Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1996 Commission file number 1-2940
HSBC Americas, Inc.
(Exact name of registrant as specified in its charter)
One Marine Midland Center
Buffalo, New York 14203
(Address of principal executive offices)
Telephone (716) 841-2424
IRS Employer Identification No. 22-1093160. State of Incorporation: Delaware
Securities registered on the New York Stock Exchange pursuant to Section 12(b)
of the Act:
$5.50 Cumulative Preferred Stock
Adjustable Rate Cumulative Preferred Stock
8 5/8% Subordinated Capital Notes due 1997
7% Subordinated Notes due 2006
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) had filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to
this Form 10-K. [X]
All voting stock (1,001 shares of Common Stock $5 par value) is owned by HSBC
Holdings B.V., an indirect wholly owned subsidiary of HSBC Holdings plc.
Documents incorporated by reference: None
1
This page is intentionally left blank.
2
T A B L E O F C O N T E N T S
Page
Part I
1. Business 4
2. Properties 5
3. Legal Proceedings 5
4. Submission of Matters to a Vote of
Security Holders 6
Part II
5. Market for the Registrant's Common Equity
and Related Stockholder Matters 6
6. Selected Financial Data 7
7. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 10
8. Financial Statements and
Supplementary Data 30
9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure 69
Part III
10. Directors and Executive Officers
of the Registrant 69
11. Executive Compensation 71
12. Security Ownership of Certain Beneficial
Owners and Management 73
13. Certain Relationships and Related
Transactions 73
Part IV
14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 74
3
P A R T I
Item 1. Business
HSBC Americas, Inc. (the Company) is a New York State based bank holding
company registered under the Bank Holding Company Act of 1956, as amended. At
December 31, 1996, the Company, together with its subsidiaries, had assets of
$23.6 billion and employed approximately 8,400 full and part time employees.
All of the Company's common stock is owned by HSBC Holdings B.V., an indirect
wholly owned subsidiary of HSBC Holdings plc (HSBC). HSBC, the ultimate
parent company of The Hongkong and Shanghai Banking Corporation Limited
(HongkongBank) and Midland Bank plc, is an international banking and financial
services organization with major commercial and investment banking franchises
operating under long established names in Asia, Europe, North America and the
Middle East. Principal executive offices of HSBC are located in London,
England. HSBC, with assets of $402 billion at December 31, 1996, is one of
the world's largest banking groups.
The Company's principal subsidiary, Marine Midland Bank (the Bank), which had
assets of $23.3 billion and deposits of $18.9 billion at December 31, 1996, is
supervised and routinely examined by the Superintendent of Banks of the State
of New York and the Board of Governors of the Federal Reserve System. The
Company also is a participant in a joint venture, Wells Fargo HSBC Trade Bank.
The Bank is a regional bank with a distinctive geographic franchise
encompassing the entire State of New York. Selected banking products are
offered on a national basis. The Bank is engaged in a general commercial
banking business, offering a full range of banking products and services to
corporations, institutions, governments and individuals. Through its
affiliation with HSBC, the Bank offers its customers access to global markets
and services. In turn, the Bank plays a role in the delivery and processing
of other HSBC products.
The Bank is subject to banking laws and regulations which, among other things,
require that reserves be maintained against deposits and, in some cases,
currently limit the establishment of branch banking offices in the U.S.
outside its home state. The Company is also prohibited, with certain
exceptions, from engaging, directly or indirectly, in activities which are not
closely related to banking. In addition, the Federal Reserve Act restricts
certain transactions between banks and their nonbank affiliates.
The FDIC Improvement Act of 1991 (FDICIA) set standards for: addressing the
safety and soundness of the deposit insurance system, supervision of domestic
and foreign depository institutions, accounting, prompt regulatory action and
federal deposit insurance. Pursuant to FDICIA, a well capitalized bank must
have a Tier 1 risk-based capital ratio of at least 6%, a total risk-based
capital ratio of at least 10%, a leverage ratio of at least 5% and not be
subject to a capital directive order. The leverage ratio measures Tier 1
capital against total non-risk weighted assets. The Bank's ratios at
December 31, 1996 exceeded all ratios required for the well capitalized
category. Revisions to the risk-based capital guidelines regarding market
risk have been issued effective in 1998. These guidelines will not
significantly affect the Company's risk-based capital ratios.
4
P A R T I Continued
Item 1. Business Continued
In connection with establishing standards to assure the safety and soundness
of financial institutions the Federal Reserve Board issued guidelines on
operations, management, and compensation, as well as standards for asset
quality and earnings. The guidelines have not had a significant effect on the
Company's operations.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(IBBEA) authorized interstate acquisitions of banks and bank holding companies
without geographic limitation beginning in 1995. In addition, beginning in
1997, a bank may merge with a bank in another state as long as neither of the
states opt out of interstate branching. New York has enacted an opt in
statute. Also, IBBEA protects key provisions of state law and establishes a
mechanism for de novo interstate branching.
The Company and its subsidiaries face competition in all the markets they
serve. Other commercial banks, thrift institutions, consumer finance
companies, mortgage bankers, insurance companies and investment banking firms
are traditional competitors. Many of these institutions are not subject to
the same laws and regulations imposed on the Company and its subsidiaries.
Item 2. Properties
The principal executive offices of the Company and the Bank are located in
Buffalo, New York, in a building under a long-term lease. The Bank has more
than 325 other banking offices in New York State located in approximately 48
counties. More than half of these offices are located in buildings owned by
the Bank and the remaining are located in leased quarters. In addition, there
are branch offices and locations for other activities occupied under various
types of ownership and leaseholds in 8 states other than New York, none of
which is materially important to the respective activities. For information
relating to lease commitments, see Note 23 to the Financial Statements.
Item 3. Legal Proceedings
The Company and its subsidiaries are defendants in a number of legal
proceedings arising out of, and incidental to, their businesses. Management
of the Company, based on its review with counsel of the development of these
matters to date, is of the opinion that the ultimate resolution of these
pending proceedings will not have a material adverse effect on the business or
financial position of the Company.
5
P A R T I Continued
Item 4. Submission of Matters to a Vote of Security Holders
Reference is made to Item 5.
P A R T II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Since all common stock of the Company is owned by HSBC Holdings B.V., shares
of the Company's common stock are not listed or traded on a securities
exchange.
6
<TABLE>
<CAPTION>
Item 6. Selected Financial Data
- ----------------------------------------------------------------------------------------------------
Year Ended December 31, 1996 1995 (1) 1994 (1) 1993 (1) 1992 (1)
- ----------------------------------------------------------------------------------------------------
in millions
<S> <C> <C> <C> <C> <C>
Net interest income $ 961.8 $ 892.2 $ 782.1 $ 727.4 $ 716.6
Securities transactions 7.9 12.3 7.9 6.5 128.0
Other operating income 303.0 302.5 288.1 110.6 293.0
Operating expenses 656.8 695.8 820.8 944.2 907.0
Provision for loan losses 64.7 175.3 168.7 108.5 289.4
- ----------------------------------------------------------------------------------------------------
Income (loss) before taxes and cumulative effect
of change in accounting principle and
extraordinary item 551.2 335.9 88.6 (208.2) (58.8)
Applicable income tax expense 171.0 52.3 125.6 21.8 29.5
- ----------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of change
in accounting principle and extraordinary item 380.2 283.6 (37.0) (230.0) (88.3)
Cumulative effect of change in accounting principle
and extraordinary item (2) - - - 40.0 29.9
- ----------------------------------------------------------------------------------------------------
Net income (loss) $ 380.2 $ 283.6 $ (37.0) $(190.0) $ (58.4)
- ----------------------------------------------------------------------------------------------------
Balances at year end
Total assets $ 23,630 $20,553 $19,120 $20,323 $19,251
Long-term debt 1,080(3) 710 713 1,704 2,201
Common shareholder's equity 1,875 1,599 1,559 1,602 1,528
Total shareholders' equity 1,973 1,697 1,657 1,700 1,626
Ratio of shareholders' equity to assets 8.35 % 8.26 % 8.67 % 8.37 % 8.45 %
- ----------------------------------------------------------------------------------------------------
Selected financial ratios (4)
Rate of return on
Total assets 1.83 % 1.50 % (0.20)% (0.99)% (0.31)%
Total shareholders' equity 20.52 15.95 (2.21) (11.39) (3.68)
Total shareholders' equity to assets 8.90 9.37 9.00 8.68 8.34
- ----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Quarterly Results of Operations
1996 1995 (1)
-----------------------------------------------------------------------
4th Q 3rd Q 2nd Q 1st Q 4th Q 3rd Q 2nd Q 1st Q
- ----------------------------------------------------------------------------------------------------------
in millions
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income $255.5 $249.6 $ 226.7 $ 230.0 $ 229.4 $ 224.5 $ 219.1 $219.2
Securities transactions 0.8 2.3 0.5 4.3 0.9 4.9 4.6 1.9
Other operating income 78.4 75.4 73.9 75.3 75.1 76.4 76.9 74.1
Operating expenses 168.6 174.7 158.9 154.6 184.5 172.9 180.2 158.2
Provision for loan losses 15.0 15.0 15.0 19.7 17.2 17.0 16.1 125.0(5)
- ----------------------------------------------------------------------------------------------------------
Income before taxes 151.1 137.6 127.2 135.3 103.7 115.9 104.3 12.0
Applicable income taxes 46.9 36.6 38.1 49.4 39.1 34.8 40.3 (61.9)
- ----------------------------------------------------------------------------------------------------------
Net income $104.2 $101.0 $ 89.1 $ 85.9 $ 64.6 $ 81.1 $ 64.0 73.9
==========================================================================================================
(1) Restated to reflect the mergers of Concord Leasing, Inc. and Oleifera Investments, Ltd. with the
Company. See Note 1 to the financial statements.
(2) Includes the cumulative effect of change in method of accounting for income taxes of $40.0 million in
1993 and extraordinary item for utilization of operating loss carryforwards in 1992.
(3) Includes guaranteed mandatorily redeemable preferred securities of subsidiary issued in 1996.
(4) Based on average daily balances.
(5) See risk elements in the loan portfolio on pages 23 and 24.
</TABLE>
7
<TABLE>
<CAPTION>
CONSOLIDATED AVERAGE BALANCES AND INTEREST RATES - THREE YEARS
The following table shows the average balances of the principal components
of assets, liabilities and shareholders' equity, together with their
respective interest amounts and rates earned or paid on a taxable
equivalent basis.
1996
------------------------
Balance Interest Rate
- -----------------------------------------------------------------------------
Assets
<S> <C> <C> <C>
Interest bearing deposits with banks,
primarily foreign $ 1,173 $ 65.4 5.58 %
Federal funds sold and securities purchased
under resale agreements 540 28.8 5.34
Trading assets 845 51.3 6.07
Securities 3,082 188.3 6.11
Loans
Domestic
Commercial 6,661 578.5 8.68
Consumer
Residential mortgages 3,354 253.3 7.55
Other consumer 3,378 415.2 12.29
- -----------------------------------------------------------------------------
Total domestic 13,393 1,247.0 9.31
International 512 35.0 6.84
- -----------------------------------------------------------------------------
Total loans 13,905 1,282.0 9.22
- -----------------------------------------------------------------------------
Total earning assets 19,545 $1,615.8 8.27 %
- -----------------------------------------------------------------------------
Allowance for loan losses (454)
Cash and due from banks 939
Other assets 782
- -----------------------------------------------------------------------------
Total assets $ 20,812
=============================================================================
Liabilities and Shareholders' Equity
Interest bearing demand deposits $ 1,666 $ 22.3 1.34 %
Consumer savings deposits 4,051 125.0 3.09
Other consumer time deposits 3,595 191.1 5.32
Commercial and public savings and other time deposits 1,853 74.2 4.01
Deposits in foreign offices, primarily banks 1,343 68.8 5.12
- -----------------------------------------------------------------------------
Total interest bearing deposits 12,508 481.4 3.85
- -----------------------------------------------------------------------------
Federal funds purchased and securities sold
under repurchase agreements 1,085 55.7 5.13
Other short-term borrowings 1,289 65.2 5.06
Long-term debt 733 47.6 6.50
- -----------------------------------------------------------------------------
Total interest bearing liabilities 15,615 $ 649.9 4.16 %
- -----------------------------------------------------------------------------
Interest rate spread 4.11 %
- -----------------------------------------------------------------------------
Noninterest bearing deposits 3,040
Other liabilities 304
Total shareholders' equity 1,853
- -----------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 20,812
=============================================================================
Average earning assets - Domestic $ 18,262
- International 1,283
- -----------------------------------------------------------------------------
- Total $ 19,545
- -----------------------------------------------------------------------------
Net interest revenue - Domestic $ 928.5
- International 37.4
- -----------------------------------------------------------------------------
- Total $ 965.9
- -----------------------------------------------------------------------------
Net yield on average earning assets - Domestic 5.08 %
- International 2.91
- Total 4.94
- -----------------------------------------------------------------------------
Net yield on average total assets 4.64
=============================================================================
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 $17 million for 1996, $14 million for 1995 and $14 million
for 1994.
8
</TABLE>
<TABLE>
<CAPTION>
1995 1994
----------------------------- -----------------------------
Balance Interest Rate Balance Interest Rate
----------------------------------------------------------------------
in millions
<C> <C> <C> <C> <C> <C>
$ 1,009 $ 60.7 6.02 % $ 1,139 $ 48.3 4.24 %
579 34.9 6.03 669 30.3 4.53
495 34.2 6.89 953 54.0 5.67
2,382 145.2 6.09 1,824 99.9 5.47
6,595 574.3 8.71 6,725 482.2 7.18
2,898 216.3 7.47 2,654 168.7 6.36
3,167 389.8 12.31 2,786 343.7 12.34
---------------------------------------------------------------------
12,660 1,180.4 9.32 12,165 994.6 8.18
540 37.8 7.00 549 34.2 6.23
---------------------------------------------------------------------
13,200 1,218.2 9.23 12,714 1,028.8 8.09
---------------------------------------------------------------------
17,665 $1,493.2 8.45 % 17,299 $1,261.3 7.29 %
---------------------------------------------------------------------
(545) (547)
911 934
933 915
---------------------------------------------------------------------
$18,964 $18,601
=====================================================================
$ 1,582 $ 29.7 1.88 % $ 1,581 $ 26.6 1.68 %
3,749 121.8 3.25 3,938 105.7 2.68
3,076 169.0 5.50 2,306 105.8 4.59
1,693 71.3 4.21 1,386 41.2 2.97
1,461 72.7 4.98 719 28.4 3.95
---------------------------------------------------------------------
11,561 464.5 4.02 9,930 307.7 3.10
---------------------------------------------------------------------
602 34.5 5.72 511 19.3 3.79
718 47.0 6.54 1,273 61.6 4.84
711 50.4 7.08 1,290 85.9 6.65
---------------------------------------------------------------------
13,592 $ 596.4 4.39 % 13,004 $ 474.5 3.65 %
---------------------------------------------------------------------
4.06 % 3.64 %
---------------------------------------------------------------------
3,017 3,063
577 860
1,778 1,674
---------------------------------------------------------------------
$18,964 $18,601
=====================================================================
$16,082 $15,498
1,583 1,801
---------------------------------------------------------------------
$17,665 $17,299
---------------------------------------------------------------------
$ 850.8 $ 757.0
46.0 29.8
---------------------------------------------------------------------
$ 896.8 $ 786.8
---------------------------------------------------------------------
5.29 % 4.88 %
2.90 1.65
5.08 4.55
---------------------------------------------------------------------
4.73 4.23
=====================================================================
9
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The Company reported net income for 1996 of $380.2 million compared with
$283.6 million in 1995, or an increase of 34.1%. The increase in net income
from 1995 resulted from an increase in net interest income and lower operating
expenses. Return on average common shareholder's equity increased to 21.33%
in 1996 from 16.53% in 1995.
The growth in the balance sheet during 1996 includes the impact of
acquisitions made during the year. Major acquisitions included: (i) the $1.1
billion in selected assets and assumption of $1.2 billion in deposits of East
River Savings Bank in June 1996, and (ii) the $.9 billion in deposits assumed
of the institutional dollar clearing activity of Morgan Guaranty Trust Company
of New York on December 31, 1996.
A detailed review comparing 1996 operations with 1995 and 1994 follows. It
should be read in conjunction with the consolidated financial statements of
the Company which begin on page 33.
