SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): June 5, 1996
HSBC AMERICAS, INC.
(Exact name of registrant as specified in charter)
DELAWARE I-2940 22-1093160
(State or other juris- (Commission (IRS Employer
diction of incorporation) File Number) Identification No.)
ONE MARINE MIDLAND CENTER, BUFFALO, NEW YORK 14203
(Address of principal executive offices)
Registrant's telephone number, including area code: (716) 841-2424
Not Applicable
(Former name or former address,
if changed since report)
2.
Item 5. Other Events
On January 1, 1996, the net assets of Oleifera Investments, Ltd. (OIL), an
indirect wholly owned subsidiary of HSBC Holdings plc (HSBC), were
transferred to HSBC Americas, Inc. (the Company) through a contribution of
stock. Assets of OIL totaling $183 million at December 31, 1995 consisted
primarily of commercial loans and other real estate.
The transaction was accounted for as a transfer of assets between
companies under common control, with the assets and liabilities of OIL
combined with those of the Company at their historical carrying values.
The Company's financial results included in the Supplemental Annual Report
as an Exhibit reflect a restatement of prior periods to include the
accounts and results of operations of OIL as though the transaction
occurred as of the beginning of the earliest period presented. See Note
1. to the supplemental financial statements.
Item 7. Financial Statements and Exhibits
c. Exhibits
(13) Registrant's Supplemental Annual Report for year ending December 31,
1995.
3.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HSBC AMERICAS, INC.
(REGISTRANT)
/s/ Robert M. Butcher
NAME: ROBERT M. BUTCHER
TITLE: EXECUTIVE VICE PRESIDENT &
CHIEF FINANCIAL OFFICER
Date: June 5, 1996
Exhibit 13
HSBC Americas, Inc.
________________________________________________
Supplemental Annual Report
for the year ending December 31, 1995
(Restated for all periods presented to include the accounts and results of
Oleifera Investments, Ltd. combined with the Company on January 1, 1996.)
1
TABLE OF CONTENTS
Page
Management's Discussion and Analysis
of Financial Condition and Results
of Operation 3
Financial Tables 23
Consolidated Average Balances
and Interest Rates - Three Years 24
Report of Management 26
Report of Independent Auditors 27
HSBC Americas, Inc.:
Consolidated Balance Sheet 28
Consolidated Statement of Income 29
Consolidated Statement of Changes in
Shareholders' Equity 30
Consolidated Statement of Cash Flows 31
Marine Midland Bank:
Consolidated Balance Sheet 32
Summary of Significant Accounting Policies 33
Notes to Financial Statements 37
2
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The reported results of HSBC Americas, Inc. (the Company) are consolidated
with Concord Leasing, Inc. (Concord) and Oleifera Investments, Ltd. (OIL).
Concord, which provides equipment financing through secured loan and finance
lease transactions, had assets of $1.5 billion at December 31, 1994. Assets
of OIL, totaling $183 million at December 31, 1995, consisted primarily of
commercial loans and other real estate. Concord and OIL were merged with the
Company on January 1, 1995 and January 1, 1996, respectively, through the
contribution of Concord's and OIL's outstanding common stock held by HSBC
Holdings, B.V. to the Company. The transactions were accounted for as
transfers of assets between companies under common control, with the assets
and liabilities of Concord and OIL 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 and OIL as though the transactions occurred as of the
beginning of the earliest period presented.
The Company originally reported net income of $291.7 million, $229.3 million
and $173.2 million in 1995, 1994 and 1993, respectively. After these
restatements the Company's net income was $283.6 million in 1995, compared
with net losses of $37.0 million in 1994 and $190.0 million in 1993.
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 28.
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 $1,493.2 $231.9 18.4 $1,261.3 $ 40.1 3.3 $1,221.2
Interest expense 596.4 121.9 25.7 474.5 (14.7) (3.0) 489.2
Net interest income -
taxable equivalent basis 896.8 110.0 14.0 786.8 54.8 7.5 732.0
Taxable equivalent
adjustment 4.6 (.1) (1.4) 4.7 .1 .6 4.6
Net interest income $ 892.2 $110.1 14.1 $ 782.1 $ 54.7 7.5 $ 727.4
Average earning assets $ 17,665 $ 366 2.1 $ 17,299 $ (381) (2.2) $ 17,680
Average nonearning assets 1,299 (3) (.2) 1,302 (238) (15.5) 1,540
Average total assets $ 18,964 $ 363 2.0 $ 18,601 $ (619) (3.2) $ 19,220
Net yield on:
Average earning assets 5.08% .53% 11.6 4.55% .41% 9.9 4.14%
Average total assets 4.73 .50 11.8 4.23 .42 11.0 3.81
</TABLE>
3
Net interest income of $896.8 million in 1995 improved from $786.8 million in
1994 due to a number of factors, including an increase in the volume of
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 $ 60.7 $ (6.0) $ 18.4 $ 48.3 $ (3.3) $ 9.9 $ 41.7
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 145.2 33.0 12.3 99.9 (54.8) (1.1) 155.8
Loans:
Domestic:
Commercial 574.3 (9.5) 101.7 482.1 (33.8) 62.1 453.8
Consumer 606.1 61.3 32.3 512.5 73.5 (39.4) 478.4
International 37.8 (.5) 4.1 34.2 .1 1.7 32.4
Total interest income 1,493.2 44.1 187.8 1,261.3 6.1 34.0 1,221.2
Interest expense:
Interest bearing demand deposits 29.7 - 3.1 26.6 1.0 (.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 72.7 35.4 8.9 28.4 8.1 4.3 16.0
Short-term borrowings 81.5 (24.1) 24.7 80.9 (3.1) 1.0 83.0
Long-term debt 50.4 (40.7) 5.2 85.9 (43.3) 13.1 116.1
Total interest expense 596.4 2.1 119.8 474.5 (43.4) 28.7 489.2
Net interest income -
taxable equivalent basis $ 896.8 $ 42.0 $ 68.0 $ 786.8 $ 49.5 $ 5.3 $732.0
</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 24 and 25. 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 5.08% in 1995 from 4.55%
in 1994.
