Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1997 Commission file number 1-2940
HSBC Americas, Inc.
(Exact name of registrant as specified in its charter)
One Marine Midland Center
Buffalo, New York 14203
(Address of principal executive offices)
Telephone (716) 841-2424
IRS Employer Identification No. 22-1093160. State of Incorporation: Delaware
Securities registered on the New York Stock Exchange pursuant to Section 12(b)
of the Act:
7% Subordinated Notes due 2006
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) had filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to
this Form 10-K. [X]
All voting stock (1,001 shares of Common Stock $5 par value) is owned by HSBC
Holdings B.V., an indirect wholly owned subsidiary of HSBC Holdings plc.
Documents incorporated by reference: None
1
This page is intentionally left blank.
2
T A B L E O F C O N T E N T S
Page
Part I
1. Business 4
2. Properties 5
3. Legal Proceedings 6
4. Submission of Matters to a Vote of
Security Holders 6
Part II
5. Market for the Registrant's Common Equity
and Related Stockholder Matters 6
6. Selected Financial Data 7
7. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 10
7A. Quantitative and Qualitative Disclosures
About Market Risk 28
8. Financial Statements and
Supplementary Data 31
9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure 69
Part III
10. Directors and Executive Officers
of the Registrant 69
11. Executive Compensation 71
12. Security Ownership of Certain Beneficial
Owners and Management 72
13. Certain Relationships and Related
Transactions 73
Part IV
14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 74
3
P A R T I
Item 1. Business
HSBC Americas, Inc. (the Company) is a New York State based bank holding
company registered under the Bank Holding Company Act of 1956, as amended. At
December 31, 1997, the Company, together with its subsidiaries, had assets of
$31.5 billion and employed approximately 9,500 full and part time employees.
All of the Company's common stock is owned by HSBC Holdings B.V., an indirect
wholly owned subsidiary of HSBC Holdings plc (HSBC). HSBC, the ultimate
parent company of The Hongkong and Shanghai Banking Corporation Limited
(HongkongBank) and Midland Bank plc, is an international banking and financial
services organization with major commercial and investment banking franchises
operating under long established names in Asia, Europe, the Americas and the
Middle East. Principal executive offices of HSBC are located in London,
England. HSBC, with assets of $472 billion at December 31, 1997, is one of
the world's largest banking groups.
Effective March 1, 1997 the Company completed its acquisition of CTUS Inc.
(CTUS), a unitary thrift holding company for $676 million in cash. CTUS owned
First Federal Savings and Loan Association of Rochester (First Federal), a
thrift institution which had $7.0 billion in assets and deposits of $4.3
billion. The operations of First Federal were merged into the Company's
principal subsidiary, Marine Midland Bank (the Bank) at the date of
acquisition.
The Bank which had assets of $31.3 billion and deposits of $23.9 billion at
December 31, 1997, is supervised and routinely examined by the Superintendent
of Banks of the State of New York and the Board of Governors of the Federal
Reserve System (the Federal Reserve). The Company also is a participant in a
joint venture, Wells Fargo HSBC Trade Bank.
The Bank is a regional bank with a distinctive geographic franchise
encompassing the entire State of New York. Selected commercial and consumer
banking products are offered on a national basis. The Bank is engaged in a
general commercial banking business, offering a full range of banking products
and services to corporations, institutions, governments and individuals.
Through its affiliation with HSBC, the Bank offers its customers access to
global markets and services. In turn, the Bank plays a role in the delivery
and processing of other HSBC products.
The Bank is subject to banking laws and regulations which, among other things,
require that reserves be maintained against deposits and, in some cases,
currently limit the establishment of branch banking offices in the U.S.
outside its home state. The Company is also prohibited, with certain
exceptions, from engaging, directly or indirectly, in activities which are not
closely related to banking. In addition, the Federal Reserve Act restricts
certain transactions between banks and their nonbank affiliates.
The Company and the Bank are subject to risk-based capital and leveraged
guidelines issued by the Federal Reserve. The Federal Reserve is required by
law to take specific prompt actions with respect to financial institutions
that do not meet minimum capital standards. Five capital standards have been
4
P A R T I Continued
Item 1. Business Continued
identified, the highest of which is well-capitalized. A well-capitalized bank
must have a Tier 1 risk-based capital ratio of at least 6%, a total risk-based
capital ratio of at least 10%, a leverage ratio of at least 5% and not be
subject to a capital directive order. The leverage ratio measures Tier 1
capital against total non-risk weighted assets. The Bank's ratios at December
31, 1997 exceeded all ratios required for the well-capitalized category.
Revisions to the risk-based capital guidelines regarding market risk have been
issued effective in 1998. These guidelines will not have a significant effect
on the Bank's risk-based capital ratios.
