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 September 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 18 pages.
2.
Part I - FINANCIAL INFORMATION
Page
Item 1 - Financial Statements
Consolidated Balance Sheet
September 30, 1998 and December 31, 1997 3
Consolidated Statement of Income
For The Quarter and Nine Months
Ended September 30, 1998 and 1997 4
Consolidated Statement of Changes in
Shareholders' Equity For The Nine Months
Ended September 30, 1998 and 1997 5
Consolidated Statement of Cash Flows
For The Nine Months Ended
September 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 17
Signatures 18
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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
September 30, December 31,
1998 1997
- -------------------------------------------------------------------------------
in thousands
<S> <C> <C>
Assets
Cash and due from banks $ 937,676 $ 928,691
Interest bearing deposits with banks 3,836,338 2,643,010
Federal funds sold and securities
purchased under resale agreements 1,634,540 497,992
Trading assets 894,111 979,454
Securities available for sale 4,022,910 3,998,773
Loans 21,063,361 21,622,232
Less - allowance for credit losses 402,684 409,409
- -------------------------------------------------------------------------------
Loans, net 20,660,677 21,212,823
Premises and equipment 208,042 225,753
Accrued interest receivable 213,890 233,849
Intangible assets 469,841 481,953
Other assets 464,043 315,275
- -------------------------------------------------------------------------------
Total assets $ 33,342,068 $ 31,517,573
===============================================================================
Liabilities
Deposits in domestic offices
Noninterest bearing $ 3,909,959 $ 4,195,248
Interest bearing 16,853,382 15,981,866
Interest bearing deposits in foreign offices 4,894,946 2,640,050
- -------------------------------------------------------------------------------
Total deposits 25,658,287 22,817,164
Short-term borrowings 3,415,730 4,202,175
Interest, taxes and other liabilities 880,068 751,217
Long-term debt 1,298,314 1,708,064
- -------------------------------------------------------------------------------
Total liabilities 31,252,399 29,478,620
- -------------------------------------------------------------------------------
Shareholders' equity
Preferred stock - -
Common stock 5 5
Capital surplus 1,805,867 1,804,527
Retained earnings 218,550 205,112
Accumulated other comprehensive income 65,247 29,309
- -------------------------------------------------------------------------------
Total shareholders' equity 2,089,669 2,038,953
- -------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 33,342,068 $ 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 Nine months ended
September 30, September 30,
1998 1997 1998 1997
- ----------------------------------------------------------------------------------
in thousands
<S> <C> <C> <C> <C>
Interest income
Loans $ 440,269 $ 452,153 $ 1,335,644 $ 1,280,753
Securities 55,764 55,912 171,325 163,946
Trading assets 12,003 14,731 38,283 43,874
Deposits with banks 31,346 26,299 88,908 64,777
Federal funds sold and
securities purchased
under resale agreements 54,531 12,391 115,903 42,763
- ----------------------------------------------------------------------------------
Total interest income 593,913 561,486 1,750,063 1,596,113
- ----------------------------------------------------------------------------------
Interest expense
Deposits
In domestic offices 166,593 155,982 494,406 428,295
In foreign offices 66,460 27,429 154,495 66,665
Short-term borrowings 50,785 49,088 158,505 135,376
Long-term debt 22,266 30,350 72,614 82,490
- ----------------------------------------------------------------------------------
Total interest expense 306,104 262,849 880,020 712,826
- ----------------------------------------------------------------------------------
Net interest income 287,809 298,637 870,043 883,287
Provision for credit losses 20,000 24,000 59,000 63,400
- ----------------------------------------------------------------------------------
Net interest income, after
provision for credit losses 267,809 274,637 811,043 819,887
- ----------------------------------------------------------------------------------
Other operating income
Trust income 11,737 10,469 34,487 31,605
Service charges 28,746 26,837 85,230 76,228
Mortgage servicing income 4,220 5,195 16,146 15,693
Other fees and commissions 36,673 34,765 107,629 98,786
Trading revenues 1,385 1,619 5,465 4,771
Other income 19,302 14,242 81,098 35,006
- ----------------------------------------------------------------------------------
Total other operating income 102,063 93,127 330,055 262,089
- ----------------------------------------------------------------------------------
369,872 367,764 1,141,098 1,081,976
- ----------------------------------------------------------------------------------
Other operating expenses
Salaries and employee benefits 104,959 104,263 306,920 300,266
Net occupancy expense 23,106 23,369 66,945 67,713
Other expenses 64,629 74,337 206,195 213,093