Yields on commercial loans increased from 7.18% in 1994 to 8.71% 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 $1,061 million at year-end 1994 to $468 million at
year-end 1995.
4
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 $314.8 million in 1995 compared with $296.0 million
in 1994 and $117.1 million in 1993.
Increase(Decrease) Increase(Decrease)
1995 Amount % 1994 Amount % 1993
in millions
<S> <C> <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 59.1 (3.0) (4.8) 62.1 (19.1) (23.6) 81.2
Other income 28.2 3.6 15.0 24.6 (24.6) (50.1) 49.2
Nontrading income 297.1 (4.9) (1.6) 302.0 188.5 165.8 113.5
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 $314.8 $18.8 6.4 $ 296.0 $ 178.9 152.5 $117.1
</TABLE>
Nontrading Income
Nontrading income was $297.1 million or $4.9 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.
5
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> <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.
6
<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 17.5 (3.9) (18.2) 21.4 (7.0) (24.5) 28.4
Other real estate (ORE) and
owned asset (income) expense 18.1 (44.6) (71.1) 62.7 (121.3) (65.9) 184.0
Other 118.5 (53.6) (31.1) 172.1 21.0 13.8 151.1
Total other operating expenses 689.9 (130.9) (15.9) 820.8 (123.4) (13.1) 944.2
Provision for ORE and
owned assets 5.9 5.9 100.0 - - - -
Total other operating expenses
after provision for ORE and
owned assets $695.8 $(125.0) (15.2) $820.8 $(123.4) (13.1) $944.2
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 $18.1 million in 1995
compared with $62.7 million in 1994 and $184.0 million in 1993. The years
1994 and 1993 include $32.5 million and $135.1 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.
7
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 $175.3 million in 1995 compared with $168.7
million in 1994 and $108.5 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 a
reduced level of nonaccruing loans which 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 21.
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. Deferred tax assets associated with OIL's
operations have been fully offset by a valuation allowance due to limitations
on the realization of these assets.
8
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 $3,173 million a year ago primarily as a
result of increased money market activities. Deposits at December 31, 1995
were 111.3% of loans compared with 104.9% 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
9
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.
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.
<TABLE>
<CAPTION>
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 Supplemental 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.
10
<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 - 7,932 748 892 4,200 13,772
Other earning assets - 1,135 - - - 1,135
Other assets, net 1,544 - - - - 1,544
Total assets $ 1,544 $10,410 $976 $1,194 $6,429 $20,553
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 3,433 - - - - 3,433
Other liabilities 278 - - - - 278
Shareholders' equity 1,697 - - - - 1,697
Total sources of funds $ 5,408 $ 7,368 $854 $1,050 $5,873 $20,553
Effect of interest rate swaps - (1,680) (6) 456 1,230
Interest sensitivity gap $(3,864) $ 1,362 $116 $ 600 $1,786
</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 $ 360 $ 58 $ 10
Mortgage loans 787 123 89
Lease financing 14 15 4
Other business and financial 4,243 796 136
International 445 - 296
Total $5,849 $992 $535
Loans with fixed or predetermined
interest rates $1,302 $983 $519
Loans having floating or adjustable
interest rates 4,547 9 16
Total $5,849 $992 $535
</TABLE>
11
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 34 34
Equity securities 79 80 -
$2,614 $ 114 $ 34
</TABLE>
12
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.
13
<TABLE>
<CAPTION>
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 $ 428 $ 480 $ 730 $ 1,290 $ 1,726
Mortgage loans 999 931 915 671 766
Loans and advances to affiliates 343 302 160 106 134
Other business and financial 4,865 4,993 5,072 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
13,031 12,506 12,004 12,058 13,765
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 $13,772 $13,134 $12,521 $12,678 $14,377
</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.
14
<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
Supplemental Financial Statements.
15
Capital Resources
Total shareholders' equity at year-end 1995 was $1,697 million, compared with
$1,657 million at year-end 1994. The equity base was increased by $283.6
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, $117.7 million return of capital paid to HSBC Holdings
B.V. and $5.9 million for preferred shareholder dividends. The ratio of
shareholders' equity to total year-end assets was 8.26% at December 31, 1995
compared with 8.67% 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 $2.5 billion resulting
in risk adjusted capital ratios of 10.89% at the Tier 1 level and 16.39% at
the total capital level. These ratios compared with 11.82% at the Tier 1
level and 18.01% 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
16
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 8.36% leverage ratio compared with 8.78% 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.