As further assurance for the safety and soundness of financial institutions,
the Federal Reserve has guidelines on operations, management, and
compensation, as well as standards for asset quality and earnings. The
guidelines have not had a significant effect on the Company's operations.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(IBBEA) authorized interstate bank acquisitions beginning in 1995. In
addition, beginning in 1997, banks may merge across state lines as long as
neither state opts out of interstate branching. New York State has enacted an
opt in statute. Also, IBBEA protects key provisions of state law and
establishes a mechanism for de novo interstate branching.
The Company and its subsidiaries face competition in all the markets they
serve. Other commercial banks, thrift institutions, consumer finance
companies, mortgage bankers, insurance companies and investment banking firms
are traditional competitors. Many of these institutions are not subject to
the same laws and regulations imposed on the Company and its subsidiaries.
Item 2. Properties
The principal executive offices of the Company and the Bank are located in
Buffalo, New York, in a building under a long-term lease. The Bank has more
than 380 other banking offices in New York State located in 49 counties.
Approximately half of these offices are located in buildings owned by the Bank
and the remaining are located in leased quarters. In addition, there are
branch offices and locations for other activities occupied under various types
of ownership and leaseholds in 12 states other than New York, none of which is
materially important to the respective activities. For information relating
to lease commitments, see Note 22 to the Financial Statements.
5
Item 3. Legal Proceedings
The Company and its subsidiaries are defendants in a number of legal
proceedings arising out of, and incidental to, their businesses. Management
of the Company, based on its review with counsel of the development of these
matters to date, is of the opinion that the ultimate resolution of these
pending proceedings will not have a material adverse effect on the business or
financial position of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
Reference is made to Item 5.
P A R T II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Since all common stock of the Company is owned by HSBC Holdings B.V., shares
of the Company's common stock are not listed or traded on a securities
exchange.
6
<TABLE>
<CAPTION>
Item 6. Selected Financial Data
- ---------------------------------------------------------------------------------------------------------
Year Ended December 31, 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
in millions
<S> <C> <C> <C> <C> <C>
Net interest income $1,173.4 $ 961.8 $ 892.2 $ 782.1 $ 727.4
Securities transactions 17.4 7.9 12.3 7.9 6.5
Other operating income 342.0 303.0 302.5 288.1 110.6
Other operating expenses 781.4 656.8 695.8 820.8 944.2
Provision for loan losses 87.4 64.7 175.3 168.7 108.5
- ---------------------------------------------------------------------------------------------------------
Income (loss) before taxes and cumulative effect
of change in accounting principle 664.0 551.2 335.9 88.6 (208.2)
Applicable income tax expense 193.0 171.0 52.3 125.6 21.8
- ---------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of change
in accounting principle 471.0 380.2 283.6 (37.0) (230.0)
Cumulative effect of change in accounting principle (1) - - - - 40.0
- ---------------------------------------------------------------------------------------------------------
Net income (loss) $ 471.0 $ 380.2 $ 283.6 $ (37.0) $(190.0)
- ---------------------------------------------------------------------------------------------------------
Balances at year end
Total assets $ 31,518 $23,630 $20,553 $19,120 $20,323
Long-term debt 1,708 1,080 710 713 1,704
Common shareholder's equity 2,039 1,875 1,599 1,559 1,602
Total shareholders' equity 2,039 1,973 1,697 1,657 1,700
Ratio of shareholders' equity to total assets 6.47 % 8.35 % 8.26 % 8.67 % 8.37 %
- ---------------------------------------------------------------------------------------------------------
Selected financial ratios (2)
Rate of return on
Total assets 1.62 % 1.83 % 1.50 % (0.20)% (0.99)%
Total common shareholder's equity 22.93 21.33 16.53 (2.72) (12.48)
Total shareholders' equity to total assets 7.14 8.90 9.37 9.00 8.68
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Quarterly Results of Operations
1997 1996
------------------------------------------------------------------------
4th Q 3rd Q 2nd Q 1st Q 4th Q 3rd Q 2nd Q 1stQ
- ---------------------------------------------------------------------------------------------------------------
in millions
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income $ 290.1 $298.6 $ 299.7 $ 285.0 $ 255.5 $ 249.6 $ 226.7 $230.0
Securities transactions 3.3 4.9 4.8 4.4 0.8 2.3 0.5 4.3
Other operating income 94.1 88.2 84.1 75.6 78.4 75.4 73.9 75.3
Other operating expenses 200.4 201.9 196.3 182.8 168.6 174.7 158.9 154.6
Provision for loan losses 24.0 24.0 21.0 18.4 15.0 15.0 15.0 19.7
- ---------------------------------------------------------------------------------------------------------------
Income before taxes 163.1 165.8 171.3 163.8 151.1 137.6 127.2 135.3
Applicable income tax expense 42.7 45.8 55.2 49.3 46.9 36.6 38.1 49.4
- ---------------------------------------------------------------------------------------------------------------
Net income $ 120.4 $120.0 $ 116.1 $ 114.5 $ 104.2 $ 101.0 $ 89.1 $ 85.9
===============================================================================================================
(1) Change in method of accounting for income taxes.