- ----------------------------------------------------------------------------------
Total other operating expenses 192,694 201,969 580,060 581,072
- ----------------------------------------------------------------------------------
Income before taxes 177,178 165,795 561,038 500,904
Applicable income tax expense 58,100 45,800 192,600 150,300
- ----------------------------------------------------------------------------------
Net income $ 119,078 $ 119,995 $ 368,438 $ 350,604
==================================================================================
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
Nine months ended September 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, September 30, - -
- --------------------------------------------------- ----------
Common stock
Balance, January 1, 5 5
- --------------------------------------------------- ----------
Balance, September 30, 5 5
- --------------------------------------------------- ----------
Capital surplus
Balance, January 1, 1,804,527 1,803,427
Capital contribution from parent 1,340 698
- --------------------------------------------------- ----------
Balance, September 30, 1,805,867 1,804,125
- --------------------------------------------------- ----------
Retained earnings
Balance, January 1, 205,112 60,630
Net income 368,438 $ 368,438 350,604 $ 350,604
Cash dividends declared (355,000) (201,468)
- --------------------------------------------------- ----------
Balance, September 30, 218,550 209,766
- --------------------------------------------------- ----------
Accumulated other comprehensive income
Balance, January 1, 29,309 10,852
Unrealized gains on securities
available for sale, net of taxes and
reclassification adjustments 35,938 35,938 11,163 11,163
---------- ----------
Comprehensive income $ 404,376 $ 361,767
- --------------------------------------------------- ========== ---------- ==========
Balance, September 30, 65,247 22,015
- --------------------------------------------------- ----------
Total shareholders' equity,
September 30, $ 2,089,669 $ 2,035,911
=================================================== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
* $100 aggregate par value.
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6.
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 A S H F L O W S
Nine months ended September 30,
1998 1997
------------------------------------------------------------------------------------
in thousands
<S> <C> <C>
Cash flows from operating activities
Net income $ 368,438 $ 350,604
Adjustments to reconcile net income to net cash
provided (used) by operating activities
Depreciation, amortization and deferred taxes 72,253 102,726
Provision for credit losses 59,000 63,400
Net change in other accrual accounts (128,295) 21,241
Net change in loans held for sale (328,621) (320,781)
Net change in trading assets 68,448 (133,164)
Other, net (96,402) (32,616)
------------------------------------------------------------------------------------
Net cash provided by operating activities 14,821 51,410
------------------------------------------------------------------------------------
Cash flows from investing activities
Net change in interest bearing deposits with banks (1,193,328) (180,984)
Net change in short-term investments (1,136,548) 527,032
Purchases of securities (1,652,493) (1,309,331)
Sales of securities 1,222,732 1,104,044
Maturities of securities 712,046 517,293
Sales of credit card portfolios 395,148 -
Other net changes in credit card receivables 56,500 (45,939)
Net change in other short-term loans (31,070) (3,600)
Net originations and maturities of long-term loans 421,473 (670,323)
Cash used in acquisitions, net of cash acquired - (607,388)
Other, net (81,017) (11,691)
------------------------------------------------------------------------------------
Net cash used by investing activities (1,286,557) (680,887)
------------------------------------------------------------------------------------
Cash flows from financing activities
Net change in deposits 2,841,123 53,741
Net change in short-term borrowings (786,445) 1,041,991
Repayment of long-term debt (408,957) (421,683)
Guaranteed mandatorily redeemable preferred securities
of subsidiary - 200,000
Redemption of preferred stock - (98,063)
Dividends paid (365,000) (2,936)
------------------------------------------------------------------------------------
Net cash provided by financing activities 1,280,721 773,050
------------------------------------------------------------------------------------
Net change in cash and due from banks 8,985 143,573
Cash and due from banks at beginning of period 928,691 967,249
------------------------------------------------------------------------------------
Cash and due from banks at end of period $ 937,676 $ 1,110,822
====================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
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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 are consistent with those
applied in the presentation of the Company's annual financial statements,
except as noted below.
