.
The Company identified impaired loans as defined by FAS 114 totaling $322
million at December 31, 1995 of which $117 million had a specific loan loss
allowance of $61 million. No interest income was recognized on impaired loans
during 1995.
Other Problem Assets
In situations where loans are secured by real estate or other assets and the
borrower cannot continue to meet its obligations, the property can be acquired
through foreclosure. When property is so acquired, the lower of cost or fair
market value (including cost to dispose) is reported on the balance sheet as
other real estate and other owned assets. Any part of the loan exceeding the
value of the property at the time of transfer is charged against the loan loss
allowance. Subsequent decreases in fair value are included in other operating
expense.
26
Foreign Country Outstandings and Risk
Outstandings which are shown by category of borrower in the following table
include loans, interest bearing deposits and other assets. Loans are
distributed primarily on the basis of the location of the head office or
residence of the borrower or, in the case of certain guaranteed loans, the
guarantor. Interest bearing deposits with banks and their branches are
grouped by the location of the head office of the foreign bank. Investments
and acceptances are distributed on the basis of the location of the borrower.
There were no loans to government and official institutions for the countries
listed.
<TABLE>
<CAPTION>
Foreign Country Outstandings Which Exceed .75% of Total Assets
Banks and
Other Commercial
Financial and
Institutions Industrial Total
in millions
<S> <C> <C> <C>
December 31, 1995: *
Canada $ 90 $70 $160
France 345 31 376
Japan 290 - 290
December 31, 1994: *
France 195 - 195
Italy 175 - 175
Japan 385 - 385
December 31, 1993: *
Canada 150 45 195
France 285 - 285
Italy 175 - 175
Japan 332 - 332
United Kingdom 165 - 165
</TABLE>
* The table excludes bonds issued by the United Mexican States and the
Republic of Venezuela which are collateralized by zero-coupon U.S. Treasury
securities with a face value equal to that of the underlying bonds. They are
known as "Brady bonds." The fair value of such collateral for the $188
million of 6.25% Mexican bonds due 2019 was approximately $29 million, $27
million and $25 million at year ends 1995, 1994 and 1993, respectively.
Interest payments are partially secured by cash equivalent instruments for an
18 month period. The fair value of such collateral for the $166 million book
value, $177 million face value of 6.75% Venezuelan bonds due 2020 was
approximately $26 million, $24 million and $22 million at year ends 1995, 1994
and 1993, respectively. Interest payments are partially secured by cash
equivalent instruments for a 14 month period. These bonds had an aggregate
fair value of $229 million at December 31, 1995.
27
Allowance for Loan Loss and Charge Offs
At year-end 1995, the allowance was $477.5 million, or 3.46% of total loans,
compared with $495.4 million, or 3.84% of total loans, a year ago. The ratio
of the allowance to nonaccruing loans was 125.49% at December 31, 1995
compared with 57.92% a year earlier. The Company's nonaccruing loans were
reduced to $381 million at December 31, 1995 from $855 million at December 31,
1994.
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
in millions
<S> <C> <C> <C> <C> <C>
Total loans at year end $13,804 $12,914 $12,168 $12,127 $13,671
Average total loans 12,992 12,410 12,089 12,343 15,128
Allowance for loan losses:
Balance at beginning of year $ 495.4 $ 473.3 $ 594.5 $ 612.7 $ 839.7
Allowance related to acquired
businesses .4 1.2 - - -
Charge offs:
Commercial:
Construction loans - 47.2 34.4 16.2 90.2
Mortgage loans .5 3.4 24.8 51.8 71.8
Other business and financial 174.8 92.2 142.4 205.6 149.0
Consumer:
Lease financing - .7 3.3 12.6 26.6
Other consumer loans 66.1 67.3 74.9 57.7 81.7
International - - - - 182.2
Total charge offs 241.4 210.8 279.8 343.9 601.5
Recoveries on loans charged off:
Commercial:
Construction loans 11.9 10.7 4.8 9.3 5.2
Mortgage loans - - - .1 -
Other business and financial 29.8 53.6 46.2 16.4 18.2
Consumer:
Lease financing 1.0 1.5 2.2 3.5 4.5
Other consumer loans 13.4 15.3 20.1 24.6 23.8
International - - - .3 .4
Total recoveries 56.1 81.1 73.3 54.2 52.1
Total net charge offs 185.3 129.7 206.5 289.7 549.4
Provision charged to income 167.0 150.6 85.3 271.5 322.4
Balance at end of year $ 477.5 $ 495.4 $ 473.3 $ 594.5 $ 612.7
Allowance ratios:
Total net charge offs to
average loans 1.43% 1.04% 1.71% 2.35% 3.63%
Year-end allowance to:
Year-end total loans 3.46 3.84 3.89 4.90 4.48
Year-end total nonaccruing loans 125.49 57.92 60.41 40.68 41.01
</TABLE>
The allowance for loan losses is an allowance for possible credit related
losses. The allowance is increased as provisions for loan losses are charged
to current operating income. The allowance is reduced as charge offs are
recorded. Recoveries are added to the allowance. In determining the amount
of provisions for loan losses, management considers a number of factors.
28
These include judgments covering possible losses on loans, loan evaluations
and examination classifications and expected performance of various categories
of loans within an anticipated range of economic conditions. This is an
ongoing process. Charge offs of commercial loans reflect management's
judgment with respect to the ultimate collectibility of all or part of a loan.
Charge offs of consumer loans occur according to an established delinquency
schedule. Recoveries on loans previously charged off are added to the
allowance.
The loan loss allowance is considered by management to be a general allowance
available to cover loan losses within the entire portfolio. The
classifications within the table below are based on management's current
assessment of the loss potential associated with specific loans and elements
of the portfolio. Allocation is especially problematical because of the
difficulties inherent in predicting and evaluating the impact of economic
events on fully performing loans, work-outs and previously charged off loans.
Amounts allocated to consumer installment loans represent estimates of charge
offs based on formulas appropriate to the type of loan. Management cautions
that the loan loss allowance allocation does not necessarily represent the
total amount which may be available for actual future losses in any one or
more of the categories. Management is of the opinion that the loan loss
allowance as of December 31, 1995 is adequate as a general allowance.
The provisions of FAS 114 are described briefly on page 26. As a result of
this statement, effective January 1, 1995, allowances are established against
impaired loans equal to the difference between the recorded investment in the
asset and the present value of the cash flows to be received or the fair value
of the collateral, if the loan is collateral dependent. This statement does
not address the overall adequacy of the allowance for loan losses. The
allowance for loan losses did not change as a result of adopting FAS 114.
<TABLE>
<CAPTION>
Allocation of Allowance for Loan Loss
1995 1994 1993 1992 1991
% of % of % of % of % of
Loans Loans Loans Loans Loans
to to to to to
Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
in millions
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Domestic:
Commercial:
Construction loans $ 3 2.3 $ 4 2.0 $ 5 3.3 $ 58 6.1 $186 7.5
Mortgage loans 10 7.2 12 7.2 10 7.3 10 5.6 12 5.6
Other business 149 38.8 221 41.0 186 43.0 190 47.1 213 44.9
Consumer:
Lease financing - - - - 3 .5 5 2.7 12 6.1
Other consumer 54 46.3 54 44.9 58 41.7 45 33.4 73 31.4
International 28 5.4 2 4.9 1 4.2 2 5.1 7 4.5
Unallocated 234 - 202 - 210 - 284 - 110 -
Total $478 100.0 $495 100.0 $473 100.0 $594 100.0 $613 100.0
</TABLE>
29
Item 8. Financial Statements and Supplementary Data
Page
Report of Management 31
Report of Independent Auditors 32
HSBC Americas, Inc.:
Consolidated Balance Sheet 33
Consolidated Statement of Income 34
Consolidated Statement of Changes in
Shareholders' Equity 35
Consolidated Statement of Cash Flows 36
Marine Midland Bank:
Consolidated Balance Sheet 37
Summary of Significant Accounting Policies 38
Notes to Financial Statements 42
30
R E P O R T O F M A N A G E M E N T
Management of HSBC Americas, Inc., is responsible for the integrity of the
financial information presented in this annual report. Management has
prepared the financial statements in conformity with generally accepted
accounting principles. In preparing the financial statements, management
makes judgments and estimates of the expected effect of events that are
accounted for or disclosed.
The Company's systems of internal accounting control are designed to provide
reasonable assurance that assets are safeguarded against loss from
unauthorized acquisition, use or disposition and that the financial records
are reliable for preparing financial statements. The selection and training
of qualified personnel and the establishment and communication of accounting
and administrative policies and procedures are elements of these control
systems. Management believes that the system of internal control, which is
subject to close scrutiny by management and by internal auditors, supports the
integrity and reliability of the financial statements.
The Board of Directors meets regularly with management, internal auditors and
the independent auditors to discuss internal control, internal auditing and
financial reporting matters, and also the scope of the annual audit and
interim reviews. Both the internal auditors and the independent auditors have
direct access to the Board of Directors.
31
R E P O R T O F I N D E P E N D E N T A U D I T O R S
The Board of Directors and Shareholders of
HSBC Americas, Inc.
We have audited the accompanying consolidated balance sheets of HSBC Americas,
Inc. (formerly Marine Midland Banks, Inc.) and subsidiaries as of December 31,
1995 and 1994, and the related consolidated statements of income, changes in
shareholders' equity, and cash flows for each of the years in the three year
period ended December 31, 1995, and the accompanying consolidated balance
sheets of Marine Midland Bank and subsidiaries as of December 31, 1995, and
1994. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of HSBC
Americas, Inc. and subsidiaries as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in the
three year period ended December 31, 1995, and the financial position of
Marine Midland Bank and subsidiaries as of December 31, 1995 and 1994, in
conformity with generally accepted accounting principles.
As discussed in the Summary of Significant Accounting Policies, the Company
adopted the provisions of Statement of Financial Accounting Standards (SFAS)
No. 109, "Accounting for Income Taxes" and SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions" in 1993, the
provisions of SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" in 1994, and the provisions of SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan" as amended by SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures" in
1995.
/s/ KPMG PEAT MARWICK LLP
Buffalo, New York
January 26, 1996
32
<TABLE>
<CAPTION>
HSBC Americas, Inc. 1995
- ------------------------------------------------------------------------------
C O N S O L I D A T E D B A L A N C E S H E E T
December 31, 1995 1994 *
- ------------------------------------------------------------------------------
in thousands
<S> <C> <C>
Assets
Cash and due from banks $ 1,242,313 $ 1,050,558
Interest bearing deposits with banks 1,488,101 1,231,757
Federal funds sold and securities
purchased under resale agreements 518,256 599,993
Trading assets 616,531 404,300
Securities held to maturity
(market value $1,907,650 in 1994) - 1,967,638
Securities available for sale 2,613,830 80,232
Loans 13,803,503 12,914,445
Less - allowance for loan losses 477,502 495,434
- ------------------------------------------------------------------------------
Loans, net 13,326,001 12,419,011
Premises and equipment 180,552 185,211
Customers' acceptance liability 21,671 24,746
Accrued interest receivable 150,634 124,967
Other real estate and owned assets 46,972 26,381
Other assets 313,898 583,517
- ------------------------------------------------------------------------------
Total assets $ 20,518,759 $ 18,698,311
==============================================================================
Liabilities
Deposits in domestic offices:
Noninterest bearing $ 3,433,831 $ 3,213,845
Interest bearing 10,454,352 9,660,674
Interest bearing deposits in foreign offices 1,442,484 909,629
- ------------------------------------------------------------------------------
Total deposits 15,330,667 13,784,148
Federal funds purchased and securities
sold under repurchase agreements 1,136,476 729,169
Other short-term borrowings 1,401,634 1,526,720
Interest, taxes and other liabilities 253,367 420,435
Acceptances outstanding 21,671 24,746
Long-term debt 709,750 713,104
- ------------------------------------------------------------------------------
Total liabilities 18,853,565 17,198,322
- ------------------------------------------------------------------------------
Commitments and contingent liabilities (Notes 17 and 18)
Shareholders' equity
Preferred stock 98,063 98,063
Common shareholder's equity:
Common stock, $5 par; Authorized - 1,100 shares
Issued - 1,001 shares 5 5
Capital surplus 1,531,127 1,531,127
Retained earnings (accumulated deficit) 6,609 (129,206)
Net unrealized gain on securities
available for sale, net of taxes 29,390 -
- ------------------------------------------------------------------------------
Total common shareholder's equity 1,567,131 1,401,926
- ------------------------------------------------------------------------------
Total shareholders' equity 1,665,194 1,499,989
- ------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 20,518,759 $ 18,698,311
==============================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
* Restated to include the accounts and results of Concord Leasing, Inc.
merged with the Company on January 1, 1995.
33
</TABLE>
<TABLE>
<CAPTION>
HSBC Americas, Inc. 1995
- ------------------------------------------------------------------------------
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
Year Ended December 31, 1995 1994 * 1993 *
- ------------------------------------------------------------------------------
in thousands
<S> <C> <C> <C>
Interest income:
Loans $ 1,201,267 $ 1,013,830 $ 947,078
Securities 143,410 97,978 154,255
Trading assets 33,965 53,972 44,619
Deposits with banks 58,511 43,854 38,208
Federal funds sold and
securities purchased under
resale agreements 34,906 30,319 14,476
- ------------------------------------------------------------------------------
Total interest income 1,472,059 1,239,953 1,198,636
- ------------------------------------------------------------------------------
Interest expense:
Deposits:
In domestic offices 391,808 279,287 274,174
In foreign offices 73,225 28,567 16,062
Federal funds purchased and
securities sold under
repurchase agreements 34,435 19,375 25,788
Other short-term borrowings 46,991 61,586 57,224
Long-term debt 50,396 85,881 115,259
- ------------------------------------------------------------------------------
Total interest expense 596,855 474,696 488,507
- ------------------------------------------------------------------------------
Net interest income 875,204 765,257 710,129
Provision for loan losses 167,000 150,561 85,318
- ------------------------------------------------------------------------------
Net interest income, after
provision for loan losses 708,204 614,696 624,811
- ------------------------------------------------------------------------------
Other operating income:
Trust income 46,724 47,514 47,889
Service charges 85,051 84,452 83,550
Mortgage servicing income
(expense) 16,217 19,065 (203,328)
Other fees and commissions 122,075 128,254 139,261
Trading revenues (loss) 5,399 (13,884) (2,908)
Other income 40,559 32,437 55,672
- ------------------------------------------------------------------------------
Total other operating income 316,025 297,838 120,136
- ------------------------------------------------------------------------------
1,024,229 912,534 744,947
- ------------------------------------------------------------------------------
Other operating expenses:
Salaries 283,541 287,597 296,781
Pension and other employee
benefits 70,638 76,171 75,965
- ------------------------------------------------------------------------------
Total personnel expense 354,179 363,768 372,746
Net occupancy expense 76,356 71,315 77,149
Other expenses 232,953 342,094 389,415
- ------------------------------------------------------------------------------
Total other operating expenses 663,488 777,177 839,310
Provision for ORE and other owned
asset losses 5,954 - -
- ------------------------------------------------------------------------------
Total operating expenses after
provision for ORE and other
owned asset losses 669,442 777,177 839,310
- ------------------------------------------------------------------------------
Income (loss) before taxes and
cumulative effect of change in
method of accounting for
income taxes 354,787 135,357 (94,363)
Applicable income tax expense 63,100 118,200 16,500
- ------------------------------------------------------------------------------
Income (loss) before cumulative
effect of change in method
of accounting for income taxes 291,687 17,157 (110,863)
Cumulative effect of change in
method of accounting
for income taxes - - 40,000
- ------------------------------------------------------------------------------
Net income (loss) $ 291,687 $ 17,157 $ (70,863)
==============================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
* Restated to include the accounts and results of Concord Leasing, Inc.
merged with the Company on January 1, 1995.
34
</TABLE>
<TABLE>
<CAPTION>
HSBC Americas, Inc. 1995
- ------------------------------------------------------------------------------
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
Net
Unrealized
Gain on
Securities
Preferred Common Capital Retained Available
Stock Stock Surplus Earnings for Sale
- ------------------------------------------------------------------------------
in thousands
<S> <C> <C> <C> <C> <C>
Balance
December 31, 1992 * $ 98,063 $ 5 $ 1,181,127 $ 36,246 $ -
Net loss - - - (70,863) -
Cash dividends declared
on preferred stock - - - (5,873) -
Capital contribution
from parent - - 200,000 - -
- ------------------------------------------------------------------------------
Balance
December 31, 1993 * 98,063 5 1,381,127 (40,490) -
Net income - - - 17,157 -
Cash dividends declared
on preferred stock - - - (5,873) -
Cash dividends declared
on common stock - - - (100,000) -
Capital contribution
from parent - - 150,000 - -
- ------------------------------------------------------------------------------
Balance
December 31, 1994 * 98,063 5 1,531,127 (129,206) -
Net income - - - 291,687 -
Cash dividends declared
on preferred stock - - - (5,872) -
Cash dividends declared
on common stock - - - (150,000) -
Transfer of securities
held to maturity to
securities available
for sale, net of
deferred taxes - - - - 29,390
- ------------------------------------------------------------------------------
Balance
December 31, 1995 $ 98,063 $ 5 $ 1,531,127 $ 6,609 $ 29,390
==============================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
* Restated to include the accounts and results of Concord Leasing, Inc.
merged with the Company on January 1, 1995.
35
</TABLE>
<TABLE>
<CAPTION>
HSBC Americas, Inc. 1995
- -----------------------------------------------------------------------------
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
Year Ended December 31, 1995 1994 * 1993 *
- -----------------------------------------------------------------------------
in thousands
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 291,687 $ 17,157 $ (70,863)
Adjustments to reconcile net income (loss)
to net cash provided (used) by
operating activities:
Depreciation, amortization and
deferred taxes (7,723) 62,175 309,692
Provision for loan losses 167,000 150,561 85,318
Cumulative effect of change in
accounting principle - - (40,000)
Net change in other accrual accounts (160,398) (5,271) 132,232
Net change in loans originated
for sale (88,853) 171,692 60,621
Net change in trading assets (202,610) 1,191,938 (219,803)
Other, net (42,484) 11,510 24,710
- -----------------------------------------------------------------------------
Net cash provided (used) by
operating activities (43,381) 1,599,762 281,907
- -----------------------------------------------------------------------------
Cash flows from investing activities:
Net change in interest bearing
deposits with banks (256,344) 344,140 (537,378)
Net change in short-term investments 81,737 350,009 (154,367)
Purchases of securities (1,192,103) (629,054) (3,112,919)
Sales of securities 27,852 24,846 1,917,287
Maturities of securities 665,172 551,822 970,098
Net change in credit card receivables (234,858) (178,679) (726,699)
Net change in other short-term loans (74,725) (130,389) (43,286)
Net originations and maturities of
long-term loans (900,463) (904,079) 388,492
Expenditures for premises and equipment (24,906) (20,912) (12,884)
Other, net 470,953 (56,013) 101,733
- -----------------------------------------------------------------------------
Net cash used by investing activities(1,437,685) (648,309) (1,209,923)
- -----------------------------------------------------------------------------
Cash flows from financing activities:
Net change in deposits 1,546,519 801,398 (124,138)
Net change in short-term borrowings 282,221 (847,124) 1,515,622
Repayment of long-term debt (47) (987,816) (493,061)
Capital contributions - 150,000 200,000
Dividends paid (155,872) (105,873) (5,873)
- -----------------------------------------------------------------------------
Net cash provided (used) by
financing activities 1,672,821 (989,415) 1,092,550
- -----------------------------------------------------------------------------
Net change in cash and due from banks 191,755 (37,962) 164,534
Cash and due from banks at beginning
of year 1,050,558 1,088,520 923,986
- -----------------------------------------------------------------------------
Cash and due from banks at end of year $ 1,242,313 $ 1,050,558 $ 1,088,520
=============================================================================
Cash paid for: Interest $ 592,686 $ 474,609 $ 434,397
Taxes 183,997 113,631 26,832
Non-cash activities
Transfers of securities held to maturity
to available for sale 2,535,262 - -
Transfers from securities available for
sale to trading assets - - 881,354
- -----------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
* Restated to include the accounts and results of Concord Leasing, Inc.
merged with the Company on January 1, 1995.
36
</TABLE>
<TABLE>
<CAPTION>
Marine Midland Bank 1995
- ------------------------------------------------------------------------------
C O N S O L I D A T E D B A L A N C E S H E E T
December 31, 1995 1994 *
- ------------------------------------------------------------------------------
in thousands
<S> <C> <C>
Assets
Cash and due from banks $ 1,224,494 $ 1,050,204
Interest bearing deposits with banks 1,488,002 1,231,658
Federal funds sold and securities
purchased under resale agreements 518,256 599,993
Trading assets 616,531 404,300
Securities held to maturity
(market value $1,887,991 in 1994) - 1,947,617
Securities available for sale 2,567,897 41,723
Loans 13,723,691 12,759,223
Less - allowance for loan losses 476,544 493,448
- ------------------------------------------------------------------------------
Loans, net 13,247,147 12,265,775
Premises and equipment 180,431 184,599
Customers' acceptance liability 21,671 24,745
Accrued interest receivable 149,512 123,136
Other real estate and owned assets 46,702 26,296
Other assets 281,829 565,341
- ------------------------------------------------------------------------------
Total assets $ 20,342,472 $ 18,465,387
==============================================================================
Liabilities
Deposits in domestic offices:
Noninterest bearing $ 3,404,311 $ 3,171,190
Interest bearing 10,454,352 9,660,674
Interest bearing deposits in foreign offices 2,764,861 2,419,821
- ------------------------------------------------------------------------------
Total deposits 16,623,524 15,251,685
Federal funds purchased and securities
sold under repurchase agreements 1,136,476 729,169
Other short-term borrowings 379,544 300,568
Interest, taxes and other liabilities 275,714 440,906
Acceptances outstanding 21,671 24,746
Long-term debt 260,179 263,510
- ------------------------------------------------------------------------------
Total liabilities 18,697,108 17,010,584
- ------------------------------------------------------------------------------
Commitments and contingent liabilities (Notes 17 and 18)
Shareholder's equity
Common shareholder's equity:
Common stock, $100 par; Authorized - 2,250,000 shares
Issued - 1,850,000 shares 185,000 185,000
Capital surplus 1,633,098 1,758,098
Accumulated deficit (201,185) (488,295)
Net unrealized gain on securities
available for sale, net of taxes 28,451 -
- ------------------------------------------------------------------------------
Total shareholder's equity 1,645,364 1,454,803
- ------------------------------------------------------------------------------
Total liabilities and shareholder's equity $ 20,342,472 $ 18,465,387
==============================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
* Restated to include the accounts and results of Concord Leasing, Inc.
merged with the Company on January 1, 1995.
37
</TABLE>
S U M M A R Y O F S I G N I F I C A N T A C C O U N T I N G
P O L I C I E S
HSBC Americas, Inc. (the Company), formerly Marine Midland Banks, Inc., is a
New York State based bank holding company. All of the common stock of the
Company is owned by HSBC Holdings B.V., an indirect wholly owned subsidiary of
HSBC Holdings plc (HSBC).
The accounting and reporting policies of the Company and its subsidiaries,
including its principal subsidiary, Marine Midland Bank (the Bank), conform to
generally accepted accounting principles and to predominant practice within
the banking industry. The preparation of financial statements in conformity
with generally accepted accounting principles requires the use of estimates
and assumptions relating principally to unsettled transactions and events as
of the balance sheet date of the financial statements. Accordingly, upon
settlement, actual results may differ from estimated amounts. Prior years'
financial statements have been reclassified to conform with the current
financial statement presentation.
The following is a description of the more significant policies and practices.
