CONFORMED 1.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 1998 Commission file number 1-2940
HSBC Americas, Inc.
(Exact name of registrant as specified in its charter)
Delaware Corporation 22-1093160
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Marine Midland Center, Buffalo, N.Y. 14203
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (716) 841-2424
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
All voting stock (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.
This report includes a total of 17 pages.
2.
Part I - FINANCIAL INFORMATION
Page
Item 1 - Financial Statements
Consolidated Balance Sheet
June 30, 1998 and December 31, 1997 3
Consolidated Statement of Income
For The Quarter and Six Months
Ended June 30, 1998 and 1997 4
Consolidated Statement of Changes in
Shareholders' Equity For The Six Months
Ended June 30, 1998 and 1997 5
Consolidated Statement of Cash Flows
For The Six Months Ended
June 30, 1998 and 1997 6
Notes to Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Part II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 16
Signatures 17
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3.
HSBC Americas, Inc.
- ------------------------------------------------------------------------------
C O N S O L I D A T E D B A L A N C E S H E E T
June 30, December 31,
1998 1997
- ------------------------------------------------------------------------------
in thousands
<S> <C> <C>
Assets
Cash and due from banks $ 1,184,899 $ 928,691
Interest bearing deposits with banks 3,386,532 2,643,010
Federal funds sold and securities
purchased under resale agreements 3,331,158 497,992
Trading assets 764,990 979,454
Securities available for sale 3,742,560 3,998,773
Loans 20,955,312 21,622,232
Less - allowance for credit losses 406,202 409,409
- ------------------------------------------------------------------------------
Loans, net 20,549,110 21,212,823
Premises and equipment 211,958 225,753
Accrued interest receivable 216,316 233,849
Intangible assets 474,174 481,953
Other assets 416,137 315,275
- ------------------------------------------------------------------------------
Total assets $ 34,277,834 $ 31,517,573
==============================================================================
Liabilities
Deposits in domestic offices
Noninterest bearing $ 4,390,084 $ 4,195,248
Interest bearing 16,993,867 15,981,866
Interest bearing deposits in foreign offices 4,571,950 2,640,050
- ------------------------------------------------------------------------------
Total deposits 25,955,901 22,817,164
Short-term borrowings 4,214,554 4,202,175
Interest, taxes and other liabilities 692,711 751,217
Long-term debt 1,368,857 1,708,064
- ------------------------------------------------------------------------------
Total liabilities 32,232,023 29,478,620
- ------------------------------------------------------------------------------
Shareholders' equity
Preferred stock - -
Common stock 5 5
Capital surplus 1,805,333 1,804,527
Retained earnings 214,472 205,112
Accumulated other comprehensive income 26,001 29,309
- ------------------------------------------------------------------------------
Total shareholders' equity 2,045,811 2,038,953
- ------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 34,277,834 $ 31,517,573
==============================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
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4.
HSBC Americas, Inc.
- --------------------------------------------------------------------------------
C O N S O L I D A T E D S T A T E M E N T O F I N C O M E
Quarter ended June 30, Six months ended June 30,
1998 1997 1998 1997
- ----------------------------------------------------------------------------------
in thousands
<S> <C> <C> <C> <C>
Interest income
Loans $ 447,844 $ 444,332 $ 895,376 $ 828,600
Securities 56,612 59,985 115,561 108,034
Trading assets 11,941 15,048 26,280 29,143
Deposits with banks 27,921 21,351 57,562 38,477
Federal funds sold and
securities purchased
under resale agreements 49,059 15,617 61,372 30,372
- ----------------------------------------------------------------------------------
Total interest income 593,377 556,333 1,156,151 1,034,626
- ----------------------------------------------------------------------------------
Interest expense
Deposits
In domestic offices 168,095 151,117 327,813 272,312
In foreign offices 50,833 20,908 88,035 39,236
Short-term borrowings 56,905 54,044 107,721 86,287
Long-term debt 23,681 30,568 50,348 52,141
- ----------------------------------------------------------------------------------
Total interest expense 299,514 256,637 573,917 449,976
- ----------------------------------------------------------------------------------
Net interest income 293,863 299,696 582,234 584,650
Provision for credit losses 19,500 21,000 39,000 39,400
- ----------------------------------------------------------------------------------
Net interest income, after
provision for credit losses 274,363 278,696 543,234 545,250
- ----------------------------------------------------------------------------------
Other operating income
Trust income 11,707 10,613 22,750 21,137
Service charges 28,648 26,847 56,484 49,392
Mortgage servicing income 4,856 5,521 11,927 10,497
Other fees and commissions 34,376 33,588 70,955 64,021
Trading revenues 2,691 1,746 4,080 3,151
Other income 32,431 10,622 61,796 20,764
- ----------------------------------------------------------------------------------
Total other operating income 114,709 88,937 227,992 168,962
- ----------------------------------------------------------------------------------
389,072 367,633 771,226 714,212
- ----------------------------------------------------------------------------------
Other operating expenses
Salaries and employee benefits 101,000 103,936 201,961 196,002
Net occupancy expense 21,557 21,723 43,838 44,344
Other expenses 72,078 70,706 141,567 138,757
- ----------------------------------------------------------------------------------
Total other operating expenses 194,635 196,365 387,366 379,103
- ----------------------------------------------------------------------------------
Income before taxes 194,437 171,268 383,860 335,109
Applicable income tax expense 68,200 55,200 134,500 104,500
- ----------------------------------------------------------------------------------
Net income $ 126,237 $ 116,068 $ 249,360 $ 230,609
==================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
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5.