(2) Based on average daily balances.
</TABLE>
7
<TABLE>
<CAPTION>
CONSOLIDATED AVERAGE BALANCES AND INTEREST RATES - THREE YEARS
The following table shows the average balances of the principal components
of assets, liabilities and shareholders' equity, together with their
respective interest amounts and rates earned or paid on a taxable
equivalent basis.
1997
---------------------------
Balance Interest Rate
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets
Interest bearing deposits with banks,
primarily foreign $ 1,698 $ 98.7 5.82 %
Federal funds sold and securities purchased
under resale agreements 977 51.8 5.30
Trading assets 980 58.9 6.01
Securities 3,567 219.2 6.14
Loans
Domestic
Commercial 7,457 666.9 8.94
Consumer
Residential mortgages 8,867 633.1 7.14
Other consumer 3,045 389.5 12.79
- ------------------------------------------------------------------------------
Total domestic 19,369 1,689.5 8.72
International 680 45.9 6.76
- ------------------------------------------------------------------------------
Total loans 20,049 1,735.4 8.66
- ------------------------------------------------------------------------------
Total earning assets 27,271 $ 2,164.0 7.94 %
- ------------------------------------------------------------------------------
Allowance for loan losses (426)
Cash and due from banks 1,010
Other assets 1,171
- ------------------------------------------------------------------------------
Total assets $ 29,026
==============================================================================
Liabilities and Shareholders' Equity
Interest bearing demand deposits $ 1,974 $ 22.7 1.15 %
Consumer savings deposits 5,369 155.7 2.90
Other consumer time deposits 5,971 318.6 5.34
Commercial, public savings and other time deposits 2,105 86.9 4.13
Deposits in foreign offices, primarily banks 1,846 95.2 5.15
- ------------------------------------------------------------------------------
Total interest bearing deposits 17,265 679.1 3.93
- ------------------------------------------------------------------------------
Federal funds purchased and securities sold
under repurchase agreements 1,977 108.3 5.48
Other short-term borrowings 1,585 88.4 5.58
Long-term debt 1,755 111.8 6.37
- ------------------------------------------------------------------------------
Total interest bearing liabilities 22,582 $ 987.6 4.37 %
- ------------------------------------------------------------------------------
Interest rate spread 3.57 %
- ------------------------------------------------------------------------------
Noninterest bearing deposits 3,891
Other liabilities 481
Total shareholders' equity 2,072
- ------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 29,026
==============================================================================
Average earning assets - Domestic $ 24,971
- International 2,300
- ------------------------------------------------------------------------------
- Total $ 27,271
- ------------------------------------------------------------------------------
Net interest revenue - Domestic $ 1,109.5
- International 66.9
- ------------------------------------------------------------------------------
- Total $ 1,176.4
- ------------------------------------------------------------------------------
Net yield on average earning assets - Domestic 4.35 %
- International 2.91
- Total 4.31
- ------------------------------------------------------------------------------
Net yield on average total assets 4.05
==============================================================================
Total weighted average rate earned on earning assets is interest and fee
earnings divided by daily average amounts of total interest earning assets,
including the daily average amount on nonperforming loans. Loan fees
included were $20 million for 1997, $17 million for 1996 and $14 million
for 1995.
</TABLE>
8
<TABLE>
<CAPTION>
1996 1995
------------------------------ ------------------------------
Balance Interest Rate Balance Interest Rate
----------------------------------------------------------------------
in millions
<C> <C> <C> <C> <C> <C>
$ 1,173 $ 65.4 5.58 % $ 1,009 $ 60.7 6.02 %
540 28.8 5.34 579 34.9 6.03
845 51.3 6.07 495 34.2 6.89
3,082 188.3 6.11 2,382 145.2 6.09
6,661 578.5 8.68 6,595 574.3 8.71
3,354 253.3 7.55 2,898 216.3 7.47
3,378 415.2 12.29 3,167 389.8 12.31
----------------------------------------------------------------------
13,393 1,247.0 9.31 12,660 1,180.4 9.32
512 35.0 6.84 540 37.8 7.00
----------------------------------------------------------------------
13,905 1,282.0 9.22 13,200 1,218.2 9.23
----------------------------------------------------------------------
19,545 $ 1,615.8 8.27 % 17,665 $ 1,493.2 8.45 %
----------------------------------------------------------------------
(454) (545)
939 911
782 933
----------------------------------------------------------------------
$ 20,812 $ 18,964
======================================================================
$ 1,666 $ 22.3 1.34 % $ 1,582 $ 29.7 1.88 %
4,051 125.0 3.09 3,749 121.8 3.25
3,595 191.1 5.32 3,076 169.0 5.50
1,853 74.2 4.01 1,693 71.3 4.21
1,343 68.8 5.12 1,461 72.7 4.98
----------------------------------------------------------------------
12,508 481.4 3.85 11,561 464.5 4.02
----------------------------------------------------------------------
1,085 55.7 5.13 602 34.5 5.72
1,289 65.2 5.06 718 47.0 6.54
733 47.6 6.50 711 50.4 7.08
----------------------------------------------------------------------
15,615 $ 649.9 4.16 % 13,592 $ 596.4 4.39 %
----------------------------------------------------------------------
4.11 % 4.06 %
----------------------------------------------------------------------
3,040 3,017
304 577
1,853 1,778
----------------------------------------------------------------------
$ 20,812 $ 18,964
======================================================================
$ 18,262 $ 16,082
1,283 1,583
----------------------------------------------------------------------
$ 19,545 $ 17,665
----------------------------------------------------------------------
$ 928.5 $ 850.8
37.4 46.0
----------------------------------------------------------------------
$ 965.9 $ 896.8
----------------------------------------------------------------------
5.08 % 5.29 %
2.91 2.90
4.94 5.08
----------------------------------------------------------------------
4.64 4.73
======================================================================
</TABLE>
9
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The Company reported net income for 1997 of $471.0 million compared with
$380.2 million in 1996, or an increase of 23.9%. Return on average common
shareholder's equity increased to 22.93% in 1997 from 21.33% in 1996.