Principles of Consolidation
The financial statements of the Company and the Bank are consolidated with
those of their respective wholly owned subsidiaries. All material
intercompany transactions and balances have been eliminated.
Investments in companies in which the percentage of ownership is at least 20%,
but not more than 50%, are accounted for under the equity method and are
included in other assets in the consolidated balance sheet.
Securities
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt and
Equity Securities (FAS 115), which specifies the prospective accounting and
reporting for all investments in debt securities and for investments in equity
securities that have readily determinable fair values. Under FAS 115, debt
securities that the Company has the ability and intent to hold to maturity are
reported at cost, adjusted for amortization of premiums and accretion of
discounts. Securities acquired principally for the purpose of selling them in
the near term are classified as trading assets and reported at fair value,
with unrealized gains and losses included in earnings. All other securities
are classified as available for sale and carried at fair value, with
unrealized gains and losses, net of related income taxes, excluded from
earnings and reported as a separate component of shareholders' equity.
Realized gains and losses on sales of securities are computed on a specific
identified cost basis and are reported within other income in the consolidated
statement of income. Adjustments of trading assets to fair value and gains
and losses on the sale of such securities are recorded in trading revenues.
Prior to the adoption of FAS 115, securities available for sale were reported
at the lower of aggregate cost or market value with any valuation adjustments
reflected in income.
38
Loans
Loans are stated at their principal amount outstanding, net of unearned income
and the net of unamortized nonrefundable fees and related direct loan
origination costs. Loans held for sale are carried at the lower of aggregate
cost or market value. Interest income is recorded based on methods that
result in level rates of return over the terms of the loans. Loans include
lease financing transactions representing the aggregate of lease receivables
plus estimated residual values net of unearned income. Unearned income is
amortized over the lease terms by methods producing a constant rate of return
on net lease assets.
Commercial loans are categorized as nonaccruing when, in the opinion of
management, reasonable doubt exists with respect to collectibility of interest
or principal based on certain factors including period of time past due
(principally ninety days) and adequacy of collateral. At the time a loan is
classified as nonaccruing, any accrued interest recorded on the loan is
generally reversed and charged against income. Interest income on these loans
is recognized only to the extent of cash received. In those instances where
there is doubt as to collectibility of principal, any interest payments
received are applied to principal. Loans are not reclassified as accruing
until interest and principal payments are brought current and future payments
are reasonably assured. Consumer loans, including residential mortgages, are
charged off against the allowance for loan losses according to an established
delinquency schedule.
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan
(FAS 114), as amended by Statement of Financial Accounting Standards No. 118,
Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures (FAS 118). FAS 114 considers a loan impaired when, based on
current information and events, it is probable that a creditor will be unable
to collect all amounts due according to the contractual terms of the loan
agreement. Impaired loans are valued at the present value of expected future
cash flows, discounted at the loan's original effective interest rate or, as a
practical expedient, at the loan's observable market price or the fair value
of the collateral if the loan is collateral dependent.
Restructured loans are loans for which the original contractual terms have
been modified to provide for terms that are less than the Company would be
willing to accept for new loans with comparable risk because of a
deterioration in the borrowers' financial condition. Interest on these loans
is accrued at the renegotiated rates.
Loan Fees
Nonrefundable fees and related direct costs associated with the origination or
purchase of loans are deferred and netted against outstanding loan balances.
The amortization of net deferred fees and costs are recognized in interest
income, generally by the interest method, based on the contractual terms of
the loans. Nonrefundable fees related to lending activities other than direct
loan origination are recognized as other income over the period the related
service is provided. This includes fees associated with the issuance of loan
commitments where the likelihood of the commitment being exercised is
considered remote. In the event of the exercise of the commitment, the
39
remaining unamortized fee is recognized in interest income over the loan term
using the interest method. Other credit-related fees, such as standby letter
of credit fees, loan syndication and agency fees and annual credit card fees
are recognized as other operating income over the period the related service
is performed.
Allowance for Loan Losses
The allowance for loan losses is an allowance for possible credit related
losses. Additions to the allowance are made by provisions charged to current
operating income. The determination of the balance of the allowance is based
on many factors including credit evaluation of the loan portfolio, current
economic conditions, and past loan loss experience. The allowance for loan
losses includes a general component which, in management's judgment, is
adequate to provide for unidentified losses in the loan portfolio.
Other Real Estate and Other Owned Assets
In situations where loans are secured by real estate or other property and the
borrower cannot continue to meet its obligations, the property can be acquired
through foreclosure. Such properties are recorded at the lower of cost or
fair value (including costs to dispose of the property) on the acquisition
dates. Any part of the loan exceeding the fair value of the property at the
time of transfer is charged against the loan loss allowance. Subsequent
decreases in fair value and net operating results on the property are included
in other operating expenses.
Mortgage Servicing Rights
Mortgage servicing rights (MSRs) include purchased mortgage servicing rights
(PMSRs) and excess mortgage servicing rights (EMSRs). PMSRs represent the
cost of rights acquired in a purchase of mortgage loans where a definitive
plan for the sale of loans exists when the transaction was initiated or the
cost to acquire the rights to service a pool of mortgages that have previously
been sold. EMSRs are recognized when mortgage loans are sold with servicing
retained and the net servicing fee rate exceeds the normal servicing fee. The
selling price of the loans is adjusted for such excess.
MSRs are amortized over the expected life of the loans serviced, including
expected prepayments, using a method that approximates the level yield method.
The carrying value of the MSRs is periodically evaluated in relation to
estimated future net servicing revenue. Write downs of MSRs are recognized
when unexpected prepayments are experienced or anticipated, so that estimated
future net servicing income exceeds the carrying amount. The evaluation of
future net servicing income is based on a discounted and disaggregated
(individual portfolio) methodology.
40
Income Taxes
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes (FAS 109). FAS 109
requires an asset and liability method of accounting for income taxes. Under
this method, deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases, as well as the estimated future tax consequences
attributable to net operating loss and tax credit carryforwards. A valuation
allowance is established to reduce deferred tax assets to the amounts expected
to be realized.
The Company and its subsidiaries file a consolidated federal income tax
return. Taxes of each subsidiary of the Company are generally determined on
the basis of filing separate returns.
Derivative Financial Instruments
Derivative financial instruments, principally interest rate swaps and forward
rate agreements are utilized by the Company to manage risk pursuant to an
overall asset-liability management strategy. To the extent that these risk
management positions are linked to assets-liabilities that are valued on an
historical cost basis, accrual or deferral based accounting is applied. As
such, risk management positions are not marked to current market value, rather
cash flows and/or gains and losses realized are accrued and/or amortized as an
adjustment to net interest income, or to the income or expense generated by
the corresponding specific asset-liability position.
Derivative financial instruments specifically linked to and utilized to offset
the risk associated with securities classified as available for sale, are
accounted for on the same basis as the underlying securities. The mark to
market value of the derivatives are included with the fair value of the
related instruments and as such become a component of the unrealized gains
(losses) recorded in the shareholders' equity adjustment account.
Trading positions in derivative financial instruments utilized to offset risk
associated with cash trading instruments and foreign exchange trading activity
are accounted for on a mark to market (fair value) basis consistent with the
accounting applied to the related activity. The mark to market adjustment,
which is recorded through the use of a valuation reserve and may include an
interest receivable/payable component, along with any related gains or losses
realized upon liquidation of a derivative trading position, is recorded as a
component of trading revenues (loss).
Derivative financial instruments entered into to facilitate the needs of
customers are immediately matched off by taking corresponding and offsetting
positions with other counterparties. The Company considers this activity to
be a fee generating service offered to certain select customers and does not
maintain unmatched positions within this portfolio. With the exception of a
small spread between the pay and receive rates, representing compensation for
facilitating the transaction, the periodic accrual amounts effectively offset
each other. If a position becomes unmatched for any reason, it is immediately
accounted for on a mark to market basis.
41
N O T E S T O F I N A N C I A L S T A T E M E N T S
Note 1. Significant Acquisitions
On January 1, 1995 Concord Leasing, Inc. (Concord), an indirect wholly owned
subsidiary of HSBC, was merged with the Company. Concord's outstanding stock
was contributed to the Company. Concord provides equipment financing through
secured loan and finance lease transactions. Assets of Concord totaled $1.5
billion at December 31, 1994.
The merger transaction was accounted for as a transfer of assets between
companies under common control, with the assets and liabilities of Concord
combined with those of the Company at their historical carrying values. The
Company's accompanying consolidated financial statements reflect a restatement
of prior periods to include the accounts and results of operations of Concord
as though the merger transaction occurred as of the beginning of the earliest
period presented. Previously reported information was as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1994 1993
in millions
<S> <C> <C>
Net interest income, after
provision for loan losses:
HSBC Americas, Inc. $ 759.9 $ 796.2
Concord Leasing, Inc. (145.2) (171.4)
$ 614.7 $ 624.8
Net income (loss):
HSBC Americas, Inc. $ 229.3 $ 173.2
Concord Leasing, Inc. (212.1) (244.1)
$ 17.2 $ (70.9)
</TABLE>
On January 1, 1996 Oleifera Investments, Ltd., (OIL), an indirect wholly owned
subsidiary of HSBC, was transferred to the Company. OIL's outstanding stock
was contributed to the Company. Assets of OIL totaling $183 million at
December 31, 1995 consisted primarily of commercial loans and other real
estate. The merger transaction was accounted for as a transfer of assets
between companies under common control similar to the accounting followed by
the Concord merger.
The following unaudited pro forma data summarizes the combined results of
operations of the Company and OIL.
<TABLE>
<CAPTION>
Year Ended December 31, 1995 1994 1993
in millions
<S> <C> <C> <C>
Net interest income $892.2 $782.1 $ 727.4
Net interest income, after
provision for loan losses 718.3 613.4 618.9
Net income (loss) 283.6 (37.0) (190.0)
</TABLE>
The Company has reached an agreement to acquire the East River Savings Bank
branch network and deposits, and selected commercial, residential and consumer
loans for $93 million. The agreement calls for the Company to acquire all 11
branches, and $1.1 billion in assets and to assume $1.2 billion in deposits.
The purchase transaction is subject to regulatory approvals and is expected to
be consummated in the second quarter of 1996.
42
Note 2. Cash and Due from Banks
The Bank is required to maintain noninterest bearing balances at Federal
Reserve Banks as part of its membership requirements in the Federal Reserve
System. These balances averaged $214,338,000 in 1995 and $203,669,000 in
1994.
Note 3. Trading Assets
<TABLE>
<CAPTION>
An analysis of trading assets, which are valued at market, follows.
December 31, 1995 1994
in thousands
<S> <C> <C>
U.S. Government $ 10,394 $ 10,259
Mortgage and other asset
backed securities 600,508 360,723
Other securities 4,624 30,921
Derivatives 1,005 2,397
$616,531 $404,300
</TABLE>
<TABLE>
<CAPTION>
The net gains (losses) resulting from trading activities are summarized by
categories of financial instruments in the following table.
Year Ended December 31, 1995 1994 1993
in thousands
<S> <C> <C> <C>
U.S. Government $(2,302) $ (6,361) $ 7,111
Mortgage and other asset
backed securities 5,660 (19,663) (4,860)
Other securities 1,171 (854) 9,500
Derivatives (2,975) 9,369 (21,941)
Trading asset revenues (loss) 1,554 (17,509) (10,190)
Foreign exchange revenue 3,845 3,625 7,282
Trading revenues (loss) $ 5,399 $(13,884) $ (2,908)
</TABLE>
Note 4. Securities
On October 1, 1993, the Company transferred its entire available for sale
portfolio having a market value of $881,354,000 to trading assets. As a
result of the transfer, the adoption of Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities (FAS 115), on January 1, 1994 had no effect on the Company's
financial statements.
In November 1995, the Financial Accounting Standards Board issued a Special
Report, "A Guide to the Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities" which provided a one-time
opportunity for companies to reassess the appropriateness of the
classifications of securities under FAS 115. The Company reassessed the
classifications of its securities held and during December 1995 transferred
securities from held to maturity with an amortized cost of $2,491,402,000 and
a fair value of $2,535,262,000 to available for sale. The redesignations were
accounted for at fair value resulting in an unrealized gain net of taxes of
$29,390,000 recorded in shareholders' equity. The one-time reassessment does
43
not call into question management's ability and intent to hold securities to
maturity in the future. The amortized cost and fair value of securities
follows.
<TABLE>
<CAPTION>
1995 1994
Gross Gross
Amortized Unrealized Unrealized Fair Amortized Fair
December 31, Cost Gains Losses Value Cost Value
in thousands
<S> <C> <C> <C> <C> <C> <C>
Held to maturity:
U.S. Treasury $ - $ - $ - $ - $1,064,995 $1,037,274
U.S. Government agency - - - - 750,917 718,974
Other debt securities - - - - 151,726 151,402
$ - $ - $ - $ - $1,967,638 $1,907,650
Available for sale:
U.S. Treasury $1,682,527 $33,510 $1,353 $1,714,684 $ - $ -
U.S. Government agency 607,699 12,312 1,507 618,504 - -
Other debt securities 201,176 917 19 202,074 - -
Equity securities 77,212 1,356 - 78,568 80,232 80,232
$2,568,614 $48,095 $2,879 $2,613,830 $ 80,232 $ 80,232
</TABLE>
At December 31, 1994, with regard to securities held to maturity, the Company
had gross unrealized gains of $29,000, $267,000 and $722,000 and gross
unrealized losses of $27,750,000, $32,210,000 and $1,046,000 related to U.S.
Treasury, U.S. Government agency and other debt securities, respectively.
Proceeds from the sale of securities available for sale during 1995 were
$20,732,000 resulting in gross realized gains of $16,680,000 and gross
realized losses of $4,340,000 compared with proceeds of $16,136,000 and gross
realized gains of $8,935,000 and gross realized losses of $1,029,000 in 1994.
The net gains realized related to equity investments classified as available
for sale during 1995 and 1994. During 1993, proceeds from the sale of
securities totaled $1,875,322,000 resulting in gross gains and losses of
$2,900,000 and $7,300,000 respectively. Substantially all interest income on
securities is taxable.
The carrying and fair values of debt securities available for sale at
December 31, 1995, by contractual maturity are shown in the following table.
Expected maturities will differ from contractual maturities because borrowers
may have the right to prepay obligations with or without prepayment penalties.
The amounts reflected in the table exclude $77,212,000 amortized cost,
($78,568,000 fair value) of equity securities available for sale that do not
have fixed maturities.
<TABLE>
<CAPTION>
Available for Sale
Amortized Fair
December 31, 1995 Cost Value
in thousands
<S> <C> <C>
Within one year $ 306,696 $ 306,667
After one but within five years 1,452,505 1,481,682
After five but within ten years 516,841 519,820
After ten years 215,360 227,093
$2,491,402 $2,535,262
</TABLE>
44
Note 5. Loans
Loans are presented net of unearned income of $196,399,000 and $253,980,000 at
December 31, 1995 and 1994, respectively. A distribution of the loan
portfolio follows. International loans include "Brady bonds" issued by the
United Mexican States and the Republic of Venezuela in the refinancing of
their debt obligations. These bonds had an aggregate carrying value of
$353,334,000 (face value $365,600,000) and an aggregate fair value of
$228,679,000, $185,907,000 and $284,729,000 at year ends 1995, 1994 and 1993,
respectively. The Company's intent is to hold these instruments until
maturity. The bonds are fully secured as to principal by zero-coupon U.S.
Treasury securities with face value equal to that of the underlying bonds.
<TABLE>
<CAPTION>
December 31, 1995 1994
in thousands
<S> <C> <C>
Domestic:
Commercial:
Construction loans $ 315,476 $ 265,306
Mortgage loans 999,207 930,794
Loans and advances to affiliates 490,911 302,219
Other business and financial 4,861,408 4,988,081
Consumer:
Residential mortgages 3,080,267 2,738,083
Credit card receivables 1,843,660 1,655,463
Other consumer loans 1,471,952 1,406,509
International 740,622 627,990
$13,803,503 $12,914,445
</TABLE>
Residential mortgages include $121,586,000 and $21,350,000 of residential
mortgages held for sale at December 31, 1995 and 1994, respectively. Other
consumer loans include $397,250,000 and $406,009,000 of higher education loans
also held for sale at December 31, 1995 and 1994, respectively.
At December 31, 1995 and 1994, the Company's nonaccruing loans were
$380,524,000 and $855,409,000, respectively. At December 31, 1995 and 1994,
the Company had commitments to lend additional funds of $10,379,000 and
$9,869,000, respectively, to borrowers whose loans are classified as
nonaccruing. A significant portion of these commitments include clauses that
provide for cancellation in the event of a material adverse change in the
financial position of the borrower.
<TABLE>
<CAPTION>
Year Ended December 31, 1995 1994 1993
in thousands
<S> <C> <C> <C>
Interest revenue on nonaccruing loans which
would have been recorded had they been
current in accordance with their original terms $50,588 $72,691 $74,031
Interest revenue recorded on nonaccruing loans 20,817 28,482 17,417
</TABLE>
As a result of adopting the provisions of FAS 114, insubstance foreclosed real
estate (ISORE) and insubstance foreclosed other assets are now classified as
nonaccruing loans. ISORE totaling $67,000,000 and insubstance foreclosed
other assets totaling $3,200,000 at December 31, 1994 have been reclassified
to loans in the consolidated balance sheet to reflect consistent presentation.
45
The Company identified impaired loans as defined by FAS 114 totaling
$321,919,000 at December 31, 1995, of which $116,661,000 had specific loan
loss allowance of $61,159,000. All impaired loans are classified as
nonaccruing. The average recorded investment in such impaired loans during
1995 was $415,691,000. No interest income was recognized on impaired loans
during 1995.
The Company has loans outstanding to certain nonemployee directors and to
certain entities in which a director is a general partner or has a 10% or more
ownership. The loans were made in the ordinary course of business on
substantially the same terms, including interest rates and collateral, as
those prevailing at the same time for comparable transactions with other
persons and do not involve more than normal risk of collectibility or present
other unfavorable features. The aggregate amount of such loans does not
exceed 5% of shareholders' equity at December 31, 1995 and 1994.
Note 6. Allowance for Loan Losses
<TABLE>
<CAPTION>
An analysis of the allowance for loan losses follows.
1995 1994 1993
in thousands
<S> <C> <C> <C>
Balance at beginning of year $ 495,434 $ 473,346 $ 594,459
Allowance related to acquired businesses 371 1,167 -
Provision charged to income 167,000 150,561 85,318
Recoveries on loans charged off 56,133 81,118 73,388
Loans charged off (241,436) (210,758) (279,819)
Balance at end of year $ 477,502 $ 495,434 $ 473,346
</TABLE>
Note 5 provides information on impaired loans as defined by FAS 114 and the
related specific loan loss allowance. The allowance did not change as a
result of adopting FAS 114 and FAS 118.
Note 7. Mortgage Servicing Rights
<TABLE>
<CAPTION>
An analysis of mortgage servicing rights (MSRs) follows.
December 31, 1995 1994
in thousands
<S> <C> <C>
Purchased mortgage servicing rights $23,828 $30,783
Excess mortgage servicing rights 12,994 22,027
$36,822 $52,810
</TABLE>
The Company services mortgages for others. The unpaid balances of these loans
were $6.5 billion, $6.9 billion and $7.3 billion at December 31, 1995, 1994,
and 1993, respectively.
The MSRs at December 31, 1995 were estimated to have a market value of $65
million. The carrying value of MSRs is periodically evaluated in relation to
the estimated future net servicing revenue. The evaluation of estimated
future net servicing revenue is based on a discounted and disaggregated
methodology incorporating prepayment speeds based on the published security
dealer estimates and other assumptions. At December 31, 1995, the carrying
value of both PMSRs and EMSRs was below the estimated future net servicing
revenue. Amortization and writedowns related to MSRs was $17 million, $16
million and $259 million for the years 1995, 1994 and 1993, respectively.
46
The Company is required to adopt Statement of Financial Accounting Standards
No. 122, Accounting for Mortgage Servicing Rights (FAS 122), effective
January 1, 1996. FAS 122 requires that a mortgage banking enterprise
recognize as separate assets the rights to service mortgage loans for others,
however those servicing rights are acquired. FAS 122 also introduces the
concept of evaluating impairment in servicing rights based on fair value. The
Company does not expect that the adoption of FAS 122 will have a material
effect on its financial position or results of operation.
Note 8. Short-Term Borrowings
At December 31, 1995, the Company had unused lines of credit with HSBC
aggregating $100,000,000. These lines of credit do not require compensating
balance arrangements and commitment fees are not significant. Outstanding
domestic commercial paper borrowings were $276,590,000 and $226,152,000 at
December 31, 1995 and 1994, respectively.
Note 9. Income Taxes
Effective January 1, 1993, the Company prospectively adopted Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes (FAS 109).
Total income tax expense (benefit) for the years ended December 31, 1995, 1994
and 1993 was allocated as follows including the deferred Federal income tax
benefit of $40,000,000 reflected as the cumulative effect at January 1, 1993,
of the change in accounting for income taxes.
<TABLE>
<CAPTION>
Year Ended December 31, 1995 1994 1993
in thousands
<S> <C> <C> <C>
To income from operations $63,100 $118,200 $ 16,500
To unrealized gain on securities
available for sale, net of taxes 15,825 - -
To cumulative effective of change
in accounting for income taxes - - (40,000)
$78,925 $118,200 $(23,500)
</TABLE>
<TABLE>
<CAPTION>
The components of the Company's consolidated income tax expense from
operations follows:
Year Ended December 31, 1995 1994 1993
in thousands
<S> <C> <C> <C>
Current:
Federal $ 74,816 $ 88,200 $ 9,588
State and local 52,284 30,000 6,804
Foreign - - 108
Total current 127,100 118,200 16,500
Deferred:
Decrease (increase) in deferred tax assets 41,780 (22,608) 45,520
Decrease (increase) in valuation allowance
for deferred tax assets (105,780) 22,608 (45,520)
Total deferred (64,000) - -
Total income taxes $ 63,100 $118,200 $ 16,500
</TABLE>
47
The following table is an analysis of the difference between effective rates
based on the total income tax provision attributable to income from operations
and the statutory U.S. Federal income tax rate.
<TABLE>
<CAPTION>
Year Ended December 31, 1995 1994 1993
<S> <C> <C> <C>
Statutory rate 35.0% 35.0% 35.0%
Increase (decrease) due to:
State, local and foreign income taxes 9.6 14.4 (5.9)
Change in valuation allowance for deferred tax assets (29.4) 17.8 48.2
Adjustment to deferred tax assets and liabilities
for enacted change in tax rate - - 5.8
Alternative minimum tax due to limitation
of net operating loss - - (10.2)
Tax exempt interest income (.8) (2.2) 3.0
Adjustment to deferred tax assets and
liabilities due to change in tax basis 2.5 (38.6) -
Limit on net operating loss benefit recognized - 54.9 (87.9)
Other items .9 6.1 (5.5)
Effective income tax rate 17.8% 87.4% (17.5)%
</TABLE>
<TABLE>
<CAPTION>
The components of the net deferred tax asset are summarized below.
December 31, 1995 1994
in thousands
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $174,647 $207,234
Deferred charge offs 64,711 70,980
Depreciation and amortization 18,523 18,249
Accrued expenses not currently deductible 50,644 48,061
Federal net operating loss carryforwards 73,500 74,935
Accrued pension cost 607 10,638
Mortgage servicing fees 6,724 10,165
Other 8,874 3,573
398,230 443,835
Less valuation allowance 235,672 341,451
Total deferred tax assets 162,558 102,384
Less deferred tax liabilities:
Lease financing income accrued 36,648 40,191
Accrued income on foreign bonds 21,910 22,193
Securities available for sale 15,825 -
Total deferred tax liabilities 74,383 62,384
Net deferred tax asset $ 88,175 $ 40,000
</TABLE>
During 1995, gross deferred tax assets declined by $45,605,000 and deferred
tax liabilities increased by $11,999,000. These changes were offset by a
decrease of $105,779,000 in the valuation allowance, resulting in an increase
of $48,175,000 in the net deferred tax asset. The recognition of the
$88,175,000 net deferred tax asset at December 31, 1995 was based principally
on the forecast that taxable income in 1996 would be sufficient to fully
utilize the Federal net operating loss carryforward.