E A R N I N G S P E R F O R M A N C E R E V I E W
Net Interest Income
Net interest income is the total interest income on earning assets less the
interest expense on deposits and borrowed funds. In the discussion that
follows, interest income and rates are presented and analyzed on a taxable
equivalent basis, in order to permit comparisons of yields on tax-exempt and
taxable assets.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Increase(Decrease) Increase(Decrease)
1996 Amount % 1995 Amount % 1994
- --------------------------------------------------------------------------------------------------
in millions
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income $1,615.8 $122.6 8.2 $1,493.2 $231.9 18.4 $1,261.3
Interest expense 649.9 53.5 9.0 596.4 121.9 25.7 474.5
- --------------------------------------------------------------------------------------------------
Net interest income -
taxable equivalent basis 965.9 69.1 7.7 896.8 110.0 14.0 786.8
Taxable equivalent
adjustment 4.1 (.5) (11.5) 4.6 (.1) (1.4) 4.7
- --------------------------------------------------------------------------------------------------
Net interest income $ 961.8 $ 69.6 7.8 $ 892.2 $110.1 14.1 $ 782.1
- --------------------------------------------------------------------------------------------------
Average earning assets $ 19,545 $1,880 10.6 $ 17,665 $ 366 2.1 $ 17,299
Average nonearning assets 1,267 (32) (2.5) 1,299 (3) (.2) 1,302
- --------------------------------------------------------------------------------------------------
Average total assets $ 20,812 $1,848 9.7 $ 18,964 $ 363 2.0 $ 18,601
- --------------------------------------------------------------------------------------------------
Net yield on:
Average earning assets 4.94% (.14)% (2.8) 5.08% .53% 11.6 4.55%
Average total assets 4.64 (.09) (1.9) 4.73 .50 11.8 4.23
==================================================================================================
10
</TABLE>
Net interest income of $965.9 million in 1996 improved from $896.8 million in
1995 due to a number of factors, including increases in consumer loan volume,
an increased investment portfolio and a reduction in nonaccruing commercial
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
- ---------------------------------------------------------------------------------------------------------------
1996 Compared to 1995 1995 Compared to 1994
Increase(Decrease) Increase(Decrease)
1996 Volume Rate 1995 Volume Rate 1994
- ---------------------------------------------------------------------------------------------------------------
in millions
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Interest bearing deposits with banks $ 65.4 $ 9.3 $ (4.6) $ 60.7 $ (6.0) $ 18.4 $ 48.3
Federal funds sold and securities
purchased under resale agreements 28.8 (2.3) (3.8) 34.9 (4.4) 9.0 30.3
Trading assets 51.3 21.6 (4.5) 34.2 (29.8) 10.0 54.0
Securities 188.3 42.8 .3 145.2 33.0 12.3 99.9
Loans:
Domestic:
Commercial 578.5 5.7 (1.5) 574.3 (9.6) 101.7 482.2
Consumer
Residential mortgages 253.3 34.5 2.5 216.3 16.4 31.2 168.7
Credit card receivables 255.1 22.1 (2.7) 235.7 27.7 8.3 199.7
Other consumer 160.1 5.2 .8 154.1 19.3 (9.2) 144.0
International 35.0 (1.9) (.9) 37.8 (.5) 4.1 34.2
- ---------------------------------------------------------------------------------------------------------------
Total interest income 1,615.8 137.0 (14.4) 1,493.2 46.1 185.8 1,261.3
- ---------------------------------------------------------------------------------------------------------------
Interest expense:
Interest bearing demand deposits 22.3 1.5 (8.9) 29.7 - 3.1 26.6
Consumer savings and
other time deposits 316.1 34.2 (8.9) 290.8 21.0 58.3 211.5
Commercial and public savings
and other time deposits 74.2 6.5 (3.6) 71.3 10.5 19.6 41.2
Deposits in foreign offices 68.8 (6.0) 2.1 72.7 35.4 8.9 28.4
Short-term borrowings 120.9 55.6 (16.2) 81.5 (24.1) 24.7 80.9
Long-term debt 47.6 1.5 (4.3) 50.4 (40.7) 5.2 85.9
- ---------------------------------------------------------------------------------------------------------------
Total interest expense 649.9 93.3 (39.8) 596.4 2.1 119.8 474.5
- ---------------------------------------------------------------------------------------------------------------
Net interest income -
taxable equivalent basis $ 965.9 $ 43.7 $ 25.4 $ 896.8 $ 44.0 $ 66.0 $ 786.8
===============================================================================================================
</TABLE>
The changes in interest income and interest expense due to both rate and
volume have been allocated in proportion to the absolute amounts of the change
in each.
11
Average Balances and Interest Rates
Average balances and interest rates earned or paid for the past three years
are reported on pages 8 and 9. Average earning assets increased to $19,545
million in 1996 from $17,665 million in 1995 resulting in increased interest
income even though rates earned declined to 8.27% in 1996 from 8.45% in 1995.
Average commercial loans were $6,661 million in 1996, approximately the same
level as 1995. The level of nonaccruing loans decreased to $357 million at
year-end 1996 from $468 million at year-end 1995 reflecting a continuing
improvement in commercial credit quality. Yields on commercial loans were
8.68% in 1996 compared with 8.71% in 1995. Average residential mortgages
increased to $3,354 million in 1996 from $2,898 million in 1995 and $2,654
million in 1994. In addition, the yield on these loans increased to 7.55% in
1996 from 7.47% in 1995. Average credit card receivables increased to $1,883
million in 1996 from $1,720 million in 1995.
Domestic time deposits, including NOW accounts, and consumer, commercial and
public savings and other time deposits averaged $11.2 billion during 1996,
compared with $10.1 billion in 1995. The growth in average deposits includes
the impact of the $1.2 billion in deposits assumed of the East River Savings
Bank in June 1996. Average effective rates on these types of deposits were
3.70% in 1996, compared with 3.88% in 1995.
Average investment securities increased to $3,082 million in 1996 from $2,382
million in 1995. At the same time, average short-term borrowings increased to
$2,374 million in 1996 from $1,320 million in 1995 providing the funding for
the increased holdings, mostly highly liquid U.S. government securities. Net
interest income of the Company benefited from this activity since the asset
rate earned was 6.11% compared with the rate paid of 5.09%.
<TABLE>
<CAPTION>
Other Operating Income
Other operating income was $310.9 million in 1996 compared with $314.8 million
in 1995 and $296.0 million in 1994.
- ------------------------------------------------------------------------------------------------
Increase(Decrease) Increase(Decrease)
1996 Amount % 1995 Amount % 1994
- ------------------------------------------------------------------------------------------------
in millions
<S> <C> <C> <C> <C> <C> <C> <C>
Trust income $ 41.1 $ (5.6) (11.9) $ 46.7 $ (.8) (1.7) $ 47.5
Service charges 89.9 4.8 5.6 85.1 .6 .7 84.5
Mortgage servicing income 15.1 (1.1) (7.1) 16.2 (2.9) (14.9) 19.1
Letter of credit fees 19.6 1.0 5.4 18.6 (.4) (2.2) 19.0
Credit card fees 53.0 9.8 22.6 43.2 (2.0) (4.4) 45.2
Other fee-based income 43.4 (15.7) (26.5) 59.1 (3.0) (4.8) 62.1
Other income 37.1 8.9 31.2 28.2 3.6 15.0 24.6
- ------------------------------------------------------------------------------------------------
Nontrading income 299.2 2.1 .7 297.1 (4.9) (1.6) 302.0
- ------------------------------------------------------------------------------------------------
Trading asset revenue (loss) (.2) (1.8) (112.6) 1.6 19.1 108.9 (17.5)
Foreign exchange revenue 4.0 .2 3.4 3.8 .2 6.1 3.6
- ------------------------------------------------------------------------------------------------
Trading revenues (loss) 3.8 (1.6) (30.0) 5.4 19.3 138.9 (13.9)
- ------------------------------------------------------------------------------------------------
Securities transactions 7.9 (4.4) (35.7) 12.3 4.4 56.1 7.9
- ------------------------------------------------------------------------------------------------
Total other operating income $310.9 $ (3.9) (1.3) $314.8 $18.8 6.4 $296.0
================================================================================================
12
</TABLE>
Nontrading Income
Nontrading income of $299.2 million in 1996 was essentially the same level as
1995. The decrease in other fee-based income as a result of business
divestitures in late 1995, which were approximately $29.0 million, was offset
by higher bankcard fees, deposit service charges and trade service fees.
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>
1996
Average balance
outstanding $ 32 $ 808 $ 4 $ 1 $ 845
Interest income 1.8 49.2 .3 - 51.3
Trading revenue 1.8 (2.6) 1.4 (.8) (.2)
1995
Average balance
outstanding 12 462 23 (2) 495
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)
================================================================================
</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's trading portfolio was increased to $892
million at year-end 1996 from $617 million at year-end 1995 and $404 million
at year-end 1994.
Securities Transactions
Securities transactions during 1996 resulted in net gains of $7.9 million
compared with net gains of $12.3 million in 1995 and $7.9 million in 1994.
The gains realized relate to investments classified as available for sale,
primarily highly leveraged partnership interests.
13
<TABLE>
<CAPTION>
Other Operating Expenses
- -------------------------------------------------------------------------------------------------
Increase(Decrease) Increase(Decrease)
1996 Amount % 1995 Amount % 1994
- -------------------------------------------------------------------------------------------------
in millions
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries $280.8 $ (2.8) (1.0) $283.6 $ (4.0) (1.4) $287.6
Pension and other
employee benefits 71.3 .7 .9 70.6 (5.6) (7.3) 76.2
- -------------------------------------------------------------------------------------------------
Total personnel 352.1 (2.1) (.6) 354.2 (9.6) (2.6) 363.8
Net occupancy 78.5 2.1 2.9 76.4 5.1 7.1 71.3
Equipment 31.1 (.7) (2.0) 31.8 (3.5) (9.9) 35.3
Amortization of intangibles 14.4 3.2 27.7 11.2 (4.6) (28.9) 15.8
FDIC assessment .6 (14.0) (96.1) 14.6 (14.4) (49.7) 29.0
Marketing 26.0 3.2 13.8 22.8 (2.2) (8.6) 25.0
Outside services 27.1 2.3 9.1 24.8 .4 1.7 24.4
Professional fees 23.3 5.8 33.0 17.5 (3.9) (18.2) 21.4
Other real estate (ORE) and
owned asset (income) expense 3.7 (14.4) (79.4) 18.1 (44.6) (71.1) 62.7
Other 96.6 (21.9) (18.5) 118.5 (53.6) (31.1) 172.1
- -------------------------------------------------------------------------------------------------
Total other operating expenses 653.4 (36.5) (5.3) 689.9 (130.9) (15.9) 820.8
Provision for ORE and
owned assets 3.4 (2.5) (43.6) 5.9 5.9 100.0 -
- -------------------------------------------------------------------------------------------------
Total other operating expenses
after provision for ORE and
owned assets $656.8 $(39.0) (5.6) $695.8 $(125.0) (15.2) $820.8
- -------------------------------------------------------------------------------------------------
Personnel - average number 8,037 (264) (3.2) 8,301 (135) (1.6) 8,436
=================================================================================================
The ratio of operating expenses to income declined to 51% in 1996 from over
75% in 1994.
</TABLE>
Personnel Expense
Personnel expense was $352.1 million in 1996 compared with $354.2 million in
1995 and $363.8 million in 1994. Average staffing levels (full time
equivalents) have declined during the three year period to 8,037 in 1996 from
8,436 in 1994. During 1994, the Company offered a voluntary retirement
program. The charge for this program of $29.8 million was included in other
expenses.
Other Operating Expenses
Other operating expenses excluding personnel, have decreased primarily as a
result of lower FDIC assessment as well as decreases in costs associated with
problem credits. 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 and a similar
reduction in 1996. The amount reported for 1996 includes $.4 million,
representing the one-time assessment to recapitalize the SAIF Insurance Fund.
The Company had $71 million in deposits subject to this assessment.
ORE and owned asset expenses were $3.7 million in 1996 compared with $18.1
million in 1995 and $62.7 million in 1994. The year 1994 included $32.5
million of revaluation adjustments related to ORE and owned assets. Beginning
in 1995, these revaluations are considered in the level of provision provided
for ORE and owned assets.
14
Provision for Loan Losses
Provision for loan losses was $64.7 million in 1996 compared with $175.3
million in 1995 and $168.7 million in 1994. Commercial loan credit quality
has improved with net charge offs declining to $30.4 million in 1996 from
$178.0 million in 1995. The provision for loan losses in 1995 included $113.0
million for management's decision to accelerate the timing of control and
disposal of a troubled aircraft portfolio which was acquired through the
merger of Concord Leasing, Inc. on January 1, 1995. Provision for loan losses
during 1996 included the higher level of net charge offs in the credit card
portfolio, $37.0 million higher than in 1995.
Nonaccruing loans were 23.7% less at December 31, 1996 than one year ago. An
analysis of the loan loss allowance and the provision for loan losses begins
on page 26.
Income Taxes
Income taxes are accounted for under the asset and liability method, whereby
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss carryforwards. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be recovered or
settled.
Realization of deferred tax assets is contingent upon the generation of future
taxable income or the existence of sufficient taxable income within the
carryback period. A valuation allowance has been established for the portion
of the Company's net deductible temporary differences which are not expected
to be realized. Income tax expense was affected in 1996 and 1995 by
reductions in the valuation allowance of $53.7 million and $103.5 million,
respectively.
At December 31, 1996, the Company had a net deferred tax asset of $55.2
million, as compared with a net deferred tax asset of $88.2 million at
December 31, 1995.
<TABLE>
<CAPTION>
Line of Business Results
- -------------------------------------------------------------------------------------------
Consumer Commercial Other Total
- -------------------------------------------------------------------------------------------
1996 1995 1996 1995 1996 1995 1996 1995
- -------------------------------------------------------------------------------------------
Income/expense in millions; average balances in billions
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income $516.1 $454.8 $327.9 $327.6 $117.8 $109.8 $961.8 $892.2
Other operating income 174.9 159.0 96.5 94.0 39.5 61.8 310.9 314.8
Provision for loan losses 114.4 59.5 (49.7) 115.8 - - 64.7 175.3
Operating expenses 410.7 396.2 208.0 236.3 38.1 63.3 656.8 695.8
Income before taxes 165.9 158.1 266.1 69.5 119.2 108.3 551.2 335.9
Average assets 7.0 6.4 7.8 7.9 6.0 4.7 20.8 19.0
Average liabilities and
equity 10.1 9.2 4.1 4.2 6.6 5.6 20.8 19.0
===========================================================================================
15
</TABLE>
The Company has identified two major business segments, consumer and
commercial banking for purposes of management reporting. The consumer
business operates a full-service consumer franchise encompassing branch
banking, credit cards, mortgage banking and private banking. The commercial
banking business operates a diversified range of wholesale banking services
emphasizing global capabilities to local, regional and national corporate
customers, financial institutions and government entities. The other category
includes the Company's investment securities portfolio, selected special
charges and earnings on capital.
The business segment results show the financial performance of these segments.
The results are determined based on the Company's management accounting
process which assigns balance sheet and income statement items to the
respective business units. Expenses of the business units include all direct
costs and allocations of indirect costs.
The consumer business was favorably impacted by growth in loans including
residential mortgages and credit cards, and also deposits. The increase in
residential mortgages and deposits from 1995 includes the result of the
acquisition activity in 1996. Earnings from consumer business were negatively
affected by the increase in credit card charge offs in 1996 compared with
1995. The earnings of the commercial business increased in 1996 from 1995
primarily as a result of the improved credit quality of the portfolio
including special provision for loan losses provided in 1995 relating to the
Concord portfolio.
B A L A N C E S H E E T R E V I E W
Risk Management
The Company's organizational structure includes a Risk Management Committee
comprised of senior officers to oversee the risk management process. This
committee is charged with the review of the internal control framework which
identifies, measures, monitors and controls the risks undertaken by the
various business and support units and the Company as a whole to determine if
they are collectively well controlled and to ensure that they would not have
an adverse effect on the institution. It is responsible for the review of all
risks associated with selective new products and activities and their primary
internal controls prior to their implementation. The spectrum of risks
includes, but is not limited to, liquidity, market, credit, operational, legal
and reputational risk. The Asset and Liability Management Policy Committee
manages the details of liquidity and market risk. The management of credit
risk is further discussed on page 21.
16
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 has a wide range of available techniques for implementing asset-
liability management decisions. 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 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 $300 million at
December 31, 1996. Wholesale liabilities increased to $4,267 million at
December 31, 1996 from $4,205 million a year ago primarily to fund increased
money market assets. Deposits at December 31, 1996 were 120.5% of loans
compared with 111.3% at December 31, 1995.