HSBC Americas, Inc.
- ------------------------------------------------------------------------------------------
C O N S O L I D A T E D S T A T E M E N T O F C H A N G E S
I N S H A R E H O L D E R S' E Q U I T Y
Six months ended June 30,
1998 1997
- ------------------------------------------------------------------------------------------
Comprehensive Comprehensive
Total Income Total Income
- -----------------------------------------------------------------------------------------
in thousands
<S> <C> <C> <C> <C>
Preferred stock
Balance, January 1, $ - * $ 98,063
Redemption of stock - (98,063)
- --------------------------------------------------- ----------
Balance, June 30, - -
- --------------------------------------------------- ----------
Common stock
Balance, January 1, 5 5
- --------------------------------------------------- ----------
Balance, June 30, 5 5
- --------------------------------------------------- ----------
Capital surplus
Balance, January 1, 1,804,527 1,803,427
Capital contribution from parent 806 304
- --------------------------------------------------- ----------
Balance, June 30, 1,805,333 1,803,731
- --------------------------------------------------- ----------
Retained earnings
Balance, January 1, 205,112 60,630
Net income 249,360 $ 249,360 230,609 $ 230,609
Cash dividends declared (240,000) (1,468)
- --------------------------------------------------- ----------
Balance, June 30, 214,472 289,771
- --------------------------------------------------- ----------
Accumulated other comprehensive income
Balance, January 1, 29,309 10,852
Unrealized losses on securities
available for sale, net of taxes and
reclassification adjustments (3,308) (3,308) (2,959) (2,959)
---------- ----------
Comprehensive income $ 246,052 $ 227,650
- --------------------------------------------------- ========== ---------- ==========
Balance, June 30, 26,001 7,893
- --------------------------------------------------- ----------
Total shareholders' equity, June 30, $ 2,045,811 $ 2,101,400
=================================================== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
* $100 aggregate par value.
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6.
HSBC Americas, Inc.
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C O N S O L I D A T E D S T A T E M E N T O F C A S H F L O W S
Six months ended June 30,
1998 1997
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in thousands
<S> <C> <C>
Cash flows from operating activities
Net income $ 249,360 $ 230,609
Adjustments to reconcile net income to net cash
provided (used) by operating activities
Depreciation, amortization and deferred taxes 39,495 91,574
Provision for credit losses 39,000 39,400
Net change in other accrual accounts (71,818) (106,866)
Net change in loans held for sale (351,018) (49,379)
Net change in trading assets 216,400 (113,365)
Other, net (52,007) (19,834)
------------------------------------------------------------------------------------
Net cash provided by operating activities 69,412 72,139
------------------------------------------------------------------------------------
Cash flows from investing activities
Net change in interest bearing deposits with banks (743,522) (197,498)
Net change in short-term investments (2,833,166) (1,441,790)
Purchases of securities (793,070) (640,813)
Sales of securities 422,606 509,843
Maturities of securities 632,463 268,235
Sales of credit card portfolios 395,148 -
Other net changes in credit card receivables 32,670 141,536
Net change in other short-term loans (26,847) (28,583)
Net originations and maturities of long-term loans 597,115 (421,781)
Cash used in acquisitions, net of cash acquired - (607,388)
Other, net (69,039) (56,634)
------------------------------------------------------------------------------------
Net cash used by investing activities (2,385,642) (2,474,873)
------------------------------------------------------------------------------------
Cash flows from financing activities
Net change in deposits 3,138,737 1,148,632
Net change in short-term borrowings 12,379 1,525,374
Repayment of long-term debt (338,678) (291,370)
Guaranteed mandatorily redeemable preferred securities
of subsidiary - 200,000
Redemption of preferred stock - (98,063)
Dividends paid (240,000) (2,936)
------------------------------------------------------------------------------------
Net cash provided by financing activities 2,572,438 2,481,637
------------------------------------------------------------------------------------
Net change in cash and due from banks 256,208 78,903
Cash and due from banks at beginning of period 928,691 967,249
------------------------------------------------------------------------------------
Cash and due from banks at end of period $ 1,184,899 $ 1,046,152
====================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
7.