48
Note 10. Long-Term Debt
<TABLE>
<CAPTION>
The following is a summary of long-term debt.
December 31, 1995 1994
in thousands
<S> <C> <C>
Issued by the Company or subsidiaries other than the Bank:
Floating rate subordinated notes due 2000 (5.94%) $200,000 $200,000
Floating rate subordinated notes due 2009 (5.88%) 124,320 124,320
Floating rate subordinated capital notes due 1999 (6.19%) 100,000 100,000
8 5/8% subordinated capital notes due 1997 125,000 125,000
Other notes payable 252 274
549,572 549,594
Issued by Marine Midland Bank or its subsidiaries:
Floating rate subordinated capital notes due 1996 (5.81%) 125,000 125,000
Obligations under capital leases 35,178 38,510
$709,750 $713,104
</TABLE>
Debt issued by Marine Midland Bank or its subsidiaries excludes a floating
rate note payable to the Company of $100,000,000 due 2000.
Interest rates on floating rate notes are determined periodically by formulas
based on certain money market rates or, in certain instances, by minimum
interest rates as specified in the agreements governing the respective issues.
Interest rates on the floating notes in effect at December 31, 1995 are shown
in parentheses.
At maturity, the floating rate subordinated capital notes due 1999 and the
8 5/8% subordinated capital notes due 1997 will be exchanged by the Company
for capital securities of the Company, or at the Company's option, the
principal amount may be paid from funds designated by the Board of Governors
of the Federal Reserve System as available for the retirement or redemption of
the notes.
The floating rate subordinated capital notes due 1996 issued by the Bank are
to be purchased by the Company at maturity for consideration consisting of (i)
cash equal to any net proceeds of the sale of capital securities, (ii) capital
securities of the Company having a market value equal to the principal amount
of the notes, or (iii) a combination thereof.
Scheduled maturities for the debt, excluding obligations under capital leases,
over the next five years are as follows: 1996, $125,052,000; 1997,
$125,057,000; 1998, $63,000; 1999, $100,069,000; and 2000, $200,011,000.
Maturities for obligations under capital leases are reported in Note 17,
Commitments and Contingent Liabilities.
Note 11. Preferred Stock
<TABLE>
<CAPTION>
A summary of preferred stock outstanding at December 31, 1995 and 1994
follows:
in thousands
<S> <C>
$5.50 Cumulative preferred stock, 22,154 shares $ 2,216
Adjustable rate cumulative preferred stock, 1,916,950 shares 95,847
$98,063
</TABLE>
49
The $5.50 cumulative preferred stock has a stated value and a liquidation
value of $100 per share and is redeemable at the election of the Company at
$100 per share.
The adjustable rate cumulative preferred stock has a liquidation preference of
$50 per share. The dividend rate is determined quarterly and is based on a
formula which considers certain short- and long-term interest rates. The
dividend rate per annum for any dividend period will not be less than 6% nor
greater than 12%. This stock is redeemable at the option of the Company at
$50 per share.
Note 12. Common Stock
All of the common stock of the Company is owned by HSBC Holdings B.V. Common
shares authorized and issued are 1,100 and 1,001, respectively, with a par
value of $5.00.
Note 13. Retained Earnings
Bank dividends are a major source of funds for payment by the Company of
shareholder dividends and along with interest earned on investments, cover the
Company's operating expenses which consist primarily of interest on
outstanding debt. The approval of the Federal Reserve Board is required if
the total of all dividends declared by the Bank in any year would exceed the
net profits for that year, combined with the retained profits for the two
preceding years. Under a separate restriction, payment of dividends are
prohibited in amounts greater than undivided profits then on hand, after
deducting actual losses and bad debts. Bad debts are debts due and unpaid for
a period of six months unless well secured and in the process of collection.
These rules currently restrict the Bank from paying dividends to the Company
as of December 31, 1995.
Restrictions on the Company's ability to pay common dividends are contained in
its Certificate of Incorporation. Under the covenant, the aggregate amount of
all common dividends, distributions and payments declared or made after
December 31, 1963 cannot exceed an amount computed under a formula set forth
in the certificate. As of December 31, 1995, the amount available under the
formula exceeded such payments since December 31, 1963 by $1.5 billion.
Note 14. Transactions with Principal Shareholder
The Company's common stock is owned by HSBC Holdings B.V., an indirect wholly
owned subsidiary of HSBC.
In the normal course of business, the Company conducts transactions with HSBC,
including its 25% or more owned subsidiaries (HSBC Group). These transactions
occur at prevailing market rates and terms and, include deposits taken and
placed, short-term borrowings and interest rate contracts.
At December 31, 1995 and 1994 assets of $537,382,000 and $358,732,000,
respectively, and liabilities of $1,796,463,000 and $1,731,223,000,
respectively, related to such transactions with the HSBC Group were included
in the Company's balance sheet. In anticipation of the merger transaction
50
described in Note 1, HSBC transferred $1 billion to the Company in December
1994. These funds were used by Concord to extinguish its debt payable to
nonaffiliated parties prior to January 1, 1995. Borrowings from HSBC,
included in other short-term borrowings on the balance sheet, were
$745,500,000 at December 31, 1995.
Interest rate forward and futures contracts and interest rate swap contracts
entered into with the HSBC Group are used primarily as an asset and liability
management tool to manage interest rate risk. At December 31, 1995 and 1994
the notional value of these contracts with members of the HSBC Group were
$17,302,744,000 and $15,216,960,000, respectively.
Legal restrictions on extensions of credit by the Bank to the HSBC Group
require that such extensions be secured by eligible collateral. At
December 31, 1995 and 1994, outstanding extensions of credit secured by
eligible collateral were $362,406,000 and $99,428,000, respectively.
Note 15. Employee Benefit Plans
The Company, the Bank and certain other subsidiaries maintain a
noncontributory pension plan covering substantially all of their employees.
Certain other HSBC subsidiaries participate in this plan. Benefits under the
plan are based on age, years of service and employee's compensation during the
last five years of employment. The following table sets forth the plan's
funded status.
<TABLE>
<CAPTION>
December 31, 1995 1994
in thousands
<S> <C> <C>
Plan assets at fair value, primarily
marketable securities $243,454 $173,952
Actuarial present value of benefits
for service rendered to date:
Vested benefits based on
salaries to date 205,514 169,209
Additional benefits for nonvested
participants 13,308 10,356
Accumulated benefits based on
salaries to date 218,822 179,565
Additional benefits based on
estimated future salary levels 42,185 34,513
Projected benefit obligation 261,007 214,078
Projected benefit obligation (in excess of)
or less than plan assets (17,553) (40,126)
Unrecognized net asset existing at January 1,
1985 being amortized over 14 years (4,022) (5,363)
Unrecognized prior service cost 5,177 5,508
Unrecognized net loss 15,478 9,041
Accrued pension liability $ (920) $(30,940)
Assumptions used:
Discount rate 7.25% 8.25%
Weighted average salary increase 4.90 5.90
Expected long-term rate of return on assets 9.50 9.50
</TABLE>
51
<TABLE>
<CAPTION>
Net pension expense for 1995, 1994 and 1993 included the following components.
1995 1994 1993
in thousands
<S> <C> <C> <C>
Service cost-benefits earned during the year $ 10,260 $ 10,323 $ 11,813
Interest cost 17,496 15,526 13,586
Actual return on assets (38,321) 4,049 (17,522)
Net amortization and deferral 21,545 (21,069) 4,043
Net pension expense $ 10,980 $ 8,829 $ 11,920
</TABLE>
Accrued pension cost at December 31, 1995 and December 31, 1994, includes
$460,000 and $545,000, respectively, and net pension expense includes $905,000
for 1995 and $696,000 for 1994 and 1993 recognized in the financial statements
of other HSBC subsidiaries.
The Company maintains unfunded noncontributory health and life insurance
coverage for all employees who retired from the Company and were eligible for
immediate pension benefits from the Company's retirement plan. Employees
retiring after January 1, 1993 will absorb a portion of the cost of these
benefits. Employees hired after this same date are not eligible for these
benefits. A premium cap has been established for the Company's share of
retiree medical costs.
<TABLE>
<CAPTION>
The following table sets forth the status of the plan with the amounts
included in the balance sheet at December 31, 1995 and 1994.
December 31, 1995 1994
in thousands
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $ 45,809 $ 49,534
Fully eligible active plan participants 2,345 2,792
Other active plan participants 28,861 17,455
(77,015) (69,781)
Plan assets at fair value - -
Funded status (77,015) (69,781)
Unrecognized transition obligation existing at
January 1, 1993 being amortized over 20 years 55,200 58,447
Unrecognized net (gain) loss 3,348 (134)
Accrued postretirement benefit cost $(18,467) $(11,468)
Assumptions used:
Discount rate 6.75% 8.00%
Health care cost trend rate 14.00 15.00
</TABLE>
<TABLE>
<CAPTION>
Net periodic postretirement benefit cost for 1995, 1994 and 1993 included the
following components.
1995 1994 1993
in thousands
<S> <C> <C> <C>
Service cost - benefits earned during the year $1,694 $ 1,818 $ 1,658
Interest cost on accumulated postretirement benefit
obligation 4,839 5,187 5,239
Amortization of unrecognized transition obligation 3,247 3,270 3,303
Net periodic postretirement benefit cost $9,780 $10,275 $10,200
</TABLE>
For measurement purposes, the health care cost trend rate was assumed
initially decreasing 1% per year to increases of 7% per year in the year 2002.
The health care cost trend rate assumption has an effect on the amounts
52
reported. For example, increasing the assumed health care cost trend rates by
1% point in each year would increase the accumulated postretirement benefit
obligation as of December 31, 1995 by $1,124,000 and the aggregate of the
interest cost and service cost components of the net periodic cost by
$104,000. The amortization of the initial liability of $66,064,000 over 20
years beginning January 1, 1993 is reflected in the amortization of
unrecognized transition obligation. The initial liability represented an
accumulated postretirement benefit obligation of $43,987,000 for current
retirees and $22,077,000 for active employees based on a weighted-average
discount rate of 8.25%.
During 1994, the Company reflected the expense impact of a voluntary
retirement program. Based on Statement of Financial Accounting Standards
No. 88, Employers' Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination of Benefits, the Company recorded
$19,950,000 for specific termination benefits relating to pension payments in
operating expenses. The Company also recorded an additional $393,000 expense
relating to retiree health and life insurance as a result of this program.
Effective in 1994, the Company adopted Statement of Financial Accounting
Standards No. 112, Employers' Accounting for Postemployment Benefits (FAS 112)
which requires recognition of the cost of benefits provided to former or
inactive employees after employment but before retirement on an accrual basis,
rather than expensing such costs when paid. Since the Company was
substantially in compliance with the provisions of FAS 112, the adoption of
this statement had an immaterial impact on 1994 earnings.
Note 16. International Operations
International activities are defined as those conducted with non-U.S.
domiciled customers. In the following table, international loans are
distributed geographically primarily on the basis of the location of the head
office or residence of the borrowers or, in the case of certain guaranteed
loans, the guarantors. Interest bearing deposits with banks and their
branches are grouped by the location of the head office of the foreign bank.
Investments and acceptances are distributed on the basis of the location of
the issuers or borrowers. The following tables summarize the Company's
international activities.
<TABLE>
<CAPTION>
International Assets by Geographic Distribution and Domestic Assets
December 31, 1995 1994
in millions
<S> <C> <C>
International:
Europe/Middle East/Africa $ 702 $ 690
Asia/Pacific 761 519
Other Western Hemisphere 543 533
Less: allowance for loan losses (28) (2)
Total international 1,978 1,740
Domestic 18,541 16,958
Total domestic/international $20,519 $18,698
</TABLE>
53
Total international assets averaged $1,555,000,000, $1,729,000,000 and
$1,924,000,000, or 8.4%, 9.6% and 10.4% of total average assets, during 1995,
1994 and 1993, respectively. Total international liabilities averaged
$1,433,000,000, $1,597,000,000 and $1,800,000,000, or 8.4%, 9.6% and 10.5%
of total average liabilities, during 1995, 1994 and 1993, respectively.
<TABLE>
<CAPTION>
Revenues and Earnings - International
Income (Loss) Before Taxes Income (Loss) Before
Total Operating Income and Change in Accounting Change in Accounting
Year Ended December 31, 1995 1994 1993 1995 1994 1993 1995 1994 1993
in millions
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
International:
Europe/MiddleEast/
Africa $ 36.5 $ 33.6 $ 48.4 $ 10.8 $ 3.2 $ 5.4 $ 6.2 $ 2.0 $ 4.7
Asia/Pacific 46.7 37.1 33.0 27.5 11.6 8.8 15.7 7.7 7.9
Other Western
Hemisphere 38.9 35.6 37.8 (13.8) 10.1 10.5 (7.9) 6.7 9.3
United States 13.0 10.7 24.9 10.1 5.3 12.4 5.8 3.5 11.0
Total international 135.1 117.0 144.1 34.6 30.2 37.1 19.8 19.9 32.9
Domestic 1,653.0 1,420.8 1,174.7 320.2 105.2 (131.5) 271.9 (2.7) (143.8)
Total domestic/
international $1,788.1 $1,537.8 $1,318.8 $354.8 $135.4 $ (94.4) $291.7 $ 17.2 $(110.9)
</TABLE>
Interest and fee related income on international assets is distributed
geographically on the same basis as the related asset. Other international
operating income is distributed to the geographic area where the service or
operation is performed. Included in consolidated other income are foreign
currency exchange gains of $3,845,000, $3,625,000 and $7,282,000 for 1995,
1994 and 1993, respectively.
In order to arrive at income before taxes and change in accounting by
geographic areas, various allocations, some of which are subjective by
necessity, have been made. In addition to estimating a provision for loan
losses, allocations of indirect expenses and administrative overhead are made
among areas to best reflect services provided and a charge or credit is made
at market rates for use of funds after consideration has been given for the
use of capital. Taxes are estimated for international operations and are
allocated geographically in proportion to income before taxes.
54
Note 17. Commitments and Contingent Liabilities
At December 31, 1995 securities, loans and other assets carried in the
consolidated balance sheets at $1,198,480,000 were pledged as collateral for
borrowings, to secure governmental and trust deposits and for other purposes.
The Company and its subsidiaries are obligated under a number of
noncancellable leases for premises and equipment. Certain leases contain
renewal options and escalation clauses. Minimum future rental commitments on
leases in effect at December 3l, l995 were:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
in thousands
<S> <C> <C>
1996 $ 7,549 $ 22,858
1997 7,398 21,359
1998 6,546 19,798
1999 6,504 18,151
2000 6,408 16,410
Later years 72,774 45,805
Total minimum lease payments 107,179 $144,381
Less: executory costs 39,314
Net minimum obligation 67,865
Less: amount representing interest 32,687
Present value of net minimum lease payments at December 31, 1995 $ 35,178
</TABLE>
Operating expenses include rental expense, net of sublease rentals, of
$36,608,000, $33,832,000 and $42,301,000 in 1995, 1994 and 1993, respectively.
The Company and its subsidiaries are defendants in a number of legal
proceedings arising out of, and incidental to, their businesses. Management
of the Company, based on its review with counsel of the development of these
matters to date, is of the opinion that the ultimate resolution of these
pending proceedings will not have a material adverse effect on the business or
financial position of the Company.
Note 18. Financial Instruments With Off-Balance Sheet Risk
The Company is party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers, to
reduce its own exposure to fluctuations in interest rates and to realize
profits. The contract or notional amount of those instruments expresses the
extent of involvement the Company has in particular classes of financial
instruments. These financial instruments involve, to varying degrees,
elements of credit and market risk in excess of the amount recognized in the
consolidated balance sheet. Credit risk represents the possibility of loss
resulting from the failure of another party to perform in accordance with the
terms of a contract. The Company uses the same credit policies in making
commitments and conditional obligations as it does for balance sheet
instruments.
Market risk represents the exposure to future loss resulting from the decrease
in value of an on- or off-balance sheet financial instrument caused by changes
in interest rates. Market risk is a function of the type of financial
instrument involved, transaction volume, tenor and terms of the agreement and
55
the overall interest rate environment. The Company controls market risk by
managing the mix of the aggregate financial instrument portfolio and by
entering into offsetting positions.
<TABLE>
<CAPTION>
A summary of the significant financial instruments with off-balance sheet risk
follows.
December 31, 1995 1994
in millions
<S> <C> <C>
Financial instruments whose contract amounts represent the associated risk:
Standby letters of credit and financial guarantees
Guarantees for certain debt obligations of borrowers
State and municipal $ 385 $ 1,236
Industrial revenue 285 335
Other, primarily corporate 35 181
Other 412 384
Other letters of credit 215 144
Commitments to extend credit 4,711 4,791
Financial instruments whose notional or contract amounts do not represent
the associated risk:
Interest rate swaps 13,398 12,817
Forward rate agreements 3,540 2,105
Futures contracts 100 1,016
Interest rate caps and floors 527 442
Foreign exchange contracts 165 221
</TABLE>
For commitments to extend credit, standby letters of credit and guarantees,
the Company's exposure to credit loss in the event of non-performance by the
counterparty to the financial instrument, is represented by the contractual
amount of those instruments. Management does not anticipate any material
losses as a result of these transactions.
For those financial instruments whose contractual or notional amount does not
represent the amount exposed to credit loss, risk at any point in time
represents the cost, on a present value basis, of replacing these existing
transactions at current interest and exchange rates. Based on this
measurement, $118,293,000 was at risk at December 31, 1995. See Note 19 for
further discussion of activities in derivative financial instruments. The
Company controls the credit risk associated with off-balance sheet derivative
financial instruments established for each counterparty through the normal
credit approval process. The Company generally does not require collateral or
other security to support these financial instruments.
Standby letters of credit and guarantees have been reduced by $56,567,000 and
$44,966,000 at December 31, 1995 and 1994, respectively, which represent the
amounts participated to other institutions. Maturities of guarantees for
certain debt obligations of borrowers range from 1996 to 2015. Fees received
are generally recognized as revenue over the life of the guarantee.
Foreign exchange contracts represent the gross amount of contracts to purchase
and sell foreign currencies, and do not consider the extent to which offsets
may exist.
56
Note 19. Derivative Financial Instruments
As principally an end-user of off-balance sheet financial instruments, the
Company uses various derivative products to manage its overall interest rate
risk by reducing the risk associated with changes in the income stream of
certain on-balance sheet assets. The Company also maintains various
derivatives in its trading and available for sale securities portfolio to
offset risk associated with changes in market value of the related assets, and
to satisfy the foreign currency requirements of customers.
The derivative instrument portfolios are actively managed in response to
changes in overall and specific balance sheet positions, cash requirements,
expectations of future interest rates, market environments and business
strategies. Associated credit risk is controlled through the establishment
and monitoring of approved limits in derivative positions. Credit risk is
also mitigated by the fact that almost all derivative contracts are executed
with members of the HSBC group, and such contracts are subject to enforceable
master netting agreements.
<TABLE>
<CAPTION>
The following table summarizes the risk management and trading positions of
derivative contracts.
Notional Fair Value
December 31, 1995 1994 1995 1994
in millions
<S> <C> <C> <C> <C>
Risk management positions
Interest rate swaps $12,691 $11,638 $(12) $(104)
Forward rate agreements 3,540 2,105 1 1
Interest rate caps and floors 527 442 - -
Trading positions
Interest rate swaps 707 1,180 (1) (3)
Futures contracts 100 1,016 - 1
Foreign exchange contracts 165 221 - 1
</TABLE>
Risk management activities - Through the normal course of operations, the
Company is subject to the risk of interest rate fluctuations to the extent
that interest earning assets and interest bearing liabilities mature or
reprice at different times or by differing amounts. The Company's risk
management activities are designed to optimize net interest income within
ranges of interest rate risk that management considers acceptable. Currently,
the Company conducts its risk management activities within the context of an
asset-sensitive balance sheet position. This asset-sensitive position, while
improving net interest margin when interest rates rise and assets are
repricing to higher rates in advance of liabilities, negatively impacts margin
when interest rates are falling. At December 31, 1995, interest rate swaps
included pay variable/receive fixed positions of $6,122,000,000, pay
fixed/receive variable positions of $5,699,000,000 and pay variable/receive
variable positions of $870,000,000.
The Company uses interest rate swaps and forward rate agreements in its risk
management activities which are linked as hedges of various on-balance sheet
assets. As net interest margins decrease as a result of decreases in interest
rates, cash flows from the derivative contracts will increase to replace a
portion of the lost margins. Conversely, as net interest margins improve as
interest rates rise, amounts due under the derivative contracts increase to
dampen the positive effect of rate increases.
57
Interest rate risk is measured through a combination of various simulation
modeling techniques and repricing analyses.
<TABLE>
<CAPTION>
The following represents a maturity analysis of risk management derivative
contracts outstanding at December 31, 1995.
December 31, 1996 1997 1998 1999 2000 2001- Total
2004
in millions
<S> <C> <C> <C> <C> <C> <C> <C>
Interest rate swaps $9,345 $1,843 $658 $165 $232 $448 $12,691
Forward rate agreements 2,885 655 - - - - 3,540
Interest rate caps and floors 48 23 - - 156 300 527
</TABLE>
At December 31, 1995, derivative contracts with a notional value of
$9,410,000,000 and unrecognized fair value loss of $2,847,000 were being
effectively utilized to hedge interest rate risk associated with certain
residential mortgage assets. In addition, $6,531,000,000 in notional value
contracts, with an unrecognized loss of $2,613,000 were being utilized to
hedge interest rate risk associated with certain commercial loan assets. The
Company also has $155,750,000 in notional value contracts with an unrecognized
fair value gain of $857,000 being utilized to hedge risk associated with
mortgage servicing rights. Further $135,818,000 in notional value contracts
with an unrecognized fair value gain of $17,000 were entered into to
facilitate the needs of certain customers and $525,300,000 in notional value
of derivative contracts with a fair value loss of $6,066,000 are specifically
linked to securities reported as available for sale.
For those assets reported on an historical cost basis, risk management
positions are not marked to current market value, rather, cash flows and/or
gains and losses realized are accrued and/or amortized as an adjustment to the
interest income generated by the corresponding specific asset position.
For investment securities reported as available for sale, the mark to market
of the related derivative contacts are considered a component of the fair
value of the securities they are linked to for purposes of determining the
adjustment to shareholders' equity that results pursuant to the valuation of
these instruments.
Trading activities - The Company deploys excess liquidity by maintaining
active trading positions in a variety of highly-liquid debt instruments
including U.S. Government obligations, non-high risk mortgage and asset-backed
and other securities for the purpose of generating income. The trading
portfolio is managed to realize profits from short-term price movements
associated with holding high credit quality securities and associated off-
balance sheet derivative instruments.
The majority of derivative instruments held in the trading portfolio are
utilized to hedge market and interest rate risk associated with the on-balance
sheet cash instruments they are linked to. That is, changes in value of cash
instruments are effectively offset by changes in value of the related
derivative to the extent the on-balance sheet positions are hedged. The
Company had no speculative derivative positions at December 31, 1995.