The Company's results include the effect of recent acquisitions. Major
acquisitions were as follows. Effective March 1, 1997, the Company acquired
CTUS Inc. which owned First Federal Savings and Loan Association of Rochester
(First Federal). This acquisition had $7.0 billion in assets and deposits of
$4.3 billion. On December 31, 1996, the Company acquired the institutional
U.S. dollar clearing activity of Morgan Guaranty Trust Company of New York.
The Company assumed $.9 billion in deposit liabilities and acquired a like
amount of Federal funds sold. The Company acquired $1.1 billion in selected
assets and assumed $1.2 billion in deposits of East River Savings Bank in June
1996.
A detailed review comparing 1997 operations with 1996 and 1995 follows. It
should be read in conjunction with the consolidated financial statements of
the Company which begin on page 34.
E A R N I N G S P E R F O R M A N C E R E V I E W
<TABLE>
<CAPTION>
Net Interest Income
Net interest income is the total interest income on earning assets less the
interest expense on deposits and borrowed funds. In the discussion that
follows, interest income and rates are presented and analyzed on a taxable
equivalent basis, in order to permit comparisons of yields on tax-exempt and
taxable assets.
- -----------------------------------------------------------------------------------------------------------
Increase(Decrease) Increase(Decrease)
1997 Amount % 1996 Amount % 1995
- ------------------------------------------------------------------------------------------------------------
in millions
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income $2,164.0 $548.2 33.9 $1,615.8 $122.6 8.2 $1,493.2
Interest expense 987.6 337.7 52.0 649.9 53.5 9.0 596.4
- -------------------------------------------------------------------------------------------------------------
Net interest income -
taxable equivalent basis 1,176.4 210.5 21.8 965.9 69.1 7.7 896.8
Taxable equivalent
adjustment 3.0 (1.1) (25.7) 4.1 (.5) (11.5) 4.6
- ------------------------------------------------------------------------------------------------------------
Net interest income $1,173.4 $211.6 22.0 $ 961.8 $ 69.6 7.8 $ 892.2
- ------------------------------------------------------------------------------------------------------------
Average earning assets $ 27,271 $7,726 39.5 $ 19,545 $1,880 10.6 $ 17,665
Average nonearning assets 1,755 488 38.5 1,267 (32) (2.5) 1,299
- ------------------------------------------------------------------------------------------------------------
Average total assets $ 29,026 $8,214 39.5 $ 20,812 $1,848 9.7 $ 18,964
- ------------------------------------------------------------------------------------------------------------
Net yield on:
Average earning assets 4.31% (.63)% (12.8) 4.94% (.14)% (2.8) 5.08%
Average total assets 4.05 (.59) (12.7) 4.64 (.09) (1.9) 4.73
============================================================================================================
</TABLE>
10
Net interest income increased to $1,176.4 million in 1997 compared with $965.9
million in 1996. The acquisitions were the principal factor behind the
increase. Additionally, there was growth in nonacquisition related business.
The net yields on earning assets have declined primarily as a result of the
First Federal acquisition on March 1, 1997. Savings and loan associations,
such as First Federal, generally have narrower interest margins than
commercial banking institutions.
The following table presents net interest income components on a taxable
equivalent basis, using marginal tax rates of 35%, and quantifies the changes
in the components according to "volume and rate".