17
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 $ 170 $ 365 $ 595 $ 876 $1,145
Other domestic loans 298 696 525 1,136 1,053
Subtotal 468 1,061 1,120 2,012 2,198
International - - - - 2
Total nonaccruing loans 468 1,061 1,120 2,012 2,200
Restructured accruing loans 13 10 - - -
Total nonaccruing and restructured loans 481 1,071 1,120 2,012 2,200
Other real estate 65 144 217 283 156
Other owned assets 45 8 32 98 32
Total nonaccruing and restructured loans,
other real estate and other owned assets $ 591 $1,223 $1,369 $2,393 $2,388
Ratios:
Nonaccruing and restructured
loans to total loans 3.50% 8.16% 8.95% 15.87% 15.30%
Nonaccruing loans, restructured loans,
other real estate and other owned
assets to total assets 2.88 6.40 6.74 12.43 11.98
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 $468 million or 3.40% of total
loans, compared with $1,061 million or 8.08% 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
18
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 construction and commercial real estate loans
include those associated with OIL: $87 million, $206 million and $337 million
at December 31, 1995, 1994 and 1993, respectively.
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 53% 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 $69 million, $33 million of
which was applied as interest income and $36 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 $348
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.
19
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.
20
Allowance for Loan Loss and Charge Offs
At year-end 1995, the allowance was $477.5 million, or 3.47% of total loans,
compared with $531.5 million, or 4.05% of total loans, a year ago. The ratio
of the allowance to nonaccruing loans was 101.95% at December 31, 1995
compared with 50.08% a year earlier. The Company's nonaccruing loans were
reduced to $468 million at December 31, 1995 from $1,061 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 $13,772 $13,134 $12,521 $12,678 $14,377
Average total loans 13,200 12,714 12,469 12,618 15,481
Allowance for loan losses:
Balance at beginning of year $ 531.5 $ 524.3 $ 700.9 $ 727.0 $ 907.7
Allowance related to acquired
businesses .4 1.2 - - -
Charge offs:
Commercial:
Construction loans 44.4 68.8 111.5 42.0 96.5
Mortgage loans .5 14.8 26.3 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 285.8 243.8 358.4 369.7 607.8
Recoveries on loans charged off:
Commercial:
Construction loans 11.9 10.7 4.8 9.3 35.4
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 82.3
Total net charge offs 229.7 162.7 285.1 315.5 525.5
Provision charged to income 175.3 168.7 108.5 289.4 344.8
Balance at end of year $ 477.5 $ 531.5 $ 524.3 $ 700.9 $ 727.0
Allowance ratios:
Total net charge offs to
average loans 1.74% 1.28% 2.29% 2.50% 3.39%
Year-end allowance to:
Year-end total loans 3.47 4.05 4.19 5.53 5.06
Year-end total nonaccruing loans 101.95 50.08 46.79 34.84 33.05
</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.
21
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 19. 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 3.1 $ 40 3.7 $ 56 5.8 $164 10.2 $300 12.0
Mortgage loans 10 7.3 12 7.1 10 7.3 10 5.3 12 5.3
Other business 149 37.8 221 40.3 186 41.8 190 45.1 213 42.7
Consumer:
Lease financing - - - - 3 .5 6 2.6 12 5.8
Other consumer 54 46.4 54 44.1 58 40.5 45 32.0 73 29.9
International 28 5.4 2 4.8 1 4.1 2 4.8 7 4.3
Unallocated 234 - 202 - 210 - 284 - 110 -
Total $478 100.0 $531 100.0 $524 100.0 $701 100.0 $727 100.0
</TABLE>
22
<TABLE>
<CAPTION>
Financial Tables
- ----------------------------------------------------------------------------------------------------
Year Ended December 31, 1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------
in millions
<S> <C> <C> <C> <C> <C>
Net interest income $ 892.2 $ 782.1 $ 727.4 $ 716.6 $ 746.9
Securities transactions 12.3 7.9 6.5 128.0 (27.8)
Other operating income 302.5 288.1 110.6 293.0 417.1
Operating expenses 695.8 820.8 944.2 907.0 938.5
Provision for loan losses 175.3 168.7 108.5 289.4 344.8
- ----------------------------------------------------------------------------------------------------
Income (loss) before taxes and cumulative effect
of change in accounting principle and
extraordinary item 335.9 88.6 (208.2) (58.8) (147.1)
Applicable income tax expense 52.3 125.6 21.8 29.5 26.9
- ----------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of change
in accounting principle and extraordinary item 283.6 (37.0) (230.0) (88.3) (174.0)
Cumulative effect of change in accounting principle
and extraordinary item (1) - - 40.0 29.9 -
- ----------------------------------------------------------------------------------------------------
Net income (loss) $ 283.6 $ (37.0) $(190.0) $ (58.4) $(174.0)
- ----------------------------------------------------------------------------------------------------
Balances at year end
Total assets $ 20,553 $19,120 $20,323 $19,251 $19,931
Long-term debt 710 713 1,704 2,201 1,731
Common shareholder's equity 1,599 1,559 1,602 1,528 1,462
Total shareholders' equity 1,697 1,657 1,700 1,626 1,560
Ratio of shareholders' equity to assets 8.26 % 8.67 % 8.37 % 8.45 % 7.83 %
- ----------------------------------------------------------------------------------------------------
Selected Financial Ratios (2)
Rate of return on:
Total assets 1.50 % (0.20)% (0.99)% (0.31)% (0.84)%
Total shareholders' equity 15.95 (2.21) (11.39) (3.68) (12.52)
Total shareholders' equity to assets 9.37 9.00 8.68 8.34 6.72
- ----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Quarterly Results of Operations
1995 1994
- --------------------------------------------------------------------------------------------------------
4th Q 3rd Q 2nd Q 1st Q 4th Q 3rd Q 2nd Q 1stQ
- --------------------------------------------------------------------------------------------------------
in millions
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income $229.4 $224.5 $ 219.1 $ 219.2 $ 200.8 $ 193.6 $ 197.1 $190.6