The Company's derivative trading positions, which are currently limited to
interest rate swaps, exchange traded forwards, futures and open foreign
58
exchange contracts, are subject to interest rate risk, maturity and credit
exposure limits. Stop loss limits have been imposed on all trading positions,
including derivatives, to mitigate exposure to price movements.
<TABLE>
<CAPTION>
Net revenues, by instrument type, associated with trading activities during
1995 and 1994 follows:
Net Gains/(Losses) 1995 1994
in millions
<S> <C> <C>
Interest rate swaps $ - $2.5
Forward rate agreements - .3
Futures contracts (3.0) 6.6
Foreign exchange contracts 3.8 3.6
</TABLE>
Derivative trading positions are marked to market with gains and losses
recorded as a component of net trading revenues. Generally, as individual
trading assets are sold, the corresponding derivative positions are liquidated
and gains and losses realized.
<TABLE>
<CAPTION>
The following summarizes by instrument type, the year-end and average fair
values of derivative trading positions.
Fair Value
December 31, 1995 Year-end Average
in millions
<S> <C> <C>
Interest rate swaps
Assets $ 4.5 $ 5.9
Liabilities (5.4) (7.6)
Futures contracts
Assets - .1
Liabilities (.1) (.2)
Foreign exchange contracts
Assets 2.5 3.8
Liabilities (2.5) (3.7)
</TABLE>
Foreign exchange trading activities - The Company maintains open positions in
various foreign exchange contracts, principally to accommodate customer
demands for specific currencies. Foreign currencies are purchased and sold on
a spot basis, with settlement occurring within a two day period. Addition-
ally, certain forward purchase and sale agreements are entered into in order
to match customer requests with settlement requirements associated with
foreign markets. The Company also maintains a limited number of open
positions.
<TABLE>
<CAPTION>
The following summarizes the foreign currency trading contracts outstanding.
Notional Fair
December 31, 1995 Amount Value
in millions
<S> <C> <C>
Spot contracts $ 6 $ -
Forward contracts 157 -
Option contracts 2 -
</TABLE>
Approximately 75% of the contracts outstanding are denominated in major
currencies. All open foreign exchange contracts are marked to market on a
daily basis with gains and losses recorded as a component of net trading
revenues.
59
Relating to certain contracts, the Company records unrealized gains as assets
and unrealized losses as liabilities on the balance sheet. Offsetting of
unrealized gains and losses is recognized for multiple contracts executed with
the same counterparty if a valid right and intent to set off exists. The
majority of the Company's arrangements are subject to legally enforceable
master netting agreements with affiliated companies which provide for the
right of set off.
Note 20. Concentrations of Credit Risk
The Company enters into a variety of transactions in the normal course of
business that involve both on- and off-balance sheet credit risk. Principal
among these activities is lending to various commercial, institutional,
governmental and individual customers. Although the Company actively
participates in lending activity throughout the United States and on a limited
basis abroad, credit risk is concentrated in the Northeastern United States.
The ability of individual borrowers to repay is linked to the economic
stability of the regions from where the loans originate, as well as the
creditworthiness of the borrower. With emphasis on the Western, Central and
Metropolitan regions of New York State, the Company maintains a diversified
portfolio of loan assets.
In general, the Company controls the varying degrees of credit risk involved
in on- and off-balance sheet transactions through specific credit policies.
These policies and procedures provide for a strict approval, monitoring and
reporting process.
<TABLE>
<CAPTION>
The following table summarizes the Company's significant concentrations of
credit risk at December 31, 1995.
Off-Balance
On-Balance Sheet
Sheet Commitments
in millions
<S> <C> <C>
Consumer:
Installment, credit card loans and leases $3,316 $6,475
Residential mortgages 3,080 420
Real estate - commercial construction and mortgage loans 1,315 136
</TABLE>
It is the Company's policy to require collateral in support of on- and
off-balance sheet transactions, when it is deemed appropriate. Varying
degrees and types of collateral are secured dependent upon management's credit
evaluation.
Note 21. Fair Value of Financial Instruments
The following disclosures represent the Company's best estimate of the fair
value of on- and off-balance sheet financial instruments, determined on a
basis consistent with the requirements as outlined in Financial Accounting
Standards No. 107, Disclosures About Fair Value of Financial Instruments (FAS
107). To the extent possible, these values have been determined by reference
to current market quotations. In those instances where market quotes are not
available, fair values have been estimated by management based upon quoted
prices for financial instruments with similar characteristics or on reasonable
valuation techniques such as present value analyses using appropriate discount
rates and adjustments for associated credit risk. The Company has employed
60
the following methods and assumptions to estimate the fair value of each class
of financial instrument for which it is practicable to do so.
Financial instruments with carrying value equal to fair value - The carrying
value of certain financial assets including cash and due from banks, interest
bearing deposits with banks, federal funds sold and securities purchased under
resale agreements, accrued interest receivable, and customers' acceptance
liability and certain financial liabilities including short-term borrowings,
interest, taxes and other liabilities and acceptances outstanding, as a result
of their short-term nature, carrying value is considered to be equal to fair
value.
Securities and trading assets - For securities, fair value has been based upon
current market quotations, where available. If quoted market prices are not
available, fair value has been estimated based upon the quoted price of
similar instruments.
Loans - The fair value of the performing loan portfolio has been determined
principally based upon a discounted analysis of the anticipated cash flows,
adjusted for expected credit losses. The loans have been grouped to the
extent possible, into homogeneous pools, segregated by maturity and the
weighted average maturity and average coupon rate of the loans within each
pool calculated. Depending upon the type of loan involved, maturity
assumptions have been based on either contractual or expected maturity.
Pursuant to the valuation methodology, credit risk has been factored into the
present value analysis of cash flows associated with each loan type, by
allocating the allowance for credit losses. The allocated portion of the
allowance, adjusted by a present value factor based upon the timing of
expected losses, has been deducted from the gross cash flows prior to
performing the present value calculation.
As a result of the allocation of the allowance to adjust the anticipated cash
flows for credit risk, a published interest rate that equates as closely as
possible to a "risk-free" or "low-risk" loan has been selected for the purpose
of discounting the commercial loan portfolio, adjusted for a liquidity factor
where appropriate.
Consumer loans have been discounted at the estimated rate of return an
investor would demand for the product, without regard to credit risk. This
rate has been formulated based upon reference to current market rates. The
fair value of the residential mortgage portfolio has been determined by
reference to quoted market prices for loans with similar characteristics and
maturities.
The portion of the allowance attributable to nonperforming loans has been
deducted from carrying value to arrive at an estimate of fair value for
nonperforming loans.
Intangible assets - The Company has elected not to specifically disclose the
fair value of certain intangible assets. In addition, the Company has not
estimated the fair value of unrecorded intangible assets associated with its
own portfolio of core deposits and credit card receivables. The fair value of
the Company's intangibles is believed to be significant.
61
Deposits - The fair value of demand, savings and certain money market deposits
is equal to the amount payable on demand at the reporting date. For other
types of deposits with fixed maturities, fair value has been estimated based
upon interest rates currently being offered on deposits with similar
characteristics and maturities.
Long-term debt - Fair value has been estimated based upon interest rates
currently available to the Company for borrowings with similar characteristics
and maturities.
The following, which is provided for disclosure purposes only, provides a
comparison of the carrying value and fair value of the Company's on-balance
sheet financial instruments. Fair values have been determined on a basis
consistent with the requirements of FAS 107 and do not necessarily represent
the amount that would be realized upon their liquidation.
<TABLE>
<CAPTION>
1995 1994
Carrying Fair Carrying Fair
December 31, Value Value Value Value
in millions
<S> <C> <C> <C> <C>
Financial assets:
Instruments with carrying value
equal to fair value $ 3,421 $ 3,421 $ 3,033 $ 3,033
Trading assets 618 618 407 407
Related derivatives (1) (1) (3) (3)
Securities 2,620 2,620 2,048 1,988
Related derivatives (6) (6) - -
Loans, net of allowance for
loan losses 13,416 13,565 12,439 12,176
Related derivatives 39 (6) - -
Financial liabilities:
Instruments with carrying value
equal to fair value 2,813 2,813 2,696 2,696
Deposits:
Without fixed maturities 10,668 10,668 9,319 9,319
Fixed maturities 4,663 4,638 4,465 4,383
Long-term debt 710 725 713 718
</TABLE>
The above table excludes $155,750,000 notional value interest rate floors with
a fair value of $857,000 associated with mortgage servicing rights and
$135,818,000 of notional value customer facilitation interest rate swaps with
a fair value of $17,000 which are outside of the scope required in this
footnote.
The amounts reported for 1995 include the carrying value and fair value of
derivatives used for asset-liability management activities. Derivatives
associated with loans are hedging interest rate risk on certain variable rate
commercial loans and fixed rate residential mortgage assets. The fair value
of the related derivatives hedging the market value of securities available
for sale is included in determining the net unrealized gain on securities
reported as a separate component of shareholders' equity.
62
In 1994, the Company did not disclose the linkage between on-balance sheet
assets carried at historical cost and the related derivative contracts even
though these contracts were effectively hedging the associated interest rate
risk. The carrying value of derivatives used for asset-liability management
was included in other assets and other liabilities.
The fair value of derivative financial instruments is disclosed in Note 19,
Derivative Financial Instruments.
The notional amount of off-balance sheet commitments to extend credit, standby
letters of credit and financial guarantees, is considered equal to fair value.
Due to the uncertainty involved in attempting to assess the likelihood and
timing of a commitment being drawn upon, coupled with lack of an established
market and the wide diversity of fee structures, the Company does not believe
it is meaningful to provide an estimate of fair value that differs from the
notional value of the commitment. Further detail with respect to off-balance
sheet financial instruments is provided in Note 18, Financial Instruments With
Off-Balance Sheet Risk.
<TABLE>
<CAPTION>
Note 22. Financial Statements of HSBC Americas, Inc. (parent)
Condensed financial statements of HSBC Americas, Inc., the parent company only
follow.
Balance Sheet
December 31, 1995 1994
<S> <C> <C>
Assets: in thousands
Cash and due from banks $ 389 $ 466
Interest bearing deposits with banking subsidiary 1,278,400 1,465,200
Securities available for sale 34,810 35,459
Loans (net of allowance for loan losses of $128
and $228) 77,915 127,818
Receivable from subsidiaries 105,456 112,911
Investment in subsidiaries at amount of their
net assets:
Banking 1,645,364 1,454,804
Other 34,336 30,288
Other assets 76,089 62,837
Total assets $3,252,759 $3,289,783
Liabilities:
Interest, taxes and other liabilities $ 16,155 $ 14,322
Short-term borrowings 1,022,090 1,226,152
Long-term debt 549,320 549,320
Total liabilities 1,587,565 1,789,794
Shareholders' equity* 1,665,194 1,499,989
Total liabilities and shareholders' equity $3,252,759 $3,289,783
* See Consolidated Statement of Changes in Shareholders' Equity, page 35.
</TABLE>
63
<TABLE>
<CAPTION>
Statement of Income
Year Ended December 31, 1995 1994 1993
in thousands
<S> <C> <C> <C>
Income:
Dividends from bank subsidiaries $ - $ 150,000 $ -
Dividends from other subsidiaries 661 30,500 1,350
Interest from subsidiaries 49,150 22,490 16,103
Other interest income 8,354 10,461 8,406
Securities transactions 12,335 7,853 11,010
Other income (5) 9,618 3,780
Total income 70,495 230,922 40,649
Expenses:
Interest (including $4, $5,187
and $6,822 paid to subsidiaries) 64,595 47,638 43,620
Other expenses 5,046 4,624 2,415
Total expenses 69,641 52,262 46,035
Income (loss) before taxes, cumulative
effect of change in accounting
principle and equity in undistributed
income (loss) of subsidiaries 854 178,660 (5,386)
Income taxes (benefit) 1,631 (118) 5,430
Income (loss) before cumulative effect
of change in accounting principle
and equity in undistributed income (loss)
of subsidiaries (777) 178,778 (10,816)
Equity in undistributed income (loss)
of subsidiaries before cumulative effect
of change in accounting principle 292,464 (161,621) (100,047)
Income (loss) before cumulative effect
of change in accounting principle 291,687 17,157 (110,863)
Cumulative effect of change in
accounting principle - - 40,000
Net income (loss) $291,687 $ 17,157 $ (70,863)
</TABLE>
64
<TABLE>
<CAPTION>
Statement of Cash Flows
Year Ended December 31, 1995 1994 1993
in thousands
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 291,687 $ 17,157 $ (70,863)
Adjustments to reconcile net income (loss)
to net cash provided (used) by
operating activities:
Depreciation and amortization 3,012 3,035 578
Net change in other accrued accounts 496 (6,901) 41,576
Undistributed (income) loss of subsidiaries (292,464) 161,621 60,047
Other, net (9,146) (31,135) (19,387)
Net cash provided (used) by
operating activities (6,415) 143,777 11,951
Cash flows from investing activities:
Net change in interest bearing
deposits with banks 186,800 (1,082,866) (24,000)
Purchases of securities (8,881) (350) (42,220)
Sales of securities 23,185 13,458 67,334
Net change in other short-term loans 50,000 - (50,000)
Principal collected on long-term loans 9,554 579,708 438,789
Long-term loans made to customers (3,139) (553,620) (380,916)
Investment in banking subsidiary 125,000 (150,000) (200,000)
Investment in nonbanking subsidiary 395 15,150 (27,503)
Proceeds from transfer of affiliate
to parent 145 40,105 -
Other, net (16,787) 27,721 13,199
Net cash provided (used) by
investing activities 366,272 (1,110,694) (205,317)
Cash flows from financing activities:
Net change in short-term borrowings (204,062) 1,045,208 (8,528)
Repayment of long-term debt - (122,000) -
Capital contributions from parent - 150,000 200,000
Dividends paid (155,872) (105,873) (5,873)
Net cash provided (used) by
financing activities (359,934) 967,335 185,599
Net change in cash and due from banks (77) 418 (7,767)
Cash and due from banks at beginning of year 466 48 7,815
Cash and due from banks at end of year $ 389 $ 466 $ 48
Supplementary data
Interest paid $ 66,850 $ 45,901 $ 43,641
Taxes paid 21,687 10,772 940
</TABLE>
The Bank is subject to legal restrictions on certain transactions with its
nonbank affiliates in addition to the restrictions on the payment of dividends
by the Bank to the Company (see Note 13). Restricted net assets of
consolidated subsidiaries were $1,645,364,000 at December 31, 1995.
65
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There were no disagreements on accounting and financial disclosure matters
between the Company and its independent accountants during 1995.
P A R T III
Item 10. Directors and Executive Officers of the Registrant
Directors
Set forth below is certain biographical information relating to the members of
the Company's Board of Directors. Each director is elected annually. The
information includes principal occupation, age, the year first elected a
director of the Company, and other directorships. There are no family
relationships among the directors.
John R. H. Bond, age 54, Group Chief Executive Officer of HSBC since 1993.
Formerly President and Chief Executive Officer of the Company and the Bank
since 1991. Previously Executive Director Banking, HongkongBank from 1990 to
1991 and Executive Director Americas from 1988 to 1990. Mr. Bond is Chairman
of Hongkong Bank of Canada and a director of HSBC, Hang Seng Bank Limited,
HongkongBank, Midland Bank plc, British Steel plc, the London Stock Exchange,
Saudi British Bank, Eurorail CTRL Limited and VISA International. Elected in
1987.
James H. Cleave, age 53, President and Chief Executive Officer of the Company
and the Bank since 1992. Formerly Executive Director from June 1992 through
December 1992. Previously Director, President and Chief Executive Officer of
Hongkong Bank of Canada since 1987. Mr. Cleave is also a director of Hongkong
Bank of Canada, HSBC Markets, Inc., HSBC Holdings B.V., and Wells Fargo HSBC
Trade Bank, N.A., and he is a member of the Executive Committee of HSBC.
Elected in 1991.
William R. P. Dalton, age 52, President and Chief Executive Officer of
Hongkong Bank of Canada since 1992 and a director since 1987. Appointed Chief
Operating Officer Hongkong Bank of Canada in 1987. Joined the HSBC Group in
1980 as an officer of Wardley Canada Limited, which converted to the Hongkong
Bank of Canada in 1981. Elected January 1, 1996.
Northrup R. Knox, age 67, Chairman of the Company and the Bank since 1988.
Formerly President, Niagara Frontier Hockey Corporation, professional hockey
team. Mr. Knox is a director of HSBC. He is President and a director of The
Seymour H. Knox Foundation, Inc. and Vice President of The Buffalo Fine Arts
Academy. Elected in 1973.
Sir William Purves, age 64, Chairman, HSBC. Formerly Chairman and Chief
Executive Officer, HSBC, from 1990 to 1992. Formerly, Chairman and Chief
Executive Officer, Deputy Chairman, Executive Director Banking and General
Manager International, HongkongBank. Sir Purves is Chairman of The British
Bank of the Middle East and Midland Bank plc. He is a director of
HongkongBank, The "Shell" Transport and Trading Company, plc. and The East
Asiatic Company Ltd. Elected in 1984.
66
Directors' Compensation
Directors who are employees of the Company, HSBC or other group affiliates do
not receive any compensation for their services as Company directors. As
nonexecutive Chairman of the Company and the Bank, Mr. Knox, the only
nonemployee director of the Company, receives an annual fee of $50,000 in lieu
of the current nonemployee $20,000 annual retainer and attendance fees. The
Company has standard arrangements pursuant to which a nonemployee director may
defer all or part of their fees.
The Directors' Retirement Plan covers nonemployee directors of the Company,
except those serving as directors at the request of HSBC. Mr. Knox is
currently the only director participating in this Plan. Upon retirement from
the Board, Mr. Knox will receive benefit payments for a period of ten years.
Mr. Knox's annual benefit will be 100 percent of the annual retainer for
nonemployee directors that is in effect at the last Board meeting attended.
The retirement benefit for Mr. Knox is fully vested and will be paid out over
the ten year period to his beneficiary in the event of death before benefit
payments commence, and for the balance of the period if death occurs after
retirement. The Plan is unfunded and payment will be made out of the general
funds of the Company or the Bank.
67
<TABLE>
<CAPTION>
Executive Officers
The table below shows the names and ages of all executive officers of the
Company and the positions held by them as of February 29, 1996 and the dates
when elected an executive officer of the Company or the Bank.
Year
Name Age Elected Present Position with the Company
<S> <C> <C> <S>
James H. Cleave 53 1992 President and Chief Executive Officer
Colin Bamford 53 1995 Senior Executive Vice President
Kerry B. Alberti 51 1993 Executive Vice President,
Investment Services
K. Stewart Armstrong 51 1994 Executive Vice President &
Group Audit Executive, USA
Robert M. Butcher 52 1988 Executive Vice President &
Chief Financial Officer
Robert B. Engel 42 1994 Executive Vice President &
Chief Credit Officer
Philip S. Toohey 52 1990 Legal Advisor, Americas and Secretary
Gerald A. Ronning 48 1991 Executive Vice President & Controller
</TABLE>
James H. Cleave joined the Bank and the Company as Executive Director in 1992.
Mr. Cleave had been Director, President and CEO of Hongkong Bank of Canada
since 1987 and a director of the Company since 1991.
Colin Bamford joined the Company as Senior Executive Vice President in
November 1995. Mr. Bamford had been Chief Executive Officer, HongkongBank
Japan since 1990.
Kerry B. Alberti joined the Bank and the Company as Senior Executive Vice
President, Investment Services in 1993. Mr. Alberti had been Managing
Director, Midland Financial Services, Midland Bank plc and an employee of
Midland Bank since 1988.
K. Stewart Armstrong joined the Bank and the Company as Executive Vice
President and Group Audit Executive, USA in 1994. Mr. Armstrong had been Vice
President and Chief Auditor of Hongkong Bank of Canada since 1988.
Gerald A. Ronning joined the Bank and the Company as Executive Vice President
& Controller in 1991. Mr. Ronning had been Senior Vice President, Chief
Financial Officer and Corporate Controller, Goldome.
All other executive officers have served the Company or the Bank in executive
capacities for more than five years. There are no family relationships among
the above officers.
68
Item 11. Executive Compensation
The following table sets forth information as to the compensation earned
through December 31, 1995 by James H. Cleave, President and Chief Executive
Officer and by the four most highly compensated officers of the Company and
the Bank. Three executive officers have been seconded to the Bank by HSBC,
which pays their salary and other benefits pursuant to arrangements applicable
to international HSBC officers. The three officers are: I.M. Burnett, Chief
Operating Officer; John A.D. Hamilton, Executive Vice President, Information
Technology; and Eric W. Gill, Executive Vice President and Regional President,
Central Region. The Bank reimbursed HSBC for the salary and certain benefits
paid to these officers and that reimbursement amounted to $1,731,730.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation Long Term All
Name and Incentive Other
Principal Position Year Salary Bonus Other Payouts Compensation
<S> <C> <C> <C> <C> <C> <C>
James H. Cleave 1995 $660,000 $550,000 $178,319 $ - $ 24,000
President and 1994 600,000 500,000 145,891 - 18,000
Chief Executive Officer 1993 550,000 450,000 179,091 - 21,434
Robert M. Butcher 1995 295,042 127,000 9,629 - 5,926
Executive Vice President & 1994 287,981 126,875 9,442 - 5,719
Chief Financial Officer 1993 280,481 123,600 9,847 34,750 9,434
Kerry B. Alberti 1995 263,362 72,775 3,982 - 9,120
Executive Vice President, 1994 260,000 81,900 5,181 - 9,120
Investment Services 1993 115,996 49,000 1,755 - 34,765
Peter B. Davidson 1995 209,288 90,050 6,096 - 6,000
Executive Vice President, 1994 204,385 75,725 5,910 - 86,473
Consumer Finance, of the Bank 1993 92,308 87,500 2,620 - 88,353
Philip S. Toohey 1995 199,490 79,650 9,629 - 6,600
Legal Advisor, Americas and 1994 190,304 60,000 9,442 - 6,600
Secretary 1993 184,165 58,000 9,610 6,000 7,367
</TABLE>
Other Annual Compensation for Mr. Cleave includes $109,917, $115,802 and
$125,492 for 1995, 1994 and 1993, respectively, received for housing allowance
together with miscellaneous other benefit payments. Other Annual Compensation
for the other named executives includes health and insurance benefits.
Amounts reported as All Other Compensation for 1995 include the Company's
contributions to its 401(K) plan and a four percent credit on salary deferred
under the Company's deferred salary plan. Since deferred salary is not
eligible for the company matching contributions under the 401(K) plan, salary
deferrals are increased by four percent, which is the maximum matching
contribution available under the 401(K) plan. HSBC secondees to the Company
do not participate in these benefit plans. Reimbursed moving expenses are
included in All Other Compensation for Mr. Alberti in 1993 and for
Mr. Davidson in 1994 and 1993.
HSBC has granted options on HSBC common stock to the named executives.
Options were granted on March 7, 1995, exercisable beginning March 7, 1998 and
expiring March 7, 2005.
69
The following table shows the estimated annual retirement benefit payable upon
normal retirement on a straight life annuity basis to participating employees,
including officers, in the compensation and years of service classifications
indicated under the Company's retirement plans which cover most officers and
employees on a non-contributory basis. The amounts shown are before
application of social security reductions. Years of service credited for
benefit purposes is limited to 30 years in the aggregate.