<TABLE>
<CAPTION>
Net Interest Income Components Including Volume/Rate Analysis
- --------------------------------------------------------------------------------------------------------------------
1997 Compared to 1996 1996 Compared to 1995
Increase(Decrease) Increase(Decrease)
1997 Volume Rate 1996 Volume Rate 1995
- --------------------------------------------------------------------------------------------------------------------
in millions
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Interest bearing deposits with banks $ 98.7 $ 30.4 $ 2.9 $ 65.4 $ 9.3 $ (4.6) $ 60.7
Federal funds sold and securities
purchased under resale agreements 51.8 23.2 (.2) 28.8 (2.3) (3.8) 34.9
Trading assets 58.9 8.1 (.5) 51.3 21.6 (4.5) 34.2
Securities 219.2 29.8 1.1 188.3 42.8 .3 145.2
Loans:
Domestic:
Commercial 666.9 70.7 17.7 578.5 5.7 (1.5) 574.3
Consumer
Residential mortgages 633.1 394.3 (14.5) 253.3 34.5 2.5 216.3
Credit card receivables 240.8 (16.8) 2.5 255.1 22.1 (2.7) 235.7
Other consumer 148.7 (23.6) 12.2 160.1 5.2 .8 154.1
International 45.9 11.3 (.4) 35.0 (1.9) (.9) 37.8
- --------------------------------------------------------------------------------------------------------------------
Total interest income 2,164.0 527.4 20.8 1,615.8 137.0 (14.4) 1,493.2
- --------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest bearing demand deposits 22.7 3.8 (3.4) 22.3 1.5 (8.9) 29.7
Consumer savings and
other time deposits 474.3 154.5 3.7 316.1 34.2 (8.9) 290.8
Commercial and public savings
and other time deposits 86.9 10.4 2.3 74.2 6.5 (3.6) 71.3
Deposits in foreign offices 95.2 26.0 .4 68.8 (6.0) 2.1 72.7
Short-term borrowings 196.7 64.9 10.9 120.9 55.6 (16.2) 81.5
Long-term debt 111.8 65.1 (.9) 47.6 1.5 (4.3) 50.4
- --------------------------------------------------------------------------------------------------------------------
Total interest expense 987.6 324.7 13.0 649.9 93.3 (39.8) 596.4
- --------------------------------------------------------------------------------------------------------------------
Net interest income -
taxable equivalent basis $1,176.4 $202.7 $ 7.8 $ 965.9 $ 43.7 $ 25.4 $ 896.8
====================================================================================================================
</TABLE>
The changes in interest income and interest expense due to both rate and
volume have been allocated in proportion to the absolute amounts of the change
in each.
11
Average Balances and Interest Rates
Average balances and interest rates earned or paid for the past three years
are reported on pages 8 and 9. Average earning assets increased to $27,271
million in 1997 from $19,545 million in 1996 resulting in increased interest
income even though rates earned declined to 7.94% in 1997 from 8.27% in 1996.
The decline in yield is primarily attributable to the lower yielding,
predominantly adjustable rate, residential mortgage portfolio acquired from
First Federal.
Average commercial loans were $7,457 million in 1997, compared with $6,661
million in 1996. The level of nonaccruing loans decreased to $311 million at
year-end 1997 from $357 million at year-end 1996 reflecting a continuing
improvement in commercial credit quality. Yields on commercial loans were
8.94% in 1997 compared with 8.68% in 1996. Average residential mortgages
increased to $8,867 million in 1997 from $3,354 million in 1996. The assets
acquired from First Federal included $5.1 billion in residential mortgages,
which were primarily adjustable rate. As a result, the yield on residential
mortgages declined to 7.14% in 1997 compared with 7.55% in 1996. Average
credit card receivables decreased to $1,760 million in 1997 from $1,883
million in 1996.
Domestic deposits, including NOW accounts, consumer, commercial and public
savings and other time deposits averaged $15,419 million during 1997, compared
with $11,165 million in 1996. The growth in average deposits includes the
impact of the acquisition activity. Average effective rates on these types of
deposits were 3.79% in 1997, compared with 3.70% in 1996.
Average short-term investments and trading assets increased to $3,655 million
in 1997 from $2,558 million in 1996. At the same time, average short-term
borrowings increased to $3,562 million in 1997 from $2,374 million in 1996
providing the funding for the increased holdings. Average long-term debt
increased to $1,755 million in 1997 from $733 million in 1996. The increase
included the effect of the guaranteed mandatorily redeemable preferred
securities issuance of $200 million in December 1996 and $200 million in May
1997. Also included are advances from the Federal Home Loan Bank of New York
as a result of the First Federal acquisition which averaged $647 million in
1997.
12
<TABLE>
<CAPTION>
Other Operating Income
Other operating income was $359.4 million in 1997 compared with $310.9 million
in 1996 and $314.8 million in 1995.