Notes to Consolidated Financial Statements
1. Basis of Presentation
The accounting and reporting policies of HSBC Americas, Inc. (the Company) and
its subsidiaries including its principal subsidiary, Marine Midland Bank,
conform to generally accepted accounting principles and to predominant
practice within the banking industry. Such policies, except as noted below,
are consistent with those applied in the presentation of the Company's annual
financial statements.
The interim financial information in this report has not been audited. In the
opinion of the Company's management, all adjustments necessary for a fair
presentation of financial position, results of operations and cash flows for
the interim periods have been made. The interim financial information should
be read in conjunction with the 1997 Annual Report on Form 10-K.
2. Derivative Financial Instruments
The Company uses a variety of derivative instruments to manage interest rate
risk. These derivative instruments follow either the synthetic alteration or
hedge model of accounting. Interest rate risk is managed by achieving a mix
of derivative instruments and balance sheet assets and liabilities deemed
consistent and desirable given expectations of interest rate movements,
balance sheet changes and risk management strategies.
Under the synthetic alteration accounting model, the related derivative
contract is linked to specific individual or pools of similar balance sheet
assets or liabilities by the notional and interest rate risk characteristics
of the associated instruments.
Under the hedge accounting model, the related derivative likewise is linked to
specific individual or pools of similar balance sheet assets or liabilities by
the notional and interest rate risk characteristics of the associated
instruments. In addition, the asset, liability or event that the derivative
is associated with exposes the enterprise to price or interest rate risk and
the related derivative contract effectively reduces that risk. Accordingly,
there must be high correlation between the changes in market value of the
derivative and the fair value or cash flows associated with the hedged item so
that it is probable that the results of the derivative will substantially
offset the effects of price or interest rate movement on the hedged item. To
the extent these criteria are satisfied, the derivative contract is accounted
for on a basis consistent with that of the underlying hedged item.
For a derivative financial instrument synthetically altering an asset or
liability accounted for on an historical cost basis, accrual based accounting
is applied. Specifically, income or expense is recognized and accrued to the
next settlement date in accordance with the contractual terms of the agreement
as an adjustment to the income or expense associated with the underlying
balance sheet position. The derivative position would not be marked to market.
Derivative instruments that are entered into for the purpose of generating
trading revenues are accounted for on a mark to market basis. Associated
income and expense is recognized as trading revenue. For derivatives linked
to securities classified as available for sale, the mark to market is
considered a component of the market value of the related securities and is
recorded through shareholders' equity consistent with the valuation of the
assets. Derivatives used to limit the potential for loss associated with the
valuation of mortgage servicing rights are also considered in the valuation of
the related asset.
Derivatives that do not qualify as synthetic alterations or hedges at
inception, or that cease to qualify as synthetic alterations or hedges, are
marked to market through earnings. Derivatives that are effectively cancelled
are marked to market prospectively with any gains or losses at that time being
8.
deferred and amortized to earnings over the remaining life of the derivative.
If the altered or hedged position is liquidated the gain or loss, including
any deferred amount is recognized in earnings.
3. Pledged Financial Instruments
At June 30, 1998, securities, loans and other assets carried at $4.8 billion
were pledged as collateral for borrowings, to secure public and trust deposits
and for other purposes.
4. Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities
Effective January 1, 1997, the Company generally adopted the provisions of
Statement of Financial Accounting Standards No. 125, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities (FAS
125), prospectively, and adopted certain other of its provisions on January 1,
1998, as permitted by FAS 125. 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 adoption of the provisions of FAS 125 including
those provisions where adoption was delayed until January 1, 1998, did not
have a material effect on the financial position or results of operations of
the Company.
5. Comprehensive Income
Effective January 1, 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income (FAS
130). FAS 130 establishes standards for reporting the components of
comprehensive income and requires that all such components be included in a
financial statement that is displayed with the same prominence as other
financial statements. Comprehensive income includes net income as well as
certain items that are reported directly within a separate component of
shareholders' equity. The Company has reported comprehensive income in the
consolidated statement of changes in shareholders' equity. The disclosure
requirements of FAS 130 have no impact on the financial position or results of
operation of the Company.