<TABLE>
<CAPTION>
Five-Year Average Estimated Annual Retirement Benefits for Representative Years of Credited Service
Compensation 15 20 25 30 35
<C> <C> <C> <C> <C> <C>
$125,000 $ 37,063 $ 49,563 $ 62,063 $ 74,563 $ 74,875
150,000 44,475 59,475 74,475 89,475 89,850
175,000 51,888 69,388 86,888 104,388 104,825
200,000 59,300 79,300 99,300 119,300 119,800
225,000 66,713 89,213 111,713 134,213 134,775
250,000 74,125 99,125 124,125 149,125 149,750
300,000 88,950 118,950 148,950 178,950 179,700
350,000 103,775 138,775 173,775 208,775 209,650
400,000 118,600 158,600 198,600 238,600 239,600
450,000 133,425 178,425 223,425 268,425 269,550
500,000 148,250 198,250 248,250 298,250 299,500
600,000 177,900 237,900 297,900 357,900 359,400
</TABLE>
The Pension Plan is a non-contributory defined benefit pension plan under
which the Bank and other participating subsidiaries of the Company make
contributions in actuarially determined amounts. Compensation covered by the
Pension Plan includes regular basic earnings (including salary reduction
contributions to the 401(K) plan) and general staff bonuses, but not other
incentive awards, bonuses, special payments or deferred salary. The Company
maintains supplemental benefit plans which provide for the difference between
the benefits actually payable under the Pension Plan and those that would have
been payable if certain other awards, special payments and deferred salaries
were taken into account and if compensation in excess of the limitations set
by the Internal Revenue Code could be counted. Payments under these plans are
unfunded and will be made out of the general funds of the Bank or other
participating subsidiaries. The calculation of retirement benefits is based
on the highest five-consecutive year compensation.
Members of the Senior Management Committee of the Bank receive two times their
normal credited service for each year and fraction thereof served as a
committee member in determining pension and severance benefits to a maximum of
30 years of credited service in total. This additional service accrual is
unfunded and payments will be made from the general funds of the Bank or other
subsidiaries. As of December 31, 1995, the individuals listed in the Summary
Compensation Table have total years of credited service in determining
benefits payable under the plans as follows: Mr. Cleave, 7.2; Mr. Butcher,
13.7; Mr. Alberti, 10.0; Mr. Davidson, 4.8; and Mr. Toohey, 14.5. HSBC
secondees to the Company do not participate in the retirement plans.
70
Item 12. Security Ownership of Certain Beneficial Owners and Management
Principal Holder of Securities
The Company is 100 percent owned by HSBC Holdings B.V. HSBC Holdings B.V. is
an indirect wholly owned subsidiary of HSBC Holdings plc.
Messrs. Purves, Bond and Knox are directors of HSBC. Messrs. Purves and Bond
are officers of HSBC.
None of the directors or executive officers owned any of the Company's common
or preferred stock at December 31, 1995.
Item 13. Certain Relationships and Related Transactions
Directors and officers of the Company, members of their immediate families and
HSBC and its affiliates were customers of, and had transactions with, the
Company, the Bank and other subsidiaries of the Company in the ordinary course
of business during 1995. Similar transactions in the ordinary course of
business may be expected to take place in the future.
All loans to executive officers and directors and members of their immediate
families and to HSBC and its affiliates were made on substantially the same
terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons and did not involve more
than normal risk of collectibility or present other unfavorable features.
71
P A R T I V
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
A
1. and 2. Financial Statements and Schedules
The following financial statements and schedules of the Company and its
subsidiaries are included in Item 8:
Report of Independent Auditors
HSBC Americas, Inc.:
Consolidated Balance Sheet
Consolidated Statement of Income
Consolidated Statement of Changes in Shareholders' Equity
Consolidated Statement of Cash Flows
Marine Midland Bank:
Consolidated Balance Sheet
Summary of Significant Accounting Policies
Notes to Financial Statements
3. Exhibits
3 a Registrant's Restated Certificate of Incorporation and Amendments
Thereto
b Registrant's By-Laws, as Amended to Date
4 Instruments Defining the Rights of Security Holders, Including
Indentures
Registrant has previously filed with the Commission as Exhibits to
various registration statements all Indentures and other Instruments
Defining the Rights of Security Holders
22 Subsidiaries of the Registrant
The Company's only significant subsidiary, as defined, is Marine
Midland Bank, a state bank organized under the laws of New York State.
B
Reports on Form 8-K
A Current Report on Form 8-K dated October 2, 1995, was filed with the
Securities and Exchange Commission on October 2, 1995, reporting that the
Company had changed its name from Marine Midland Banks, Inc. to HSBC Americas,
Inc.
72
S I G N A T U R E S
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
HSBC Americas, Inc.
Registrant
/s/ Philip S. Toohey
Philip S. Toohey
Legal Advisor, Americas
and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed on February 29, 1996 by the following persons on behalf
of the Registrant and in the capacities indicated:
/s/ Robert M. Butcher
Robert M. Butcher
Executive Vice President &
Chief Financial Officer
(Principal Financial Officer)
/s/ Gerald A. Ronning
Gerald A. Ronning
Executive Vice President &
Controller
(Principal Accounting Officer)
Northrup R. Knox*
Chairman of the Board
James H. Cleave*
Director, President & Chief Executive Officer
John R. H. Bond* Director
William R. P. Dalton* Director
William Purves* Director
* /s/ Philip S. Toohey
Philip S. Toohey
Attorney-in-fact
73
RESTATED CERTIFICATE OF INCORPORATION
OF
HSBC AMERICAS, INC.
HSBC Americas, Inc. a corporation organized and
existing under the laws of the State of Delaware (the
"Corporation"), hereby certifies as follows:
1. The name of the Corporation is HSBC Americas, Inc.
HSBC Americas, Inc. was originally incorporated under the name
of Marine Midland Corporation, and the original Certificate of
Incorporation of the Corporation was filed with the Secretary of
State of the State of Delaware on September 23, 1929.
2. Pursuant to Sections 242 and 245 of the General
Corporation Law of the State of Delaware, this Restated
Certificate of Incorporation restates and integrates and also
further amends the provisions of the Certificate of Incorporation
of this Corporation, and has been duly adopted in accordance with
Sections 228, 242, and 245 of the General Corporation Law of the
State of Delaware pursuant to a written consent adopted by the
sole holder of all outstanding shares of common stock, par value
$5.00 per share, of the Corporation.
3. The text of the Restated Certificate of
Incorporation as heretofore amended or supplemented is hereby
restated and further amended to read in its entirety as follows:
First: The name of this corporation is HSBC Americas,
Inc.
Second: Its registered office in the State of Delaware
is located at 32 Loockerman Square, Suite L-100, Dover, Kent
County, Delaware. The name and address of its registered agent
is The Prentice-Hall Corporation System, Inc., 32 Loockerman
Square, Suite L-100, Dover, Kent County, Delaware 19901.
Third: The nature of the business and the objects and
purposes proposed to be transacted, promoted and carried on, are
to do any or all of the things herein mentioned as fully and to
the same extent as natural persons might or could do in any part
of the world as set forth below. (Wherever used in this Article
Third, the expression "evidence of indebtedness" or "evidences of
indebtedness" shall mean and include, without limiting its
generality, any and all bonds, debentures, notes, coupons,
mortgages, commercial paper and/or any other instruments
evidencing indebtedness, however created, issued or granted and
whether fully paid or subject to further payments; and the
expression "certificate of interest," or "certificates of
interest" shall mean and include, without limiting its
74
generality, any and all certificates or shares of stock, scrip,
interim receipts, participation certificates, voting trust
certificates, subscription warrants, option warrants and/or any
other instruments evidencing interest in share capital or other
property, however created, issued or granted and whether fully
paid or subject to further payments.)
(1) To acquire by purchase, subscription,
contract or otherwise, hold for investment or
otherwise, own, sell, exchange, mortgage, pledge or
otherwise dispose of, and generally deal in and with
evidences of indebtedness and/or certificates of
interest issued or created in any and all parts of the
world by banks, trust companies, financial institutions
of every kind and description, corporations,
associations, partnerships, firms, trustees,
syndicates, individuals, governments, states,
municipalities or other political or governmental
divisions or subdivisions, or by any combinations,
organizations or entities whatsoever, irrespective of
their form or the name by which they may be described,
and to issue in exchange therefor or in payment
thereof, in any manner permitted by law, its own
evidences of indebtedness and/or certificates of
interest, or to make payment therefor by any other
lawful means of payment whatsoever; and to exercise any
and all of said powers, either on its own account, or
with or as agent for other persons, firms, corporations
or organizations.
(2) To receive, collect and dispose of interest,
dividends and income upon, of and from any evidence of
indebtedness or certificate of interest and any other
property held or owned by it, and to exercise any and
all rights, powers and privileges of individual
ownership or interest in respect of any and all such
evidences of indebtedness or certificates of interest,
including the right to vote thereon for any and all
purposes.
(3) To endorse or guarantee the payment of
principal and/or interest or dividends upon, and to
guarantee the performance of sinking fund or other
obligations of, any evidences of indebtedness or
certificates of interest, and to guarantee the
performance of any of the contracts or other
undertakings in which the corporation may otherwise be
or become interested, of any corporation, association,
partnership, firm, trustee, syndicate, individual,
government, state, municipality or other political or
governmental division or subdivision, domestic or
foreign, in so far as may be permitted by law to a
corporation of this character.
75
(4) To enter into, make, perform and carry out or
cancel and rescind contracts relating to or
underwritings of evidences of indebtedness or
certificates of interest, of any corporation,
association, partnership, firm, trustee, syndicate,
individual, government, state, municipality or other
political or governmental division or subdivision,
domestic or foreign, or of any combination,
organization, or entity, domestic or foreign, and to
act as manager of any underwriting or purchasing or
selling syndicate.
(5) To lend money, whether or not secured by
mortgages or other liens on real estate or personal
property, and to negotiate and make, either as
principal or broker or agent, contracts or other
agreements in connection therewith.
(6) To borrow money with or without security, to
make, accept, endorse, guarantee, execute and issue
evidences of indebtedness and to secure the same by a
mortgage, pledge, deed of trust, other lien or
otherwise, upon all or any part of the property of the
corporation, wherever situated.
(7) To act as agent or representative of
individuals, firms and corporations, and as such to
develop and extend the business interests of
individuals, firms and corporations.
(8) To purchase, hold, sell and transfer the
shares of its own capital stock, provided it shall not
use its funds or property for the purchase of its own
shares of capital stock when such use would cause any
impairment of its capital, and provided that shares of
its own capital stock belonging to it shall not be
voted upon, directly or indirectly, but nothing in this
subdivision shall be construed as limiting the exercise
of the rights given by Section 243 of the General
Corporation Law of the State of Delaware.
(9) To take, lease, purchase or otherwise acquire
and to own, use, hold, sell, convey, lease, exchange,
mortgage, improve, develop, cultivate and otherwise
handle, deal in and dispose of real estate, real
property and any interest or right therein.
(10) To purchase, manufacture, acquire, hold,
own, mortgage, pledge, lease, sell, assign and
transfer, and to invest, trade, deal in and with goods,
wares, merchandise, patents, trade-marks, rights,
privileges, franchises, grants and property of every
kind and description; to carry on any of the above
businesses or any other business connected therewith,
76
wherever the same may be permitted by law, and to the
same extent as the laws of this State will permit and
as fully and with all the powers that the laws of this
State confer upon corporations and organizations under
the General Corporation Law of the State of Delaware.
(11) To acquire and take over as a going concern
and/or carry on the business of any person, firm,
association or corporation engaged in any business
which this corporation is authorized to carry on.
(12) To render service, assistance, counsel and
advice to any person, firm, association or corporation
in the conduct of his or its business.
(13) To do all and everything necessary, suitable
and proper for the accomplishment of any of the
purposes or the attainment of any of the objects or the
furtherance of any of the powers hereinbefore set
forth, either as principal or agent, either alone or
associated with other corporations or with firms or
individuals, and either directly or indirectly through
one or more subsidiary company or companies organized
or utilized for the purpose, and to do any other act or
acts, thing or things, incidental or pertaining to or
growing out of, or connected with the aforesaid
business, or powers, or any parts thereof, provided the
same be not inconsistent with the law under which this
corporation is organized.
(14) The business or purpose of the corporation
is from time to time to do any one or more acts and
things herein set forth; and it may conduct such
business in all its branches or any part thereof either
within or outside the State of Delaware, and in other
states and territories and dependencies of the United
States and in foreign countries.
The foregoing enumeration of specific powers shall not
be deemed to limit or restrict in any manner the general powers
of the corporation and the enjoyment and exercise thereof as
conferred by the laws of the State of Delaware upon corporations
formed under the General Corporation Law of said State, and the
doing of any or all the things hereinbefore set forth to the same
extent as natural persons might or could do; but this corporation
shall not, by any implication or construction, be deemed to
possess the power of issuing bills, notes, or other evidences of
debt for circulation as money, or the power of carrying on the
business of receiving deposits of money, or the business of
buying gold and silver bullion or foreign coins.
Fourth: The total number of shares of all classes of
stock which the Corporation shall have authority to issue is ten
million, fifty thousand, two hundred, fifty-eight (10,050,258)
77
shares of which forty-nine thousand, one hundred, fifty-eight
(49,158) shares without par value are to be of a class designated
Cumulative Preferred Stock, ten million (10,000,000) shares of
the par value of $1.00 each are to be designated Preferred Stock
and one thousand, one hundred (1,100) of the par value of $5.00
each are to be of a class designated Common Stock.
The designations and the voting powers, preferences,
and relative, participating, optional and other special rights of
the Cumulative Preferred Stock and the Common Stock, and the
qualifications, limitations and restrictions thereof, are as
follows:
1. Issue of Cumulative Preferred Stock in Series.
The Cumulative Preferred Stock shall be issued from time to time
in series as hereinafter provided. All shares of Cumulative
Preferred Stock, regardless of series, shall be of equal rank
with each other and shall be identical with each other in all
respects except as provided in this Article Fourth; and the
shares of Cumulative Preferred Stock of any one series shall be
identical with each other in all respects except as to the dates
from and after which dividends thereon shall be cumulative.
2. $5.50 Convertible Preferred Stock. There is
hereby established a first series of Cumulative Preferred Stock,
which shall consist (and shall not be increased to a number in
excess) of 24,579 shares. Such first series shall have the
designation, voting powers, preferences and rights, and the
qualifications, limitations and restrictions thereof, which are
set forth in this Article Fourth in respect of the Cumulative
Preferred Stock of all series and in addition, the following:
(a) The designation of such first series of
Cumulative Preferred Stock shall be "$5.50 Convertible Preferred
Stock" (hereinafter called the $5.50 Preferred Stock).
(b) The dividend rate for the $5.50 Preferred
Stock shall be $5.50 per share per annum, and the date from and
after which dividends on each share of the $5.50 Preferred Stock
shall be cumulative is the date of issue of the $5.50 Preferred
Stock.
(c) The $5.50 Preferred Stock may not be redeemed
prior to the fifth anniversary of the date of issue thereof. On
and after such anniversary the $5.50 Preferred Stock shall be
redeemable at the option of the corporation at the following
respective redemption prices per share during the year commencing
on the indicated anniversary of the above-mentioned date of
issue:
Redemption Redemption
Price Per Price Per
Anniversary Share Anniversary Share
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Fifth . . . . .$105.00 Tenth . . . .$102.50
Sixth . . . . . 104.50 Eleventh . . 102.00
Seventh . . . . 104.00 Twelfth . . . 101.50
Eighth . . . . 103.50 Thirteenth . 101.00
Ninth . . . . . 103.00 Fourteenth . 100.50
and thereafter at the redemption price of $100.00 per share,
plus, in each case, an amount equal to all accrued and unpaid
dividends thereon to the date fixed for redemption.
(d) In the event of any liquidation, dissolution
or winding up of the affairs of the corporation, the holders of
the $5.50 Preferred Stock then outstanding shall be entitled to
receive out of the assets of the corporation, before any
distribution or payment shall be made to the holders of any
junior stock, (i) if such liquidation, dissolution or winding up
shall be voluntary, (A) prior to the second anniversary of the
date of issue of the $5.50 Preferred Stock, $111.00 per share or
(B) thereafter and prior to the fifth anniversary of the date of
issue of the $5.50 Preferred Stock, $105.00 per share or (C) on
or after such fifth anniversary, an amount equal to the
redemption price set forth in paragraph (c) of this subdivision 2
then in effect, and (ii) if such liquidation, dissolution or
winding up shall be involuntary, the amount of $100.00 per share,
plus, in each case, an amount equal to all accrued and unpaid
dividends thereon to the date fixed for payment of such
distributive amounts.
(e) So long as any shares of the $5.50 Preferred
Stock shall be outstanding, the corporation shall not, without
the consent, given in writing or by resolution adopted at a
meeting duly called for that purpose, of the holders of record of
at least a majority of that number of shares of the $5.50
Preferred Stock then outstanding, reduce its capital in respect
of the $5.50 Preferred Stock below an amount equal to $100 times
the number of shares of the $5.50 Preferred Stock then
outstanding.
3. Provisions Applicable to all Series of Cumulative
Preferred Stock. The voting powers, preferences and rights, and
the qualifications, limitations and restrictions thereof,
applicable to the Cumulative Preferred Stock of all series, are
as follows:
(a) Dividends on Cumulative Preferred Stock. The
holders of the Cumulative Preferred Stock of each series shall be
entitled to receive, in preference to the holders of any junior
stock, when and as declared by the Board of Directors, but only
out of net profits or net assets of the corporation legally
available for the payment of dividends, cumulative cash dividends
at the annual rate for such series fixed in this Article FOURTH,
and no more, payable on the first days of January, April, July,
and October in each year (such days being herein called "dividend
payment dates" and the quarterly periods ending on such days
79
being herein called "dividend periods"), to stockholders of
record on the respective dates, which shall be the same dates for
all series, fixed for the purpose by the Board of Directors in
advance of payment of each particular dividend. The holders of
shares of the Cumulative Preferred Stock shall not be entitled to
receive any dividends thereon other than the dividends referred
to in this paragraph (a).
No dividends shall be paid upon, or declared or set
apart for, any share of Cumulative Preferred Stock of any series
for any dividend period unless at the same time a like
proportionate dividend for the same dividend period, ratably in
proportion to the respective annual dividend rates fixed
therefor, shall be paid upon, or declared and set apart for, all
shares of Cumulative Preferred Stock of all series then issued
and outstanding and entitled to receive such dividend.
(b) Dividends on Junior Stock. So long as any
shares of the Cumulative Preferred Stock shall be outstanding,
the corporation will not declare or pay any dividend on any
junior stock (other than dividends payable solely in junior
stock) or make any other distribution of any sort, either
directly or indirectly, in respect of any junior stock or make
any payment on account of the purchase, redemption or other
acquisition of any junior stock, unless, at the date of such
declaration in the case of a dividend or at the date of such
distribution or other payment
(i) all cumulative dividends on the then
outstanding shares of Cumulative Preferred Stock
for all past dividend periods shall have been paid
or declared and a sum sufficient for the payment
thereof set apart; and
(ii) after giving effect, as if paid, to the
proposed dividend, distribution or payment, the
aggregate amount of all such dividends,
distributions and payments declared or made after
December 31, 1963 does not exceed the sum of
(A) Consolidated Net Operating Income
from December 31, 1963 to such date of
declaration, distribution or payment,
(B) the net proceeds to the
corporation, valued where other than cash by
the Board of Directors, from the issuance or
sale after June 30, 1964 of any shares of
junior stock and of any convertible
securities (other than junior stock) which
have been converted into junior stock, and
(C) $17,000,000.
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Subject to the foregoing provisions of this
paragraph (b), such dividends (payable in cash, stock or
otherwise) as may be determined by the Board of Directors may be
declared and paid on any junior stock from time to time out of
the net profits or net assets of the corporation legally
available therefor, and the Cumulative Preferred Stock shall not
be entitled to participate in any such dividends.
(c) Redemption of Cumulative Preferred Stock.
Subject to the provisions of paragraph (d) of this subdivision 3,
the corporation at its option (expressed by resolution of the
Board of Directors) may (except as provided in subdivision 2 in
respect of the $5.50 Preferred Stock) redeem the outstanding
shares of Cumulative Preferred Stock, or of any series thereof,
at any time in whole, or from time to time in part, upon notice
duly given as hereinafter specified, at the applicable redemption
price or prices for such shares fixed in subdivision 2 of this
Article Fourth, plus, in each case, an amount equal to all
accrued and unpaid dividends thereon to the date fixed for
redemption. Notice of every such redemption of Cumulative
Preferred Stock, in form approved by the Board of Directors,
shall be given by mailing such notice not less than thirty nor
more than sixty days prior to the date fixed for such redemption
to each holder of record of shares so to be redeemed at his
address as the same shall appear on the books of the corporation.
In case of redemption of a part only of the Cumulative Preferred
Stock of any series at the time outstanding, the redemption may
be either pro rata or by lot, as determined by the Board of
Directors. Subject to the foregoing, the Board of Directors
shall have full power and authority to prescribe the manner in
which the drawings by lot or the pro rata redemption shall be
conducted and the terms and conditions upon which the Cumulative
Preferred Stock shall be redeemed from time to time.
If any such notice of redemption shall have been duly
given, then, from and after the date fixed in such notice as the
redemption date (unless default be made by the corporation in
providing funds for the payment of the redemption price, and
accrued and unpaid dividends to the date fixed for redemption),
notwithstanding that any certificate for shares so called for
redemption shall not have been surrendered for cancellation, all
shares so called for redemption shall no longer be deemed
outstanding on and after such redemption date, and the right to
receive dividends thereon and all other rights with respect to
such shares shall forthwith on such redemption date cease and
terminate, except only the right of the holders thereof to
receive the amount payable on redemption thereof, without
interest.
If any such notice of redemption shall have been duly
given or if the corporation shall have given to the bank or trust
company hereinafter referred to irrevocable written authorization
promptly to give or complete such notice, and if on or before the
redemption date specified therein the funds necessary for such
81
redemption shall have been deposited by the corporation with a
bank or trust company designated in such notice, doing business
in the Borough of Manhattan, the City of New York, State of New
York, and having a capital, surplus and undivided profits
aggregating at least $5,000,000 according to its last published
statement of condition, in trust for the pro rata benefit of the
holders of the shares so called for redemption, then,
notwithstanding that any certificate for shares so called for
redemption shall not have been surrendered for cancellation, from
and after the time of such deposit all shares so called for
redemption shall no longer be deemed outstanding and all rights
with respect to such shares shall forthwith cease and terminate,
except only the right of the holders thereof to receive from such
bank or trust company at any time after the time of such deposit
the funds so deposited, without interest, and the right to
exercise, before the date fixed for redemption, all privileges of
conversion or exchange, if any, not theretofore expired. Any
interest accrued on such funds shall be paid to the corporation
from time to time. Any funds so deposited and unclaimed at the
end of six years from such redemption date shall be repaid to the
corporation, after which the holders of the shares so called for
redemption shall look only to the corporation for payment
thereof; provided that any funds so deposited which shall not be
required for redemption because of the exercise of any privilege
of conversion or exchange subsequent to the date of deposit shall
be repaid to the corporation forthwith.
None of the shares of Cumulative Preferred Stock of any
series redeemed pursuant to the foregoing provisions or converted
into or exchanged for other shares of the corporation or
purchased or otherwise acquired by the corporation shall be
reissued, and the corporation may from time to time take such
appropriate corporate action as may be necessary to eliminate
such shares from its authorized capital stock.
(d) Limitation of Right to Redeem or Purchase
Cumulative Preferred Stock. If and so long as all cumulative
dividends on the outstanding shares of Cumulative Preferred Stock
of all series for all past dividend periods shall not have been
paid or declared and a sum sufficient for the payment thereof set
apart, the corporation shall not redeem less than all of the
Cumulative Preferred Stock at the time outstanding, and neither
the corporation nor any subsidiary shall purchase or otherwise
acquire for value any of the Cumulative Preferred Stock at the
time outstanding unless such purchase or other acquisition shall
be pursuant to tenders called for on at least twenty days'
previous notice by mail to all the holders of record of the
Cumulative Preferred Stock at their respective addresses as the
same shall appear on the books of the corporation, and the shares
so purchased or otherwise acquired shall be those tendered at the
lowest prices pursuant to such call for tenders; provided,
however, that if some, but less than all, of the shares tendered
at a particular price are to be purchased or otherwise acquired
pursuant to such call for tenders, the number of shares to be
82
purchased or acquired from each holder who has tendered shares at
such price shall be in the proportion which the number of shares
he has tendered at such price bears to the total number of shares
tendered at such price.