- ------------------------------------------------------------------------------------------------
Increase(Decrease) Increase(Decrease)
1997 Amount % 1996 Amount % 1995
- ------------------------------------------------------------------------------------------------
in millions
<S> <C> <C> <C> <C> <C> <C> <C>
Trust income $ 42.9 $ 1.8 4.2 $ 41.1 $ (5.6) (11.9) $ 46.7
Service charges 104.0 14.1 15.7 89.9 4.8 5.6 85.1
Mortgage servicing income 21.6 6.5 43.4 15.1 (1.1) (7.1) 16.2
Letter of credit fees 21.5 1.9 9.7 19.6 1.0 5.4 18.6
Credit card fees 50.9 (2.1) (3.9) 53.0 9.8 22.6 43.2
Other fee-based income 62.3 18.9 43.5 43.4 (15.7) (26.5) 59.1
Other income 32.6 (4.5) (12.2) 37.1 8.9 31.2 28.2
- ------------------------------------------------------------------------------------------------
Nontrading income 335.8 36.6 12.2 299.2 2.1 .7 297.1
- ------------------------------------------------------------------------------------------------
Trading asset revenue (loss) 1.8 2.0 989.0 (.2) (1.8) (112.6) 1.6
Foreign exchange revenue 4.4 .4 11.4 4.0 .2 3.4 3.8
- ------------------------------------------------------------------------------------------------
Trading revenues 6.2 2.4 63.2 3.8 (1.6) (30.0) 5.4
- ------------------------------------------------------------------------------------------------
Securities transactions 17.4 9.5 119.9 7.9 (4.4) (35.7) 12.3
- ------------------------------------------------------------------------------------------------
Total other operating income $359.4 $48.5 15.6 $310.9 $ (3.9) (1.3) $314.8
================================================================================================
</TABLE>
Nontrading Income
Nontrading income was $335.8 million in 1997 compared with $299.2 million in
1996. Fee income categories (service charges, mortgages, other fees and
commissions) were favorably impacted from the recent acquisitions.
Trading Revenues
Trading revenue includes securities trading gains and losses, commissions
earned from distributing municipal obligations, and foreign exchange fees from
transactions with corporate clients and correspondent banks. It does not
include interest income from these activities (included as a component of net
interest income), which is usually substantial. The following is an analysis
of the average balance outstanding, interest income (on a taxable equivalent
basis) and trading revenue related to trading assets. This analysis excludes
foreign exchange revenue which is separately disclosed in the table of other
operating income.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
Mortgage
and Other
U.S. Asset-Backed Other
Government Securities Securities Derivatives Total
- ------------------------------------------------------------------------------------
in millions
<S> <C> <C> <C> <C> <C>
1997
Average balance
outstanding $ 2 $ 972 $ 5 $ 1 $ 980
Interest income .2 58.3 .4 - 58.9
Trading revenues .3 .5 1.3 (.3) 1.8
1996
Average balance
outstanding 32 808 4 1 845
Interest income 1.8 49.2 .3 - 51.3
Trading revenues 1.8 (2.6) 1.4 (.8) (.2)
1995
Average balance
outstanding 12 462 23 (2) 495
Interest income .7 32.8 .7 - 34.2
Trading revenues (2.3) 5.7 1.2 (3.0) 1.6
====================================================================================
</TABLE>
13
Securities Transactions
Securities transactions during 1997 resulted in net gains of $17.4 million
compared with net gains of $7.9 million in 1996 and $12.3 million in 1995.
The gains realized relate to investments classified as available for sale,
primarily highly leveraged partnership interests.
<TABLE>
<CAPTION>
Other Operating Expenses
- -------------------------------------------------------------------------------------------------------
Increase(Decrease) Increase(Decrease)
1997 Amount % 1996 Amount % 1995
- -------------------------------------------------------------------------------------------------------
in millions
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries and employee benefits $398.0 $ 45.9 13.0 $352.1 $ (2.1) (.6) $354.2
Net occupancy 91.0 12.5 15.8 78.5 2.1 2.9 76.4
Equipment 45.1 14.0 45.0 31.1 (.7) (2.0) 31.8
Amortization of intangibles 34.4 20.0 139.6 14.4 3.2 27.7 11.2
FDIC assessment 4.2 3.6 646.2 .6 (14.0) (96.1) 14.6
Marketing 27.0 1.0 3.9 26.0 3.2 13.8 22.8
Outside services 38.9 12.1 45.0 26.8 2.0 8.1 24.8
Professional fees 22.8 (.5) (1.9) 23.3 5.8 33.0 17.5
Other real estate and
owned asset expense 2.5 (4.6) (64.2) 7.1 (16.9) (70.5) 24.0
Other 117.5 20.6 21.3 96.9 (21.6) (18.2) 118.5
- -------------------------------------------------------------------------------------------------------
Total other operating expenses $781.4 $124.6 19.0 $656.8 $(39.0) (5.6) $695.8
- -------------------------------------------------------------------------------------------------------
Personnel - average number 9,010 973 12.1 8,037 (264) (3.2) 8,301
=======================================================================================================
</TABLE>
Other operating expenses were $781.4 million in 1997 compared with $656.8
million in 1996 and $695.8 million in 1995. The expense increase in 1997 over
1996 relates directly to acquisitions. As a result of the Company's efforts
to leverage existing infrastructure, cost:income ratio for 1997 was 51.0%
compared with 51.6% in 1996.