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 derivative financial instruments. Consisting
principally of interest rate swaps and forward rate agreements, these
derivative financial instruments mitigate interest rate risk by altering the
repricing characteristics of certain on-balance sheet assets and liabilities.
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
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.
17
Interest Rate Sensitivity
<TABLE>
<CAPTION>
The following table, which is based upon dynamic simulation modeling as of
December 31, 1996, demonstrates the impact of a 1 percent positive and
negative movement in interest rates on the Company's net interest income for
the next twelve months and illustrates the effectiveness of the risk
management positions at reducing overall interest rate sensitivity.
- ----------------------------------------------------------------------------
Changes in net interest income attributable to: +1% -1%
- ----------------------------------------------------------------------------
in millions
<S> <C> <C>
Balance sheet assets and liabilities $ 5 $(14)
Risk management positions in derivative
off-balance sheet instruments (8) 7
- ----------------------------------------------------------------------------
$(3) $ (7)
============================================================================
</TABLE>
Management has primarily used derivative financial instruments to alter the
repricing characteristics of balance sheet assets and liabilities, thereby
decreasing the Company's overall sensitivity to changes in interest rates.
In addition to using derivative financial instruments to manage overall
repricing risk, the Company uses 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 derivatives are based upon the London Interbank Offered
Rate (LIBOR). Given that the majority of rate sensitive loan assets are prime
based, and consistent with risk management philosophy, the Company may enter
into certain agreements whereby the LIBOR and prime interest streams are
exchanged. Derivative financial instruments are also used 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 25 to the Financial Statements.
The following table shows the repricing structure of assets and liabilities as
of December 31, 1996, 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. For those assets and
liabilities subject to change in behavior due to movements in interest rates
such as mortgage sensitivity to prepayments, data is reported based on their
assumed life until the earlier of expected repricing or maturity. The
resulting "gaps" indicate the sensitivity of earnings with respect to the
direction, magnitude and timing of changes in market interest rates. Data
shown is as of one day, and one day figures can be distorted by temporary
swings in assets or liabilities.
18
<TABLE>
<CAPTION>
Interest Rate Sensitivity
- ----------------------------------------------------------------------------------------
Noninterest
Bearing 0-90 91-180 181-365 Over 1
December 31, 1996 Funds Days Days Days Year Total
- ----------------------------------------------------------------------------------------
in millions
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest bearing deposits
with banks $ - $ 1,618 $ 315 $ - $ - $ 1,933
Securities - 343 165 969 1,393 2,870
Loans - 7,921 655 814 5,302 14,692
Other earning assets - 2,729 - - 5 2,734
Other assets, net 1,401 - - - - 1,401
- ----------------------------------------------------------------------------------------
Total assets $ 1,401 $12,611 $1,135 $ 1,783 $6,700 $23,630
- ----------------------------------------------------------------------------------------
Sources of funds:
Interest bearing deposits:
Domestic offices
Time deposits of $100,000
or more $ - $ 916 $ 140 $ 99 $ 96 $ 1,251
Other - 3,869 1,145 1,203 4,154 10,371
Foreign offices - 1,770 3 - - 1,773
Other interest bearing
liabilities - 3,328 1 1 231 3,561
Noninterest bearing deposits 4,315 - - - - 4,315
Other liabilities 386 - - - - 386
Shareholders' equity 1,973 - - - - 1,973
- ----------------------------------------------------------------------------------------
Total sources of funds $ 6,674 $ 9,883 $1,289 $ 1,303 $4,481 $23,630
- ----------------------------------------------------------------------------------------
Effect of interest rate swaps - 349 (36) (1,662) 1,349
- ----------------------------------------------------------------------------------------
Interest sensitivity gap $(5,273) $ 3,077 $ (190) $(1,182) $3,568
========================================================================================
</TABLE>
<TABLE>
<CAPTION>
Commercial Loan Maturities and Sensitivity to Changes in Interest Rates
- ------------------------------------------------------------------------------
One Over One Over
Year Through Five
December 31, 1996 or Less Five Years Years
- ------------------------------------------------------------------------------
in millions
<S> <C> <C> <C>
Domestic:
Construction loans $ 155 $ 204 $ 37
Mortgage loans 338 897 454
Other business and financial 2,754 1,792 548
International 148 28 333
- ------------------------------------------------------------------------------
Total $3,395 $2,921 $1,372
==============================================================================
Loans with fixed or predetermined
interest rates $1,539 $1,529 $ 923
Loans having floating or adjustable
interest rates 1,856 1,392 449
- ------------------------------------------------------------------------------
Total $3,395 $2,921 $1,372
==============================================================================
The table presents the contractual maturity and interest sensitivity of
domestic commercial and international loans at year-end 1996.
19
</TABLE>
Securities Portfolios
Debt securities that the Company has the ability and intent to hold to
maturity are reported at amortized cost. Securities acquired principally for
the purpose of selling them in the near term are classified as trading
securities and reported at fair value, with unrealized gains and losses
included in earnings. All other securities are classified as available for
sale and carried at fair value, with unrealized gains and losses excluded from
earnings and reported as a separate component of shareholders' equity.
In 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 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, 1996 1995 1994
- ------------------------------------------------------------------------------
in millions
<S> <C> <C> <C>
Available for sale:
U.S. Treasury $2,275 $1,715 $ -
U.S. Government agency obligations 374 618 -
Other debt securities 149 202 34
Equity securities 72 79 80
- ------------------------------------------------------------------------------
$2,870 $2,614 $ 114
- ------------------------------------------------------------------------------
Held to maturity:
U.S. Treasury $ - $ - $1,065
U.S. Government agency obligations - - 751
Other debt securities - - 152
- ------------------------------------------------------------------------------
$ - $ - $1,968
==============================================================================
</TABLE>
<TABLE>
<CAPTION>
The following table reflects the distribution of maturities of the available
for sale portfolio at year-end 1996 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, 1996. 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 $72 million, including $43
million in Federal Reserve Bank stock, without fixed maturities which had a
weighted average yield of 6.83%.
20
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 $1,083 5.53% $1,041 5.82% $151 5.60% $ - -%
U.S. Gov't agency 5 6.48 18 6.48 114 6.23 237 7.12
Other debt securities - - 149 5.93 - - - -
- ------------------------------------------------------------------------------------------
Total fair value $1,088 5.53% $1,208 5.84% $265 5.87% $237 7.12%
- ------------------------------------------------------------------------------------------
Total amortized cost $1,081 $1,210 $263 $231
==========================================================================================
</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
estimated prepayments. Based on the anticipated cash flows, the total
maturity distributions for the portfolio would be $1,255 million, $1,269
million, $192 million and $82 million for within one year, after one but
within five years, after five years but within ten years and after ten years,
respectively.
Credit Risk 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 Risk Management Committee is responsible for oversight of credit policy
and the credit risk profile of the loan portfolio. The Chief Credit Officer
is responsible for the design and management of the credit function including
monitoring and making changes, where appropriate, to written credit policies.
In addition to active supervision and evaluation by lending officers, periodic
reviews of the loan portfolio are made by internal auditors, independent
auditors, the Board of Directors and regulatory agency examiners. These
reviews cover selected borrowers' current financial position, past and
prospective earnings and cash flow, and realizable value of collateral and
guarantees. These reviews also serve as an early identification of problem
credits.
21
<TABLE>
<CAPTION>
Loans Outstanding
The following table provides a breakdown of major loan categories as of year
end for the past five years. The acquisition of assets acquired from East
River Savings Bank in June 1996 included a commercial mortgage portfolio of
$600 million and a residential mortgage portfolio of $300 million. The
commercial loan portfolio does not include any industry concentration which
exceeded 10% of loans at December 31, 1996.
- --------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------
in millions
<S> <C> <C> <C> <C> <C>
Domestic:
Commercial:
Construction loans $ 396 $ 428 $ 480 $ 730 $ 1,290
Mortgage loans 1,689 999 931 915 671
Loans and advances to affiliates 96 343 302 160 106
Other business and financial 4,998 4,865 4,993 5,072 5,610
Consumer:
Residential mortgages 3,632 3,080 2,738 2,356 1,983
Credit card receivables 1,939 1,844 1,656 1,521 822
Other consumer loans 1,433 1,472 1,406 1,250 1,576
- --------------------------------------------------------------------------------------------
14,183 13,031 12,506 12,004 12,058
- --------------------------------------------------------------------------------------------
International:
Government and official institutions 359 373 383 381 453
Banks and other financial institutions 95 284 191 25 25
Commercial and industrial 55 84 54 111 142
- --------------------------------------------------------------------------------------------
509 741 628 517 620
- --------------------------------------------------------------------------------------------
Total loans $14,692 $13,772 $13,134 $12,521 $12,678
============================================================================================
</TABLE>
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.
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.
22
<TABLE>
<CAPTION>
Risk Elements in the Loan Portfolio at Year End
- ------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------
in millions
<S> <C> <C> <C> <C> <C>
Nonaccruing loans:
Domestic:
Construction and other commercial
real estate $ 176 $ 170 $ 365 $ 595 $ 876
Other domestic loans 181 298 696 525 1,136
- ------------------------------------------------------------------------------------
Subtotal 357 468 1,061 1,120 2,012
International - - - - -
- ------------------------------------------------------------------------------------
Total nonaccruing loans 357 468 1,061 1,120 2,012
Restructured accruing loans 25 13 10 - -
- ------------------------------------------------------------------------------------
Total nonaccruing and restructured loans 382 481 1,071 1,120 2,012
Other real estate 13 65 144 217 283
Owned assets 1 45 8 32 98
- ------------------------------------------------------------------------------------
Total nonaccruing and restructured loans,
other real estate and owned assets $ 396 $ 591 $1,223 $1,369 $2,393
====================================================================================
Ratios:
Nonaccruing and restructured
loans to total loans 2.60% 3.50% 8.16% 8.95% 15.87%
Nonaccruing loans, restructured loans,
other real estate and owned assets
to total assets 1.68 2.88 6.40 6.74 12.43
- ------------------------------------------------------------------------------------
Accruing loans contractually past due
90 days or more as to principal or
interest (all domestic):
Residential real estate mortgages $ 12 $ 15 $ 18 $ 12 $ 22
Credit card receivables 35 22 9 12 13
Other consumer loans 12 14 11 12 7
All other 16 9 17 25 45
- ------------------------------------------------------------------------------------
Total accruing loans contractually past
due 90 days or more $ 75 $ 60 $ 55 $ 61 $ 87
====================================================================================
</TABLE>
In certain situations where the borrower is experiencing temporary cash flow
problems, and after careful examination by management, the interest rate and
payment terms may be adjusted from the original contractual agreement. When
this occurs and the revised terms at the time of renegotiation are less than
the Company would be willing to accept for a new loan with comparable risk,
the loan is separately identified as restructured.
Nonaccruing loans at December 31, 1996 totaled $357 million or 2.43% of total
loans, compared with $468 million or 3.40% 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,
primarily aircraft, prior to 1995. 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 early 1995 to reflect the change in strategy. The majority of the
decline in nonaccruing loans at December 31, 1996 compared with year ends 1995
and 1994 occurred in this portfolio. Nonaccruing loans that have been
restructured but remain in nonaccruing status amounted to $76 million, $70
million and $11 million at December 31, 1996, 1995 and 1994, respectively.
23
Of the nonaccruing loans at December 31, 1996 over 50% are less than 30 days
past due as to cash payment of principal and interest. Cash payments received
on loans on nonaccruing status during 1996, or since loans were placed on
nonaccruing status, whichever was later, totaled $70 million, $36 million of
which was applied as interest income and $34 million as reduction of loan
principal.
Residential mortgages are generally designated as nonaccruing when delinquent
for more than ninety days. Other consumer loans are generally not designated
as nonaccruing and are charged off against the allowance for loan losses
according to an established delinquency schedule. Higher credit card
delinquencies (charged off when 180 days delinquent) during 1996 resulted in
increased net charge offs associated with this portfolio compared with prior
years.
The Company identified impaired loans totaling $258 million at December 31,
1996 of which $61 million had an allocation from the allowance of $24 million.
At December 31, 1995, the Company had identified impaired loans of $348
million, of which $117 million had an allocation from the allowance of $61
million. 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.
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
value (including cost to dispose) is reported on the balance sheet in other
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 provision for ORE and other owned asset losses.
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.
24
<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, 1996: *
Canada $208 $108 $316
Switzerland 178 - 178
United Kingdom 93 219 312
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
===========================================================================
* 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 $31 million, $29
million and $27 million at year ends 1996, 1995 and 1994, 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 $28 million, $26 million and $24 million at year ends 1996, 1995
and 1994, respectively. Interest payments are partially secured by cash
equivalent instruments for a 14 month period. These bonds had an aggregate
fair value of $273 million at December 31, 1996.
25
</TABLE>
Allowance for Loan Loss and Charge Offs
At year-end 1996, the allowance was $418.2 million, or 2.85% of total loans,
compared with $477.5 million, or 3.47% of total loans, a year ago. The ratio
of the allowance to nonaccruing loans was 116.98% at December 31, 1996
compared with 101.95% a year earlier. The Company's nonaccruing loans were
reduced to $357 million at December 31, 1996 from $468 million at December 31,
1995.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------
in millions
<S> <C> <C> <C> <C> <C>
Total loans at year end $14,692 $13,772 $13,134 $12,521 $12,678
Average total loans 13,905 13,200 12,714 12,469 12,618
Allowance for loan losses:
Balance at beginning of year $ 477.5 $ 531.5 $ 524.3 $ 700.9 $ 727.0
Allowance related to acquired
businesses 3.4 .4 1.2 - -
Charge offs:
Commercial:
Construction loans - 44.4 68.8 111.5 42.0
Mortgage loans - .5 14.8 26.3 51.8
Other business and financial 69.8 174.8 92.2 142.4 205.6
Consumer:
Credit card receivables 91.7 53.8 50.5 40.4 31.2
Other consumer loans 20.0 12.3 17.5 37.8 39.1
International - - - - -
- --------------------------------------------------------------------------------------
Total charge offs 181.5 285.8 243.8 358.4 369.7
- --------------------------------------------------------------------------------------
Recoveries on loans charged off:
Commercial:
Construction loans 1.1 11.9 10.7 4.8 9.3
Mortgage loans - - - - .1
Other business and financial 38.3 29.8 53.6 46.2 16.4
Consumer:
Credit card receivables 9.2 8.3 8.3 10.0 11.7
Other consumer loans 5.5 6.1 8.5 12.3 16.4
International - - - - .3
- --------------------------------------------------------------------------------------
Total recoveries 54.1 56.1 81.1 73.3 54.2
- --------------------------------------------------------------------------------------
Total net charge offs 127.4 229.7 162.7 285.1 315.5
- --------------------------------------------------------------------------------------
Provision charged to income 64.7 175.3 168.7 108.5 289.4
- --------------------------------------------------------------------------------------
Balance at end of year $ 418.2 $ 477.5 $ 531.5 $ 524.3 $ 700.9
- --------------------------------------------------------------------------------------
Allowance ratios:
Total net charge offs to
average loans .92% 1.74% 1.28% 2.29% 2.50%
Year-end allowance to:
Year-end total loans 2.85 3.47 4.05 4.19 5.53
Year-end total nonaccruing loans 116.98 101.95 50.08 46.79 34.84
======================================================================================
</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.
26
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 and residential mortgages
reflect management's judgment with respect to the ultimate collectibility of
all or part of a loan. Charge offs of consumer loans, excluding residential
mortgages, 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, 1996 is adequate as a general allowance.
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. The allowance for loan
losses did not change as a result of this establishment.
<TABLE>
<CAPTION>
Allocation of Allowance for Loan Loss
- ----------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------
% 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 $ 2 2.7 $ 3 3.1 $ 40 3.7 $ 56 5.8 $164 10.2
Mortgage loans 19 11.5 10 7.3 12 7.1 10 7.3 10 5.3
Other business 75 34.7 149 37.8 221 40.3 186 41.8 190 45.1
Consumer:
Credit card receivables 55 13.2 40 13.4 42 12.6 47 12.2 26 6.5
Other consumer 16 34.5 14 33.0 12 31.5 14 28.8 25 28.1
International 26 3.4 28 5.4 2 4.8 1 4.1 2 4.8
Unallocated 225 - 234 - 202 - 210 - 284 -
- ----------------------------------------------------------------------------------------------------------
Total $418 100.0 $478 100.0 $531 100.0 $524 100.0 $701 100.0
==========================================================================================================
27
</TABLE>
Capital Resources
Total shareholders' equity at year-end 1996 was $1,973 million, compared with
$1,697 million at year-end 1995. The equity base was increased by $380.2
million from net income, reduced by $18.5 million from change in net
unrealized gains on securities available for sale, $80 million for common
shareholder dividends paid to HSBC Holdings B.V. and $5.9 million for
preferred shareholder dividends. The capital contribution from the parent of
$.3 million primarily relates to an HSBC stock ownership plan in which almost
all of the Company's employees are eligible to participate.