Securities transactions 0.9 4.9 4.6 1.9 2.9 1.2 2.0 1.8
Other operating income 75.1 76.4 76.9 74.1 76.1 76.3 67.6 68.1
Operating expenses 184.5 172.9 180.2 158.2 219.4 193.1 214.0 194.3
Provision for loan losses (recovery) 17.2 17.0 16.1 125.0 (3) 28.4 (1.9) 140.4(3) 1.8
- --------------------------------------------------------------------------------------------------------
Income (loss) before taxes 103.7 115.9 104.3 12.0 32.0 79.9 (87.7) 64.4
Applicable income taxes 39.1 34.8 40.3 (61.9) 35.5 31.1 33.1 25.9
- --------------------------------------------------------------------------------------------------------
Net income (loss) $ 64.6 $ 81.1 $ 64.0 $ 73.9 $ (3.5) $ 48.8 $(120.8) 38.5
========================================================================================================
(1) 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.
(2) Based on average daily balances.
(3) See risk elements in the loan portfolio on pages 18 and 19.
23
</TABLE>
<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 $ 1,009 $ 60.7 6.02 %
Federal funds sold and securities purchased
under resale agreements 579 34.9 6.03
Trading assets 495 34.2 6.89
Securities 2,382 145.2 6.09
Loans:
Domestic:
Commercial 6,595 574.3 8.71
Consumer
Residential mortgages 2,898 216.3 7.47
Other consumer 3,167 389.8 12.31
- -----------------------------------------------------------------------------
Total domestic 12,660 1,180.4 9.32
International 540 37.8 7.00
- -----------------------------------------------------------------------------
Total loans 13,200 1,218.2 9.23
- -----------------------------------------------------------------------------
Total earning assets 17,665 $1,493.2 8.45 %
- -----------------------------------------------------------------------------
Allowance for loan losses (545)
Cash and due from banks 911
Other assets 933
- -----------------------------------------------------------------------------
Total assets $ 18,964
=============================================================================
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 1,461 72.7 4.98
- -----------------------------------------------------------------------------
Total interest bearing deposits 11,561 464.5 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 13,592 $ 596.4 4.39 %
- -----------------------------------------------------------------------------
Interest rate spread 4.06 %
- -----------------------------------------------------------------------------
Noninterest bearing deposits 3,017
Other liabilities 577
Total shareholders' equity 1,778
- -----------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 18,964
=============================================================================
Average earning assets - Domestic $ 16,082
- International 1,583
- -----------------------------------------------------------------------------
- Total $ 17,665
- -----------------------------------------------------------------------------
Net interest revenue - Domestic $ 850.8
- International 46.0
- -----------------------------------------------------------------------------
- Total $ 896.8
- -----------------------------------------------------------------------------
Net yield on average earning assets - Domestic 5.29 %
- International 2.90
- Total 5.08
- -----------------------------------------------------------------------------
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.
24
</TABLE>
<TABLE>
<CAPTION>
1994 1993
----------------------------- -----------------------------
Balance Interest Rate Balance Interest Rate
---------------------------------------------------------------------
in millions
<C> <C> <C> <C> <C> <C>
$ 1,139 $ 48.3 4.24 % $ 1,231 $ 41.7 3.39 %
669 30.3 4.53 445 14.5 3.25
953 54.0 5.67 710 44.6 6.29
1,824 99.9 5.47 2,825 155.8 5.51
6,725 482.1 7.18 7,241 453.8 6.27
2,654 168.7 6.36 2,092 158.6 7.58
2,786 343.8 12.34 2,588 319.8 12.35
---------------------------------------------------------------------
12,165 994.6 8.18 11,921 932.2 7.82
549 34.2 6.23 548 32.4 5.91
---------------------------------------------------------------------
12,714 1,028.8 8.09 12,469 964.6 7.74
---------------------------------------------------------------------
17,299 $1,261.3 7.29 % 17,680 $1,221.2 6.91 %
---------------------------------------------------------------------
(547) (579)
934 946
915 1,173
---------------------------------------------------------------------
$18,601 $19,220
=====================================================================
$ 1,581 $ 26.6 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
719 28.4 3.95 500 16.0 3.20
---------------------------------------------------------------------
9,930 307.7 3.10 9,860 290.1 2.94
---------------------------------------------------------------------
511 19.3 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 1,962 116.1 5.92
---------------------------------------------------------------------
13,004 $ 474.5 3.65 % 13,674 $ 489.2 3.58 %
---------------------------------------------------------------------
3.64 % 3.33 %
---------------------------------------------------------------------
3,063 3,071
860 807
1,674 1,668
---------------------------------------------------------------------
$18,601 $19,220
=====================================================================
$15,498 $15,698
1,801 1,982
---------------------------------------------------------------------
$17,299 $17,680
---------------------------------------------------------------------
$ 757.0 $ 708.0
29.8 24.0
---------------------------------------------------------------------
$ 786.8 $ 732.0
---------------------------------------------------------------------
4.88 % 4.51 %
1.65 1.21
4.55 4.14
---------------------------------------------------------------------
4.23 3.81
=====================================================================
25
</TABLE>
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.