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 September 30, 1998, securities, loans and other assets carried at $4.1
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 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), that were
required to be adopted on that date, on a prospective basis, and adopted the
remaining provisions of FAS 125 on January 1, 1998. FAS 125 established
criteria primarily 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
operations of the Company.
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Accumulated other comprehensive income for the Company relates to unrealized
gains on securities available for sale summarized as follows:
Before Tax Tax Net of Tax
Amount Expense Amount
---------- ------- ----------
(in millions)
<S> <C> <C> <C>
Nine Months Ended September 30, 1998
- ------------------------------------
Unrealized holding gains arising
during the period $66.0 $23.2 $42.8
Less: reclassification adjustments
for gains realized in net income
during the period 10.6 3.7 6.9
---- ---- ----
Net other comprehensive income $55.4 $19.5 $35.9
==== ==== ====
Nine Months Ended September 30, 1997
- ------------------------------------
Unrealized holding gains arising
during the period $31.5 $11.1 $20.4
Less: reclassification adjustments
for gains realized in net income
during the period 14.1 4.9 9.2
---- ---- ----
Net other comprehensive income $17.4 $ 6.2 $11.2
==== ==== ====
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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. The Company is currently assessing the
manner in which it will disclose FAS 131 information, which is required to be
presented in the Company's 1998 Annual Report on Form 10-K.
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, the derivatives gain or loss associated with the effective
portion of the hedge 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 in fair value.
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 third quarter net income of $119.1
million, compared with a $120.0 million in the 1997 third quarter. For the
first nine months of 1998, net income was $368.4 million, compared with $350.6
million for the first nine months of last year.
Net Interest Income
Net interest income for the third quarter of 1998 was $287.8 million compared
with $298.6 million for the third quarter of 1997. For the first nine months
of 1998, net interest income was $870.0 million compared with $883.3 million
for the first nine months of 1997.
Interest income of $593.9 million in the third quarter of 1998 was 5.8% higher
than the third quarter of 1997. Average earning assets of $31.6 billion for
the third quarter of 1998 were 10.8% higher than a year ago. The average rate
earned on earning assets was 7.47% for the third quarter of 1998 compared with
7.83% a year ago. The average rate earned in the third quarter of 1998 was
impacted by a significant increase in short-term treasury assets and by a
change in mix of loans, with more lower yielding commercial and fewer higher
yielding consumer loans. Interest income of $1,750.0 million for the first
nine months of 1998 was 9.6% higher than the first nine months of 1997.
Average earning assets of $30.6 billion for the first nine months of 1998 were
14.8% higher than the first nine months of 1997. The average rate earned on
earning assets was 7.65% for the first nine months of 1998 compared with 8.01%
a year ago.
Interest expense for the third quarter of 1998 was $306.1 million,
representing a 16.5% increase over the third quarter of 1997. Average
interest bearing liabilities for the third quarter of 1998 were $27.0 billion,
13.6% 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 4.51% compared with 4.39% a year ago. Interest
expense for the first nine months of 1998 was $880.0 million or 23.5% above
the first nine months of 1997. Average interest bearing liabilities for the
first nine months of 1998 were $26.0 billion, 18.3% higher than a year ago.
The average rate paid on interest bearing liabilities was 4.52% for the first
nine months of 1998 compared with 4.33% a year ago.
The taxable equivalent net yield on average total assets for the third quarter
of 1998 was 3.41%, compared with 3.93% a year ago. The taxable equivalent net
yield on average total assets for the first nine months of 1998 was 3.58%,
compared with 4.17% a year ago. The decrease in net yield was a direct result
of the change in mix of loans described above, the placement of the higher
level of HSBC Group deposits in short-term investments, and the impact of a
flatter yield curve and competitive pricing pressures.
Other Operating Income
For the third quarter of 1998, total other operating income was $102.1
million, compared with $93.1 million in the 1997 third quarter. For the first
nine months of 1998, total other operating income was $330.1 million, compared
with $262.1 million for the first nine months of 1997. Other income for the
first nine months of 1998 included 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 $192.7 million in the 1998 third quarter
compared with $202.0 million for the 1997 third quarter. Other operating
expenses were $580.1 million for the first nine months of 1998 compared with
$581.1 million a year ago. The cost:income ratio was 49.4% in the third
quarter of 1998 and 48.3% for the first nine months of 1998, compared with
51.6% and 50.7% for the same periods of 1997, respectively.