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Accumulated other comprehensive income for the Company relates to unrealized
losses on securities available for sale summarized as follows:
Before Tax Tax Expense Net of Tax
Amount (Benefit) Amount
---------- ----------- ----------
(in millions)
<S> <C> <C> <C>
Six Months Ended June 30, 1998
Unrealized holding gains arising
during the period $ 1.2 $ .5 $ .7
Less: reclassification adjustments
for gains realized in net income
during the period 6.2 2.2 4.0
---- ---- ----
Net other comprehensive income (loss) $(5.0) $(1.7) $(3.3)
==== ==== ====
Six Months Ended June 30, 1997
Unrealized holding gains arising
during the period $ 4.8 $ 1.8 $ 3.0
Less: reclassification adjustments
for gains realized in net income
during the period 9.2 3.2 6.0
---- ---- ----
Net other comprehensive income (loss) $(4.4) $(1.4) $(3.0)
==== ==== ====
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9.
6. New Accounting Standards
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 131, Disclosures About
Segments of an Enterprise and Related Information (FAS 131). The provisions
of FAS 131 require disclosure of financial and descriptive information about
an entity's reportable operating segments. Segments are defined as components
of an entity that engage in business activities that generate revenues and
expenses, whose operating results are reviewed by management in the
determination of resource allocation and performance and for which discrete
financial information is available. FAS 131 is effective for the first annual
period beginning in 1998. The Company is currently assessing the manner in
which it will disclose the required information.
In February 1998, the FASB issued Statement of Financial Accounting Standards
No. 132, Employer's Disclosures about Pensions and Other Postretirement
Benefits (FAS 132), which will be effective for year-end 1998 financial
statements. FAS 132 revises and standardizes pension and other postretirement
plan disclosures. It does not change the measurement or recognition
standards.
In March 1998, the AICPA issued Statement of Position 98-1, Accounting for the
Cost of Computer Software Developed or Obtained for Internal Use (SOP 98-1).
The provisions of SOP 98-1 require the capitalization of eligible costs of
specified activities related to computer software developed or obtained for
internal use and becomes effective for fiscal year 1999. Historically these
costs were generally expensed. The statement, when implemented, is not
expected to materially impact the financial position or results of operation
of the Company.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities (FAS 133).
FAS 133 establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires that all derivatives be
recognized as either assets or liabilities in the balance sheet and that those
instruments be measured at fair value. The accounting for changes in the fair
value of a derivative (that is, gains and losses) depends on the intended use
of the derivative and the resulting designation.
- For a derivative designated as hedging the exposures to changes in
the fair value of a recognized asset or liability or a firm
commitment, the gain or loss is recognized in earnings in the period
of change together with the offsetting loss or gain on the hedged
item attributable to the risk being hedged.
- For a derivative designated as hedging the exposure to variable cash
flows of a forecasted transaction, the effective portion of the
derivatives gain or loss is initially reported as a component of
other comprehensive income and subsequently reclassified into
earnings when the forecasted transaction affects earnings. The
ineffective portion is reported in earnings immediately.
- For a derivative not designated as a hedging instrument, the gain or
loss is recognized in earnings in the period of change.
FAS 133 is effective beginning January 1, 2000. The Company is in the process
of evaluating the potential impact of FAS 133 including reconsidering the
Company's risk management strategies.
10.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
HSBC Americas, Inc. (the Company) reported second quarter net income of $126.2
million, compared with a $116.1 million in the 1997 second quarter. For the
first six months of 1998, net income was $249.4 million, compared with
$230.6 million for the first six months of last year.
Net Interest Income
Net interest income for the second quarter of 1998 was $293.9 million compared
with $299.7 million for the second quarter of 1997. For the first six months
of 1998, net interest income was $582.2 million compared with $584.7 million
for the first six months of 1997.
Interest income of $593.4 million in the second quarter of 1998 was 6.7%
higher than the second quarter of 1997. Average earning assets of $31.0
billion for the second quarter of 1998 were 10.6% higher than a year ago.
Specifically, average short-term investments increased by $2.7 billion over
1997 levels. The average rate earned on earning assets was 7.68% for the
second quarter of 1998 compared with 7.96% a year ago. The average rate
earned in the second quarter of 1998 was impacted by a significant increase in
short term treasury assets and by a change in the mix of loans, with more
commercial and fewer consumer loans. Interest income of $1,156.1 million for
the first six months of 1998 was 11.7% higher than the first six months of
1997. Average earning assets of $30.1 billion for the first six months of
1998 were 17.0% higher than the first six months of 1997. The average rate
earned on earning assets was 7.75% for the first six months of 1998 compared
with 8.12% a year ago.