(e) Voting Rights. Except as otherwise provided
by law and as otherwise provided in this Article Fourth, and
subject to the provisions of the by-laws of the corporation, as
from time to time amended, with respect to the closing of the
transfer books and the fixing of a record date for the
determination of stockholders entitled to vote, the holders of
the Common Stock shall exclusively possess voting power for the
election of directors and for all other purposes, and the holders
of the Cumulative Preferred Stock shall have no voting power and
shall not be entitled to any notice of any meeting of
stockholders; provided, however, that if at the time of the
giving of notice of any annual meeting of stockholders for the
election of directors a default in preferred dividends, as
hereinafter defined, shall exist, the holders of the Cumulative
Preferred Stock, voting separately as a class and without regard
to series, shall have the right at such annual meeting to elect
two members of the Board of Directors but shall not be entitled
to vote in the election of any of the other directors of the
corporation, and the holders of the Common Stock, voting
separately as a class, shall be entitled to elect the remaining
members of the Board of Directors but shall not be entitled to
vote in the election of the two directors of the corporation so
to be elected by the holders of the Cumulative Preferred Stock.
Any director elected by the holders of the Cumulative Preferred
Stock, voting as a class as aforesaid, together with each
director elected to fill a vacancy in the office of a Preferred
Director as hereinafter provided (hereinafter called a "Preferred
Director"), shall continue to serve as such director until the
next annual meeting of stockholders and until his successor shall
be elected and qualified, notwithstanding that prior to the end
of such term a default in preferred dividends shall cease to
exist. Any Preferred Director may be removed with or without
cause by, and shall not be removed except by, the vote of the
holders of the Cumulative Preferred Stock, voting separately as a
class without regard to series, at a meeting of stockholders or
at a meeting of the holders of shares of Cumulative Preferred
Stock called for the purpose. So long as a default in preferred
dividends shall exist (i) any vacancy in the office of a
Preferred Director may, except as provided in the following
clause (ii), be filled for the unexpired term by the remaining
Preferred Director or, if there shall at the time be no Preferred
Director in office, by the remaining members of the Board of
Directors, and (ii) in the case of the removal of any Preferred
Director, the vacancy may be filled for the unexpired term by the
vote of the holders of the Cumulative Preferred Stock, voting
separately as a class without regard to series, at the same
meeting at which such removal shall be voted or at any subsequent
meeting. So long as there is a Preferred Director in office (i)
if there shall be an executive or similar committee of the Board
83
of Directors, at least one Preferred Director shall be a member
of such committee, (ii) notice of each special meeting of the
Board of Directors shall be given to each Preferred Director not
less than three days by mail or one day by telegraph or telephone
prior to the meeting, and (iii) notice of each special meeting of
the executive or similar committee of the Board of Directors, if
any, shall be given to each Preferred Director who is a member
thereof not less than three days by mail or one day by telegraph
or telephone prior to the meeting. Preferred Directors need not
be stockholders. For the purposes of this paragraph (e), a
default in preferred dividends shall be deemed to have occurred
whenever at the time of giving of notice of any annual meeting of
stockholders for the election of directors the amount of accrued
and unpaid dividends upon any shares of any series of the
Cumulative Preferred Stock shall be equivalent to four quarterly
dividends or more, and, having so occurred, such default in
preferred dividends shall be deemed to exist thereafter until,
but only until, all cumulative dividends on all shares of
Cumulative Preferred Stock then outstanding, of each and every
series, for all past dividend periods shall have been paid or
declared and set apart for payment. Nothing herein contained
shall be deemed to prevent an amendment of the by-laws of the
corporation, in the manner therein provided, which shall increase
the number of directors of the corporation so as to provide
additional places on the Board of Directors for either one or
both of the two directors so to be elected by the holders of the
Cumulative Preferred Stock, or so as to increase the number of
directors to be elected by the holders of the Common Stock, or to
prevent any other change in the number of the directors of the
corporation.
So long as a default in preferred dividends shall exist
(i) the presence in person or by proxy of the holders of twenty-
five percent of the outstanding shares of the Cumulative
Preferred Stock, considered as a class without regard to series,
shall be (except as provided above in respect of the filling of a
vacancy caused by the removal of a Preferred Director) required
to constitute a quorum of such class at any meeting of
stockholders or at any meeting of the holders of shares of
Cumulative Preferred Stock called for the purpose of electing a
Preferred Director or Preferred Directors; provided, however,
that a majority of the holders of the Cumulative Preferred Stock
who are present in person or represented by proxy at any such
meeting at which there shall be no quorum of such class shall
have power to adjourn the meeting from time to time, without
notice other than announcement at the meeting, solely for the
purpose of electing a Preferred Director or Preferred Directors
at an adjourned session of such meeting at which there shall be a
quorum of such class; and (ii) the presence in person or by proxy
of the holders of a majority (or such lesser number as may at the
time be specified in the by-laws of the corporation) of the
outstanding shares of Common Stock shall be required to
constitute a quorum of such class at any meeting of stockholders
at which the holders of the Common Stock, voting as a class
84
aforesaid, shall be entitled to vote for the election of
directors of the corporation. No delay or failure by the holders
of the Cumulative Preferred Stock to elect a Preferred Director
shall invalidate the election of the members of the Board of
Directors elected by the holders of the Common Stock. Holders of
Cumulative Preferred Stock shall be entitled to notice of each
meeting of stockholders at which they shall have the right to
elect a Preferred Director, such notice to be mailed to such
holders at least 10 days prior to such meeting.
Each stockholder entitled to vote at any particular
time in accordance with the provisions of this Article Fourth
shall have one vote for each share of stock held of record by him
and at the time entitled to voting power.
(f) Restrictions on Certain Capital Changes. So
long as any shares of the Cumulative Preferred Stock of any
series shall be outstanding, the corporation shall not, without
the consent, given in writing or by resolution adopted at a
meeting duly called for that purpose, of the holders of record of
at least two-thirds of the number of shares of the Cumulative
Preferred Stock of all series then outstanding, considered as a
class without regard to series,
(i) create or issue any shares of any new
class of stock ranking prior to the Cumulative
Preferred Stock or alter or change the
designations or the voting powers, preferences or
rights, or the qualifications, limitations or
restrictions thereof, of the Cumulative Preferred
Stock or of any series thereof; provided, however,
that any such alteration or change of the
designations or of the voting powers, preferences
or rights, or the qualifications, limitations or
restrictions thereof, of any particular series of
the Cumulative Preferred Stock which does not
affect the holders of the Cumulative Preferred
Stock of any other series may be effected with the
consent, given as aforesaid, of the holders of
record of at least two-thirds of the number of
shares of the particular series of Cumulative
Preferred Stock affected by such alteration or
change; and provided, further, that nothing in
this clause (i) shall require the vote or consent
of the holders of the Cumulative Preferred Stock
for or in respect of the creation or increase in
the authorized number of shares of any junior
stock or any stock (other than the Cumulative
Preferred Stock) ranking on a parity with the
Cumulative Preferred Stock; or
(ii) create or issue any shares of any new
class of stock ranking on a parity with the
Cumulative Preferred Stock, unless, after giving
85
effect to the issue of such shares, (A) the sum of
(1) the aggregate par value (or stated value in
the case of shares without par value) of all
outstanding shares of stock of the corporation,
(2) the aggregate amount of the surplus (whether
capital, earned or other) and the contingency or
other surplus reserves of the corporation, all as
determined in accordance with generally accepted
accounting principles applicable to banks and bank
holding companies, and (3) the sum of the combined
reserves for possible loan losses and other
valuation reserves of the constituent banks, as
determined in accordance with generally accepted
accounting principles applicable to banks, will be
at least 250% of the aggregate par value (or
stated value in the case of shares without par
value) of all shares of the Cumulative Preferred
Stock and all shares of stock of the corporation
of every other class ranking prior to or on a
parity with the Cumulative Preferred Stock, and
(B) the Consolidated Net Operating Income earned
during the three calendar years immediately
preceding such issue shall have averaged at least
four times the annual dividend requirements on all
shares of Cumulative Preferred Stock and all
shares of stock of the corporation of every other
class ranking prior to or on a parity with the
Cumulative Preferred Stock which will be
outstanding.
(g) Rights on Liquidation. In the event of any
liquidation, dissolution or winding up of the affairs of the
corporation, the holders of the Cumulative Preferred Stock of
each series shall be entitled to receive out of the assets of the
corporation, before any distribution or payment shall be made to
the holders of any junior stock, the amount per share specified
in this Article FOURTH with respect thereto, and the holders of
the junior stock shall be entitled, to the exclusion of the
holders of the Cumulative Preferred Stock of any and all series,
to share ratably in all the remaining assets of the corporation
in accordance with their respective rights. If upon any
liquidation, dissolution or winding up of the affairs of the
corporation the assets available for distribution shall be
insufficient to pay the holders of all outstanding shares of
Cumulative Preferred Stock the full amounts to which they
respectively shall be entitled, the holders of shares of
Cumulative Preferred Stock of all series shall share ratably in
any distribution of assets in accordance with the sums which
would be payable on such distribution if all sums payable were
paid in full. Neither the consolidation or merger of the
corporation with or into any other corporation, nor any sale,
lease or conveyance of all or any part of the property or
business of the corporation, shall be deemed to be a liquidation,
dissolution or winding up of the affairs of the corporation
86
within the meaning of this paragraph (g).
(h) Preemptive Rights. No holder of Cumulative
Preferred Stock of any series shall be entitled as such, as a
matter of right, to subscribe for or purchase any part of any new
or additional issue of stock of any class whatsoever, or of
obligations or other securities convertible into, or exchangeable
for, any stock of any class whatsoever, whether now or hereafter
authorized and whether issued for cash or other consideration or
by way of dividend.
4. Definitions. For all purposes of this Article
Fourth:
The term "accrued and unpaid dividends" when used with
reference to any share of any series of the Cumulative Preferred
Stock shall mean (whether or not in any dividend period there
shall have been net profit or net assets of the corporation
legally available for the payment of dividends) an amount
computed at the annual dividend rate for the shares of such
series from the date on which dividends on such share become
cumulative to and including the date to which such dividends are
to be accrued, less the aggregate amount of all dividends
theretofore paid on such share; but no interest shall be payable
upon any arrearages.
The term "Board of Directors" shall mean the Board of
Directors of the corporation.
The term "Consolidated Net Operating Income" shall mean
the consolidated net operating income of the corporation, the
constituent banks and such subsidiaries the accounts of which are
in fact consolidated with those of the corporation in its annual
report to stockholders, all as determined from time to time in
accordance with generally accepted accounting principles
applicable to banks and bank holding companies.
The term "constituent banks" shall mean all commercial
banks and trust companies, whether organized under Federal or
State law, at least a majority of the shares of voting stock of
which shall at the time be owned, directly or indirectly, by the
corporation or by one or more subsidiaries or by the corporation
and one or more subsidiaries.
The term "junior stock", when used with reference to
the Cumulative Preferred Stock, shall mean the Common Stock and
any other stock of the corporation, now or hereafter authorized,
over which the Cumulative Preferred Stock has preference or
priority either in the payment of dividends or in the
distribution of assets upon any liquidation, dissolution or
winding up of the affairs of the corporation.
The term "stock ranking on a parity with the Cumulative
Preferred Stock" shall mean any stock of the corporation, now or
87
hereafter authorized, which has preference on a parity with the
Cumulative Preferred Stock either in the payment of dividends or
in the distribution of assets upon any liquidation, dissolution
or winding up of the affairs of the corporation.
The term "stock ranking prior to the Cumulative
Preferred Stock" shall mean any stock of the corporation, now or
hereafter authorized, which has preference over the Cumulative
Preferred Stock either in the payment of dividends or in the
distribution of assets upon any liquidation, dissolution or
winding up of the affairs of the corporation.
The term "subsidiary" shall mean any corporation,
association or business trust at least a majority of the shares
of the voting stock of which shall at the time be owned, directly
or indirectly, by the corporation or by one or more subsidiaries
or by the corporation and one or more subsidiaries.
The term "voting stock", as applied to the stock (or
the equivalent thereof, in the case of corporations incorporated
outside the continental limits of the United States of America)
of any corporation, shall mean stock (or such equivalent) of any
class or classes, however designated, having ordinary voting
power for the election of a majority of the directors of such
corporation, other than stock (or such equivalent) having such
power only by reason of the happening of a contingency.
5. Class Voting. Except as otherwise required by law
or by the provisions of the Certificate of Incorporation, the
vote of the holders of all or any portion of any class of stock,
as a class, shall not be required for any action whatsoever to be
taken or authorized by the stockholders of the corporation,
including any amendment of the Certificate of Incorporation.
6. Preferred Stock. The Preferred Stock may be
issued from time to time in one or more series and with such
designation for each such series as shall be stated and expressed
in the resolution or resolutions providing for the issue of each
such series adopted by the Board of Directors. The Board of
Directors in any such resolution or resolutions is expressly
authorized to state and express for each such series:
(i) the voting powers, if any, of the
holders of stock of such series;
(ii) the rate per annum and the times at and
conditions upon which the holders of stock of such
series shall be entitled to receive dividends, and
whether such dividends shall be cumulative or non-
cumulative and if cumulative the terms upon which
such dividends shall be cumulative;
(iii) the price or prices and the time or
times at and the manner in which the stock of such
88
series shall be redeemable;
(iv) the terms, if any, upon which shares of
stock of such series shall be convertible into, or
exchangeable for, shares of stock of any other
class or classes or of any other series of the
same or any other class or classes; including the
price or prices or the rate or rates of conversion
or exchange and the terms of adjustment, if any;
(v) the rights to which the holders of the
shares of stock of such series shall be entitled
upon any voluntary or involuntary liquidation,
dissolution or winding up of the corporation,
provided, however, that in no event shall they be
entitled to receive upon any such liquidation,
dissolution or winding up more than $120 per
share, plus in respect of each such share a sum
computed at the annual dividend rate for such
series from and after the date on which dividends
on such shares become cumulative to and including
the date fixed for such payment, less the
aggregate of dividends theretofore paid thereon;
and
(vi) any other designations, preferences and
relative, participating, optional or other special
rights, and qualifications, limitations or
restrictions thereof so far as they are not
inconsistent with the provisions of the
certificate of incorporation, as amended, and to
the full extent now or hereafter permitted by the
laws of Delaware, provided, however, that in no
event shall any series of Preferred Stock rank
prior to the Cumulative Preferred Stock.
7. Adjustable Rate Cumulative Preferred Stock, Series
A. Pursuant to authority conferred by this Article Fourth on
the Board of Directors of the corporation, the Board of
Directors, pursuant to a Certificate of Designations filed in the
Office of the Secretary of State of the State of Delaware on
March 7, 1983, established a series of Preferred Stock of the
corporation ("Preferred Stock") to consist of 2,000,000 shares.
Such series has the voting powers, designation, preferences and
relative, participating, optional or other special rights, and
the qualifications, limitations or restrictions, in addition to
those set forth in this Article Fourth in respect of the
Preferred Stock of all series as follows:
(a) Designation. The designation of this
series of Preferred Stock shall be "Adjustable
Rate Cumulative Preferred Stock, Series A"
(hereinafter called this "Series") and the number
of shares constituting this Series is Two Million
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(2,000,000). The number of authorized shares of
this Series may be reduced by further resolution
duly adopted by the Board of Directors of the
corporation and by the filing of a certificate
pursuant to the provisions of the General
Corporation Law of the State of Delaware stating
that such reduction has been so authorized, but
the number of authorized shares of this Series
shall not be increased.
(b) Dividend Rate.
(1) Dividend rates on the shares of
this Series shall be: (i) for the periods
(the "Initial Dividend Periods") (A) from the
date of their original issue to and including
March 31, 1983, (B) from April 1, 1983 to and
including June 30, 1983, and (C) from July 1,
1983 to and including September 30, 1983, at
a rate per annum of 10% on the liquidation
preference thereof, and (ii) for each
quarterly dividend period (hereinafter
referred to as a "Quarterly Dividend Period";
and any Initial Dividend Period or any
Quarterly Dividend Period being hereinafter
individually referred to as a "Dividend
Period" and collectively referred to as
"Dividend Periods") thereafter, which
quarterly dividend periods shall commence on
January 1, April 1, July 1 and October 1 in
each year and shall end on and include the
day next preceding the first day of the next
Quarterly Dividend Period, at a rate per
annum on the liquidation preference thereof
equal to the Applicable Rate (as defined in
paragraph (2) of this Section (b)) in respect
of such Quarterly Dividend Period. Such
dividends shall be cumulative from the date
of original issue of such shares and shall be
payable, when and as declared by the Board of
Directors or by a committee of said Board
duly authorized by said Board to declare such
dividends, on January 1, April 1, July 1, and
October 1 of each year, commencing April 1,
1983. Each such dividend shall be paid to
the holders of record of shares of this
Series as they appear on the stock register
of the corporation on such record date, not
exceeding 30 days preceding the payment date
thereof, as shall be fixed by the Board of
Directors of the corporation or by a
committee of said Board of Directors duly
authorized to fix such date. Dividends on
account of arrears for any past Dividend
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Periods may be declared and paid at any time,
without reference to any regular dividend
payment date, to holders of record on such
date, not exceeding 30 days preceding the
payment date thereof, as may be fixed by the
Board of Directors of the corporation or by a
committee of said Board of Directors duly
authorized to fix such date.
(2) Except as provided below in
this paragraph, the "Applicable Rate"
for any Quarterly Dividend Period shall
be (a) 2% less than (b) the highest of
the Treasury Bill Rate, the Ten Year
Constant Maturity Rate and the Twenty
Year Constant Maturity Rate (each as
hereinafter defined) for such Dividend
Period. In the event that the
corporation determines in good faith
that for any reason
(i) any one of the Treasury
Bill Rate, the Ten Year Constant
Maturity Rate and the Twenty Year
Constant Maturity Rate cannot be
determined for any Quarterly
Dividend Period, then the
Applicable Rate for such Dividend
Period shall be 2% less than the
higher of whichever two of such
Rates can be so determined;
(ii) only one of the Treasury
Bill Rate, the Ten Year Constant
Maturity Rate and the Twenty Year
Constant Maturity Rate can be
determined for any Quarterly
Dividend Period, then the
Applicable Rate for such Dividend
Period shall be 2% less than
whichever such Rate can be so
determined; or
(iii) None of the Treasury Bill
Rate, the Ten Year Constant
Maturity Rate and the Twenty Year
Constant Maturity Rate can be
determined for any Quarterly
Dividend Period, then the
Applicable Rate in effect for the
preceding Dividend Period shall be
continued for such Dividend Period.
Anything herein to the contrary notwithstanding,
91
the Applicable Rate for any Quarterly Dividend
Period shall in no event be less than 6% per annum
or greater than 12% per annum.
(3) Except as provided below in
this paragraph, the "Treasury Bill Rate"
for each Quarterly Dividend Period shall
be the arithmetic average of the two
most recent weekly per annum market
discount rates (or the one weekly per
annum market discount rate, if only one
such rate shall be published during the
relevant Calendar Period (as defined
below)) for three-month U.S. Treasury
bills, as published weekly by the
Federal Reserve Board during the
Calendar Period immediately prior to the
last ten calendar days of March, June,
September or December, as the case may
be, prior to the Quarterly Dividend
Period for which the dividend rate on
this Series is being determined. In the
event that the Federal Reserve Board
does not publish such a weekly per annum
market discount rate during such
Calendar Period, then the Treasury Bill
Rate for such Dividend Period shall be
the arithmetic average of the two most
recent weekly per annum market discount
rates (or the one weekly per annum
market discount rate, if only one such
rate shall be published during the
relevant Calendar Period) for three-
month U.S. Treasury bills, as published
weekly during such Calendar Period by
any Federal Reserve Bank or by any U.S.
Government department or agency selected
by the corporation. In the event that a
per annum market discount rate for
three-month U.S. Treasury bills shall
not be published by the Federal Reserve
Board or by any Federal Reserve Bank or
by any U.S. Government department or
agency during such Calendar Period, then
the Treasury Bill Rate for such Dividend
Period shall be the arithmetic average
of the two most recent weekly per annum
market discount rates (or the one weekly
per annum market discount rate, if only
one such rate shall be published during
the relevant Calendar Period as provided
below) for all of the U.S. Treasury
bills then having maturities of not less
than 80 nor more than 100 days, as
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published during such Calendar Period by
the Federal Reserve Board or, if the
Federal Reserve Board shall not publish
such rates, by any Federal Reserve Bank
or by any U.S. Government department or
agency selected by the corporation. In
the event that the corporation
determines in good faith that for any
reason no such U.S. Treasury bill rates
are published as provided above during
such Calendar Period, then the Treasury
Bill Rate for such Dividend Period shall
be the arithmetic average of the per
annum market discount rates based upon
the closing bids during such Calendar
Period for each of the issues of
marketable noninterest bearing U.S.
Treasury securities with a maturity of
not less than 80 nor more than 100 days
from the date of each such quotation, as
chosen and quoted daily for each
business day in New York City (or less
frequently if daily quotations shall not
be generally available) to the
corporation by at least three recognized
dealers in U.S. Government securities
selected by the corporation. In the
event that the corporation determines in
good faith that for any reason the
corporation cannot determine the
Treasury Bill Rate for any Quarterly
Dividend Period as provided above in
this paragraph, the Treasury Bill Rate
for such Dividend Period shall be the
arithmetic average of the per annum
market discount rates based upon the
closing bids during such Calendar Period
for each of the issues of marketable
interest-bearing U.S. Treasury
securities with a maturity of not less
than 80 nor more than 100 days, as
chosen and quoted daily for each
business day in New York City (or less
frequently if daily quotations shall not
be generally available) to the
corporation by at least three recognized
dealers in U.S. Government securities
selected by the corporation.
(4) Except as provided below in
this paragraph, the "Ten Year Constant
Maturity Rate" for each Quarterly
Dividend Period shall be the arithmetic
average of the two most recent weekly
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per annum Ten Year Average Yields (or
the one weekly per annum Ten Year
Average Yield, if only one such Yield
shall be published during the relevant
Calendar Period as provided below), as
published weekly by the Federal Reserve
Board during the Calendar Period
immediately prior to the last ten
calendar days of March, June, September
or December, as the case may be, prior
to the Quarterly Dividend Period for
which the dividend rate on this Series
is being determined. In the event that
the Federal Reserve Board does not
publish such a weekly per annum Ten Year
Average Yield during such Calendar
Period, then the Ten Year Constant
Maturity Rate for such Dividend Period
shall be the arithmetic average of the
two most recent weekly per annum Ten
Year Average Yields (or the one weekly
per annum Ten Year Average Yield, if
only one such Yield shall be published
during the relevant Calendar Period as
provided below), as published weekly
during such Calendar Period by any
Federal Reserve Bank or by any U.S.