Year 2000
The Company recognizes the significant challenge posed by the approach of the
new millennium on the ability of systems around the world to properly
recognize the date change to January 1, 2000. Year 2000 readiness is the
Company's top priority. The project is managed as a corporate-wide effort and
receives the highest level of commitment from senior management. Progress of
the Year 2000 project is reported to the Board of Directors at each meeting.
The project is organized in the following phases: awareness, assessment,
renovation, validation and implementation. The awareness and assessment
phases have been completed and the remaining three phases are all over 75%
complete as of September 30, 1998. The Company has evaluated all of its IT
systems as to whether they are mission critical to the organization and has
prioritized its efforts to ensure that these systems are addressed promptly.
These mission critical systems, with the exception of one system which will be
remediated in the first quarter of 1999, are expected to be remediated for
Year 2000 compliance by the end of 1998.
In the early phases of the project, the Company conducted an impact analysis
whereby data processing environments, systems and applications were identified
for their date sensitivity. An inventory database of these items was
developed in preparation for remediation tracking and reporting to ensure that
all potential areas that could be affected were addressed.
The Company has also evaluated the potential effect of the Year 2000 on its
non-IT systems used to conduct business at its facilities including building
security systems, heating, lighting, elevators, fire alarm systems and other
equipment. Non-IT systems have been inventoried and Year 2000 questionnaires
have been sent to the Company's office equipment vendors and landlords to
determine the status of their Year 2000 readiness.
The readiness of the Company's customers, business partners and suppliers is
also receiving significant attention. The Company has been actively
communicating with third parties concerning the status of their Year 2000
readiness. An inventory of the status of all vendors and suppliers has been
completed and their products and services are being tested for Year 2000
compliance. Information received from third parties is being analyzed as part
of the process of evaluating our options and attempting to mitigate third-
party risk.
The Company is presently revising its corporate-wide business continuity plans
to include continuity in the event of major Year 2000 system failures. These
plans will be based on the Company's current disaster recovery plans modified
to address Year 2000 risks. Each business unit of the Company has assessed
the potential impact of the Year 2000 for consideration in the contingency
planning exercise. The Company expects to complete its contingency planning
by March 31, 1999.
The Company believes that significant Year 2000 failures in the Company's
systems or the systems of its customers, business partners, suppliers or other
HSBC Group affiliates with which it conducts business, could ultimately have a
material adverse effect on its financial position or results of operations.
The Company assesses its worst case Year 2000 scenarios to include: (1)
material credit losses due to Year 2000 failures adversely affecting its large
commercial banking customer base and (2) liquidity strain resulting from
potential disruption of the global financial markets stemming from significant
Year 2000 failures.
12.
The Company will expend significant effort through mid-1999 in completing the
testing of its IT systems. The Company will continue developing its
contingency plans and evaluating third-party risk throughout 1999.
The Company estimates that the total cost of the project will range between
$50 million and $60 million, including $10 million relating to non-IT
projects. Approximately $36 million has been incurred to date for the total
project, including $27 million in the first nine months of 1998. These costs
include total estimated capitalizable costs of $16 million for upgrading
personal computers and replacing software, of which $7 million has been
incurred through September 30, 1998. Management does not anticipate any
material incremental costs to be incurred in any single period as generally
the costs represent the redeployment of existing IT resources. Although the
redeployment has resulted in deferral of other IT projects, the Company does
not expect the deferrals will have a material effect on its financial position
or results of operations.
Income Taxes
The effective rate was 34% in the first nine months of 1998 compared with 30%
in the first nine months of 1997. Tax expense in 1997 benefited favorably
from the recognition of deferred losses associated with prior acquisitions of
related entities. The net deferred tax asset at September 30, 1998 was $45
million, including a valuation reserve of $98 million, compared with $40
million, including a valuation reserve of $131 million at December 31, 1997.
<TABLE>
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Asset Quality
The following tables provides a summary of the allowance for credit losses and
nonperforming assets.