The ratio of shareholders' equity to total year-end assets was 8.35% at
December 31, 1996 compared with 8.26% at December 31, 1995.
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
preferred stock including the guaranteed mandatorily redeemable preferred
securities of subsidiary of the Company issued in 1996. 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 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, 1996 was approximately $16.8 billion.
Tier 1 capital was $2.0 billion and total capital was $2.9 billion resulting
in risk adjusted capital ratios of 11.92% at the Tier 1 level and 17.00% at
the total capital level. These ratios compared with 10.89% at the Tier 1
level and 16.39% at the total capital level at December 31, 1995.
28
Banking industry regulators also have guidelines that set forth the leverage
ratios to be applied to banking organizations in conjunction with the
risk-based capital framework. Under these guidelines, strong bank holding
companies must maintain a minimum leverage ratio of Tier 1 capital to
quarterly average total assets of 3%. At December 31, 1996, the Company had a
9.54% leverage ratio compared with 8.36% at December 31, 1995.
The regulatory agencies established five capital categories applicable to
banks from well capitalized to critically undercapitalized. The Bank's ratios
at December 31, 1996 exceeded the ratios required for the well capitalized
category.
In 1996, the bank regulators amended their risk-based capital guidelines to
incorporate a measure for market risk inherent in the trading portfolio.
Under the new market risk requirements, capital will be allocated to support
the amount of market risk that relates to the Company's trading activities.
The market risk rules are not effective until 1998 and will only apply to
institutions with significant trading activities. It is currently estimated
that the new rules will not significantly affect the risk-based capital ratios
of the Company.
From time to time, the bank regulators propose amendments to or issue
interpretations of risk-based capital guidelines. Such proposals or
interpretations could, upon implementation, affect reported capital ratios and
net risk-adjusted assets.
Pending Acquisition
In August 1996, the Company announced that it had reached an agreement to
acquire CTUS Inc., a unitary thrift holding company and parent of First
Federal Savings and Loan Association of Rochester, from Toronto-based CT
Financial Services Inc. for $620 million. The transaction is expected to
close in March 1997. The Company will sell a portion of its portfolio of
investment securities to fund the purchase price. The pending acquisition is
more fully described in Note 1 to the Financial Statements.
29
Item 8. Financial Statements and Supplementary Data
Page
Report of Management 31
Report of Independent Auditors 32
HSBC Americas, Inc.:
Consolidated Balance Sheet 33
Consolidated Statement of Income 34
Consolidated Statement of Changes in
Shareholders' Equity 35
Consolidated Statement of Cash Flows 36
Marine Midland Bank:
Consolidated Balance Sheet 37
Summary of Significant Accounting Policies 38
Notes to Financial Statements 42
30
R E P O R T O F M A N A G E M E N T
Management of HSBC Americas, Inc., is responsible for the integrity of the
financial information presented in this annual report. Management has
prepared the financial statements in conformity with generally accepted
accounting principles. In preparing the financial statements, management
makes judgments and estimates of the expected effect of events that are
accounted for or disclosed.
The Company's systems of internal accounting control are designed to provide
reasonable assurance, but not absolute, that assets are safeguarded against
loss from unauthorized acquisition, use or disposition and that the financial
records are reliable for preparing financial statements. The selection and
training of qualified personnel and the establishment and communication of
accounting and administrative policies and procedures are elements of these
control systems. Management believes that the system of internal control,
which is subject to close scrutiny by management and by internal auditors,
supports the integrity and reliability of the financial statements.
The Board of Directors meets regularly with management, internal auditors and
the independent auditors to discuss internal control, internal auditing and
financial reporting matters, and also the scope of the annual audit and
interim reviews. Both the internal auditors and the independent auditors have
direct access to the Board of Directors.
31
R E P O R T O F I N D E P E N D E N T A U D I T O R S
The Board of Directors and Shareholders of
HSBC Americas, Inc.
We have audited the accompanying consolidated balance sheets of HSBC Americas,
Inc. and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for each of the years in the three year period ended December 31, 1996,
and the accompanying consolidated balance sheets of Marine Midland Bank and
subsidiaries as of December 31, 1996 and 1995. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of HSBC
Americas, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three year period ended December 31, 1996, and the financial position of
Marine Midland Bank and subsidiaries as of December 31, 1996 and 1995, in
conformity with generally accepted accounting principles.
As discussed in the Summary of Significant Accounting Policies, the Company
adopted the provisions of Statement of Financial Accounting Standards (SFAS)
No. 114, "Accounting by Creditors for Impairment of a Loan" as amended by SFAS
No. 118, "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures" in 1995.
/s/ KPMG PEAT MARWICK LLP
Buffalo, New York
January 23, 1997
32
<TABLE>
<CAPTION>
HSBC Americas, Inc. 1996
- ------------------------------------------------------------------------------
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, 1996 1995
- ------------------------------------------------------------------------------
in thousands
<S> <C> <C>
Assets
Cash and due from banks $ 967,249 $ 1,242,335
Interest bearing deposits with banks 1,933,036 1,488,101
Federal funds sold and securities
purchased under resale agreements 1,841,863 518,256
Trading assets 891,546 616,531
Securities available for sale 2,870,075 2,613,830
Loans 14,691,916 13,772,339
Less - allowance for loan losses 418,159 477,502
- ------------------------------------------------------------------------------
Loans, net 14,273,757 13,294,837
Premises and equipment 189,795 180,552
Accrued interest receivable 175,326 150,335
Intangible assets 192,355 71,596
Other assets 294,753 376,970
- ------------------------------------------------------------------------------
Total assets $ 23,629,755 $ 20,553,343
==============================================================================
Liabilities
Deposits in domestic offices
Noninterest bearing $ 4,315,447 $ 3,433,016
Interest bearing 11,621,213 10,454,352
Interest bearing deposits in foreign offices 1,773,159 1,442,484
- ------------------------------------------------------------------------------
Total deposits 17,709,819 15,329,852
Short-term borrowings 2,481,342 2,538,110
Interest, taxes and other liabilities 385,434 278,765
Long-term debt 880,183 709,750
Guaranteed mandatorily redeemable preferred
securities of subsidiary 200,000 -
- ------------------------------------------------------------------------------
Total liabilities 21,656,778 18,856,477
- ------------------------------------------------------------------------------
Commitments and contingent liabilities (Notes 23 and 24)
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 1,803,427 1,803,094
Retained earnings (accumulated deficit) 60,630 (233,686)
Net unrealized gain on securities
available for sale, net of taxes 10,852 29,390
- ------------------------------------------------------------------------------
Total common shareholder's equity 1,874,914 1,598,803
- ------------------------------------------------------------------------------
Total shareholders' equity 1,972,977 1,696,866
- ------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 23,629,755 $ 20,553,343
==============================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
33
</TABLE>
<TABLE>
<CAPTION>
HSBC Americas, Inc. 1996
- ------------------------------------------------------------------------------
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, 1996 1995 1994
- ------------------------------------------------------------------------------
in thousands
<S> <C> <C> <C>
Interest income
Loans $ 1,278,681 $ 1,213,929 $ 1,024,352
Securities 187,539 145,000 99,706
Trading assets 51,231 33,965 53,972
Deposits with banks 65,439 60,725 48,256
Federal funds sold and
securities purchased under
resale agreements 28,831 34,906 30,319
- ------------------------------------------------------------------------------
Total interest income 1,611,721 1,488,525 1,256,605
- ------------------------------------------------------------------------------
Interest expense
Deposits
In domestic offices 412,679 391,808 279,287
In foreign offices 68,773 72,733 28,398
Short-term borrowings 120,873 81,426 80,961
Long-term debt 47,628 50,396 85,881
- ------------------------------------------------------------------------------
Total interest expense 649,953 596,363 474,527
- ------------------------------------------------------------------------------
Net interest income 961,768 892,162 782,078
Provision for loan losses 64,750 175,292 168,703
- ------------------------------------------------------------------------------
Net interest income, after
provision for loan losses 897,018 716,870 613,375
- ------------------------------------------------------------------------------
Other operating income
Trust income 41,155 46,724 47,514
Service charges 89,856 85,051 84,452
Mortgage servicing income 15,074 16,217 19,065
Other fees and commissions 116,057 120,905 126,310
Trading revenues (loss) 3,779 5,399 (13,884)
Other income 45,022 40,609 32,487
- ------------------------------------------------------------------------------
Total other operating income 310,943 314,905 295,944
- ------------------------------------------------------------------------------
1,207,961 1,031,775 909,319
- ------------------------------------------------------------------------------
Other operating expenses
Salaries 280,844 283,541 287,597
Pension and other employee benefits 71,290 70,638 76,171
- ------------------------------------------------------------------------------
Total personnel expense 352,134 354,179 363,768
Net occupancy expense 78,541 76,356 71,315
Other expenses 222,741 259,361 385,629
- ------------------------------------------------------------------------------
Total other operating expenses 653,416 689,896 820,712
Provision for ORE and other owned
asset losses 3,357 5,954 -
- ------------------------------------------------------------------------------
Total other operating expenses after
provision for ORE and other
owned asset losses 656,773 695,850 820,712
- ------------------------------------------------------------------------------
Income before taxes 551,188 335,925 88,607
Applicable income tax expense 171,000 52,341 125,572
- ------------------------------------------------------------------------------
Net income (loss) $ 380,188 $ 283,584 $ (36,965)
==============================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
34
</TABLE>
<TABLE>
<CAPTION>
HSBC Americas, Inc. 1996
- ------------------------------------------------------------------------------
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
Retained Gain on
Earnings Securities
Preferred Common Capital (Accumulated Available
Stock Stock Surplus Deficit) for Sale
- ------------------------------------------------------------------------------
in thousands
<S> <C> <C> <C> <C> <C>
Balance
December 31, 1993 $98,063 $ 5 $ 1,820,777 $ (218,559) $ -
Net loss - - - (36,965) -
Cash dividends declared
on preferred stock
$5.50 cumulative - - - (122) -
Adjustable rate cumulative - - - (5,751) -
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
$5.50 cumulative - - - (122) -
Adjustable rate cumulative - - - (5,751) -
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 taxes - - - - 29,390
- ------------------------------------------------------------------------------
Balance
December 31, 1995 98,063 5 1,803,094 (233,686) 29,390
Net income - - - 380,188 -
Change in unrealized gain
on securities available
for sale, net of taxes - - - - (18,538)
Cash dividends declared
on preferred stock
$5.50 cumulative - - - (122) -
Adjustable rate cumulative - - - (5,750) -
Cash dividends declared
on common stock - - - (80,000) -
Capital contribution from parent - - 333 - -
- ------------------------------------------------------------------------------
Balance December 31, 1996 $98,063 $ 5 $ 1,803,427 $ 60,630 $ 10,852
==============================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
35
</TABLE>
<TABLE>
<CAPTION>
HSBC Americas, Inc. 1996
- -----------------------------------------------------------------------------
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, 1996 1995 1994
- -----------------------------------------------------------------------------
in thousands
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss) $ 380,188 $ 283,584 $ (36,965)
Adjustments to reconcile net income
(loss) to net cash provided (used)
by operating activities
Depreciation, amortization and
deferred taxes 103,055 (6,743) 64,512
Provision for loan losses 64,750 175,292 168,703
Net change in other accrual accounts 73,698 (424,005) (139,582)
Net change in loans originated for sale 325,109 (88,853) 171,692
Net change in trading assets (270,047) (202,610) 1,191,938
Other, net (49,107) (28,469) 37,098
- -----------------------------------------------------------------------------
Net cash provided (used) by
operating activities 627,646 (291,804) 1,457,396
- -----------------------------------------------------------------------------
Cash flows from investing activities
Net change in interest bearing
deposits with banks (218,875) (182,054) 409,104
Net change in short-term investments (378,485) 81,737 350,009
Purchases of securities (956,647) (1,192,103) (629,054)
Sales of securities 89,780 61,852 24,846
Maturities of securities 650,584 665,172 551,822
Net change in credit card receivables (181,915) (234,858) (178,679)
Net change in other short-term loans 43,540 (74,725) (130,389)
Net originations and maturities of
long-term loans (172,860) (698,367) (873,779)
Expenditures for premises and equipment (32,605) (24,906) (20,912)
Net cash used in acquisitions,
net of cash acquired (40,094) - -
Other, net 85,803 523,648 40,209
- -----------------------------------------------------------------------------
Net cash used by investing activities (1,111,774) (1,074,604) (456,823)
- -----------------------------------------------------------------------------
Cash flows from financing activities
Net change in deposits (21,173) 1,549,122 802,188
Net change in short-term borrowings (56,768) 282,221 (847,124)
Issuance of long-term debt 297,522 - -
Repayment of long-term debt (125,000) (47) (987,816)
Guaranteed mandatorily redeemable
preferred securities of subsidiary 200,000 - -
Capital contributions 333 (117,683) 100,000
Dividends paid (85,872) (155,873) (105,873)
- -----------------------------------------------------------------------------
Net cash provided (used) by
financing activities 209,042 1,557,740 (1,038,625)
- -----------------------------------------------------------------------------
Net change in cash and due from banks (275,086) 191,332 (38,052)
Cash and due from banks at beginning
of year 1,242,335 1,051,003 1,089,055
- -----------------------------------------------------------------------------
Cash and due from banks at end of year $ 967,249 $ 1,242,335 $ 1,051,003
=============================================================================
Cash paid for: Interest $ 638,997 $ 592,194 $ 474,440
Income taxes 76,788 185,453 113,779
Non-cash activities
Transfers of securities held to maturity
to available for sale - 2,535,262 -
Fair value of net liabilities assumed
in acquisitions (99,446) - -
- -----------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
36
</TABLE>
<TABLE>
<CAPTION>
Marine Midland Bank 1996
- ------------------------------------------------------------------------------
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, 1996 1995
- ------------------------------------------------------------------------------
in thousands
<S> <C> <C>
Assets
Cash and due from banks $ 967,072 $ 1,224,494
Interest bearing deposits with banks 1,867,936 1,488,002
Federal funds sold and securities
purchased under resale agreements 1,841,863 518,256
Trading assets 891,546 616,531
Securities available for sale 2,841,138 2,567,897
Loans 14,555,533 13,723,691
Less - allowance for loan losses 415,451 476,544
- ------------------------------------------------------------------------------
Loans, net 14,140,082 13,247,147
Premises and equipment 189,689 180,431
Intangible assets 187,259 63,644
Accrued interest receivable 174,783 149,512
Other assets 243,786 286,558
- ------------------------------------------------------------------------------
Total assets $ 23,345,154 $ 20,342,472
==============================================================================
Liabilities
Deposits in domestic offices
Noninterest bearing $ 4,242,927 $ 3,404,311
Interest bearing 11,621,213 10,454,352
Interest bearing deposits in foreign offices 3,036,069 2,764,861
- ------------------------------------------------------------------------------
Total deposits 18,900,209 16,623,524
Short-term borrowings 1,724,709 1,516,020
Interest, taxes and other liabilities 407,264 297,385
Long-term debt 430,642 260,179
- ------------------------------------------------------------------------------
Total liabilities 21,462,824 18,697,108
- ------------------------------------------------------------------------------
Commitments and contingent liabilities (Notes 23 and 24)
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 1,633,431 1,633,098
Retained earnings (accumulated deficit) 54,753 (201,185)
Net unrealized gain on securities
available for sale, net of taxes 9,146 28,451
- ------------------------------------------------------------------------------
Total shareholder's equity 1,882,330 1,645,364
- ------------------------------------------------------------------------------
Total liabilities and shareholder's equity $ 23,345,154 $ 20,342,472
==============================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
37
</TABLE>
S U M M A R Y O F S I G N I F I C A N T A C C O U N T I N G
P O L I C I E S
HSBC Americas, Inc. (the Company) 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
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.
Loans
Loans are stated at their principal amount outstanding, net of unearned
income, 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.
38
Commercial loans are categorized as nonaccruing when, in the opinion of
management, reasonable doubt exists with respect to collectibility of interest
or principal based on certain factors including period of time past due
(principally ninety days) and adequacy of collateral. At the time a loan is
classified as nonaccruing, any accrued interest recorded on the loan is
generally reversed and charged against income. Interest income on these loans
is recognized only to the extent of cash received. In those instances where
there is doubt as to collectibility of principal, any interest payments
received are applied to principal. Loans are not reclassified as accruing
until interest and principal payments are brought current and future payments
are reasonably assured.