26
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 supplemental consolidated balance sheets of
HSBC Americas, Inc. and subsidiaries as of December 31, 1995 and 1994, and
the related supplemental 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 supplemental consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these supplemental 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.
The supplemental consolidated financial statements give retroactive effect
to the combining of HSBC Americas, Inc. and Oleifera Investments, Ltd. on
January 1, 1996, which has been accounted for in a manner similar to a
pooling-of-interests as described in Note 1 to the supplemental consolidated
financial statements. Generally accepted accounting principles proscribe
giving effect to a consummated business combination accounted for by the
pooling-of-interests method in financial statements that do not include the
date of consummation. These supplemental consolidated financial statements
do not extend through the date of consummation. However, they will become
the historical consolidated financial statements of HSBC Americas, Inc. and
subsidiaries after financial statements covering the date of consummation of
the business combination are issued.
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 applicable after
financial statements are issued for a period that includes the date of
consummation of the business combination.
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.
Buffalo, New York /s/ KPMG Peat Marwick LLP
January 26, 1996
27
<TABLE>
<CAPTION>
HSBC Americas, Inc. 1995
- ------------------------------------------------------------------------------
S U P P L E M E N T A L 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 $ 1,242,335 $ 1,051,003
Interest bearing deposits with banks 1,488,101 1,306,047
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 2,613,830 114,232
Loans 13,772,339 13,133,831
Less - allowance for loan losses 477,502 531,496
- ------------------------------------------------------------------------------
Loans, net 13,294,837 12,602,335
Premises and equipment 180,552 185,211
Customers' acceptance liability 21,671 24,746
Accrued interest receivable 150,335 125,071
Other real estate and owned assets 109,758 151,548
Other assets 317,137 587,665
- ------------------------------------------------------------------------------
Total assets $ 20,553,343 $ 19,119,789
==============================================================================
Liabilities
Deposits in domestic offices:
Noninterest bearing $ 3,433,016 $ 3,212,478
Interest bearing 10,454,352 9,660,674
Interest bearing deposits in foreign offices 1,442,484 907,578
- ------------------------------------------------------------------------------
Total deposits 15,329,852 13,780,730
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 257,094 687,872
Acceptances outstanding 21,671 24,746
Long-term debt 709,750 713,104
- ------------------------------------------------------------------------------
Total liabilities 18,856,477 17,462,341
- ------------------------------------------------------------------------------
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 1,803,094 1,920,777
Accumulated deficit (233,686) (361,397)
Net unrealized gain on securities
available for sale, net of taxes 29,390 -
- ------------------------------------------------------------------------------
Total common shareholder's equity 1,598,803 1,559,385
- ------------------------------------------------------------------------------
Total shareholders' equity 1,696,866 1,657,448
- ------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 20,553,343 $ 19,119,789
==============================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
* Restated, see Note 1 regarding acquisitions.
28
</TABLE>
<TABLE>
<CAPTION>
HSBC Americas, Inc. 1995
- ------------------------------------------------------------------------------
S U P P L E M E N T A L 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 $ 1,213,929 $ 1,024,352 $ 960,187
Securities 145,000 99,706 155,602
Trading assets 33,965 53,972 44,619
Deposits with banks 60,725 48,256 41,721
Federal funds sold and
securities purchased under
resale agreements 34,906 30,319 14,476
- ------------------------------------------------------------------------------
Total interest income 1,488,525 1,256,605 1,216,605
- ------------------------------------------------------------------------------
Interest expense:
Deposits:
In domestic offices 391,808 279,287 274,174
In foreign offices 72,733 28,398 15,998
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 85,881 116,061
- ------------------------------------------------------------------------------
Total interest expense 596,363 474,527 489,245
- ------------------------------------------------------------------------------
Net interest income 892,162 782,078 727,360
Provision for loan losses 175,292 168,703 108,468
- ------------------------------------------------------------------------------
Net interest income, after
provision for loan losses 716,870 613,375 618,892
- ------------------------------------------------------------------------------
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 120,905 126,310 136,201
Trading revenues (loss) 5,399 (13,884) (2,908)
Other income 40,609 32,487 55,796
- ------------------------------------------------------------------------------
Total other operating income 314,905 295,944 117,200
- ------------------------------------------------------------------------------
1,031,775 909,319 736,092
- ------------------------------------------------------------------------------
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 259,361 385,629 494,349
- ------------------------------------------------------------------------------
Total other operating expenses 689,896 820,712 944,244
Provision for ORE and other owned
asset losses 5,954 - -
- ------------------------------------------------------------------------------
Total operating expenses after
provision for ORE and other
owned asset losses 695,850 820,712 944,244
- ------------------------------------------------------------------------------
Income (loss) before taxes and
cumulative effect of change in
method of accounting for
income taxes 335,925 88,607 (208,152)
Applicable income tax expense 52,341 125,572 21,873
- ------------------------------------------------------------------------------
Income (loss) before cumulative
effect of change in method
of accounting for income taxes 283,584 (36,965) (230,025)
Cumulative effect of change in
method of accounting
for income taxes - - 40,000
- ------------------------------------------------------------------------------
Net income (loss) $ 283,584 $ (36,965) $ (190,025)
==============================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
* Restated, see Note 1 regarding acquisitions.