3rd 3rd 9 Months Year 9 Months
Quarter Quarter Ended Ended Ended
1998 1997 9/30/98 12/31/97 9/30/97
------- ------- -------- -------- --------
(in millions)
<S> <C> <C> <C> <C> <C>
Allowance for Credit Losses
Balance at beginning of period $406.2 $431.6 $409.4 $418.2 $418.2
Allowance related to acquired
companies - - - 40.3 40.3
Provision charged to income 20.0 24.0 59.0 87.4 63.4
Net charge offs 23.5 28.2 65.7 136.5 94.5
----- ----- ----- ----- -----
Balance at end of period $402.7 $427.4 $402.7 $409.4 $427.4
===== ===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1998 1997 1997
------------ ----------- ------------
(in millions)
<S> <C> <C> <C>
Nonaccruing Loans
Balance at end of period $287.9 $311.1 $321.4
As a percent of loans outstanding 1.37% 1.44% 1.49%
Nonperforming Loans and Assets*
Balance at end of period $301.3 $322.8 $327.0
As a percent of total assets .90% 1.02% 1.04%
Allowance Ratios
Allowance for credit losses as a
percent of:
Loans 1.91% 1.89% 1.98%
Nonaccruing loans 139.85 131.62 132.95
* Includes nonaccruing loans, other real estate and other owned assets.
</TABLE>
13.
Provisions for credit losses were $20.0 million in the third quarter of 1998
compared with $24.0 million in the third quarter of 1997. Provisions for
credit losses for the first nine months of 1998 were $59.0 million compared
with $63.4 million during the first nine months of 1997. Net charge offs in
the credit card portfolio were $65.8 million and $94.9 million in the first
nine months of 1998 and 1997, respectively. The Company sold a $325 million
credit card portfolio which 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 4.34% at September 30, 1998, compared with 4.57% at
December 31, 1997 and 5.28% at September 30, 1997. This high level has
partially been offset by net recoveries of $10.7 million in the commercial
loan portfolio in the first nine months of 1998 compared with net recoveries
of $11.6 million in the first nine months of 1997.
The Company identified impaired loans totaling $172 million at September 30,
1998, of which $53 million had a specific loan loss allowance of $23 million.
At December 31, 1997, impaired loans totaled $153 million, of which $54
million had a specific loan 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 September 30, 1998, $12.1 billion notional value of such positions, with an
estimated positive fair value of approximately $216.8 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 September 30, 1998, $.6 billion
notional value of such positions with an estimated positive fair value of $.6
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
September 30, 1998. Wholesale liabilities were $8.6 billion at September 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.
14.
Capital
Shareholders' equity was $2.1 billion at September 30, 1998 and $2.0 billion
at December 31, 1997.
Under risk-based capital guidelines, the Company's capital ratios were 8.90%
at the Tier 1 level and 12.74% at the total capital level at September 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 6.27% at September 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 billion in loans
outstanding and $100 million of 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. Such risks and uncertainties include, but are not limited to,
potential changes in interest rates, competitive factors and general economic
conditions.
<TABLE>
<CAPTION>
15.
HSBC Americas, Inc.