Government department or agency selected
by the corporation. In the event that a
per annum Ten Year Average Yield shall
not be published by the Federal Reserve
Board or by any Federal Reserve Bank or
by any U.S. Government department or
agency during such Calendar Period, then
the Ten Year Constant Maturity Rate for
such Dividend Period shall be the
arithmetic average of the two most
recent weekly per annum average yields
to maturity (or the one weekly average
yield to maturity, if only one such
yield shall be published during the
relevant Calendar Period as provided
below) for all of the actively traded
marketable U.S. Treasury fixed interest
rate securities (other than Special
Securities) then having maturities of
not less than eight nor more than twelve
years, as published during such Calendar
Period by the Federal Reserve Board or,
if the Federal Reserve Board shall not
publish such yields, by any Federal
Reserve Bank or by any U.S. Government
department or agency selected by the
corporation. In the event that the
94
corporation determines in good faith
that for any reason the corporation
cannot determine the Ten Year Constant
Maturity Rate for any Quarterly Dividend
Period as provided above in this
paragraph, then the Ten Year Constant
Maturity Rate for such Dividend Period
shall be the arithmetic average of the
per annum average yields to maturity
based upon the closing bids during such
Calendar Period for each of the issues
of actively traded marketable U.S.
Treasury fixed interest rate securities
(other than Special Securities) with a
final maturity date not less than eight
nor more than twelve years from the date
of each such quotation, as chosen and
quoted daily for each business day in
New York City (or less frequently if
daily quotations shall not be generally
available) to the corporation by at
least three recognized dealers in U.S.
Government securities selected by the
corporation.
(5) Except as provided below in this
paragraph, the "Twenty Year Constant Maturity
Rate" for each Quarterly Dividend Period shall be
the arithmetic average of the two most recent
weekly per annum Twenty Year Average Yields (or
the one weekly per annum Twenty Year Average
Yield, if only one such Yield shall be published
during the relevant Calendar Period as provided
below), as published weekly by the Federal Reserve
Board during the Calendar Period immediately prior
to the last ten calendar days of March, June,
September or December, as the case may be, prior
to the Quarterly Dividend Period for which the
dividend rate on this Series is being determined.
In the event that the Federal Reserve Board does
not publish such a weekly per annum Twenty Year
Average Yield during such Calendar Period, then
the Twenty Year Constant Maturity Rate for such
Dividend Period shall be the arithmetic average of
the two most recent weekly per annum Twenty Year
Average Yields (or the one weekly per annum Twenty
Year Average Yield, if only one such Yield shall
be published during the relevant Calendar Period
as provided below), as published weekly during
such Calendar Period by any Federal Reserve Bank
or by any U.S. Government department or agency
selected by the corporation. In the event that a
per annum Twenty Year Average Yield shall not be
published by the Federal Reserve Board or by any
95
Federal Reserve Bank or by any U.S. Government
department or agency during such Calendar Period,
then the Twenty Year Constant Maturity Rate for
such Dividend Period shall be the arithmetic
average of the two most recent weekly per annum
average yields to maturity (or the one weekly
average yield to maturity, if only one such yield
shall be published during the relevant Calendar
Period as provided below) for all of the actively
traded marketable U.S. Treasury fixed interest
rate securities (other than Special Securities)
then having maturities of not less than eighteen
nor more than twenty-two years, as published
during such Calendar Period by the Federal Reserve
Board or, if the Federal Reserve Board shall not
publish such yields, by any Federal Reserve Bank
or by any U.S. Government department or agency
selected by the corporation. In the event that
the corporation determines in good faith that for
any reason the corporation cannot determine the
Twenty Year Constant Maturity Rate for any
Quarterly Dividend Period as provided above in
this paragraph, then the Twenty Year Constant
Maturity Rate for such Dividend Period shall be
the arithmetic average of the per annum average
yields to maturity based upon the closing bids
during such Calendar Period for each of the issues
of actively traded marketable U.S. Treasury fixed
interest rate securities (other than Special
Securities) with a final maturity date not less
than eighteen nor more than twenty-two years from
the date of each such quotation, as chosen and
quoted daily for each business day in New York
City (or less frequently if daily quotations shall
not be generally available) to the corporation by
at least three recognized dealers in U.S.
Government securities selected by the corporation.
(6) The Treasury Bill Rate, the Ten Year
Constant Maturity Rate and the Twenty Year
Constant Maturity Rate shall each be rounded to
the nearest five one-hundredths of a percentage
point.
(7) The Applicable Rate with respect to each
Quarterly Dividend Period will be calculated as
promptly as practicable by the corporation
according to the appropriate method described
herein. The corporation will cause each
Applicable Rate to be published in a newspaper of
general circulation in New York City prior to the
commencement of the Quarterly Dividend Period to
which it applies and will cause notice of such
Applicable Rate to be enclosed with the dividend
96
payment checks next mailed to the holders of
shares of this Series.
(8) For purposes of this Section (b), the
term
(i) "Calendar Period" shall mean
14 calendar days;
(ii) "Special Securities" shall mean
securities which can, at the option of the
holder, be surrendered at face value in
payment of any Federal estate tax or which
provide tax benefits to the holder and are
priced to reflect such tax benefits or which
were originally issued at a deep or
substantial discount;
(iii) "Ten Year Average Yield" shall mean
the average yield to maturity for actively
traded marketable U.S. Treasury fixed
interest rate securities (adjusted to
constant maturities of ten years); and
(iv) "Twenty Year Average Yield" shall
mean the average yield to maturity for
actively traded marketable U.S. Treasury
fixed interest rate securities (adjusted to
constant maturities of 20 years).
(9) So long as any shares of this Series are
outstanding, the corporation shall not (a) declare
or pay or set apart for payment any dividend or
other distribution (other than dividends or
distributions payable in shares of stock of the
corporation ranking junior to this Series as to
dividends and upon liquidation) for any period
upon any stock of the corporation ranking on a
parity with, or any stock of the corporation
ranking junior to, this Series as to dividends or
upon liquidation or (b) redeem, purchase or
otherwise acquire for any consideration any stock
of the corporation ranking on a parity with, or
any stock of the corporation ranking junior to,
this Series as to dividends or upon liquidation,
unless, in either case, all dividends payable to
holders of shares of this Series and of any stock
of the corporation ranking on a parity therewith
as to dividends for its current dividend period
and all past dividend periods have been paid, are
contemporaneously being paid or have been declared
and a sum sufficient for the payment thereof set
aside for such payment, except that
notwithstanding clause (a) above the corporation
97
may pay dividends on the shares of this Series and
shares of stock of the corporation ranking on a
parity therewith as to dividends ratably in
accordance with the sums which would be payable on
such shares if all dividends, including
accumulations, if any, were declared and paid in
full. Holders of shares of this Series shall not
be entitled to any dividends, whether payable in
cash, property or stock, in excess of full
cumulative dividends, as herein provided, on this
Series. No interest, or sum of money in lieu of
interest, shall be payable in respect of any
dividend payment or payments on this Series which
may be in arrears.
(10) Dividends payable on this Series for
each full Quarterly Dividend Period shall be
computed by analyzing the Applicable Rate and
dividing by four. Dividends payable on this
Series for any period less than a full Dividend
Period shall be computed on the basis of a 360-day
year of 30-day months and the actual number of
days elapsed in the period for which payable.
(c) Redemption.
(1) The shares of this Series shall not be
redeemable prior to April 1, 1988. On and after
April 1, 1988, the corporation, at its option, may
redeem shares of this Series, as a whole or in
part, at any time or from time to time, at a
redemption price (i) in the case of any redemption
on a redemption date occurring on or after
April 1, 1988, and prior to April 1, 1993, of
$51.50 per share and (ii) in the case of any
redemption on a redemption date occurring on or
after April 1, 1993, of $50 per share, plus, in
each case, accrued and unpaid dividends thereon to
the date fixed for redemption.
(2) In the event that fewer than all the
outstanding shares of this Series are to be
redeemed, the number of shares to be redeemed
shall be determined by the Board of Directors and
the shares to be redeemed shall be determined by
lot or pro rata as may be determined by the Board
of Directors or by any other method as may be
determined by the Board of Directors in its sole
discretion to be equitable.
(3) In the event the corporation shall
redeem shares of this Series, notice of such
redemption shall be given by first class mail,
postage prepaid, mailed not less than 30 nor more
98
than 60 days prior to the redemption date, to each
holder of record of the shares to be redeemed, at
such holder's address as the same appears on the
stock register of the corporation. Each such
notice shall state: (i) the redemption date;
(ii) the number of shares of this Series to be
redeemed and, if fewer than all the shares held by
such holder are to be redeemed, the number of such
shares to be redeemed from such holder; (iii) the
redemption price; (iv) the place or places where
certificates for such shares are to be surrendered
for payment of the redemption price; and (v) that
dividends on the shares to be redeemed will cease
to accrue on such redemption date.
(4) Notice having been mailed as aforesaid,
from and after the redemption date (unless default
shall be made by the corporation in providing
money for the payment of the redemption price)
dividends on the shares of this Series so called
for redemption shall cease to accrue, and said
shares shall no longer be deemed to be
outstanding, and all rights of the holders thereof
as stockholders of the corporation (except the
right to receive from the corporation the
redemption price) shall cease. Upon surrender in
accordance with said notice of the certificates
for any shares so redeemed (properly endorsed or
assigned for transfer, if the Board of Directors
of the corporation shall so require and the notice
shall so state), such shares shall be redeemed by
the corporation at the redemption price aforesaid.
In case fewer than all the shares represented by
any such certificate are redeemed, a new
certificate shall be issued representing the
unredeemed shares without cost to the holder
thereof.
(5) Any shares of this Series which shall at
any time have been redeemed shall, after such
redemption, have the status of authorized but
unissued shares of Preferred Stock, without
designation as to series until such shares are
once more designated as part of a particular
series by the Board of Directors.
(6) Notwithstanding the foregoing provisions
of this Section (c), if any dividends on this
Series are in arrears, no shares of Preferred
Stock shall be redeemed, and the corporation shall
not purchase or otherwise acquire any shares of
this Series; provided, however, that the foregoing
shall not prevent the purchase or acquisition of
shares of this Series pursuant to a purchase or
99
exchange offer made on the same terms to all
holders of Preferred Stock and any other shares of
stock of the Company ranking on a parity therewith
as to dividends.
(d) Conversion or Exchange. The holders of
shares of this Series shall not have any rights herein
to convert such shares into or exchange such shares for
shares of any other class or classes or of any other
series of any class or classes of capital stock of the
corporation.
(e) Voting. The shares of this Series shall not
have any voting powers either general or special,
except as expressly required by applicable law and
except that
(1) The consent of the holders of at least
66-2/3% of all of the shares of this Series at the
time outstanding, given in person or by proxy,
either in writing or by a vote at a meeting called
for the purpose at which the holders of shares of
this Series shall vote together as a separate
class, shall be necessary for authorizing,
effecting or validating the amendment, alteration
or repeal of any of the provisions of the
Certificate of Incorporation or of any certificate
amendatory thereof or supplemental thereto
(including any Certificate of Designation and
Terms or any similar document relating to any
series of Preferred Stock) so as to materially
adversely affect the powers, preferences,
privileges or rights of this Series;
(2) The consent of the holders of at least
66-2/3% of all of the shares of this Series and
all other series of Preferred Stock ranking on a
parity with shares of this Series, either as to
dividends or upon liquidation, at the time
outstanding, given in person or by proxy, either
in writing or by a vote at a meeting called for
the purpose at which the holders of shares of this
Series and such other series of Preferred Stock
shall vote together as a single class without
regard to series, shall be necessary for
authorizing, effecting or validating the creation,
authorization, increase in the authorized amount
of or issue of any shares of any class or series
of stock of the corporation ranking prior to the
shares of this Series as to dividends or upon
liquidation, or the reclassification of any
authorized stock of the corporation into any such
prior shares, or the creation, authorization or
issue of any obligation or security convertible
100
into or evidencing the right to purchase any such
prior shares;
(3) The consent of the holders of at least a
majority of all of the shares of this Series and
all other series of Preferred Stock ranking on a
parity with this Series, either as to dividends or
upon liquidation, at the time outstanding, given
in person or by proxy, either in writing or by a
vote at a meeting called for the purpose at which
the holders of shares of this Series and such
other series of Preferred Stock shall vote
together as a single class without regard to
series, shall be necessary for authorizing,
effecting or validating the sale, lease or
conveyance of all or substantially all the
property or business of the corporation or the
merger or consolidation of the corporation into or
with any other corporation; provided, however,
that no such vote or consent of the holders of
shares of this Series and such other series of
Preferred Stock, voting as a class without regard
to series, shall be required for the merger or
consolidation of another corporation into or with
the corporation if none of the preferences,
rights, powers or privileges of this Series or
such other series of Preferred Stock or the
holders thereof will be adversely affected thereby
and there shall not be authorized or outstanding
after such merger or consolidation any class of
stock or other securities (except such stock or
securities of the corporation as may have been
authorized or outstanding immediately preceding
such merger or consolidation) ranking prior to the
shares of this Series and such other series of
Preferred Stock as to dividends or upon
liquidation; and provided further, however, that
there shall not be authorized or outstanding after
such merger or consolidation more than 10,000,000
shares of Preferred Stock or any class of stock or
other securities (except such stock or securities
of the corporation as may have been authorized or
outstanding immediately preceding such merger or
consolidation) ranking on a parity with the shares
of this Series as to dividends or upon
liquidation, in which case the vote specified by
this paragraph (3) shall be required;
(4) If at the time of any annual meeting of
stockholders for the election of directors a
default in preference dividends on the Preferred
Stock shall exist, the number of directors
constituting the Board of Directors of the
corporation shall be increased by two, and the
101
holders of the Preferred Stock of all series
(whether or not the holders of such series of
Preferred Stock would be entitled to vote for the
election of directors if such default in
preference dividends did not exist), shall have
the right at such meeting, voting together as a
single class without regard to series, to the
exclusion of the holders of Common Stock, to elect
two directors of the corporation to fill such
newly created directorships. Such right shall
continue until there are no dividends in arrears
upon the Preferred Stock. Each director elected
by the holders of shares of Preferred Stock
(herein called a "Preferred Director"), shall
continue to serve as such director for the full
term for which he shall have been elected,
notwithstanding that prior to the end of such term
a default in preference dividends shall cease to
exist. Any Preferred Director may be removed by,
and shall not be removed except by, the vote of
the holders of record of the outstanding shares of
Preferred Stock, voting together as a single class
without regard to series, at a meeting of the
stockholders, or of the holders of shares of
Preferred Stock, called for the purpose. So long
as a default in any preference dividends on the
Preferred Stock shall exist (A) any vacancy in the
office of a Preferred Director may be filled
(except as provided in the following clause (B))
by an instrument in writing signed by the
remaining Preferred Director and filed with the
corporation and (B) in the case of the removal of
any Preferred Director, the vacancy may be filled
by the vote of the holders of the outstanding
shares of Preferred Stock, voting together as a
single class without regard to series, at the same
meeting at which such removal shall be voted.
Each director appointed as aforesaid by the
remaining Preferred Director shall be deemed, for
all purposes hereof, to be a Preferred Director.
Whenever the term of office of the Preferred
Directors shall end and a default in preference
dividends shall no longer exist, the number of
directors constituting the Board of Directors of
the corporation shall be reduced by two. For the
purposes hereof, a "default in preference
dividends" on the Preferred Stock shall be deemed
to have occurred whenever the amount of accrued
dividends upon any series of the Preferred Stock
shall be equivalent to six full quarter-yearly
dividends or more, and, having so occurred, such
default shall be deemed to exist thereafter until,
but only until, all accrued dividends on all
shares of Preferred Stock of each and every series
102
then outstanding shall have been paid to the end
of the last preceding Quarterly Dividend Period;
(f) Liquidation Rights.
(1) Upon the dissolution, voluntary or
involuntary liquidation or winding up of the
corporation, the holders of the shares of this
Series shall be entitled to receive out of the
assets of the corporation, before any payment or
distribution shall be made on the Common Stock or
on any other class of stock of the corporation
ranking junior to the Preferred Stock upon
liquidation, the amount of $50 per share, plus a
sum equal to all dividends (whether or not earned
or declared) on such shares accrued and unpaid
thereon to the date of final distribution.
(2) For the purposes of this Section (f), a
voluntary or involuntary liquidation, dissolution
or winding up of the corporation shall include
neither the consolidation or merger of the
corporation with or into any other corporation,
nor any sale, lease or conveyance of all or any
part of the property or business of the
corporation.
(3) After the payment to the holders of the
shares of this Series of the full preferential
amounts provided for in this Section (f), the
holders of this Series as such shall have no right
or claim to any of the remaining assets of the
corporation.
(4) In the event the assets of the
corporation available for distribution to the
holders of shares of this Series upon any
dissolution, liquidation or winding up of the
corporation, whether voluntary or involuntary,
shall be insufficient to pay in full all amounts
to which such holders are entitled pursuant to
paragraph (1) of this Section (f), no such
distribution shall be made on account of any
shares of stock of the corporation ranking on a
parity with the shares of this Series upon such
dissolution, liquidation or winding up unless
proportionate distributive amounts shall be paid
on account of the shares of this Series, ratably,
in proportion to the full distributable amounts
for which holders of all such parity shares are
respectively entitled upon such dissolution,
liquidation or winding up.
(5) Upon the dissolution, liquidation or
103
winding up of the corporation, the holders of
shares of this Series then outstanding shall be
entitled to be paid out of the assets of the
corporation available for distribution to its
stockholders all amounts to which such holders are
entitled pursuant to paragraph (1) of this
Section (f) before any payment shall be made to
the holders of any class of capital stock of the
corporation ranking junior upon liquidation to
this Series.
(g) For purposes of this Series, any stock of any
class or classes of the corporation shall be deemed to
rank:
(1) prior to the shares of this Series,
either as to dividends or upon liquidation, if the
holders of such class or classes shall be entitled
to the receipt of dividends or of amounts
distributable upon dissolution, liquidation or
winding up of the corporation, as the case may be,
in preference or priority to the holders of shares
of this Series;
(2) on a parity with shares of this Series,
either as to dividends or upon liquidation,
whether or not the dividend rates, dividend
payment dates or redemption or liquidation prices
per share or sinking fund provisions, if any, be
different from those of this Series, if the
holders of such stock shall be entitled to the
receipt of dividends or of amounts distributable
upon dissolution, liquidation or winding up of the
corporation, as the case may be, in proportion to
their respective dividend rates or liquidation
prices, without preference or priority, one over
the other, as between the holders of such stock
and the holders of shares of this Series; and
(3) junior to shares of this Series, either
as to dividends or upon liquidation, if such class
shall be Common Stock or if the holders of shares
of this Series shall be entitled to receipt of
dividends or of amounts distributable upon
dissolution, liquidation or winding up of the
corporation, as the case may be, in preference or
priority to the holders of shares of such class or
classes.
(4) The Series shall rank on a parity as to
dividends and upon liquidation with the Cumulative
Preferred Stock of the corporation.
104
Fifth: The minimum amount of capital with which the
corporation will commence business is One Thousand Dollars
($1,000.00).
Sixth: This corporation is to have perpetual
existence.
Seventh: The private property of the stockholders
shall not be subject to payment of corporate debts to any extent
whatsoever.
Eighth: No holder of shares of stock of the
corporation of any class, now or hereafter authorized, shall have
any preemptive right to subscribe for, purchase or receive any
shares of stock of the corporation of any class, now or hereafter
authorized, or any options or warrants for such shares, or any
rights to subscribe to or purchase such shares, or any securities
convertible into or exchangeable for such shares, which may at
any time be issued, sold or offered for sale by the corporation.
Ninth: Subject to the provisions of law and in
furtherance and not in limitation of the powers conferred by law,
the Board of Directors of the corporation is hereby empowered by
resolution or resolutions:
1. To provide for the issuance from time to time of
its shares of stock of any class, whether now or hereafter
authorized, and securities convertible into shares of its stock
of any class, and/or securities whether now or hereafter
authorized carrying a privilege to subscribe for or receive
shares of its stock of any class, for such considerations and
upon such terms and conditions as the Board of Directors may fix
from time to time.
2. To determine that only a part of the consideration
which shall be received by the corporation in excess of the par
value of its shares of capital stock or any thereof, which it
shall issue from time to time, shall be capital.
3. Without the consent of the stockholders of any
class, to authorize the issuance and sale from time to time of
evidences of indebtedness (as defined in Article Third hereof) of
the corporation for such considerations as it may deem advisable,
to provide that such evidences of indebtedness be issued in such
series, in such denomination or denominations, and with such
interest rate or rates, redemption price or prices, and maturing
at such time or times and otherwise varying as it may determine;
and likewise without such consent to mortgage, pledge and/or
hypothecate all or any part of the corporation's property, real,
personal or mixed (except its corporate franchises), and its
rents, revenues and income, whether now owned or hereafter
acquired, and to authorize the execution, delivery, filing and
recording of all mortgages, deeds of trust or other indentures,
in such form as shall be determined by it, to secure the payment
105
of all or any of such evidences of indebtedness, the principal
and interest thereof, the premium, if any, thereon, and any and
all amounts or sums payable in respect thereof or in connection
therewith.
4. To make, alter, amend, change, add to or repeal
the by-laws of this corporation, without any action on the part
of the stockholders.
5. By resolution passed by a majority of the whole
board, to designate two or more of its number to constitute an
executive committee, which committee, so far as is provided in
said resolution or in the by-laws of this corporation, shall have
and may exercise the powers of the Board of Directors in the
management of the business and affairs of this corporation, and
have power to authorize the seal of this corporation to be
affixed to all papers which may require it.
6. When and as authorized by the affirmative vote of
the holders of a majority of the stock issued and outstanding
having voting power given at a stockholders' meeting duly called
for that purpose, or when authorized by the written consent of
the holders of a majority of the voting stock issued and
outstanding, to sell, lease or exchange all of the property and
assets of the corporation, including its good will and its
corporate franchises, upon such terms and conditions and for such
consideration, which may be in whole or in part evidences of
indebtedness and/or certificates of interest (as defined in
Article Third hereof), as its Board of Directors shall deem
expedient and for the best interests of the corporation.
7. From time to time, to determine whether and to
what extent and at what times and places and under what
conditions and regulations the accounts and books of this
corporation (other than the stock ledger) or any of them shall be
open to the inspection of stockholders; and no stockholder shall
have any right of inspecting any account, book or document of
this corporation, except as conferred by statute, unless
authorized by resolution of stockholders or directors.
8. To set apart out of any of the funds or assets of
this corporation, available for dividends, a reserve or reserves
for any proper purpose, and to abolish any such reserve or
reserves. Against any such reserve or reserves and/or surplus so
established, there may be charged losses at any time incurred by
this corporation, also dividends or other distribution upon
stock. Such reserve or reserves and/or surplus may be reduced
from time to time by the Board of Directors by transfer from such
reserve or reserves and/or surplus to capital account.
9. At any time or from time to time to create and
issue (without any action by the stockholders of the
corporation), whether or not in connection with the issue and
sale of any shares of stock or other securities of the
106
corporation, rights or options entitling the holders thereof to
purchase from the corporation shares of its capital stock, such
rights or options to be evidenced by or in such instrument or
instruments as shall be approved by the Board of Directors. The
terms upon which, the time or times, which may be limited or
unlimited in duration, at or within which, and the price or
prices at which any such shares may be purchased from the
corporation upon the exercise of any such right or option shall
be such as shall be fixed and stated in a resolution or
resolutions adopted by the Board of Directors providing for the
creation and issue of such rights or options, and set forth or
incorporated by reference in the instrument or instruments
evidencing such rights or options.
Tenth: The number of Directors which shall constitute
the whole Board shall be such from time to time as shall be fixed
by the by-laws, but in no case shall the Board be less than three
(3). In case of any increase in the number of Directors, such
additional Directors shall be chosen by the Directors or
stockholders at the time entitled to vote, as may be prescribed
in the by-laws of this corporation. Directors need not be
stockholders. This corporation may in its by-laws confer powers
upon its directors in addition to those conferred in this
certificate of incorporation and in addition to the powers and
authorities expressly conferred upon them by statute.