29
</TABLE>
<TABLE>
<CAPTION>
HSBC Americas, Inc. 1995
- --------------------------------------------------------------------------------
S U P P L E M E N T A L 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 Accumulated Available
Stock Stock Surplus Deficit for Sale
- --------------------------------------------------------------------------------
in thousands
<S> <C> <C> <C> <C> <C>
Balance
December 31, 1992 as
originally reported in
Form 10-K for year
ended December 31, 1995 $ 98,063 $ 5 $ 1,181,127 $ 36,246 $ -
Common stock contributed
for pooling of Oleifera
Investments, Ltd. - - 369,650 (58,907) -
- --------------------------------------------------------------------------------
Balance
December 31, 1992 as
restated * 98,063 5 1,550,777 (22,661) -
Net loss - - - (190,025) -
Cash dividends declared
on preferred stock - - - (5,873) -
Capital contribution
from parent - - 270,000 - -
- --------------------------------------------------------------------------------
Balance
December 31, 1993 * 98,063 5 1,820,777 (218,559) -
Net loss - - - (36,965) -
Cash dividends declared
on preferred stock - - - (5,873) -
Cash dividends declared
on common stock - - - (100,000) -
Capital contribution
from parent - - 100,000 - -
- --------------------------------------------------------------------------------
Balance
December 31, 1994 * 98,063 5 1,920,777 (361,397) -
Net income - - - 283,584 -
Cash dividends declared
on preferred stock - - - (5,873) -
Cash dividends declared
on common stock - - - (150,000) -
Return of capital
to parent - - (117,683) - -
Transfer of securities
held to maturity to
securities available
for sale, net of
deferred taxes - - - - 29,390
- --------------------------------------------------------------------------------
Balance
December 31, 1995 * $ 98,063 $ 5 $ 1,803,094 $ (233,686) $ 29,390
================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
* Restated, see Note 1 regarding acquisitions.
30
</TABLE>
<TABLE>
<CAPTION>
HSBC Americas, Inc. 1995
- -----------------------------------------------------------------------------
S U P P L E M E N T A L 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) $ 283,584 $ (36,965) $ (190,025)
Adjustments to reconcile net income (loss)
to net cash provided (used) by
operating activities:
Depreciation, amortization and
deferred taxes (6,743) 64,512 314,208
Provision for loan losses 175,292 168,703 108,468
Cumulative effect of change in
accounting principle - - (40,000)
Net change in other accrual accounts (424,005) (139,582) 112,721
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 (28,469) 37,098 79,253
- -----------------------------------------------------------------------------
Net cash provided (used) by
operating activities (291,804) 1,457,396 225,443
- -----------------------------------------------------------------------------
Cash flows from investing activities:
Net change in interest bearing
deposits with banks (182,054) 409,104 (642,611)
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 61,852 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 (698,367) (873,779) 518,138
Expenditures for premises and equipment (24,906) (20,912) (12,884)
Other, net 523,648 40,209 60,690
- -----------------------------------------------------------------------------
Net cash used by investing activities (1,074,604) (456,823) (1,226,553)
- -----------------------------------------------------------------------------
Cash flows from financing activities:
Net change in deposits 1,549,122 802,188 (122,613)
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(return of capital) (117,683) 100,000 270,000
Dividends paid (155,873) (105,873) (5,873)
- -----------------------------------------------------------------------------
Net cash provided (used) by
financing activities 1,557,740 (1,038,625) 1,164,075
- -----------------------------------------------------------------------------
Net change in cash and due from banks 191,332 (38,052) 162,965
Cash and due from banks at beginning
of year 1,051,003 1,089,055 926,090
- -----------------------------------------------------------------------------
Cash and due from banks at end of year $ 1,242,335 $ 1,051,003 $ 1,089,055
=============================================================================
Cash paid for: Interest $ 592,194 $ 474,440 $ 435,776
Taxes 185,453 113,779 26,995
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, see Note 1 regarding acquisitions.
31
</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.
32
</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.
33
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
34
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.
35
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.