- -----------------------------------------------------------------------------------
CONSOLIDATED AVERAGE BALANCES AND INTEREST RATES*
Third Quarter 1998 Third Quarter 1997
Balance Interest Rate Balance Interest Rate
- -----------------------------------------------------------------------------------
in millions
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest bearing deposits
with banks $ 2,147 $ 31.4 5.79 % $ 1,804 $ 26.3 5.78 %
Federal funds sold and
securities purchased under
resale agreements 3,859 54.5 5.61 972 12.4 5.06
Trading assets 816 12.0 5.90 990 14.8 5.97
Securities 3,810 55.8 5.81 3,650 55.9 6.08
Loans
Domestic
Commercial 8,464 182.1 8.54 7,432 168.6 9.00
Consumer
Residential mortgages 9,288 169.7 7.31 9,996 185.6 7.43
Other consumer 2,562 77.5 11.99 3,019 87.3 11.47
- -----------------------------------------------------------------------------------
Total domestic 20,314 429.3 8.38 20,447 441.5 8.57
International 646 11.5 7.07 639 11.3 7.00
- -----------------------------------------------------------------------------------
Total loans 20,960 440.8 8.34 21,086 452.8 8.52
- -----------------------------------------------------------------------------------
Total earning assets 31,592 $ 594.5 7.47 % 28,502 $ 562.2 7.83 %
- -----------------------------------------------------------------------------------
Allowance for credit losses (406) (429)
Cash and due from banks 1,106 980
Other assets 1,296 1,169
- -----------------------------------------------------------------------------------
Total assets $ 33,588 $ 30,222
===================================================================================
Liabilities and Shareholders' Equity
Interest bearing demand
deposits $ 2,093 $ 5.8 1.09 % $ 2,016 $ 5.8 1.14 %
Consumer savings deposits 5,593 38.4 2.72 5,629 39.1 2.76
Other consumer time deposits 6,298 88.7 5.59 6,336 87.8 5.50
Commercial, public savings
and other time deposits 3,095 33.8 4.33 2,231 23.2 4.14
Deposits in foreign offices,
primarily banks 4,932 66.4 5.35 2,072 27.5 5.25
- -----------------------------------------------------------------------------------
Total interest bearing deposits 22,011 233.1 4.20 18,284 183.4 3.98
- -----------------------------------------------------------------------------------
Federal funds purchased and
securities sold under
repurchase agreements 696 9.0 5.16 1,815 25.1 5.49
Other short-term borrowings 2,907 41.7 5.69 1,738 23.9 5.47
Long-term debt 1,342 22.3 6.58 1,895 30.4 6.35
- -----------------------------------------------------------------------------------
Total interest bearing
liabilities 26,956 $ 306.1 4.51 % 23,732 $ 262.8 4.39 %
- -----------------------------------------------------------------------------------
Interest rate spread 2.96 % 3.44 %
- -----------------------------------------------------------------------------------
Noninterest bearing deposits 3,802 3,926
Other liabilities 727 420
Shareholders' equity 2,103 2,144
- -----------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 33,588 $ 30,222
===================================================================================
Average earning assets
- Domestic $ 29,374 $ 26,175
- International 2,218 2,327
- -----------------------------------------------------------------------------------
- Total $ 31,592 $ 28,502
- -----------------------------------------------------------------------------------
Net interest revenue
- Domestic $ 279.8 $ 282.8
- International 8.6 16.6
- -----------------------------------------------------------------------------------
- Total $ 288.4 $ 299.4
- -----------------------------------------------------------------------------------
Net yield on average earning assets
- Domestic 3.97 % 4.29 %
- International 1.84 2.83
- Total 3.62 4.17
- -----------------------------------------------------------------------------------
Net yield on average total assets 3.41 3.93
===================================================================================
* Interest and rates are presented on a taxable equivalent basis.
</TABLE>
<TABLE>
<CAPTION>
16.
HSBC Americas, Inc.
- ---------------------------------------------------------------------------------
CONSOLIDATED AVERAGE BALANCES AND INTEREST RATES*
Nine Months 1998 Nine Months 1997
Balance Interest Rate Balance Interest Rate
- ---------------------------------------------------------------------------------
in millions
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest bearing deposits
with banks $ 2,018 $ 88.9 5.89 % $ 1,499 $ 64.8 5.78 %
Federal funds sold and
securities purchased under
resale agreements 2,766 115.9 5.60 1,072 42.8 5.33
Trading assets 848 38.4 6.04 981 44.0 5.98
Securities 3,811 171.5 6.01 3,546 164.1 6.19
Loans
Domestic
Commercial 8,238 542.4 8.80 7,385 502.8 9.10
Consumer