Residential mortgages are generally designated as nonaccruing when delinquent
for more than ninety days. Other consumer loans are generally not designated
as nonaccruing and 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
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.
39
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 allowance for loan losses. Subsequent
decreases in fair value and net operating results on the property are included
in provision for ORE and other owned asset losses.
Mortgage Servicing Rights
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 122, Accounting for Mortgage Servicing Rights (FAS
122) prospectively. FAS 122 requires that a mortgage banking enterprise
recognize mortgage servicing rights (MSRs) as separate assets. MSRs represent
the right to service loans for others, whether acquired directly or in
conjunction with the acquisition of mortgage loan assets. As originated or
purchased loans are sold, securitized or where a definitive plan exists to
sell or securitize such loans, their total cost is allocated between MSRs and
the loans, based on relative fair values.
Prior to January 1, 1996, MSRs included purchased mortgage servicing rights
(PMSRs) and excess mortgage servicing rights (EMSRs). PMSRs represented the
cost of rights acquired in a purchase of mortgage loans where a definitive
plan for the sale of loans existed when the transaction was initiated or the
cost to acquire the rights to service a pool of mortgages that have previously
been sold. EMSRs were recognized when mortgage loans were sold with servicing
retained and the net servicing fee exceeded the normal servicing fee. The
selling price of the loans was 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 for impairment based
on the difference between the carrying value of such rights and their current
fair value. For purposes of measuring impairment, which is recorded through
the use of a valuation reserve (prior to January 1, 1996 through direct
writedowns), MSRs are stratified based upon interest rates and whether or not
such rates are fixed or variable. The evaluation of future net servicing
income is based on a discounted and disaggregated (individual portfolio)
methodology.
40
Income Taxes
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 used by the Company to manage risk pursuant to an overall
asset-liability management strategy. To the extent that they are linked to
assets and liabilities that are valued on an historical cost basis, accrual or
deferral based accounting is applied. As such, they 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 used 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.
Derivative financial instruments used to offset risk associated with cash
trading instruments and foreign exchange trading activity are accounted for on
a mark to market (fair value) basis consistent with the accounting applied to
the related activity. The mark to market adjustment, which is recorded
through the use of a valuation reserve and may include an interest
receivable/payable component, along with any related gains or losses realized
upon liquidation of a derivative trading position, is recorded as a component
of trading revenues (loss).
Derivative financial instruments entered into to facilitate the needs of
customers are immediately matched off by taking corresponding and offsetting
positions with other counterparties. The Company considers this activity to
be a fee generating service offered to certain select customers and does not
maintain unmatched positions within this portfolio. With the exception of a
small spread between the pay and receive rates, representing compensation for
facilitating the transaction, the periodic accrual amounts effectively offset
each other. If a position becomes unmatched for any reason, it is immediately
accounted for on a mark to market basis.
41
N O T E S T O F I N A N C I A L S T A T E M E N T S
Note 1. 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.
<TABLE>
<CAPTION>
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 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:
- ----------------------------------------------------------------------------
Year Ended December 31, 1995 1994
- ----------------------------------------------------------------------------
in millions
<S> <C> <C>
Net interest income (loss), after
provision for loan losses:
HSBC Americas, Inc. $708.2 $ 759.9
Concord Leasing, Inc. - (145.2)
Oleifera Investments, Ltd. 8.7 (1.3)
- ----------------------------------------------------------------------------
$716.9 $ 613.4
- ----------------------------------------------------------------------------
Net income (loss):
HSBC Americas, Inc. $291.7 $ 229.3
Concord Leasing, Inc. - (212.1)
Oleifera Investments, Ltd. (8.1) (54.2)
- ----------------------------------------------------------------------------
$283.6 $ (37.0)
- ----------------------------------------------------------------------------
</TABLE>
The Company acquired $1.1 billion in selected assets and assumed $1.2 billion
in deposits of East River Savings Bank for a purchase price of $93 million in
June 1996. The acquisition was accounted for as a purchase and the results of
its operations are included in the financial statements since the acquisition
date. The excess fair value of net assets acquired was approximately $102
million and is being amortized against income over fifteen years.
The Company acquired the institutional dollar clearing activity of Morgan
Guaranty Trust Company of New York on December 31, 1996. The Company assumed
$945 million in deposit liabilities and acquired a like amount of Federal
funds sold. The excess of fair value of net assets acquired of $32 million
will be amortized against income over ten years. The transaction was
accounted for as a purchase. Results of operations will be included in the
Company's financial statements from date of acquisition. The acquisition
requires payment of additional consideration contingent upon future revenues.
42
In August 1996, the Company and CT Financial Services Inc., (the Seller),
entered into an agreement whereby the Company would purchase from the Seller
the common shares of CTUS Inc. (CTUS), a unitary thrift holding company. CTUS
owns First Federal Savings and Loan Association of Rochester (First Federal),
a thrift institution which, at December 31, 1996 had $7.1 billion in assets
and operated 80 branches in New York State. The purchase price to be paid is
$620 million in cash, subject to upwards or downwards adjustment based on the
net book value, as defined, of First Federal at acquisition date.
It is contemplated that simultaneously with the purchase of the common shares
of CTUS by the Company, First Federal will be merged with the Bank. The
agreement provides that prior to the closing of the purchase of the CTUS
common shares, CTUS will issue to the Seller and the Seller will continue to
hold following the purchase, preferred shares of CTUS which will provide for a
contingent dividend or redemption equal to, and only to, the amount of the
recovery, net of taxes and costs, if any, by First Federal (or the Bank as its
successor) resulting from the pending action in the United States Court of
Claims by First Federal against the United States government alleging breaches
by the government of contractual obligations to First Federal following
passage of the Financial Institutions Reform, Recovery and Enforcement Act of
1989.
The transaction is expected to close in March 1997. The Company will sell a
portion of its portfolio of investment securities to fund the purchase price.
The transaction will be accounted for as a purchase and the results of CTUS's
operations will be included in the Company's financial statements from the
date of acquisition.
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 $233,658,000 in 1996 and $214,338,000 in
1995.
Note 3. Trading Assets
<TABLE>
<CAPTION>
An analysis of trading assets, which are valued at market, follows.
- ----------------------------------------------------------------------------
December 31, 1996 1995
- ----------------------------------------------------------------------------
in thousands
<S> <C> <C>
U.S. Government $ - $ 10,394
Mortgage and other asset
backed securities 883,754 600,508
Other securities 5,483 4,624
Derivatives 2,309 1,005
- ----------------------------------------------------------------------------
$891,546 $616,531
- ----------------------------------------------------------------------------
43
</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, 1996 1995 1994
- ----------------------------------------------------------------------------
in thousands
<S> <C> <C> <C>
U.S. Government $ 1,830 $(2,302) $ (6,361)
Mortgage and other asset
backed securities (2,621) 5,660 (19,663)
Other securities 1,430 1,171 (854)
Derivatives (835) (2,975) 9,369
- ----------------------------------------------------------------------------
Trading asset revenues (loss) (196) 1,554 (17,509)
Foreign exchange revenue 3,975 3,845 3,625
- ----------------------------------------------------------------------------
Trading revenues (loss) $ 3,779 $ 5,399 $(13,884)
- ----------------------------------------------------------------------------
</TABLE>
Note 4. Securities
In 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 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 amortized cost and fair
value of available for sale securities follows.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
1996 1995
------------------------------------------------ ------------------------
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>
U.S. Treasury $2,269,156 $11,192 $5,523 $2,274,825 $1,682,527 $1,714,684
U.S. Government agency 366,987 7,122 444 373,665 607,699 618,504
Other debt securities 148,641 263 14 148,890 201,176 202,074
Equity securities 70,070 2,625 - 72,695 77,212 78,568
- ---------------------------------------------------------------------------------------------------
$2,854,854 $21,202 $5,981 $2,870,075 $2,568,614 $2,613,830
===================================================================================================
</TABLE>
At December 31, 1995, with regard to securities available for sale, the
Company had gross unrealized gains of $33,510,000, $12,312,000 and $2,273,000
and unrealized losses of $1,353,000, $1,507,000 and $19,000 related to U.S.
Treasury, U.S. Government agency and other securities, respectively.
During 1996, the Company sold available for sale securities for aggregate
proceeds of $89,780,000, resulting in gross realized gains of $12,914,000 and
gross realized losses of $4,979,000. During 1995, the Company sold available
for sale securities for aggregate proceeds of $54,732,000, resulting in gross
realized gains of $16,680,000 and gross realized losses of $4,340,000. During
1994, the Company sold available for sale securities for aggregate proceeds of
$16,136,000, resulting in gross realized gains of $8,935,000 and gross
realized losses of $1,029,000. Substantially all interest income on
securities is taxable.
44
The amortized cost and fair values of debt securities available for sale at
December 31, 1996, 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 $70,070,000 amortized cost,
($72,695,000 fair value) of equity securities available for sale that do not
have fixed maturities.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Amortized Fair
December 31, 1996 Cost Value
- ------------------------------------------------------------------------------
in thousands
<S> <C> <C>
Within one year $1,081,243 $1,088,788
After one but within five years 1,209,775 1,207,188
After five but within ten years 263,281 264,357
After ten years 230,485 237,047
- ------------------------------------------------------------------------------
$2,784,784 $2,797,380
- ------------------------------------------------------------------------------
</TABLE>
Note 5. Loans
Loans are presented net of unearned income, unamortized nonrefundable fees and
related direct loan origination costs of $173,267,000 and $196,399,000 at
December 31, 1996 and 1995, 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
$273 million, $229 million and $186 million at year ends 1996, 1995 and 1994,
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, 1996 1995
- ------------------------------------------------------------------------------
in thousands
<S> <C> <C>
Domestic:
Commercial:
Construction loans $ 396,313 $ 428,237
Mortgage loans 1,689,013 999,207
Loans and advances to affiliates 95,998 343,519
Other business and financial 4,998,045 4,864,875
Consumer:
Residential mortgages 3,632,232 3,080,267
Credit card receivables 1,938,427 1,843,660
Other consumer loans 1,432,740 1,471,952
International 509,148 740,622
- ------------------------------------------------------------------------------
$14,691,916 $13,772,339
- ------------------------------------------------------------------------------
</TABLE>
Residential mortgages include $91,517,000 and $121,586,000 of residential
mortgages held for sale at December 31, 1996 and 1995, respectively. Other
consumer loans include $412,135,000 and $397,250,000 of higher education loans
also held for sale at December 31, 1996 and 1995, respectively.
At December 31, 1996 and 1995, the Company's nonaccruing loans were
$357,468,000 and $468,349,000, respectively. At December 31, 1996 and 1995,
the Company had commitments to lend additional funds of $4,747,000 and
$11,400,000, respectively, to borrowers whose loans are classified as
45
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, 1996 1995 1994
- ------------------------------------------------------------------------------
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 $39,597 $70,166 $96,588
Interest revenue recorded on nonaccruing loans 35,858 32,841 38,082
- ------------------------------------------------------------------------------
</TABLE>
Other real estate and owned assets included in other assets amounted to
$13,486,000 and $109,758,000 net of allowances for losses of $32,358,000 and
$27,537,000 at December 31, 1996 and 1995, respectively.
The Company identified impaired loans as defined by FAS 114 totaling
$257,512,000 at December 31, 1996, of which $60,651,000 had an allocation from
the allowance of $24,274,000. At December 31, 1995, the Company had
identified impaired loans of $347,778,000 of which $116,661,000 had an
allocation from the allowance of $61,159,000. The average recorded investment
in such impaired loans was $277,953,000 and $445,318,000 in 1996 and 1995,
respectively.
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, 1996 and 1995.
Note 6. Allowance for Loan Losses
<TABLE>
<CAPTION>
An analysis of the allowance for loan losses follows.
- ------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------
in thousands
<S> <C> <C> <C>
Balance at beginning of year $ 477,502 $ 531,496 $ 524,307
Allowance related to acquired businesses 3,415 371 1,167
Provision charged to income 64,750 175,292 168,703
Recoveries on loans charged off 54,006 56,133 81,118
Loans charged off (181,514) (285,790) (243,799)
- ------------------------------------------------------------------------------
Balance at end of year $ 418,159 $ 477,502 $ 531,496
- ------------------------------------------------------------------------------
</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.
Note 7. Mortgage Servicing Rights
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of these loans
were $6.2 billion and $6.5 billion at December 31, 1996 and 1995,
respectively. Custodial escrow balances maintained in connection with the
foregoing loan servicing, and included in noninterest bearing deposits in
46
domestic offices were $69.7 million and $87.7 million at December 31, 1996
and 1995, respectively.
As disclosed in the Summary of Significant Accounting Policies, effective
January 1, 1996, the Company adopted FAS 122 prospectively. The adoption of
FAS 122 did not have a material effect on the financial position or results of
operations of the Company.
<TABLE>
<CAPTION>
The following analysis reflects the changes in MSRs reported in intangible
assets.
- ------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------
in thousands
<S> <C> <C> <C>
Balance at beginning of year $ 36,822 $ 52,810 $ 56,760
Additions 11,385 1,739 12,491
Amortization (14,310) (17,727) (16,441)
- ------------------------------------------------------------------------------
Balance at end of year $ 33,897 $ 36,822 $ 52,810
- ------------------------------------------------------------------------------
</TABLE>
No valuation reserve was established against MSRs at December 31, 1996. The
fair value of MSRs as of December 31, 1996 was approximately $76.7 million.
Fair value is estimated by discounting the net servicing income to be received
over the estimated servicing term using a current market rate and
disaggregated (individual portfolio) methodology.
Note 8. Goodwill and Other Acquisition Intangibles
Goodwill and other acquisition intangibles included in intangible assets
totaled $158,458,000 and $34,774,000 at December 31, 1996 and 1995,
respectively. These amounts are amortized over the estimated periods to be
benefited, not exceeding 15 years. Amortization totaled $14,356,000 and
$11,244,000 during the years 1996 and 1995, respectively. An impairment
review is performed periodically on these assets.
<TABLE>
<CAPTION>
Note 9. Deposits
The aggregate amount of time deposit accounts (primarily certificates of
deposits) each with a minimum of $100,000 included in domestic office deposits
were $1,250,567,000 and $1,241,046,000 at December 31, 1996 and 1995,
respectively. Substantially all deposits in foreign offices exceed $100,000.
The scheduled maturities of time deposits at December 31, 1996 follows:
- ------------------------------------------------------------------------------
in thousands
<S> <C>
1997 $3,749,704
1998 818,457
1999 104,831
2000 96,201
2001 35,730
Later years 3,848
- ------------------------------------------------------------------------------
$4,808,771
- ------------------------------------------------------------------------------
47
</TABLE>
Note 10. Short-Term Borrowings
The following table shows detail relating to short-term borrowings in 1996,
1995 and 1994. Average interest rates during each year are computed by
dividing total interest expense by the average amount borrowed.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
1996 1995 1994
- ----------------------------------------------------------------------------------------------------
Average Average Average
Amount Rate Amount Rate Amount Rate
- ----------------------------------------------------------------------------------------------------
in thousands
<S> <C> <C> <C> <C> <C> <C>
Federal funds purchased
(day to day):
At December 31 $1,225,738 5.36% $1,013,435 4.64% $ 469,385 4.02%
Average during year 619,775 5.26 297,268 5.73 308,999 3.72
Maximum month-end balance 1,225,738 1,013,435 790,500
Securities sold under
repurchase agreements:
At December 31 58,491 4.98 123,041 5.48 259,783 5.22
Average during year 465,147 4.95 304,735 5.71 202,446 3.89
Maximum month-end balance 809,703 987,516 388,005
Commercial paper:
At December 31 473,633 5.30 276,590 5.49 226,152 5.33
Average during year 338,505 5.32 228,346 5.78 789,065 4.41
Maximum month-end balance 590,358 276,590 916,140
All other short-term borrowings:
At December 31 723,480 5.68 1,125,044 5.05 1,300,568 6.09
Average during year 950,020 4.97 490,079 6.89 483,731 5.53
Maximum month-end balance 1,231,399 1,125,044 1,300,568
====================================================================================================
</TABLE>
All other short-term borrowings include $283,000,000 and $745,500,000 at year
ends 1996 and 1995, respectively, from HSBC. See Note 19 to the Financial
Statements.
At December 31, 1996, the Company had unused lines of credit with HSBC
aggregating $300,000,000. These lines of credit do not require compensating
balance arrangements and commitment fees are not significant.