36
N O T E S T O S U P P L E M E N T A L F I N A N C I A L
S T A T E M E N T S
Note 1. 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.
On January 1, 1996 the net assets of Oleifera Investments, Ltd. (OIL), an
indirect wholly owned subsidiary of HSBC, were transferred to the Company
through a contribution of stock. Assets of OIL totaling $183 million at
December 31, 1995 consisted primarily of commercial loans and other real
estate.
The transactions described above were accounted for as transfers of assets
between companies under common control, with the assets and liabilities of
Concord and OIL combined with those of the Company at their historical
carrying values. The Company's accompanying supplemental consolidated
financial statements reflect a restatement of prior periods to include the
accounts and results of operations of Concord and OIL as though the
transactions occurred as of the beginning of the earliest period presented.
Previously reported information was as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1995 1994 1993
in millions
<S> <C> <C> <C>
Net interest income (loss), after
provision for loan losses:
HSBC Americas, Inc. $708.2(1) $ 759.9 $ 796.2
Concord Leasing, Inc. - (145.2) (171.4)
Oleifera Investments, Ltd. 8.7 (1.3) (5.9)
$716.9 $ 613.4 $ 618.9
Net income (loss):
HSBC Americas, Inc. $291.7(1) $ 229.3 $ 173.2
Concord Leasing, Inc. - (212.1) (244.1)
Oleifera Investments, Ltd. (8.1) (54.2) (119.1)
$283.6 $ (37.0) $(190.0)
</TABLE>
(1) As reported in Annual Report on Form 10-K for 1995.
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.
37
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.
<TABLE>
<CAPTION>
Note 3. Trading Assets
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
38
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 34,000 34,000
Equity securities 77,212 1,356 - 78,568 80,232 80,232
$2,568,614 $48,095 $2,879 $2,613,830 $ 114,232 $ 114,232
</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
$54,732,000 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>
39
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 $ 428,237 $ 480,077
Mortgage loans 999,207 930,794
Loans and advances to affiliates 343,519 302,219
Other business and financial 4,864,875 4,992,696
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
$13,772,339 $13,133,831
</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
$468,349,000 and $1,061,380,000, respectively. At December 31, 1995 and 1994,
the Company had commitments to lend additional funds of $11,400,000 and
$11,365,000, 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 $70,166 $96,588 $101,261
Interest revenue recorded on nonaccruing loans 32,841 38,082 29,434
</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.
40
The Company identified impaired loans as defined by FAS 114 totaling
$347,778,000 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 $445,318,000. 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.
<TABLE>
<CAPTION>
Note 6. Allowance for Loan Losses
An analysis of the allowance for loan losses follows.
1995 1994 1993
in thousands
<S> <C> <C> <C>
Balance at beginning of year $ 531,496 $ 524,307 $ 700,891
Allowance related to acquired businesses 371 1,167 -
Provision charged to income 175,292 168,703 108,468
Recoveries on loans charged off 56,133 81,118 73,388
Loans charged off (285,790) (243,799) (358,440)
Balance at end of year $ 477,502 $ 531,496 $ 524,307
</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.
<TABLE>
<CAPTION>
Note 7. Mortgage Servicing Rights
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.
41
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 $52,341 $125,572 $ 21,873
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)
$68,166 $125,572 $(18,127)
</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 52,484 30,200 6,994
Foreign (10,959) 7,172 5,291
Total current 116,341 125,572 21,873
Deferred:
Decrease (increase) in deferred tax assets 39,520 (41,673) (1,173)
(Decrease) increase in valuation allowance
for deferred tax assets (103,520) 41,673 1,173
Total deferred (64,000) - -
Total income taxes $ 52,341 $125,572 $ 21,873
</TABLE>
42
<TABLE>
<CAPTION>
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.
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 8.0 27.4 (3.8)
Change in valuation allowance for deferred tax assets (30.8) 10.8 44.3
Adjustment to deferred tax assets and liabilities
for enacted change in tax rate - - 2.6
Alternative minimum tax due to limitation
of net operating loss - - (4.6)
Tax exempt interest income (.9) (3.4) 1.4
Adjustment to deferred tax assets and
liabilities due to change in tax basis 1.8 (40.2) (10.6)
Limit on net operating loss benefit recognized - 102.7 (72.3)
Other items 2.5 9.4 (2.5)
Effective income tax rate 15.6% 141.7% (10.5)%
</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 $226,166
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 119,524 116,409
Accrued pension cost 607 10,638
Mortgage servicing fees 6,724 10,165
Other 30,867 8,925
466,247 509,593
Less valuation allowance 303,689 407,209
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 $43,346,000 and deferred
tax liabilities increased by $11,999,000. These changes were offset by a
decrease of $103,520,000 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.
43
<TABLE>
<CAPTION>
Note 10. Long-Term Debt
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.