Interest expense for the second quarter of 1998 was $299.5 million,
representing a 16.7% increase over the second quarter of 1997. Average
interest bearing liabilities for the second quarter of 1998 were $26.5
billion, 12.3% higher than a year ago. A significant part of the increase in
average interest bearing liabilities was attributable to higher levels of
deposits placed by other members of the HSBC Group. The average rate paid on
interest bearing liabilities was 4.54% compared with 4.37% a year ago.
Interest expense for the first six months of 1998 was $573.9 million or 27.5%
above the first six months of 1997. Average interest bearing liabilities for
the first six months of 1998 were $25.6 billion, 21.0% higher than a year ago.
The average rate paid on interest bearing liabilities was 4.53% for the first
six months of 1998 compared with 4.29% a year ago.
The taxable equivalent net yield on average total assets for the second
quarter of 1998 was 3.58%, compared with 4.02% a year ago. The taxable
equivalent net yield on average total assets for the first six months of 1998
was 3.67%, compared with 4.30% a year ago. The decrease in net yield was a
direct result of the March 1, 1997 acquisition of First Federal Savings and
Loan Association of Rochester as savings and loan associations generally have
lower margins as well as the change in mix of loans described above and the
placement of the higher level of HSBC Group deposits in short-term
investments.
Other Operating Income
For the second quarter of 1998, total other operating income was $114.7
million, compared with $88.9 million in the 1997 second quarter. For the first
six months of 1998, total other operating income was $228.0 million, compared
with $169.0 million for the first six months of 1997. Other income for the
first six months of 1998 includes gains of $28.1 million on the sales of
selected credit card portfolios. Other operating income also benefited from
increases in service charges, gains on sale of residential loans and
commissions on the sale of mutual funds and securities.
11.
Other Operating Expenses
Other operating expenses were $194.6 million in the 1998 second quarter
compared with $196.4 million for the 1997 second quarter. Other operating
expenses were $387.4 million for the first six months of 1998 compared with
$379.1 million a year ago. The cost:income ratio was 47.6% in the second
quarter of 1998 and 47.8% for the first six months of 1998, compared with
50.5% and 50.3% for the same periods of 1997, respectively.
As further described in the 1997 Annual Report on Form 10-K, the Company is
cognizant of the issues that the Year 2000 could have on its operating and
processing systems. A comprehensive plan has been developed, with critical
application coding and testing to be completed by December 31, 1998. In
addition, the Company continues contact with its vendors, outside service
providers, customers and intermediaries to determine their level of
preparedness. The Company estimates that the total cost of the project will
range between $50 million and $60 million of which approximately $25 million
has been incurred to date, including $18 million in the first half of 1998.
These costs include capitalizable costs of upgrading personal computers and
replacing software. Currently, management does not anticipate material
incremental costs will be incurred in any single period since, generally, the
costs represent the redeployment of existing information technology resources.
Income Taxes
The effective rate was 35% in the first half of 1998 compared with 31% in the
first half of 1997. Tax expense in the first half of 1997 benefited favorably
from the recognition of deferred losses associated with prior acquisitions of
related entities.
The net deferred tax asset at June 30, 1998 was $50 million, net of valuation
reserve of $113 million, compared with $40 million, net of valuation reserve
of $131 million at December 31, 1997.
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Asset Quality
The following tables provide a summary of the allowance for credit losses and
nonperforming assets.
2nd 2nd 6 Months Year 6 Months
Quarter Quarter Ended Ended Ended
1998 1997 6/30/98 12/31/97 6/30/97
------- ------- -------- -------- --------
(in millions)
<S> <C> <C> <C> <C> <C>
Allowance for Credit Losses
Balance at beginning of period $406.7 $443.5 $409.4 $418.2 $418.2
Allowance related to acquired
companies - - - 40.3 40.3
Provision charged to income 19.5 21.0 39.0 87.4 39.4
Net charge offs 20.0 32.9 42.2 136.5 66.3
----- ----- ----- ----- -----
Balance at end of period $406.2 $431.6 $406.2 $409.4 $431.6
===== ===== ===== ===== =====
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June 30, December 31, June 30,
1998 1997 1997
------- ----------- -------
(in millions)
<S> <C> <C> <C>
Nonaccruing Loans
Balance at end of period $283.9 $311.1 $309.6
As a percent of loans outstanding 1.35% 1.44% 1.48%
Nonperforming Loans and Assets*
Balance at end of period $300.3 $322.8 $318.1
As a percent of total assets .88% 1.02% .97%
Allowance Ratios
Allowance for credit losses as
a percent of:
Loans 1.94% 1.89% 2.06%
Nonaccruing loans 143.07 131.62 139.40
* Includes nonaccruing loans, other real estate and other owned assets.