Personnel expense was $398.0 million in 1997 compared with $352.1 million in
1996 and $354.2 million in 1995. Average staffing levels (full time
equivalents) increased in 1997 to 9,010 compared with 8,301 in 1995.
The Company, as a financial institution, is cognizant of the issues that the
Year 2000 could have on its operating and processing systems and has
identified which of these systems need modification. Contact has been made
with the Company's vendors, outside service providers, customers and
intermediaries whose systems electronically interface with the Company's
systems to determine their level of preparedness. Further, the Company is
committed to comply with the time table established by bank regulators.
The Company estimates total cost of the project will range between $50 million
and $60 million, including personnel and other costs related to modifying
systems as well as capitalizable costs of upgrading personal computers and
replacing computer software. Personnel and all other costs related to the
project are being expensed as incurred. 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.
14
Provision for Loan Losses
Provision for loan losses was $87.4 million in 1997 compared with $64.7
million in 1996 and $175.3 million in 1995. Net charge offs in the credit
card portfolio were $116.7 million and $82.5 million in 1997 and 1996,
respectively. This increased level was offset by continued improvement in
commercial credit quality. Commercial loan credit quality resulted in net
recoveries of $3 million in 1997 compared with net charge offs of $30.4
million in 1996. Credit card delinquencies have declined to 3.77% at
December 31, 1997 from 4.55% at December 31, 1996. However, delinquency rates
remain high by historical standards and continue to be monitored.
The provision for loan losses in 1995 included $113.0 million for management's
decision to accelerate the timing of control and disposal of a troubled
aircraft portfolio which was acquired through the merger of Concord Leasing,
Inc. on January 1, 1995.
Nonaccruing loans were 13.0% less at December 31, 1997 than one year ago. An
analysis of the loan loss allowance and the provision for loan losses begins
on page 25.
Income Taxes
Income taxes are accounted for under the asset and liability method, whereby
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss carryforwards. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be recovered or
settled.
Realization of deferred tax assets is contingent upon the generation of future
taxable income or the existence of sufficient taxable income within the
carryback period. A valuation allowance has been established for the portion
of the Company's net deductible temporary differences which are not expected
to be realized. Income tax expense was affected in 1997 and 1996 by
reductions in the valuation allowance of $81.2 million and $53.7 million,
respectively. The reduction in 1997 is recognition of the Company's three
consecutive years of earnings.
At December 31, 1997, the Company had a net deferred tax asset of $39.6
million, as compared with a net deferred tax asset of $55.2 million at
December 31, 1996.
15
<TABLE>
<CAPTION>
Line of Business Results
- --------------------------------------------------------------------------------------------------------
Consumer Commercial Other Total
- --------------------------------------------------------------------------------------------------------
1997 1996 1997 1996 1997 1996 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income/expense in millions; average balances in billions
Net interest income $659.4 $516.1 $387.4 $327.9 $126.6 $117.8 $1,173.4 $961.8
Other operating income 213.1 174.9 107.8 96.5 38.5 39.5 359.4 310.9
Provision for loan losses 149.6 114.4 (62.2) (49.7) - - 87.4 64.7
Other operating expenses 503.3 410.7 222.9 208.0 55.2 38.1 781.4 656.8
Income before taxes 219.6 165.9 334.5 266.1 109.9 119.2 664.0 551.2
Average assets 12.2 7.0 8.8 7.8 8.0 6.0 29.0 20.8
Average liabilities and
equity 14.3 10.1 5.3 4.1 9.4 6.6 29.0 20.8
========================================================================================================
</TABLE>
The Company has identified two major business segments, consumer and
commercial banking, for purposes of management reporting. The consumer
business operates a full-service consumer franchise encompassing branch
banking, credit cards, mortgage banking and private banking. The commercial
banking business operates a diversified range of wholesale banking services
emphasizing global capabilities to local, regional and national corporate
customers, financial institutions and government entities. The other category
includes the Company's investment securities portfolio, selected special
charges and earnings on capital.
The business segment results show the financial performance of these segments.
The results are determined based on the Company's management accounting
process which assigns balance sheet and income statement items to the
respective business units. Expenses of the business units include all direct
costs and allocations of indirect costs.