<TABLE>
<CAPTION>
Note 11. Preferred Stock
A summary of preferred stock outstanding at December 31, 1995 and 1994
follows:
in thousands
<C> <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>
44
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 $389,675,000 and $432,133,000,
respectively, and liabilities of $1,795,216,000 and $1,980,104,000,
respectively, related to such transactions with the HSBC Group were included
in the Company's balance sheet. In anticipation of the merger transaction
45
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 $211,692,000 and $152,923,000, 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>
46
<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
47
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 $ 764
Asia/Pacific 761 519
Other Western Hemisphere 543 533
Less: allowance for loan losses (28) (2)
Total international 1,978 1,814
Domestic 18,575 17,306
Total domestic/international $20,553 $19,120
</TABLE>
48
Total international assets averaged $1,610,000,000, $1,854,000,000 and
$2,040,000,000, or 8.5%, 10.0% and 10.6% of total average assets, during 1995,
1994 and 1993, respectively. Total international liabilities averaged
$1,475,000,000, $1,706,000,000 and $1,886,000,000, or 8.6%, 10.1% and 10.8%
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 $ 38.7 $ 38.0 $ 51.9 $ 10.7 $ 3.5 $ 6.3 $ 6.1 $ 2.3 $ 5.6
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 137.3 121.4 147.6 34.5 30.5 38.0 19.7 20.2 33.8
Domestic 1,667.3 1,433.1 1,189.3 301.4 58.1 (246.2) 263.9 (57.2) (263.8)
Total domestic/
international $1,804.6 $1,554.5 $1,336.9 $335.9 $88.6 $(208.2) $283.6 $(37.0) $(230.0)
</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.
49
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
50
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 412 387
Other letters of credit 215 144
Commitments to extend credit 4,712 4,792
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.
51
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.
52
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
53
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.
54
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 1,427 137
</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
55
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.
56
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 $ 3,108 $ 3,108
Trading assets 618 618 407 407
Related derivatives (1) (1) (3) (3)
Securities 2,620 2,620 2,082 2,022
Related derivatives (6) (6) - -
Loans, net of allowance for
loan losses 13,385 13,534 12,622 12,351
Related derivatives 39 (6) - -
Financial liabilities:
Instruments with carrying value
equal to fair value 2,817 2,817 2,963 2,963
Deposits:
Without fixed maturities 10,667 10,667 9,318 9,318
Fixed maturities 4,663 4,638 4,463 4,381
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.
57
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
in thousands
<S> <C> <C>
Assets:
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 66,008 187,747
Other assets 76,089 62,837
Total assets $3,284,431 $3,447,242
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* 1,696,866 1,657,448
Total liabilities and shareholders' equity $3,284,431 $3,447,242
* See Consolidated Statement of Changes in Shareholders' Equity, page 30.
</TABLE>
58
<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 284,361 (215,743) (219,209)
Income (loss) before cumulative effect
of change in accounting principle 283,584 (36,965) (230,025)
Cumulative effect of change in
accounting principle - - 40,000
Net income (loss) $283,584 $ (36,965) $(190,025)
</TABLE>
59
<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) $ 283,584 $ (36,965) $(190,025)
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 (284,361) 215,743 179,209
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 subsidiaries, net 118,079 65,150 (97,503)
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 483,956 (1,060,694) (275,317)
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, net (117,683) 100,000 270,000
Dividends paid (155,873) (105,873) (5,873)
Net cash provided (used) by
financing activities (477,618) 917,335 255,599
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
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.
</TABLE>
60
[ARTICLE] 9
[RESTATED]
[MULTIPLIER] 1,000,000
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] DEC-31-1995
[PERIOD-END] DEC-31-1995
[CASH] 1,242
[INT-BEARING-DEPOSITS] 1,488
[FED-FUNDS-SOLD] 518
[TRADING-ASSETS] 617
[INVESTMENTS-HELD-FOR-SALE] 2,614
[INVESTMENTS-CARRYING] 0
[INVESTMENTS-MARKET] 0
[LOANS] 13,772
[ALLOWANCE] 478
[TOTAL-ASSETS] 20,553
[DEPOSITS] 15,330
[SHORT-TERM] 2,538
[LIABILITIES-OTHER] 278
[LONG-TERM] 710
[PREFERRED-MANDATORY] 0
[PREFERRED] 98
[COMMON] 0
[OTHER-SE] 1,599
[TOTAL-LIABILITIES-AND-EQUITY] 20,553
[INTEREST-LOAN] 1,214
[INTEREST-INVEST] 145
[INTEREST-OTHER] 129
[INTEREST-TOTAL] 1,488
[INTEREST-DEPOSIT] 465
[INTEREST-EXPENSE] 596
[INTEREST-INCOME-NET] 892
[LOAN-LOSSES] 175
[SECURITIES-GAINS] 12
[EXPENSE-OTHER] 696
[INCOME-PRETAX] 336
[INCOME-PRE-EXTRAORDINARY] 284
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 284
[EPS-PRIMARY] 0
[EPS-DILUTED] 0
[YIELD-ACTUAL] 5.08
[LOANS-NON] 468
[LOANS-PAST] 60
[LOANS-TROUBLED] 13
[LOANS-PROBLEM] 0
[ALLOWANCE-OPEN] 531
[CHARGE-OFFS] 286
[RECOVERIES] 56
[ALLOWANCE-CLOSE] 478
[ALLOWANCE-DOMESTIC] 216
[ALLOWANCE-FOREIGN] 28
[ALLOWANCE-UNALLOCATED] 234
</TABLE>