</TABLE>
12.
Provisions for credit losses were $19.5 million in the second quarter of 1998
compared with $21.0 million in the second quarter of 1997. Provisions for
credit losses for the first half of 1998 were $39.0 million compared with
$39.4 million during the first half of 1997. Net charge offs in the credit
card portfolio were $45.8 million and $63.6 million in the first half of 1998
and 1997, respectively. The Company sold a $325 million credit card portfolio
in the second quarter of 1998. This portfolio maintained significantly lower
delinquency rates in comparison to the remaining credit card portfolio.
Although still high by historical standards, credit card delinquencies have
declined in the 1998 period. The delinquency rate for the credit card
portfolio, excluding this sold portfolio, was 4.16% at June 30, 1998, compared
with 4.57% at December 31, 1997 and 5.63% at June 30, 1997. This high level
has partially been offset by net recoveries of $10.9 million in the commercial
loan portfolio in the first half of 1998 compared with net recoveries of $5.8
million in the first half of 1997.
The Company identified impaired loans as defined by FAS 114 totaling $163
million at June 30, 1998, of which $61 million had a specific credit loss
allowance of $22 million. At December 31, 1997, impaired loans totaled $153
million, of which $54 million had a specific credit loss allowance of $21
million.
Derivative Financial Instruments
As principally an end-user of off-balance sheet financial instruments, the
Company uses various derivative financial instruments to manage its overall
interest rate risk and to reduce the risk associated with changes in the
income and expense stream of certain on-balance sheet assets and liabilities.
At June 30, 1998, $10.1 billion notional value of such positions, with an
estimated positive fair value of approximately $89.7 million were outstanding.
At December 31, 1997, $12.5 billion notional value of such positions, with an
estimated positive fair value of $64.0 million were outstanding.
The Company also maintains various derivatives in its trading portfolio to
offset risk associated with changes in market value of certain trading assets,
and to satisfy the foreign currency requirements of retail customers. These
derivatives are carried at fair value. At June 30, 1998, $.8 billion notional
value of such positions, with an estimated negative fair value of $.1 million
were outstanding. At December 31, 1997, $1.2 billion of notional value of
such positions, with an estimated negative fair value of $.2 million were
outstanding.
The Company's credit risk associated with off-balance sheet positions is not
considered material, since almost all derivative contracts are executed with
counterparties affiliated through common ownership. 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.
Liquidity
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 June 30,
1998. Wholesale liabilities were $9.1 billion at June 30, 1998 compared with
$7.1 billion at December 31, 1997. The Company also has strong liquidity as a
result of a high level of immediately saleable or pledgeable assets including
its securities available for sale portfolio, mortgages and other assets.
13.
Capital
Shareholders' equity was $2.0 billion at June 30, 1998 approximately the same
level as December 31, 1997.
Under risk-based capital guidelines, the Company's capital ratios were 8.98%
at the Tier 1 level and 12.85% at the total capital level at June 30, 1998.
These ratios compare with 9.36% at the Tier 1 level and 13.38% at the total
capital level at December 31, 1997. Tier 1 and total capital includes $400
million guaranteed mandatorily redeemable preferred securities issued by
subsidiaries of the Company. These securities are classified as long-term
debt on the consolidated balance sheet.
Under guidelines for leverage ratios, the Company's ratio of Tier 1 capital to
quarterly average total assets was 6.33% at June 30, 1998 compared with 6.68%
at December 31, 1997.
Pending Acquisition
The Company has received approval from the Federal Deposit Insurance
Corporation and is awaiting approval from the Board of Governors of the
Federal Reserve to acquire the commercial loan portfolio and assume certain
deposit liabilities of the New York and Chicago branches and the related
Cayman Islands branch and International Banking Facility (together, the
Branches) of The Hongkong and Shanghai Banking Corporation Limited
(HongkongBank). The Company and HongkongBank are wholly-owned subsidiaries of
HSBC Holdings plc. The Branches have approximately $2.6 billion in loans
outstanding and $150 million of related deposits. Funding for the transaction
will probably be provided by several sources including sale of short-term
investments and increased deposit balances.
Forward-Looking Statements
This report contains certain forward-looking statements (as defined in the
Private Securities Litigation Reform Act of 1995). These forward-looking
statements may involve significant risks and uncertainties. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable, actual results may differ from the results
discussed.
<TABLE>
<CAPTION>
14.
HSBC Americas, Inc.