Note 11. Income Taxes
<TABLE>
<CAPTION>
Total income tax expense (benefit) for the years ended 1996, 1995 and 1994 was
allocated as follows:
- ----------------------------------------------------------------------------
Year Ended December 31, 1996 1995 1994
- ----------------------------------------------------------------------------
in thousands
<S> <C> <C> <C>
To income from operations $171,000 $52,341 $125,572
To unrealized gain on securities
available for sale, net of taxes (10,498) 15,825 -
- ----------------------------------------------------------------------------
$160,502 $68,166 $125,572
- ----------------------------------------------------------------------------
48
</TABLE>
<TABLE>
<CAPTION>
The components of income tax expense from operations follows:
- ----------------------------------------------------------------------------
Year Ended December 31, 1996 1995 1994
- ----------------------------------------------------------------------------
in thousands
<S> <C> <C> <C>
Current:
Federal $ 57,220 $ 74,816 $ 88,200
State and local 70,280 52,484 30,200
Foreign - (10,959) 7,172
- ----------------------------------------------------------------------------
Total current 127,500 116,341 125,572
- ----------------------------------------------------------------------------
Deferred:
Deferred tax expense (benefit) 97,247 39,520 (41,673)
Increase (decrease) in valuation
allowance for deferred tax assets (53,747) (103,520) 41,673
- ----------------------------------------------------------------------------
Total deferred 43,500 (64,000) -
- ----------------------------------------------------------------------------
Total income taxes $171,000 $ 52,341 $125,572
- ----------------------------------------------------------------------------
</TABLE>
<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, 1996 1995 1994
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory rate 35.0% 35.0% 35.0%
Increase (decrease) due to:
State, local and foreign income taxes 8.3 8.0 27.4
Change in valuation allowance for
deferred tax assets (9.8) (30.8) 10.8
Tax exempt interest income (.4) (.9) (3.4)
Adjustment to deferred tax assets and
liabilities due to change in tax basis (2.9) 1.8 (40.2)
Net operating loss benefit - - 102.7
Other items .8 2.5 9.4
- ----------------------------------------------------------------------------
Effective income tax rate 31.0% 15.6% 141.7%
- ----------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
The components of the net deferred tax asset are summarized below.
- ----------------------------------------------------------------------------
December 31, 1996 1995
- ----------------------------------------------------------------------------
in thousands
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $157,681 $174,647
Deferred charge offs 20,472 64,711
Depreciation and amortization 17,376 18,523
Accrued expenses not currently deductible 51,107 50,644
Federal net operating loss carryforwards 93,852 119,524
Accrued pension cost - 607
Mortgage servicing fees 3,075 6,724
Other 28,657 30,867
- ----------------------------------------------------------------------------
372,220 466,247
Less valuation allowance 249,942 303,689
- ----------------------------------------------------------------------------
Total deferred tax assets 122,278 162,558
- ----------------------------------------------------------------------------
Less deferred tax liabilities:
Lease financing income accrued 34,364 36,648
Accrued pension cost 5,811 -
Accrued income on foreign bonds 21,603 21,910
Securities available for sale 5,327 15,825
- ----------------------------------------------------------------------------
Total deferred tax liabilities 67,105 74,383
- ----------------------------------------------------------------------------
Net deferred tax asset $ 55,173 $ 88,175
- ----------------------------------------------------------------------------
49
</TABLE>
The net change in the total valuation allowance for the years ended
December 31, 1996 and 1995 were decreases of $53,747,000 and $103,520,000,
respectively. The net change for the year ended December 31, 1994 was an
increase of $41,673,000.
Realization of deferred tax assets is contingent upon the generation of future
taxable income or the existence of sufficient taxable income within the
carryback period. A valuation allowance is provided when it is more likely
than not that some portion of the deferred tax assets will not be realized.
In assessing the need for a valuation allowance, management considers the
scheduled reversal of the deferred tax liabilities, the level of historical
taxable income, and projected future taxable income over the periods in which
the temporary differences comprising the deferred tax assets will be
deductible. Based upon the level of historical taxable income and the
scheduled reversal of the deferred tax liabilities over the periods which the
deferred tax assets are deductible, management believes it is more likely than
not the Company will realize the benefits of these deductible differences, net
of the existing valuation allowance, at December 31, 1996.
Note 12. Long-Term Debt
<TABLE>
<CAPTION>
The following is a summary of long-term debt, net of unamortized original
issue debt discount, where applicable.
- -------------------------------------------------------------------------------
December 31, 1996 1995
- -------------------------------------------------------------------------------
in thousands
<S> <C> <C>
Issued by the Company or subsidiaries other than the Bank:
Floating rate subordinated notes due 2000 (5.69%) $200,000 $200,000
Floating rate subordinated notes due 2009 (5.81%) 124,320 124,320
Floating rate subordinated capital notes due 1999 (5.81%) 100,000 100,000
8 5/8% subordinated capital notes due 1997 125,000 125,000
7% subordinated notes due 2006 297,522 -
Other notes payable 221 252
- -------------------------------------------------------------------------------
847,063 549,572
Issued by Marine Midland Bank or its subsidiaries:
Floating rate subordinated capital notes due 1996 - 125,000
Obligations under capital leases 33,120 35,178
- -------------------------------------------------------------------------------
$880,183 $709,750
- -------------------------------------------------------------------------------
</TABLE>
Debt issued by Marine Midland Bank or its subsidiaries excludes the following
notes payable to the Company; a floating rate note of $100,000,000 due 2000
and a 7.234% note of $297,522,000 due 2006.
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, 1996 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.
50
Contractual scheduled maturities for the debt, excluding obligations under
capital leases, over the next five years are as follows: 1997, $125,057,000;
1998, $63,000; 1999, $100,069,000; 2000, $200,032,000; and none in 2001.
Maturities for obligations under capital leases are reported in Note 23,
Commitments and Contingent Liabilities.
Note 13. Guaranteed Mandatorily Redeemable Preferred Securities of Subsidiary
Guaranteed mandatorily redeemable preferred securities of subsidiary
represents 7.808% Capital Securities (Capital Securities) issued by HSBC
Americas Capital Trust (the Trust), a statutory business trust and wholly
owned subsidiary of the Company. The Capital Securities represent preferred
beneficial interests in the assets of the Trust and are guaranteed by the
Company. The assets of the Trust consist of junior subordinated debentures of
the Company. The Capital Securities qualify as Tier 1 capital under the risk-
based capital guidelines of the Federal Reserve Board. Interest expense on
long-term debt included in the consolidated statement of income includes
$824,000 in 1996 relating to these securities.
The Capital Securities are redeemable at the option of the Company in the case
of a tax event or regulatory capital event at the prepayment price equal to
the greater of (i) 100% of the principal amount of the Capital Securities or
(ii) the sum of the present values of 103.904% of the principal amount of the
Capital Securities plus the remaining scheduled payments of interest thereon
from the prepayment date. Tax event refers to notice that the interest
payable on the Capital Securities would not be deductible. Regulatory capital
event refers to notice that the Capital Securities would not qualify as Tier 1
capital. The Capital Securities are redeemable at the option of the Company
on December 15, 2006 at a premium of 3.904% in the first twelve months after
December 15, 2006 and varying lesser amounts thereafter and without premium
if redeemed after December 15, 2016. The Capital Securities mature on
December 15, 2026 deferrable to the first business day after June 15, 2027.
Note 14. Preferred Stock
<TABLE>
<CAPTION>
A summary of preferred stock outstanding at December 31, 1996 and 1995
follows:
- ---------------------------------------------------------------------------
in thousands
<S> <C>
$5.50 Cumulative preferred stock, 22,154 shares $ 2,216
Adjustable rate cumulative preferred stock, 1,916,950 shares 95,847
- ---------------------------------------------------------------------------
$98,063
- ---------------------------------------------------------------------------
</TABLE>
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.
51
Note 15. 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 16. 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.
Under these rules the Bank can pay dividends to the Company as of December 31,
1996 of approximately $54.7 million, adjusted by the effect of its net income
(loss) for 1997 up to the date of such dividend declaration.
Note 17. Impact of Recently Issued Accounting Standard
In June 1996 the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities (FAS 125)
which generally becomes effective on a prospective basis beginning January 1,
1997. FASB has delayed the effective date of certain of the provisions until
January 1, 1998. FAS 125 primarily establishes criteria based on legal
control to determine whether a transfer of a financial asset is a sale or a
secured borrowing. The Company does not expect that the adoption of FAS 125
will have a material effect on its financial position or results of operation.
Note 18. Regulatory Matters
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary actions by regulators that, if undertaken, could have
a direct material effect on the financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, specific
capital guidelines must be met that involve quantitative measures of assets,
liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The capital amounts and classification are
also subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
requires the maintenance of minimum amounts and ratios (set forth in the
following table) of total and Tier 1 capital (as defined in the regulations)
to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to
average assets (as defined).
52
As of December 31, 1996, the most recent notification from the Federal Reserve
Board categorized the Company and the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage
ratios as set forth in the table must be maintained. There are no conditions
or events since that notification that management believes have changed the
categories.
<TABLE>
<CAPTION>
The capital amounts and ratios are presented in the table.
- -----------------------------------------------------------------------------------------
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------------
in millions
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996
Total capital
(to risk weighted assets)
Company $2,860 17.00% > $1,346 > 8.00% > $1,682 > 10.00%
Bank 2,288 13.83 > 1,324 > 8.00 > 1,655 > 10.00
Tier 1 capital
(to risk weighted assets)
Company 2,005 11.92 > 673 > 4.00 > 1,009 > 6.00
Bank 1,721 10.40 > 662 > 4.00 > 993 > 6.00
Tier 1 capital
(to average assets)
Company 2,005 9.54 > 631 > 3.00 > 631 > 3.00
Bank 1,721 8.26 > 834 > 4.00 > 1,042 > 5.00
As of December 31, 1995
Total capital
(to risk weighted assets)
Company 2,464 16.39 > 1,202 > 8.00 > 1,503 > 10.00
Bank 1,990 13.37 > 1,190 > 8.00 > 1,488 > 10.00
Tier 1 capital
(to risk weighted assets)
Company 1,637 10.89 > 601 > 4.00 > 902 > 6.00
Bank 1,595 10.72 > 595 > 4.00 > 893 > 6.00
Tier 1 capital
(to average assets)
Company 1,637 8.36 > 784 > 4.00 > 980 > 5.00
Bank 1,595 8.33 > 766 > 4.00 > 957 > 5.00
- -----------------------------------------------------------------------------------------
</TABLE>
Under the framework, the Bank's capital levels allow the Bank to accept
brokered deposits without prior regulatory approval. As of December 31, 1996
the Bank had no brokered deposits.
Note 19. 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.
53
At December 31, 1996 and 1995 assets of $255,919,000 and $389,675,000,
respectively, and liabilities of $1,096,637,000 and $1,795,216,000,
respectively, related to such transactions with the HSBC Group were included
in the Company's balance sheet. Borrowings from HSBC, included in short-term
borrowings on the balance sheet, were $283,000,000 and $745,500,000 at
December 31, 1996 and 1995, respectively.
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, 1996 and 1995
the notional value of these contracts with members of the HSBC Group were
$23,715,331,000 and $17,302,744,000, 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, 1996 and 1995, outstanding extensions of credit secured by
eligible collateral were $192,814,000 and $211,692,000, respectively.
During 1996 the Company purchased commercial loans having a book value of
$260,498,000 from a wholly owned subsidiary of HSBC for fair value which
approximates book value.
Note 20. Stock Option Plans
Effective January 1, 1996, the Company prospectively adopted Statement of
Financial Accounting Standards No. 123, Accounting for Stock Based
Compensation (FAS 123). Options have been granted under the HSBC Holdings
Executive Share Option Scheme (the Executive Plan) and under the HSBC Savings
Related Share Option Contribution Program (the Savings Plan). Compensation
expense associated with such options is recognized over the vesting period
based on the estimated fair value of such options at grant date.
Under the Executive Plan, options have been awarded to certain officers of the
Company to acquire shares of HSBC. The exercise price of each option is equal
to the market price of the stock of HSBC on the date of grant. The maximum
term of the options is ten years and they vest at the end of three years.
Additionally, the Company adopted the Savings Plan effective July 1, 1996
whereby eligible employees can elect to participate in the Savings Plan
through the Company's 401(k) plan and acquire contributions based on HSBC
stock at 85% of market on date of grant. An employee's agreement to
participate is a five year commitment. At the end of each five year period
employees receive the appreciation of the HSBC stock over the initial exercise
price in the form of stock of HSBC.
Since the shares and contribution commitment have been granted directly by
HSBC, the offset to compensation cost was a credit to capital surplus
representing a contribution of capital from HSBC. The adoption of FAS 123 had
an immaterial impact since the options granted and their related compensation
cost were insignificant to the financial results of the Company.
54
Note 21. 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, 1996 1995
- ----------------------------------------------------------------------------
in thousands
<S> <C> <C>
Plan assets at fair value, primarily
marketable securities $291,513 $243,454
- ----------------------------------------------------------------------------
Actuarial present value of benefits
for service rendered to date:
Vested benefits based on
salaries to date 219,449 205,514
Additional benefits for nonvested
participants 11,987 13,308
- ----------------------------------------------------------------------------
Accumulated benefits based on
salaries to date 231,436 218,822
Additional benefits based on
estimated future salary levels 68,880 42,185
- ----------------------------------------------------------------------------
Projected benefit obligation 300,316 261,007
- ----------------------------------------------------------------------------
Projected benefit obligation in excess of
plan assets (8,803) (17,553)
Unrecognized net asset existing at January 1,
1985 being amortized over 14 years (2,681) (4,022)
Unrecognized prior service cost 4,545 5,177
Unrecognized net loss 21,853 15,478
- ----------------------------------------------------------------------------
(Accrued) prepaid pension liability $ 14,914 $ (920)
- ----------------------------------------------------------------------------
Assumptions used:
Discount rate 7.75% 7.25%
Weighted average salary increase 5.40 4.90
Expected long-term rate of return on assets 9.50 9.50
- ----------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Net pension expense for 1996, 1995 and 1994 included the following components.
- ----------------------------------------------------------------------------
1996 1995 1994
- ----------------------------------------------------------------------------
in thousands
<S> <C> <C> <C>
Service cost-benefits earned during the year $ 14,696 $ 10,260 $ 10,323
Interest cost 20,789 17,496 15,526
Actual return on assets (31,396) (38,321) 4,049
Net amortization and deferral 6,942 21,545 (21,069)
- ----------------------------------------------------------------------------
Net pension expense $ 11,031 $ 10,980 $ 8,829
- ----------------------------------------------------------------------------
</TABLE>
Accrued and prepaid pension cost at December 31, 1996 and 1995, includes
$1,688,000 and $460,000 of pension liabilities, respectively, and net pension
expense includes $1,228,000, $905,000 and $696,000 for 1996, 1995 and 1994,
respectively recognized in the financial statements of other HSBC subsidiaries
employees participating in the Company's pension plan.
55
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, 1996 and 1995.
- ----------------------------------------------------------------------------
December 31, 1996 1995
- ----------------------------------------------------------------------------
in thousands
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $ 42,823 $ 45,809
Fully eligible active plan participants 2,938 2,345
Other active plan participants 24,419 28,861
- ----------------------------------------------------------------------------
(70,180) (77,015)
Plan assets at fair value - -
- ----------------------------------------------------------------------------
Funded status (70,180) (77,015)
Unrecognized transition obligation existing at
January 1, 1993 being amortized over 20 years 51,953 55,200
Unrecognized net (gain) loss (5,487) 3,348
- ----------------------------------------------------------------------------
Accrued postretirement benefit cost $(23,714) $(18,467)
- ----------------------------------------------------------------------------
Assumptions used:
Discount rate 7.50% 6.75%
Health care cost trend rate 13.00 14.00
- ----------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Net periodic postretirement benefit cost for 1996, 1995 and 1994 included the
following components.
- ----------------------------------------------------------------------------
1996 1995 1994
- ----------------------------------------------------------------------------
in thousands
<S> <C> <C> <C>
Service cost-benefits earned during the year $ 2,024 $1,694 $ 1,818
Interest cost on accumulated postretirement
benefit obligation 4,794 4,839 5,187
Amortization of unrecognized transition
obligation 3,247 3,247 3,270
- ----------------------------------------------------------------------------
Net periodic postretirement benefit cost $10,065 $9,780 $10,275
- ----------------------------------------------------------------------------
</TABLE>
For measurement purposes, the health care cost trend rate is assumed to
decrease 1% per year to an ultimate rate of 7% in the year 2002. The health
care cost trend rate assumption has an effect on the amounts reported. For
example, increasing the assumed health care cost trend rates by 1% point would
have increased the accumulated postretirement benefit obligation as of
December 31, 1996 by $963,000 and the aggregate of the interest cost and
service cost components of the 1996 net periodic cost by $101,000.