Residential mortgages 9,632 518.7 7.18 8,380 467.2 7.43
Other consumer 2,681 242.9 12.12 3,118 278.3 11.93
- ---------------------------------------------------------------------------------
Total domestic 20,551 1,304.0 8.48 18,883 1,248.3 8.84
International 615 33.3 7.24 686 34.5 6.72
- ---------------------------------------------------------------------------------
Total loans 21,166 1,337.3 8.45 19,569 1,282.8 8.76
- ---------------------------------------------------------------------------------
Total earning assets 30,609 $1,752.0 7.65 % 26,667 $1,598.5 8.01 %
- ---------------------------------------------------------------------------------
Allowance for credit losses (407) (427)
Cash and due from banks 1,120 970
Other assets 1,252 1,184
- ---------------------------------------------------------------------------------
Total assets $32,574 $28,394
=================================================================================
Liabilities and Shareholders' Equity
Interest bearing demand
deposits $ 2,094 $ 17.6 1.12 % $ 1,964 $ 17.0 1.16 %
Consumer savings deposits 5,539 112.3 2.71 5,336 117.5 2.94
Other consumer time deposits 6,299 264.8 5.62 5,865 231.5 5.28
Commercial, public savings
and other time deposits 3,058 99.7 4.36 2,037 62.3 4.09
Deposits in foreign offices,
primarily banks 3,864 154.5 5.35 1,731 66.7 5.15
- ---------------------------------------------------------------------------------
Total interest bearing deposits 20,854 648.9 4.16 16,933 495.0 3.91
- ---------------------------------------------------------------------------------
Federal funds purchased and
securities sold under
repurchase agreements 865 35.8 5.53 1,915 77.9 5.44
Other short-term borrowings 2,854 122.7 5.75 1,413 57.4 5.44
Long-term debt 1,463 72.6 6.63 1,746 82.5 6.32
- ---------------------------------------------------------------------------------
Total interest bearing
liabilities 26,036 $ 880.0 4.52 % 22,007 $ 712.8 4.33 %
- ---------------------------------------------------------------------------------
Interest rate spread 3.13 % 3.68 %
- ---------------------------------------------------------------------------------
Noninterest bearing deposits 3,768 3,866
Other liabilities 673 453
Shareholders' equity 2,097 2,068
- ---------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $32,574 $28,394
=================================================================================
Average earning assets
- Domestic $28,336 $24,419
- International 2,273 2,248
- ---------------------------------------------------------------------------------
- Total $30,609 $26,667
- ---------------------------------------------------------------------------------
Net interest revenue
- Domestic $ 840.8 $ 835.5
- International 31.2 50.2
- ---------------------------------------------------------------------------------
- Total $ 872.0 $ 885.7
- ---------------------------------------------------------------------------------
Net yield on average earning assets
- Domestic 3.97 % 4.58 %
- International 1.84 2.98
- Total 3.81 4.44
- ---------------------------------------------------------------------------------
Net yield on average total assets 3.58 4.17
=================================================================================
* Interest and rates are presented on a taxable equivalent basis.
</TABLE>
17.
Part II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Report on Form 8-K
A Current Report on Form 8-K dated August 21, 1998 was filed on
August 21, 1998 to include certain documents in connection with the
Company's registration statement on Form S-3 (No. 333-53647) filed
with the Securities and Exchange Commission on May 27, 1998, pursuant
to which Medium-Term Notes may be offered and sold from time to time.
18.
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: November 4, 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 938
<INT-BEARING-DEPOSITS> 3,836
<FED-FUNDS-SOLD> 1,635
<TRADING-ASSETS> 894
<INVESTMENTS-HELD-FOR-SALE> 4,023
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 21,063
<ALLOWANCE> 403
<TOTAL-ASSETS> 33,342
<DEPOSITS> 25,658
<SHORT-TERM> 3,416
<LIABILITIES-OTHER> 880
<LONG-TERM> 898
400
0
<COMMON> 0
<OTHER-SE> 2,090
<TOTAL-LIABILITIES-AND-EQUITY> 33,342
<INTEREST-LOAN> 1,336
<INTEREST-INVEST> 171
<INTEREST-OTHER> 243
<INTEREST-TOTAL> 1,750
<INTEREST-DEPOSIT> 649
<INTEREST-EXPENSE> 880
<INTEREST-INCOME-NET> 870
<LOAN-LOSSES> 59
<SECURITIES-GAINS> 11
<EXPENSE-OTHER> 580
<INCOME-PRETAX> 561
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 368
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 3.81
<LOANS-NON> 288
<LOANS-PAST> 25
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 409
<CHARGE-OFFS> 100
<RECOVERIES> 35
<ALLOWANCE-CLOSE> 403
<ALLOWANCE-DOMESTIC> 142
<ALLOWANCE-FOREIGN> 28
<ALLOWANCE-UNALLOCATED> 233
</TABLE>