- -----------------------------------------------------------------------------
CONSOLIDATED AVERAGE BALANCES AND INTEREST RATES*
Second Quarter 1998 Second Quarter 1997
Balance Interest Rate Balance Interest Rate
- -----------------------------------------------------------------------------
in millions
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest bearing deposits
with banks $ 1,901 $ 27.9 5.89 % $ 1,465 $ 21.4 5.84 %
Federal funds sold and
securities purchased under
resale agreements 3,520 49.1 5.59 1,096 15.6 5.72
Trading assets 787 12.0 6.09 985 15.1 6.12
Securities 3,753 56.6 6.05 3,821 60.0 6.30
Loans
Domestic
Commercial 8,252 181.6 8.83 7,449 165.2 8.90
Consumer
Residential mortgages 9,648 176.2 7.31 9,529 175.9 7.38
Other consumer 2,567 79.8 12.47 3,052 92.8 12.19
- -----------------------------------------------------------------------------
Total domestic 20,467 437.6 8.58 20,030 433.9 8.69
International 606 10.8 7.13 670 11.1 6.68
- -----------------------------------------------------------------------------
Total loans 21,073 448.4 8.53 20,700 445.0 8.62
- -----------------------------------------------------------------------------
Total earning assets 31,034 $594.0 7.68 % 28,067 $557.1 7.96 %
- -----------------------------------------------------------------------------
Allowance for credit losses (406) (434)
Cash and due from banks 1,141 974
Other assets 1,261 1,387
- -----------------------------------------------------------------------------
Total assets $33,030 $29,994
=============================================================================
Liabilities and Shareholders' Equity
Interest bearing demand
deposits $ 2,103 $ 5.9 1.13 % $ 2,033 $ 5.8 1.15 %
Consumer savings deposits 5,511 37.1 2.70 5,681 42.6 3.01
Other consumer time deposits 6,313 88.4 5.61 6,381 82.3 5.17
Commercial, public savings
and other time deposits 3,325 36.7 4.43 1,977 20.4 4.13
Deposits in foreign offices,
primarily banks 3,814 50.8 5.35 1,613 20.9 5.20
- -----------------------------------------------------------------------------
Total interest bearing deposits 21,066 218.9 4.17 17,685 172.0 3.90
- -----------------------------------------------------------------------------
Federal funds purchased and
securities sold under
repurchase agreements 769 10.7 5.56 2,618 35.8 5.49
Other short-term borrowings 3,204 46.2 5.79 1,298 18.2 5.63
Long-term debt 1,436 23.7 6.61 1,975 30.6 6.21
- -----------------------------------------------------------------------------
Total interest bearing
liabilities 26,475 $299.5 4.54 % 23,576 $256.6 4.37 %
- -----------------------------------------------------------------------------
Interest rate spread 3.14 % 3.59 %
- -----------------------------------------------------------------------------
Noninterest bearing deposits 3,780 3,868
Other liabilities 679 517
Shareholders' equity 2,096 2,033
- -----------------------------------------------------------------------------
Total liabilities and
shareholders' equity $33,030 $29,994
=============================================================================
Average earning assets
- Domestic $28,666 $25,772
- International 2,368 2,295
- -----------------------------------------------------------------------------
- Total $31,034 $28,067
- -----------------------------------------------------------------------------
Net interest revenue
- Domestic $285.6 $284.0
- International 8.9 16.5
- -----------------------------------------------------------------------------
- Total $294.5 $300.5
- -----------------------------------------------------------------------------
Net yield on average earning assets
- Domestic 4.00 % 4.42 %
- International 1.51 2.89
- Total 3.81 4.29
- -----------------------------------------------------------------------------
Net yield on average total assets 3.58 4.02
=============================================================================
* Interest and rates are presented on a taxable equivalent basis.
</TABLE>
<TABLE>
<CAPTION>
15.
HSBC Americas, Inc.