During 1994, the Company reflected the expense impact of a voluntary
retirement program. The Company recorded $19,950,000 for specific termination
benefits relating to pension payments and $393,000 expense relating to retiree
health and life insurance in operating expenses as a result of this program.
56
Note 22. 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 are grouped by
the location of the head office of the bank. Investments and acceptances are
distributed on the basis of the location of the issuers or borrowers. The
following tables summarize the Company's international activities.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
International Assets by Geographic Distribution and Domestic Assets
December 31, 1996 1995
- ----------------------------------------------------------------------------
in millions
<S> <C> <C>
International:
Europe/Middle East/Africa $ 815 $ 702
Asia/Pacific 459 761
Other Western Hemisphere 637 543
Less: allowance for loan losses (26) (28)
- ----------------------------------------------------------------------------
Total international 1,885 1,978
Domestic 21,745 18,575
- ----------------------------------------------------------------------------
Total domestic/international $23,630 $20,553
- ----------------------------------------------------------------------------
</TABLE>
Total international assets averaged $1,280,000,000, $1,610,000,000 and
$1,854,000,000, or 6.2%, 8.5% and 10.0% of total average assets, during 1996,
1995 and 1994, respectively. Total international liabilities averaged
$1,175,000,000, $1,475,000,000 and $1,706,000,000, or 6.2%, 8.6% and 10.1%
of total average liabilities, during 1996, 1995 and 1994, respectively.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Revenues and Earnings - International
Total Operating Income Income (Loss) Before Taxes Net Income (Loss)
- ------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1996 1995 1994 1996 1995 1994 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
in millions
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
International:
Europe/MiddleEast/
Africa $ 29.1 $ 38.7 $ 38.0 $ 5.8 $ 10.7 $ 3.5 $ 3.3 $ 6.1 $ 2.3
Asia/Pacific 36.2 46.7 37.1 24.9 27.5 11.6 14.2 15.7 7.7
Other Western
Hemisphere 37.0 38.9 35.6 14.6 (13.8) 10.1 8.3 (7.9) 6.7
United States 16.2 13.0 10.7 12.5 10.1 5.3 7.2 5.8 3.5
- ------------------------------------------------------------------------------------------------------------
Total international 118.5 137.3 121.4 57.8 34.5 30.5 33.0 19.7 20.2
Domestic 1,804.2 1,666.1 1,431.1 493.4 301.4 58.1 347.2 263.9 (57.2)
- ------------------------------------------------------------------------------------------------------------
Total domestic/
international $1,922.7 $1,803.4 $1,552.5 $551.2 $335.9 $88.6 $380.2 $283.6 $(37.0)
- ------------------------------------------------------------------------------------------------------------
</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 $3,974,000, $3,845,000 and $3,625,000 for 1996,
1995 and 1994, respectively.
57
In order to arrive at income before taxes 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.
Note 23. Commitments and Contingent Liabilities
At December 31, 1996 securities, loans and other assets carried in the
consolidated balance sheets at $1,269,460,000 were pledged as collateral for
borrowings, to secure governmental and trust deposits and for other purposes.
<TABLE>
<CAPTION>
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, l996 were:
- ------------------------------------------------------------------------------
Capital Operating
Leases Leases
- ------------------------------------------------------------------------------
in thousands
<S> <C> <C>
1997 $ 7,351 $ 26,689
1998 6,510 23,521
1999 6,504 21,065
2000 6,408 18,850
2001 6,377 15,877
Later years 66,397 51,124
- ------------------------------------------------------------------------------
Total minimum lease payments 99,547 $157,126
Less: executory costs 36,956
- ------------------------------------------------------------------------------
Net minimum obligation 62,591
Less: amount representing interest 29,471
- ------------------------------------------------------------------------------
Present value of net minimum lease
payments at December 31, 1996 $33,120
- ------------------------------------------------------------------------------
</TABLE>
Operating expenses include rental expense, net of sublease rentals, of
$36,719,000, $36,608,000 and $33,832,000 in 1996, 1995 and 1994, 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 24. Financial Instruments With Off-Balance Sheet Risk
The Company is party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers, to
reduce its own exposure to fluctuations in interest rates and to realize
profits. These financial instruments involve, to varying degrees, elements of
credit and market risk in excess of the amount recognized in the consolidated
balance sheet. Credit risk represents the possibility of loss resulting from
the failure of another party to perform in accordance with the terms of a
contract. The Company uses the same credit policies in making commitments and
conditional obligations as it does for balance sheet instruments.
58
Market risk represents the exposure to future loss resulting from the decrease
in value of an on- or off-balance sheet financial instrument caused by changes
in interest rates. Market risk is a function of the type of financial
instrument involved, transaction volume, tenor and terms of the agreement and
the overall interest rate environment. The Company controls market risk by
managing the mix of the aggregate financial instrument portfolio and by
entering into offsetting positions.
<TABLE>
<CAPTION>
A summary of financial instruments with off-balance sheet risk follows.
- ------------------------------------------------------------------------------
December 31, 1996 1995
- ------------------------------------------------------------------------------
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 $ 163 $ 385
Industrial revenue 291 285
Other, primarily corporate 19 35
Other 384 412
Other letters of credit 278 215
Commitments to extend credit 5,415 4,712
Financial instruments whose notional or contract
amounts do not represent the associated risk:
Interest rate swaps 14,440 13,398
Forward rate agreements 8,510 3,540
Futures contracts 1,303 100
Interest rate caps and floors 918 527
Options on futures contracts 2,721 -
Foreign exchange contracts 205 165
- ------------------------------------------------------------------------------
</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 significant
loss 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, $32,501,000 was at risk at December 31, 1996. See Note 25 for
further discussion of activities in derivative financial instruments. The
Company controls the credit risk associated with off-balance sheet derivative
financial instruments established for each counterparty through the normal
credit approval process. See Note 19 for contracts entered into with the HSBC
Group. Collateral is maintained on these positions, the amount of which is
consistent with the measurement of exposure used in the risk-based capital
ratio calculations under the banking regulators' guidelines.
Standby letters of credit and guarantees have been reduced by $21,177,000 and
$56,567,000 at December 31, 1996 and 1995, respectively, which represent the
amounts participated to other institutions. Maturities of guarantees for
certain debt obligations of borrowers range from 1997 to 2015. Fees received
are generally recognized as revenue over the life of the guarantee.
59
Foreign exchange contracts represent the gross amount of contracts to purchase
and sell foreign currencies. The extent to which offsets may exist are not
considered.
Note 25. 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 and liabilities. 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 interest rate risk and trading positions of
derivative contracts.
- ------------------------------------------------------------------------------
Notional Fair Value
December 31, 1996 1995 1996 1995
- ------------------------------------------------------------------------------
in millions
<S> <C> <C> <C> <C>
Interest rate risk positions
Interest rate swaps $14,089 $12,691 $(15) $(12)
Forward rate agreements 8,510 3,540 (3) 1
Futures contracts 850 - - -
Interest rate caps and floors 918 527 1 -
Options on futures contracts 2,721 - (1) -
Trading positions
Interest rate swaps 351 707 - (1)
Futures contracts 453 100 - -
Foreign exchange contracts 205 165 - -
- ------------------------------------------------------------------------------
</TABLE>
Interest rate risk positions - 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 interest
rate risk positions are designed to maintain net interest income within ranges
of interest rate risk that management considers acceptable. Currently, the
Company conducts its interest rate risk 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, 1996, interest rate swaps
included pay variable/receive fixed positions of $8,227,000,000, pay
fixed/receive variable positions of $5,747,000,000 and pay variable/receive
variable positions of $115,000,000.
60
The Company uses derivative contracts in its interest rate risk activities
which are linked as hedges of various on-balance sheet assets and liabilities.
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 decrease to dampen the
positive effect of rate increases.
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 interest rate risk derivative
contracts outstanding at December 31, 1996.
- ------------------------------------------------------------------------------
December 31, 1997 1998 1999 2000 2001 2002- Total
2006
- ------------------------------------------------------------------------------
in millions
<S> <C> <C> <C> <C> <C> <C> <C>
Interest rate swaps $11,464 $896 $365 $638 $ - $726 $14,089
Forward rate agreements 8,510 - - - - - 8,510
Futures contracts 850 - - - - - 850
Interest rate caps and floors - 17 - 156 445 300 918
Options on futures contracts 2,721 - - - - - 2,721
- ------------------------------------------------------------------------------
</TABLE>
At December 31, 1996, derivative contracts with notional value of
$21,731,000,000 (unrecognized fair value loss of $14,000,000) were being used
to hedge interest rate risk associated with loan assets, derivative contracts
with notional value of $725,000,000 (fair value loss of $4,000,000) were
specifically linked to securities reported as available for sale and
derivative contracts with notional value of $601,000,000 (unrecognized fair
value gain of $3,000,000) were being used to hedge risk associated with
mortgage servicing rights. In addition, notional value contracts of
$3,636,000,000 (unrecognized fair value loss of $1,000,000) were being used to
hedge changes in the cost of deposits and short-term borrowings and a notional
value contract of $300,000,000 (unrecognized fair value loss of $2,000,000)
was being used to hedge a subordinated note. Further, $95,000,000 in notional
value contracts were entered into to facilitate the needs of certain
customers.
For those assets-liabilities reported on an historical cost basis, interest
rate risk 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/expense generated by the corresponding specific asset-
liability position.
For investment securities reported as available for sale, the mark to market
of the related derivative contracts 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.
61
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. 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 used
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, 1996.
The Company's derivative trading positions 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>
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. Net revenues, by instrument type, associated
with trading activities during 1996 and 1995 follows:
- ------------------------------------------------------------------------------
Net Gains/(Losses) 1996 1995
- ------------------------------------------------------------------------------
in millions
<S> <C> <C>
Futures contracts $(.8) $(3.0)
Foreign exchange contracts 4.0 3.8
- ------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
The following summarizes by instrument type, the year-end and average fair
values of derivative trading positions.
- ------------------------------------------------------------------------------
Fair Value
December 31, 1996 Year-end Average
- ------------------------------------------------------------------------------
in millions
<S> <C> <C>
Interest rate swaps
Assets $ 4.0 $ 4.7
Liabilities (4.3) (5.6)
Futures contracts
Assets - .1
Liabilities (.3) (.2)
Foreign exchange contracts
Assets 2.3 1.3
Liabilities (2.2) (1.2)
- ------------------------------------------------------------------------------
</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. Also,
certain forward purchase and sale agreements are entered into in order to
match customer requests with settlement requirements associated with foreign
markets. Additionally a limited number of open positions are maintained.
62
<TABLE>
<CAPTION>
The following summarizes the foreign currency trading contracts outstanding.
- ------------------------------------------------------------------------------
Notional Fair
December 31, 1996 Amount Value
- ------------------------------------------------------------------------------
in millions
<S> <C> <C>
Spot contracts $ 22 $ -
Forward contracts 183 -
- ------------------------------------------------------------------------------
</TABLE>
Approximately 70% 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.
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 26. 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, 1996.
- ------------------------------------------------------------------------------
Off-Balance
On-Balance Sheet
Sheet Commitments
- ------------------------------------------------------------------------------
in millions
<S> <C> <C>
Consumer:
Credit card receivables $1,939 $7,538
Residential mortgages 3,632 456
Real estate - commercial construction and mortgage loans 2,085 148
- ------------------------------------------------------------------------------
</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.
63
Note 27. 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 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
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, are considered to be equal to fair value.
Securities and trading assets - 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
calculating the present value.
As a result of the allocation of the allowance to adjust the anticipated cash
flows for credit risk, a published interest rate that equates as closely as
possible to a "risk-free" or "low-risk" loan has been selected for the purpose
of discounting the commercial loan portfolio, adjusted for a liquidity factor
where appropriate.
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.
64
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.
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 including guaranteed mandatorily redeemable preferred
securities of subsidiary - Fair value has been estimated based upon interest
rates currently available to the Company for borrowings with similar
characteristics and maturities.
<TABLE>
<CAPTION>
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.
- ------------------------------------------------------------------------------
1996 1995
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 $ 4,935 $ 4,935 $ 3,421 $ 3,421
Related derivatives - (1) - -
Trading assets 891 891 618 618
Related derivatives - - (1) (1)
Securities 2,874 2,874 2,620 2,620
Related derivatives (4) (4) (6) (6)
Loans, net of allowance for
loan losses 14,274 14,420 13,295 13,534
Related derivatives 75 (14) 39 (6)
Financial liabilities:
Instruments with carrying value
equal to fair value 2,867 2,867 2,817 2,817
Deposits:
Without fixed maturities 10,818 10,818 10,667 10,667
Fixed maturities 6,891 6,905 4,663 4,638
Related derivatives (2) - - -
Long-term debt 1,081 1,078 710 725
Related derivatives (1) 2 - -
- ------------------------------------------------------------------------------
</TABLE>
The above table excludes $601,000,000 notional value interest rate floors with
a fair value of $3,000,000 associated with mortgage servicing rights and
$95,000,000 of notional value customer facilitation interest rate swaps with a
nominal fair value which are outside of the scope required in this footnote.
65
The amounts reported include the 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.
The fair value of derivative financial instruments is disclosed in Note 25,
Derivative Financial Instruments.
The fair value of commitments to extend credit, standby letters of credit and
financial guarantees, is not included in the previous table. These
instruments generate fees which approximate those currently charged to
originate similar commitments. Further detail with respect to off-balance
sheet financial instruments is provided in Note 24, Financial Instruments With
Off-Balance Sheet Risk.
66
Note 28. Financial Statements of HSBC Americas, Inc. (parent)
<TABLE>
<CAPTION>
Condensed parent company financial statements follow.
- ------------------------------------------------------------------------------
Balance Sheet
December 31, 1996 1995
- ------------------------------------------------------------------------------
in thousands
<S> <C> <C>
Assets:
Cash and due from banks $ 4,578 $ 389
Interest bearing deposits with banks (including
$1,152,100 and $1,278,400 in banking subsidiary) 1,217,100 1,278,400
Securities available for sale 28,937 34,810
Loans (net of allowance for loan losses of $1,284
and $128) 113,286 77,915
Receivable from subsidiaries 415,841 105,456
Investment in subsidiaries at amount of their
net assets
Banking 1,882,330 1,645,364
Other 60,957 66,008
Other assets 80,042 76,089
- ------------------------------------------------------------------------------
Total assets $3,803,071 $3,284,431
- ------------------------------------------------------------------------------
Liabilities:
Interest, taxes and other liabilities $ 20,433 $ 16,155
Short-term borrowings 756,633 1,022,090
Long-term debt 846,842 549,320
Long-term debt due to subsidiary 206,186 -
- ------------------------------------------------------------------------------
Total liabilities 1,830,094 1,587,565
Shareholders' equity 1,972,977 1,696,866
- ------------------------------------------------------------------------------
Total liabilities and shareholders' equity $3,803,071 $3,284,431
- ------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Statement of Income
Year Ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------
in thousands
<S> <C> <C> <C>
Income:
Dividends from banking subsidiary $130,000 $ - $ 150,000
Dividends from other subsidiaries 7,465 661 30,500
Interest from banking subsidiary 65,963 48,801 18,065
Interest from other subsidiaries 27 349 4,425
Other interest income 5,429 8,354 10,461
Securities transactions 7,915 12,335 7,853
Other income 2,369 (5) 9,618
- ------------------------------------------------------------------------------
Total income 219,168 70,495 230,922
- ------------------------------------------------------------------------------
Expenses:
Interest (including $852, $4, and
$5,187 paid to subsidiaries) 81,554 64,595 47,638
Other expenses 6,302 5,046 4,624
- ------------------------------------------------------------------------------
Total expenses 87,856 69,641 52,262
- ------------------------------------------------------------------------------
Income before taxes and equity
in undistributed income of
subsidiaries 131,312 854 178,660
Income taxes (benefit) (3,312) 1,631 (118)
- ------------------------------------------------------------------------------
Income before equity in
undistributed income (loss)
of subsidiaries 134,624 (777) 178,778
Equity in undistributed income (loss)
of subsidiaries 245,564 284,361 (215,743)
- ------------------------------------------------------------------------------
Net income (loss) $380,188 $283,584 $ (36,965)
- ------------------------------------------------------------------------------
67
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Statement of Cash Flows
Year Ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------
in thousands
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 380,188 $ 283,584 $ (36,965)
Adjustments to reconcile net income (loss)
to net cash provided (used) by
operating activities:
Depreciation and amortization 3,278 3,012 3,035
Net change in other accrued accounts (15,155) 496 (6,901)
Undistributed (income) loss of
subsidiaries (245,564) (284,361) 215,743
Other, net (8,190) (9,146) (31,135)
- ------------------------------------------------------------------------------
Net cash provided (used) by
operating activities 114,557 (6,415) 143,777
- ------------------------------------------------------------------------------
Cash flows from investing activities:
Net change in interest bearing
deposits with banks 61,300 186,800 (1,082,866)
Purchases of securities (125) (8,881) (350)
Sales of securities 12,829 23,185 13,458
Net change in other short-term loans 78,000 50,000 -
Principal collected on long-term loans 5,592 9,554 579,708
Long-term loans advanced (414,333) (3,139) (553,620)
Investment in banking subsidiary - 125,000 (150,000)
Investment in nonbanking subsidiary, net - 118,079 65,150
Proceeds from transfer of affiliate
to parent - 145 40,105
Other, net 219 (16,787) 27,721
- ------------------------------------------------------------------------------
Net cash provided (used) by
investing activities (256,518) 483,956 (1,060,694)
- ------------------------------------------------------------------------------
Cash flows from financing activities:
Net change in short-term borrowings (265,458) (204,062) 1,045,208
Issuance of long-term debt 497,480 - -
Repayment of long-term debt - - (122,000)
Capital contributions from parent, net - (117,683) 100,000
Dividends paid (85,872) (155,873) (105,873)
- ------------------------------------------------------------------------------
Net cash provided (used) by
financing activities 146,150 (477,618) 917,335
- ------------------------------------------------------------------------------
Net change in cash and due from banks 4,189 (77) 418
Cash and due from banks at beginning of year 389 466 48
- ------------------------------------------------------------------------------
Cash and due from banks at end of year $ 4,578 $ 389 $ 466
- ------------------------------------------------------------------------------
Supplementary data
Interest paid $ 72,662 $ 66,850 $ 45,901
Income taxes paid 5,155 21,687 10,772
- ------------------------------------------------------------------------------
</TABLE>
The Bank is subject to legal restrictions on certain transactions with its
nonbank affiliates in addition to the restrictions on the payment of dividends
by the Bank to the Company (see Note 16).