Eleventh: The corporation shall be entitled to treat
the person in whose name any share is registered as the owner
thereof for all purposes, and shall not be bound to recognize any
equitable or other claim to or interest in such share on the part
of any other person, whether or not the corporation shall have
notice thereof, save as expressly provided by the laws of the
State of Delaware.
Twelfth: Both stockholders and directors shall have
power, if the by-laws so provide, to hold their meetings and to
have one or more offices within or without the State of Delaware
and to keep the books of this corporation (subject to the
provisions of the General Corporation Law of said State) outside
the State of Delaware, at such places as may be from time to time
designated by the Board of Directors.
Thirteenth: All the powers of this corporation in so
far as the same may be lawfully vested by this certificate of
incorporation in the Board of Directors, are hereby conferred
upon the Board of Directors of this corporation, provided,
however, that by resolution of the Board of Directors adopted
either by a quorum disinterested in the subject matter of the
resolution or interested therein, as the case may be, any matter
concerning the management of the corporation or its affairs may
be referred to the stockholders of the corporation for decision
and in such cases such matters may be authorized by vote adopted
by the majority of a quorum of the stockholders entitled to vote
at a meeting thereof duly held.
107
Fourteenth: A Director of the corporation shall not in
the absence of fraud be disqualified by his office from dealing
or contracting with the corporation either as a vendor, purchaser
or otherwise, nor in the absence of fraud shall any transaction
or contract of the corporation be void or voidable or affected by
reason of the fact that any director, or any firm of which any
director is a member, or any corporation or association of which
any director is an officer, director or stockholder, is in any
way interested in such transaction or contract; provided that at
the meeting of the Board of Directors or of a committee thereof
having authority in the premises, authorizing or confirming said
contract or transaction, the existence of an interest of such
director, firm, corporation or association is disclosed or made
known (or shall have been disclosed and spread upon the records
at a previous meeting at which a quorum was present) and there
shall be present a quorum of the Board of Directors or of the
directors constituting such committee, and such contract or
transaction shall be approved by a majority of such quorum, which
majority shall consist of directors not so interested or
connected. Nor shall any director be liable to account to the
corporation for any profit realized by him from or through any
such transaction or contract of the corporation ratified or
approved as aforesaid, by reason of the fact that he or any firm
of which he is a member, or any corporation or association of
which he is an officer, director or stockholder, was interested
in such transaction or contract. Anything herein contained to
the contrary notwithstanding, all or any of the Directors of the
corporation, in connection with the organization of this
corporation and the issuance of its stock for cash and/or
properties, may vote to approve and authorize Plans and
Agreements for the acquisition by this corporation, through the
issuance of its own stock in exchange therefor, of stock in banks
and/or trust companies of which said Directors, or any of them,
may be stockholders, directors, or officers, and to approve and
authorize an underwriting agreement or agreements for the sale of
stock of this corporation, in which they or any of them may be
interested, with the same force and effect as though not so
interested. Directors so interested may be counted when present
at meetings of the Board of Directors or of such committee for
the purpose of determining the existence of a quorum. Any
contract, transaction or act of the corporation or of the Board
of Directors or of any committee thereof (whether or not approved
or ratified as hereinabove provided) which shall be ratified by a
majority in interest of a quorum of the stockholders entitled to
vote at any annual meeting or any special meeting called for such
purpose or approved in writing by a majority in interest of the
stockholders entitled to vote without a meeting, shall be as
valid and as binding as though ratified by every stockholder of
the corporation.
Fifteenth: To the fullest extent that the General
Corporation Law of the State of Delaware, as the same exists or
may hereafter be amended, permits, elimination or limitation of
the liability of directors, no director of the corporation shall
108
be liable to the corporation or its shareholders for monetary
damages for breach of his fiduciary duty as a director. Any
repeal or modification of this Article by the shareholders of the
corporation shall be prospective only and shall not adversely
affect any limitation on the personal liability of a director of
the corporation for acts or omissions occurring prior to the
effective date of such repeal or modification.
Sixteenth: This corporation reserves the right to
amend, alter, change or repeal any provision contained in this
certificate of incorporation in the manner now or hereafter
prescribed by statute, and all rights conferred on officers,
directors and stockholders herein are granted subject to this
reservation.
IN WITNESS WHEREOF, said HSBC Americas, Inc., has
caused this certificate to be signed by James H. Cleave, its
President, and attested by Philip S. Toohey, its secretary this
17th day of August, 1995.
HSBC AMERICAS, INC.
By /s/ James H. Cleave
President
(SEAL)
ATTEST:
By /s/ Philip S. Toohey
Secretary
IDwt
218307.01
109
(Restated as amended as of February 29, 1996)
BY-LAWS
of
HSBC AMERICAS, INC.
ARTICLE I
SHAREHOLDERS' MEETINGS
Section 1.1 Annual Meeting. The Annual Meeting of the
shareholders for the election of directors and the transaction of
such other business as may properly come before the meeting,
shall be held in April each year at the Office of the
Corporation, One Marine Midland Center, City of Buffalo, State of
New York, or at such other place and at such time and on such day
as may be designated from time to time by the Board of Directors.
Section 1.2 Special Meeting. Except as otherwise
specifically provided by statute, special meetings of the
shareholders may be called for any purpose at any time by the
Board, the Chairman of the Board, the President, the Chief
Executive Officer or the Secretary. Business transacted at all
special meetings of shareholders shall be confined to the
purposes stated in the Notice of Meeting.
Section 1.3 Quorum. The holders of a majority of the stock
issued and outstanding, and entitled to vote thereat, present in
person or represented by proxy, shall constitute a quorum at all
meetings of shareholders unless otherwise provided by law.
Section 1.4 Voting. At any meeting of the shareholders
each shareholder may vote in person or by proxy duly authorized
in writing. Each shareholder shall at every meeting of
shareholders be entitled to one vote for each share of stock held
by such shareholder. A majority of the votes cast shall decide
every question or matter submitted to the shareholders at any
meeting, unless otherwise provided by law or by the Certificate
of Incorporation.
Any action required to be taken at an annual or special
meeting of shareholders may be taken without a meeting by written
consent setting forth the action and signed by the holders of
outstanding shares having not less than the minimum number of
shares necessary to authorize or to take such action at a meeting
at which all shares entitled to vote thereon were present and
voted.
Section 1.5 Notice of Meeting. Written notice of each
meeting of shareholders stating the place, date, and hour of the
meeting, and, in the case of a special meeting, the purpose or
purposes for which the meeting is called, shall be delivered
personally or shall be mailed postage prepaid to each shareholder
entitled to vote at such meeting, directed to the shareholder at
his address as it appears on the records of the Corporation, not
less than ten days before the date of the meeting.
110
ARTICLE II
DIRECTORS
Section 2.1 Board of Directors. The Board of Directors
(hereinafter referred to as the "Board"), shall have the power to
manage and administer the business and affairs of the
Corporation, and, except as expressly limited by law, all
corporate powers of the Corporation shall be vested in an may be
exercised by said Board unless such powers are required by
statute, by the Certificate of Incorporation, or by these By-laws
to be done by the shareholders.
Section 2.2 Number and Term. The Board shall consist of
not less than three nor more than twenty-five directors, the
exact number within such minimum and maximum limits to be fixed
and determined from time to time by resolution of a majority of
the full Board or by resolution of the shareholders at any
meeting of shareholders. Unless sooner removed or disqualified,
each director shall hold office until the next annual meeting of
the shareholders and until his successor has been elected and
qualified.
Section 2.3 Organization Meeting. At its first meeting
after each annual meeting of shareholders, the Board shall choose
a Chairman of the Board, a President and a Chief Executive
Officer from its own members and otherwise organize the new Board
and appoint officers of the Corporation for the succeeding
year.
Section 2.4 Chairman of the Board. The Chairman of the
Board shall preside at all meetings of the Board and of
shareholders and perform such duties as shall be assigned to him
from time to time by the Board. Except as may be otherwise
provided by the By-Laws or the Board, he shall be a member ex
officio of all committees authorized by these By-Laws or the
Board. He shall be kept informed by the executive officers about
the affairs of the Corporation.
Section 2.5 Regular Meetings. The Regular Meetings of the
Board shall be held at such time and place as designated by the
Board. No notice of a Regular Meeting shall be required if the
meeting is held according to a Schedule of Regular Meetings
approved by the Board.
Section 2.6 Special Meetings. Special meetings of the
Board may be called by the Chairman of the Board, the President,
the Chief Executive Officer or the Secretary or at the written
request of any three or more directors. Each member of the Board
shall be given notice stating the time and place of each such
special meeting by telegram, telephone, or similar electronic
means, or in person, at lease one day prior to such meeting, or
by mail at least three days prior.
Section 2.7 Quorum. Three directors shall constitute a
quorum at any meeting, except when otherwise provided by law. If
a quorum is not present at any meeting, the directors present may
adjourn the meeting, and the meeting may be held, as adjourned,
without further notice provided that a quorum is then present.
The act of a majority of the directors present at any meeting at
which there is a quorum, shall be the act the Board, unless
otherwise specifically provided by statute, by the Certificate of
Incorporation, or by these By-laws.
111
Section 2.8 Vacancies. When any vacancy occurs among the
directors, the remaining members of the Board may appoint a
director to fill each such vacancy at any regular meeting of the
Board, or at a special meeting called for that purpose. Any
director so appointed shall hold office until the next annual
meeting or the shareholders and until his successor has been
elected and qualified, unless sooner displaced.
Section 2.9 Removal of Directors. Any director may be
removed either with or without cause, at any time, by a vote of
the holders of a majority of the shares of the Corporation at any
meeting of shareholders called for that purpose. A director may
be removed for cause by a vote of a majority of the full Board.
Section 2.10 Compensation of Directors. The Board shall
fix the amounts to be paid directors for their services as
directors and for their attendance at the meetings of the Board
or of committees or otherwise. No director who receives a salary
from the Corporation shall receive any fee for attending meetings
of the Board or of any of its committees.
Section 2.11 Action of the Board. Except as otherwise
provided by law, corporate action to be taken by the Board shall
mean such action at a meeting of the Board. Any action required
or permitted to be taken by the Board or any committee of the
Board may be taken without a meeting if all members of the Board
or the committee consent in writing to a resolution authorizing
the action. The resolution and the written consents thereto
shall be filed with the minutes of the proceedings of the Board
or committee. Any one or more members of the Board or any
committee may participate in a meeting of the Board or committee
by means of a conference telephone or similar communications
equipment allowing all persons participating in the meeting to
hear each other at the same time. Participation by such means
shall constitute presence in person at a meeting.
Section 2.12 Waiver of Notice. Notice of the Meeting need
not be given to any director who submits a signed Waiver of
Notice whether before or after the meeting, or who attends the
meeting without protesting, prior thereto or at its commencement,
a lack of such notice.
ARTICLE III
COMMITTEES OF THE BOARD
Section 3.1 Committees. The Board, by a resolution or
resolutions adopted by a majority of the members of the whole
Board, may appoint an Executive Committee, an Audit Committee,
and any other committees as it may deem appropriate. Each
committee shall have and may exercise any and all powers as are
conferred or authorized by the resolution appointing it. A
majority of each committee may determine its action and may fix
the time and place of its meetings, unless provided otherwise by
the Board. The Board shall have the power at any time to fill
vacancies in, to change the size of membership of, and to
discharge any committee.
112
ARTICLE IV
OFFICERS
Section 4.1 President. The Board shall appoint one of its
members to be President. In the absence of the Chairman of the
Board, the President shall preside at all meetings of the Board
and of shareholders. Except as may be otherwise provided by the
By-Laws or the Board, he shall be a member ex officio of all
committees authorized by these By-Laws or the Board. The
President shall have general executive powers, shall participate
actively in all major policy decisions and shall have and may
exercise any and all other powers and duties pertaining by law,
regulation, or practice, to the Office of President, or imposed
by these By-Laws. The President shall also have and may exercise
such further powers and duties as from time to time may be
conferred, or assigned by the Board or the Chief Executive
Officer.
Section 4.2 Chief Executive Officer. The Board shall
appoint one of its members to be Chief Executive Officer of the
Corporation. The Chairman of the Board or the President may at
the same time be appointed Chief Executive Officer. The Chief
Executive Officer shall exercise general supervision over the
policies and business affairs of the Corporation and the carrying
out of the policies adopted or approved by the Board. Except as
otherwise provided by these By-Laws, he shall have power to
determine the duties to be performed by the officers appointed as
provided in Section 4.5 of these By-Laws, and to employ and
discharge officers and employees. Except as otherwise provided
by the By-Laws or the Board, he shall be a member ex officio of
all committees authorized by these By-Laws or created by the
Board. In the absence of the Chairman of the Board and the
President, he shall preside at all meetings of the Board and of
shareholders.
Section 4.3 Executive and Other Senior Officers. The Board
shall by resolution determine from time to time those officers
whose appointment shall require approval by the Board or a
committee of the Board. Each such officer shall have such powers
and duties as may be assigned by the Board, a committee of the
Board, the President or the Chief Executive Officer.
Section 4.4 Secretary. The Board shall appoint a Secretary
who shall be the Secretary of the Board and of the Corporation
and shall keep accurate minutes of all the meetings of
shareholders and of the Board. The Secretary shall attend to the
giving of all notices required to be given by these By- Laws;
shall be custodian of the corporate seal, records, documents, and
papers of the Corporation; shall provide for the keeping of
proper records of all transactions of the Corporation; shall have
and may exercise any and all other powers and duties pertaining
by law, regulation or practice, to the Office of
Secretary, or imposed by these By-Laws; and shall also perform
such other duties as may be assigned from time to time by the
Board, the President or the Chief Executive Officer.
Section 4.5 Other Officers. The President or the Chief
Executive Officer or his designee may appoint all officers whose
appointment does not require approval by the Board or a committee
of the Board, and assign to them such titles, as from time to
time may appear to be required or desirable to transact the
business of the Corporation. Each such officer shall have such
powers and duties as may be assigned by the Board, the President
or the Chief Executive Officer.
113
Section 4.6 Tenure of Office. The Chairman of the Board,
the President and the Chief Executive Officer shall hold office
for the current year for which the Board was elected, unless they
shall resign, become disqualified, or be removed. All other
officers shall hold office until their successors have been
appointed and qualify unless they shall resign, become
disqualified or be removed. The Board shall have the power to
remove the Chairman of the Board, the President and the Chief
Executive Officer. The Board or the Chief Executive Officer or
his designee shall have the power to remove all other officers
and employees. Any vacancy occurring in the offices of Chairman
of the Board, President or Chief Executive Officer shall be
filled promptly by the Board.
Section 4.7 Compensation. The Board shall by resolution
determine from time to time the officers whose compensation will
require approval by the Board or a committee of the Board. The
Chief Executive Officer shall fix the compensation of all
officers and employees whose compensation does not require
approval by the Board.
ARTICLE V
STOCK AND STOCK CERTIFICATES
Section 5.1 Transfers. Shares of stock shall be
transferable on the books of the Corporation only by the person
named in the certificate or by an attorney, lawfully constituted
in writing, and upon surrender of the certificate therefor.
Every person becoming a shareholder by such transfer shall, in
proportion to his shares, succeed to all rights of the prior
holder of such shares.
Section 5.2 Stock Certificates. The certificates of stock
of the Corporation shall be numbered and shall be entered in the
books of the Corporation as they are issued. They shall exhibit
the holder's name and number of shares and shall be signed by the
Chairman of the Board, the President, the Chief Executive
Officer, a Vice President or any other officer appointed by the
Board for this purpose, and the Secretary or an Assistant
Secretary.
ARTICLE VI
CORPORATE SEAL
Section 6.1 Corporate Seal. The Chairman of the Board,
the President the Chief Executive Officer, the Secretary, any
Assistant Secretary, Vice President, Assistant Vice President, or
other officer thereunto designated by the Board or the Chief
Executive Officer or his designee, shall have authority to affix
the corporate seal to any document requiring such seal, and to
attest the same. Such seal shall be substantially in the
following form:
(impression )
( of )
( Seal )
114
ARTICLE VII
MISCELLANEOUS PROVISIONS
Section 7.1 Fiscal Year. The Fiscal Year of the
Corporation shall be the calendar year.
Section 7.2 Execution of Instruments. All agreements,
indentures, mortgages, deeds, conveyances, transfers,
certificates, declarations, receipts, discharges, releases,
satisfactions, settlements, petitions, schedules, accounts,
affidavits, bonds, undertakings, proxies and other instruments or
documents may be signed, executed, acknowledged, verified,
delivered or accepted on behalf of the Corporation by the
Chairman of the Board, or the President, or the Chief Executive
Officer, or the Secretary, or any Vice President, or any other
officer or employee designated by the Board or the Chief
Executive Officer of his designee. Any such instruments may also
be executed, acknowledged, verified, delivered or accepted in
behalf of the Corporation in such other manner and by such other
officers as the Board may from time to time direct. The
provisions of this Section 7.2 are supplementary to any other
provisions of these By- Laws. Each of the foregoing
authorizations shall be at the pleasure of the Board, and each
such authorization by the Chief Executive Officer or his designee
also shall be at the pleasure of the Chief Executive Officer.
Section 7.3 Records. The By-Laws and the proceedings of
all meeting of the shareholders, the Board, and standing
committees of the Board, shall be recorded in appropriate minute
books provided for the purpose. The minutes of each meeting
shall be signed by the Secretary or other officer appointed to
act as Secretary of the meeting.
Section 7.4 Emergency Operations. In the event of war or
warlike damage or disaster of sufficient severity to prevent the
conduct and management of the affairs, business, and property of
the Corporation by its directors and officers as contemplated by
these By-Laws, any two or more available members of the then
incumbent Board shall constitute a quorum for the full conduct
and management of the affairs, business, and property of the
Corporation. This By-Law shall be subject to implementation by
resolutions of the Board passed from time to time for that
purpose, and any provisions of these By-Laws (other than this
Section) and any resolutions which are contrary to the provisions
of this Section or to the provisions of any such implementary
resolutions shall be suspended until it shall be determined by
any interim Board acting under this Section that it shall be to
the advantage of the Corporation to resume the conduct and
management of its affairs, business, and property under all of
the other provisions of these By-Laws.
Section 7.5 (a) Right to Indemnification. Each person who
was or is made a party or is threatened to be made a party to or
is otherwise involved in any action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of
the fact that he is or was a director or officer of the
Corporation or, while a director or officer of the Corporation is
or was serving at the request of the Corporation as a director,
officer, employee or agent of another corporation or of a
partnership, joint venture, trust or other enterprise, including
service with respect to an employee benefit plan (an
"Indemnitee"), whether the basis of such proceeding is alleged
action in an official capacity as a director, officer, employee
or agent or in any other capacity while serving as a director or
officer, shall be
115
indemnified and held harmless by the Corporation to the fullest extent
authorized by the Delaware General Corporation Law, as the same exists or
may hereafter be amended, against all expense, liability and loss (including
attorneys' fees, judgments, fines, ERISA excise taxes or
penalties and amounts paid in settlement) reasonably incurred or
suffered by such Indemnitee in connection therewith and such
indemnification shall continue as to an Indemnitee who has ceased
to be a director or officer and shall inure to the benefit of the
Indemnitee's heirs, executors and administrators; provided,
however, that, except as provided in Section 7.5(b) hereof with
respect to proceedings to enforce rights to indemnification, the
Corporation shall indemnify any such Indemnitee in connection
with a proceeding (or party thereof) initiated by such Indemnitee
only if such proceeding (or part thereof) was authorized by the
Board. The right to indemnification conferred in this Section
7.5 shall be a contract right and shall include the right to be
paid by the Corporation the expenses incurred in defending any
such proceeding in advance of its final disposition; provided,
however, that, if the Delaware General Corporation Law so
requires, an advancement of expenses incurred by an Indemnitee
shall be made only upon delivery to the Corporation of an
undertaking, by or on behalf of such Indemnitee, to repay all
amounts so advanced if it shall ultimately be determined by final
judicial decision from which there is no further right to appeal
that such Indemnitee is not entitled to be indemnified for such
expenses under this Section or otherwise.
(b) Right of Indemnitee to Bring Suit. If a claim under
paragraph (a) of this Section 7.5 is not paid in full by the
Corporation within sixty days after a written claim has been
received by the Corporation, except in the case of a claim for an
advancement of expenses, in which case the applicable period
shall be twenty days, the Indemnitee may at any time thereafter
bring suit against the Corporation to recover the unpaid amount
of the claim. If successful in whole or in part in any such
suit, or in a suit brought by the Corporation to recover an
advancement of expenses pursuant to the terms of such
Indemnittee's undertaking the Indemnitee shall be entitled to be
paid the expense of prosecuting or defending such suit. In any
suit brought by the Indemnitee to enforce a right to
indemnification hereunder it shall be a defense that, and in any
suit by the Corporation to recover an advancement of expenses
pursuant to the terms of an undertaking the Corporation shall be
entitled to recover such expenses upon a final adjudication that,
the Indemnitee has not met the applicable standard of conduct set
forth in the Delaware General Corporation Law. Neither the
failure of the Corporation to have made a determination prior to
the commencement of such suit that indemnification of the
Indemnitee is proper in the circumstances because the Indemnitee
has met the applicable standard of conduct set forth in the
Delaware General Corporation Law, nor an actual determination by
the Corporation that the Indemnitee has not met such applicable
standard of conduct, shall create a presumption that the
Indemnitee has not met the applicable standard of conduct or, in
the case of such a suit brought by the Indemnitee, be a defense
to such suit. In any suit brought by the Indemnitee to enforce a
right to indemnification or to an advancement of expenses
hereunder, or by the Corporation to recover an advancement of
expenses pursuant to the terms of an undertaking by the
Indemnitee, the Corporation shall have the burden of proving that
the Indemnitee is not entitled to be indemnified, or to such
advancement of expenses, under this Section 7.5 or otherwise.
116
(c) Non-Exclusivity of Rights. The rights to
indemnification and to the advancement of expenses conferred in
this Section 7.5 shall not be exclusive of any other right which
any person may have or hereafter acquire under any statute, the
Corporation's Certificate of Incorporation, By-Law, agreement,
vote of shareholders or disinterested directors or otherwise.
(d) Indemnification of Employees and Agents of the
Corporation. The Corporation may, to the extent authorized from
time to time by the Board, grant rights to indemnification, and
to the advancement of expenses to any employee or agent of the
Corporation to the fullest extent of the provisions of this
Section 7.5 with respect to the indemnification and advancement
of expenses of directors and officers of the Corporation.
(e) Insurance. The Corporation may maintain insurance,
at its expense, to protect itself and any director, officer,
employee or agent of the Corporation or another corporation,
partnership, joint venture, trust or other enterprise against any
expense, liability or loss, whether or not the Corporation would
have the power to indemnify such person against such expense,
liability or loss under the Delaware General Corporation Law, as
the same exists or may hereafter be amended.
Section 7.6 Amendments. The By-Laws may be added to,
amended, altered or repealed at any regular meeting of the Board,
by a vote of a majority of the total number of the directors, or
at any meeting of shareholders, duly called and held, by a
majority of the stock represented at such meeting.
I, Gea Tung, CERTIFY that: (1) I am the duly constituted Assistant
Secretary of HSBC Americas, Inc. and as such officer have access to its
official records; (2) the foregoing By-Laws are the By-Laws of said
Corporation, and all of them are now lawfully in force and
effect.
IN TESTIMONY WHEREOF, I have hereunto affixed my official
signature and the seal of the said Corporation, in the city of
Buffalo, New York, on this 22nd day of March, 1996.
/s/ Gea Tung
dl/HAIBYLAW.mis
117
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