- ---------------------------------------------------------------------------------
CONSOLIDATED AVERAGE BALANCES AND INTEREST RATES*
Six Months 1998 Six Months 1997
Balance Interest Rate Balance Interest Rate
- ---------------------------------------------------------------------------------
in millions
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest bearing deposits
with banks $ 1,953 $ 57.5 5.94 % $ 1,344 $ 38.5 5.77 %
Federal funds sold and
securities purchased under
resale agreements 2,210 61.4 5.60 1,123 30.4 5.45
Trading assets 864 26.3 6.10 977 29.2 5.98
Securities 3,812 115.7 6.12 3,493 108.2 6.25
Loans
Domestic
Commercial 8,124 360.2 8.94 7,361 334.2 9.15
Consumer
Residential mortgages 9,806 349.0 7.12 7,559 281.6 7.45
Other consumer 2,741 165.5 12.18 3,168 191.0 12.16
- ---------------------------------------------------------------------------------
Total domestic 20,671 874.7 8.53 18,088 806.8 8.99
International 599 21.8 7.34 710 23.2 6.60
- ---------------------------------------------------------------------------------
Total loans 21,270 896.5 8.50 18,798 830.0 8.90
- ---------------------------------------------------------------------------------
Total earning assets 30,109 $1,157.4 7.75 % 25,735 $1,036.3 8.12 %
- ---------------------------------------------------------------------------------
Allowance for credit losses (407) (426)
Cash and due from banks 1,127 965
Other assets 1,230 1,191
- ---------------------------------------------------------------------------------
Total assets $32,059 $27,465
=================================================================================
Liabilities and Shareholders' Equity
Interest bearing demand
deposits $ 2,094 $ 11.8 1.13 % $ 1,937 $ 11.2 1.16 %
Consumer savings deposits 5,513 74.0 2.70 5,187 78.4 3.05
Other consumer time deposits 6,299 176.1 5.64 5,625 143.7 5.15
Commercial, public savings
and other time deposits 3,040 66.0 4.38 1,939 39.1 4.06
Deposits in foreign offices,
primarily banks 3,321 88.0 5.35 1,557 39.2 5.08
- ---------------------------------------------------------------------------------
Total interest bearing deposits 20,267 415.9 4.14 16,245 311.6 3.87
- ---------------------------------------------------------------------------------
Federal funds purchased and
securities sold under
repurchase agreements 951 26.7 5.67 1,966 52.8 5.42
Other short-term borrowings 2,826 81.0 5.78 1,248 33.5 5.41
Long-term debt 1,525 50.3 6.66 1,670 52.1 6.29
- ---------------------------------------------------------------------------------
Total interest bearing
liabilities 25,569 $ 573.9 4.53 % 21,129 $ 450.0 4.29 %
- ---------------------------------------------------------------------------------
Interest rate spread 3.22 % 3.83 %
- ---------------------------------------------------------------------------------
Noninterest bearing deposits 3,750 3,836
Other liabilities 646 470
Shareholders' equity 2,094 2,030
- ---------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $32,059 $27,465
=================================================================================
Average earning assets
- Domestic $27,808 $23,527
- International 2,301 2,208
- ---------------------------------------------------------------------------------
- Total $30,109 $25,735
- ---------------------------------------------------------------------------------
Net interest revenue
- Domestic $ 560.9 $ 552.7
- International 22.6 33.6
- ---------------------------------------------------------------------------------
- Total $ 583.5 $ 586.3
- ---------------------------------------------------------------------------------
Net yield on average earning assets
- Domestic 4.07 % 4.74 %
- International 1.98 3.07
- Total 3.91 4.59
- ---------------------------------------------------------------------------------
Net yield on average total assets 3.67 4.30
=================================================================================
* Interest and rates are presented on a taxable equivalent basis.
</TABLE>
16.
Part II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Report on Form 8-K
None
17.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HSBC Americas, Inc.
(Registrant)
Date: July 30, 1998 /s/ Gerald A. Ronning
Gerald A. Ronning
Executive Vice President & Controller
(On behalf of Registrant and
as Chief Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,185
<INT-BEARING-DEPOSITS> 3,387
<FED-FUNDS-SOLD> 3,331
<TRADING-ASSETS> 765
<INVESTMENTS-HELD-FOR-SALE> 3,743
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 20,955
<ALLOWANCE> 406
<TOTAL-ASSETS> 34,278
<DEPOSITS> 25,956
<SHORT-TERM> 4,215
<LIABILITIES-OTHER> 693
<LONG-TERM> 968
400
0
<COMMON> 0
<OTHER-SE> 2,046
<TOTAL-LIABILITIES-AND-EQUITY> 34,278
<INTEREST-LOAN> 895
<INTEREST-INVEST> 116
<INTEREST-OTHER> 145
<INTEREST-TOTAL> 1,156
<INTEREST-DEPOSIT> 416
<INTEREST-EXPENSE> 574
<INTEREST-INCOME-NET> 582
<LOAN-LOSSES> 39
<SECURITIES-GAINS> 6
<EXPENSE-OTHER> 387
<INCOME-PRETAX> 384
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 249
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 3.91
<LOANS-NON> 284
<LOANS-PAST> 34
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 409
<CHARGE-OFFS> 66
<RECOVERIES> 24
<ALLOWANCE-CLOSE> 406
<ALLOWANCE-DOMESTIC> 140
<ALLOWANCE-FOREIGN> 27
<ALLOWANCE-UNALLOCATED> 239
</TABLE>