68
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There were no disagreements on accounting and financial disclosure matters
between the Company and its independent accountants during 1996.
P A R T III
Item 10. Directors and Executive Officers of the Registrant
Directors
Set forth below is certain biographical information relating to the members of
the Company's Board of Directors. Each director is elected annually. The
information includes principal occupation, age, the year first elected a
director of the Company, and other directorships. There are no family
relationships among the directors.
John R. H. Bond, age 55, Chairman of the Company and the Bank since January 1,
1997 and Group Chief Executive Officer of HSBC since 1993. Formerly President
and Chief Executive Officer of the Company and the Bank from 1991 through
1992. Previously Executive Director Banking, HongkongBank from 1990 to 1991
and Executive Director Americas from 1988 to 1990. Mr. Bond is director and
Chairman of HSBC Finance (Netherlands) Limited, Chairman of Hongkong Bank of
Canada and a director of HSBC, HongkongBank, Midland Bank plc, British Steel
plc, the London Stock Exchange, Saudi British Bank, Orange plc and VISA
International. Elected in 1987.
James H. Cleave, age 54, President and Chief Executive Officer of the Company
and the Bank since 1992. Formerly Executive Director from June 1992 through
December 1992. Previously Director, President and Chief Executive Officer of
Hongkong Bank of Canada since 1987. Mr. Cleave is also a director of Hongkong
Bank of Canada, HSBC Markets, Inc., HSBC Holdings B.V., Wells Fargo HSBC Trade
Bank, N.A. and Utica Mutual Insurance Company. He is a member of the
Executive Committee of HSBC. Elected in 1991.
I. Malcolm Burnett, age 49, Chief Operating Officer of the Bank since 1992 and
a director of the Bank since 1996. He joined the HSBC Group in 1966 and has
served in various positions in the United Kingdom, Hong Kong, India, Indonesia
and the Solomon Islands. Prior to joining the Bank he was Chief Operating
Officer of HongkongBank Singapore, a position held since 1989. He is a
director of VISA U.S.A. Incorporated. Elected January 23, 1997.
William R. P. Dalton, age 53, President and Chief Executive Officer of
Hongkong Bank of Canada since 1992 and a director since 1987. Appointed Chief
Operating Officer Hongkong Bank of Canada in 1987. Joined the HSBC Group in
1980 as an officer of Wardley Canada Limited, which converted to the Hongkong
Bank of Canada in 1981. Elected in 1996.
Sir William Purves, age 65, Chairman, HSBC. Formerly Chairman and Chief
Executive Officer, HSBC, from 1990 to 1992. Formerly, Chairman and Chief
Executive Officer, Deputy Chairman, Executive Director Banking and General
Manager International, HongkongBank. Sir William is Chairman of The British
Bank of the Middle East and Midland Bank plc. He is a director of
HongkongBank, The "Shell" Transport and Trading Company, plc and The East
Asiatic Company Ltd. Elected in 1984.
69
Directors' Compensation
Directors who are employees of the Company, HSBC or other group affiliates do
not receive compensation for their services as Company directors. The
Directors' Retirement Plan covers nonemployee directors of the Company except
those serving as directors at the request of HSBC. Currently no active
directors participate in this Plan.
<TABLE>
<CAPTION>
Executive Officers
The table below shows the names and ages of all executive officers of the
Company and the positions held by them as of February 28, 1997 and the dates
when elected an executive officer of the Company or the Bank.
- ------------------------------------------------------------------------------
Year
Name Age Elected Present Position with the Company
- ------------------------------------------------------------------------------
<S> <C> <C> <S>
James H. Cleave 54 1992 President and Chief Executive Officer
Colin L. Bamford 54 1995 Senior Executive Vice President
Kerry B. Alberti 52 1993 Executive Vice President,
Investment Services
Robert M. Butcher 53 1988 Executive Vice President &
Chief Financial Officer
Robert B. Engel 43 1994 Executive Vice President &
Chief Credit Officer
Vincent J. Mancuso 50 1996 Executive Vice President &
Group Audit Executive, USA
Philip S. Toohey 53 1990 Legal Advisor, Americas and Secretary
Gerald A. Ronning 49 1991 Executive Vice President & Controller
- ------------------------------------------------------------------------------
</TABLE>
James H. Cleave joined the Bank and the Company as Executive Director in 1992.
Mr. Cleave had been Director, President and CEO of Hongkong Bank of Canada
since 1987 and a director of the Company since 1991.
Colin L. Bamford joined the Company as Senior Executive Vice President in
1995. Mr. Bamford had been Chief Executive Officer, HongkongBank Japan since
1990.
Kerry B. Alberti joined the Bank and the Company as Senior Executive Vice
President, Investment Services in 1993. Mr. Alberti had been Managing
Director, Midland Financial Services, Midland Bank plc and an employee of
Midland Bank since 1988.
All other executive officers have served the Company or the Bank in executive
capacities for more than five years. There are no family relationships among
the above officers.
70
Item 11. Executive Compensation
The following table sets forth information as to the compensation earned
through December 31, 1996 by James H. Cleave, President and Chief Executive
Officer and by the four most highly compensated officers of the Company and
the Bank. Two executive officers have been seconded to the Bank by HSBC,
which pays their salary and other benefits pursuant to arrangements applicable
to international HSBC officers. The two officers are: I. Malcolm Burnett,
Chief Operating Officer and John A.D. Hamilton, Executive Vice President,
Information Technology. The Bank reimbursed HSBC for the salary and certain
benefits paid to these officers and that reimbursement amounted to $1,444,224.
<TABLE>
<CAPTION>
Summary Compensation Table
- ----------------------------------------------------------------------------------------
Annual Compensation All
Name and Other
Principal Position Year Salary Bonus Other Compensation
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
James H. Cleave 1996 $700,000 $650,000 $167,396 $ 26,000
President and 1995 660,000 550,000 178,319 24,000
Chief Executive Officer 1994 600,000 500,000 145,891 18,000
Colin L. Bamford 1996 300,014 25,001 52,112 -
Senior Executive Vice President 1995 60,003 - 9,605 -
Kerry B. Alberti 1996 264,600 108,500 3,565 9,120
Executive Vice President, 1995 263,362 72,775 3,982 9,120
Investment Services 1994 260,000 81,900 5,181 9,120
Robert M. Butcher 1996 300,554 144,775 9,165 5,960
Executive Vice President & 1995 295,042 127,000 9,629 5,926
Chief Financial Officer 1994 287,981 126,875 9,442 5,719
Philip S. Toohey 1996 221,635 91,775 9,165 6,800
Legal Advisor, Americas and 1995 199,490 79,650 9,629 6,600
Secretary 1994 190,304 60,000 9,442 6,600
- ----------------------------------------------------------------------------------------
</TABLE>
Other Annual Compensation for Mr. Cleave includes $128,434, $109,917 and
$115,802 for 1996, 1995 and 1994, respectively, received for housing allowance
together with miscellaneous other benefit payments. Mr. Bamford's Other
Annual Compensation includes housing supplements of $46,167 and $8,400 in 1996
and 1995, respectively. Other Annual Compensation for the other named
executives includes health and insurance benefits.
Amounts reported as All Other Compensation include the Company's contributions
to its 401(k) plan and a four percent credit on salary deferred under the
Company's deferred salary plan. Since deferred salary is not eligible for the
company matching contributions under the 401(k) plan, salary deferrals are
increased by four percent, which is the maximum matching contribution
available under the 401(k) plan. HSBC secondees to the Company do not
participate in these benefit plans.
HSBC has granted options on HSBC common stock to the named executives.
Options were granted on April 1, 1996, exercisable beginning April 1, 1999
conditional upon the growth in earnings per share of HSBC over the three year
period and expiring April 1, 2006.
71
The following table shows the estimated annual retirement benefit payable upon
normal retirement on a straight life annuity basis to participating employees,
including officers, in the compensation and years of service classifications
indicated under the Company's retirement plans which cover most officers and
employees on a non-contributory basis. The amounts shown are before
application of social security reductions. Years of service credited for
benefit purposes is limited to 30 years in the aggregate.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Estimated Annual Retirement Benefits for Representative
Five-Year Average Years of Credited Service
Compensation 15 20 25 30 35
- ------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
$125,000 $ 37,000 $ 49,500 $ 62,000 $ 74,500 $ 74,813
150,000 44,400 59,400 74,400 89,400 89,775
175,000 51,800 69,300 86,800 104,300 104,738
200,000 59,200 79,200 99,200 119,200 119,700
225,000 66,600 89,100 111,600 134,100 134,663
250,000 74,000 99,000 124,000 149,000 149,625
300,000 88,800 118,800 148,800 178,800 179,550
350,000 103,600 138,600 173,600 208,600 209,475
400,000 118,400 158,400 198,400 238,400 239,400
450,000 133,200 178,200 223,200 268,200 269,325
500,000 148,000 198,000 248,000 298,000 299,250
600,000 177,600 237,600 297,600 357,600 359,100
- ------------------------------------------------------------------------------
</TABLE>
The Pension Plan is a non-contributory defined benefit pension plan under
which the Bank and other participating subsidiaries of the Company make
contributions in actuarially determined amounts. Compensation covered by the
Pension Plan includes regular basic earnings (including salary reduction
contributions to the 401(k) plan), but not incentive awards, bonuses, special
payments or deferred salary. The Company maintains supplemental benefit
plans which provide for the difference between the benefits actually payable
under the Pension Plan and those that would have been payable if certain other
awards, special payments and deferred salaries were taken into account and
if compensation in excess of the limitations set by the Internal Revenue Code
could be counted. Payments under these plans are unfunded and will be made
out of the general funds of the Bank or other participating subsidiaries.
The calculation of retirement benefits is based on the highest five-consecutive
year compensation.
Members of the Senior Management Committee of the Bank receive two times their
normal credited service for each year and fraction thereof served as a
committee member in determining pension and severance benefits to a maximum of
30 years of credited service in total. This additional service accrual is
unfunded and payments will be made from the general funds of the Bank or other
subsidiaries. As of December 31, 1996, the individuals listed in the Summary
Compensation Table, with the exception of Mr. Bamford who is not a member of
the Senior Management Committee, have total years of credited service in
determining benefits payable under the plans as follows: Mr. Cleave, 9.2;
Mr. Alberti, 11.9; Mr. Butcher, 15.7; and Mr. Toohey, 16.5. Mr. Bamford has
1.2 years of credited service. HSBC secondees to the Company do not
participate in the retirement plans.
72
Item 12. Security Ownership of Certain Beneficial Owners and Management
Principal Holder of Securities
The Company is 100 percent owned by HSBC Holdings B.V. HSBC Holdings B.V. is
an indirect wholly owned subsidiary of HSBC Holdings plc.
Messrs. Purves and Bond are officers and directors of HSBC.
None of the directors or executive officers owned any of the Company's common
or preferred stock at December 31, 1996.
Item 13. Certain Relationships and Related Transactions
Directors and officers of the Company, members of their immediate families and
HSBC and its affiliates were customers of, and had transactions with, the
Company, the Bank and other subsidiaries of the Company in the ordinary course
of business during 1996. Similar transactions in the ordinary course of
business may be expected to take place in the future.
All loans to executive officers and directors and members of their immediate
families and to HSBC and its affiliates were made on substantially the same
terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons and did not involve more
than normal risk of collectibility or present other unfavorable features.
73
P A R T I V
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
A
1. and 2. Financial Statements and Schedules
The following financial statements and schedules of the Company and
its subsidiaries are included in Item 8:
Report of Independent Auditors
HSBC Americas, Inc.:
Consolidated Balance Sheet
Consolidated Statement of Income
Consolidated Statement of Changes in Shareholders' Equity
Consolidated Statement of Cash Flows
Marine Midland Bank:
Consolidated Balance Sheet
Summary of Significant Accounting Policies
Notes to Financial Statements
3. Exhibits
3 a Registrant's Restated Certificate of Incorporation and
Amendments Thereto
b Registrant's By-Laws, as Amended to Date
4 Instruments Defining the Rights of Security Holders, Including
Indentures
Registrant has previously filed with the Commission as Exhibits
to various registration statements and periodic reports the
Restated Certificate of Incorporation, as amended, By-Laws and
all Indentures and other Instruments Defining the Rights of
Security Holders
22 Subsidiaries of the Registrant
The Company's only significant subsidiary, as defined, is Marine
Midland Bank, a state bank organized under the laws of New York
State.
23 Consent of independent accountants
B
Reports on Form 8-K
A Current Report on Form 8-K dated October 22, 1996 was filed providing
historical and proforma financial statements for the pending acquisition of
CTUS Inc.
A Current Report on Form 8-K dated November 1, 1996 was filed filing certain
documents in connection with the offering of the Company's 7% Subordinated
Notes due November 1, 2006.
A Current Report on Form 8-K dated December 20, 1996 was filed in connection
with the offering of the Company's 7% Subordinated Notes due November 1, 2006.
74
S I G N A T U R E S
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
HSBC Americas, Inc.
Registrant
/s/ Philip S. Toohey
Philip S. Toohey
Legal Advisor, Americas
and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed on February 28, 1997 by the following persons on behalf
of the Registrant and in the capacities indicated:
/s/ Robert M. Butcher
Robert M. Butcher
Executive Vice President &
Chief Financial Officer
(Principal Financial Officer)
/s/ Gerald A. Ronning
Gerald A. Ronning
Executive Vice President &
Controller
(Principal Accounting Officer)
John R. H. Bond*
Chairman of the Board
James H. Cleave*
Director, President & Chief Executive Officer
I. Malcolm Burnett* Director
William R. P. Dalton* Director
William Purves* Director
* /s/ Philip S. Toohey
Philip S. Toohey
Attorney-in-fact
75
EXHIBIT 23
The Board of Directors
HSBC Americas, Inc.:
We consent to incorporation by reference in the registration statement
(No. 333-5801) on Form S-3 of HSBC Americas, Inc. of our report dated
January 23, 1997, relating to the consolidated balance sheets of HSBC
Americas, Inc. and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of income, changes in shareholders'
equity, and cash flows for each of the years in the three-year period
ended December 31, 1996, and the consolidated balance sheets of Marine
Midland Bank and subsidiaries as of December 31, 1996 and 1995, which
report appears in the December 31, 1996 annual report on Form 10-K of
HSBC Americas, Inc.
/s/ KPMG PEAT MARWICK LLP
Buffalo, New York
March 13, 1997
76
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