The consumer business was favorably impacted by growth in residential
mortgages and deposits. The increase in residential mortgages and deposits
from 1996 includes the result of recent acquisition activity, particularly
First Federal. Earnings from consumer business were negatively affected by
the increase in credit card charge offs in 1997 compared with 1996. The
earnings of the commercial business increased in 1997 from 1996 as a result of
increased balances outstanding and improved credit quality of the portfolio.
In June 1997, the Financial Accounting Standards Board issued FAS 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 enterprise's operating segments in annual and interim
financial reports. FAS 131 defines an operating segment as a component of an
enterprise that engages in business activities that generate revenue and incur
expense, whose operating results are reviewed by the chief operating decision
maker in the determination of resource allocation and performance and for
which discrete financial information is available. FAS 131 is effective for
fiscal years beginning in 1998. The Company is currently evaluating the
impact of FAS 131 on the disclosures of line of business results included in
its financial reports.
16
B A L A N C E S H E E T R E V I E W
Risk Management
The Company's organizational structure includes a Risk Management Committee
comprised of senior officers to oversee the risk management process. This
committee is charged with the review of the internal control framework which
identifies, measures, monitors and controls the risks undertaken by the
various business and support units and the Company as a whole. It is
responsible for the review of all risks associated with significant new
products and activities and their primary internal controls prior to
implementation. The spectrum of risks includes, but is not limited to,
liquidity, market, credit, operational, legal and reputational risk. The
Asset and Liability Policy Committee manages the details of liquidity and
market risk. The management of credit risk is further discussed on page 20.
Asset-Liability Management
The principal objectives of asset-liability management are to ensure adequate
liquidity and to manage exposure to interest rate risk. Liquidity management
requires maintaining funds to meet customers' borrowing and deposit withdrawal
requirements as well as funding anticipated growth. Interest rate exposure
management seeks to control both near term and longer term interest rate risk
in order to provide a more stable base of net interest income.
The Bank has a wide range of available techniques for implementing asset-
liability management decisions. Overall balance sheet strategy is centralized
under the Asset and Liability Policy Committee, comprised of senior officers.
Authority and responsibility for implementation of the Committee's broad
strategy is controlled under a framework of defined trading and balance sheet
position limits.
The Company maintains a strong liquidity position. The size and stability of
its deposit base are complemented by its maintenance of a surplus borrowing
capacity in the money markets, including the ability to issue additional
commercial paper and access unused lines of credit of $300 million at
December 31, 1997. Wholesale liabilities increased to $7,133 million at
December 31, 1997 from $4,267 million a year ago primarily to fund increased
money market assets. 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.
The Company is subject to interest rate risk associated with the repricing
characteristics of its balance sheet assets and liabilities. Specifically, as
interest rates change, interest earning assets reprice at intervals that do
not correspond to the maturities or repricing patterns of interest bearing
liabilities. This mismatch between assets and liabilities in repricing
sensitivity results in shifts in net interest income as interest rates move.
To help manage the risks associated with the effects of changes in interest
rates, and to optimize net interest income within the ranges of interest rate
risk that the Company's management considers acceptable, the Company maintains
a portfolio of off-balance sheet derivative financial instruments. Consisting
17
principally of interest rate swaps and futures contracts, these derivative
financial instruments mitigate interest rate risk by altering the repricing
characteristics of certain on-balance sheet assets and liabilities.
The Company employs a combination of risk assessment techniques, principally
dynamic simulation modeling, capital at risk analysis and gap analysis to
analyze the sensitivity of its earnings and capital positions to changes in
interest rates. These risk assessment techniques are comprehensive, in that
they include all on-balance sheet and off-balance sheet items. In dynamic
simulation modeling, our primary focus, reaction to a range of positive and
negative interest rate movements is projected with consideration given to
known activities and to the behavioral patterns of specific pools of assets
and liabilities in the corresponding rate environments. Patterns of certain
asset and liability movements can be reasonably estimated based upon available
historical data.
Interest Rate Sensitivity
<TABLE>
<CAPTION>
The following table shows the repricing structure of assets and liabilities as
of December 31, 1997. For assets and liabilities whose cash flows are subject
to change due to movements in interest rates, such as the sensitivity of
mortgage loans to prepayments, data is reported based on the earlier of
expected repricing or maturity. The resulting "gaps" are reviewed to assess
the potential sensitivity to earnings with respect to the direction, magnitude
and timing of changes in market interest rates. Data shown is as of one day,
and one day figures can be distorted by temporary swings in assets or
liabilities.
- -------------------------------------------------------------------------------------------------------
Interest Bearing Funds
Noninterest ----------------------------------------
Bearing 0-90 91-180 181-365 Over 1
December 31, 1997 Funds Days Days Days Year Total
- -------------------------------------------------------------------------------------------------------
in millions
<S> <C> <C> <C> <C> <C> <C>
Assets $ 1,776 $13,640 $2,513 $2,649 $10,940 $31,518
Liabilities and shareholder's equity 6,985 13,289 2,279 2,523 6,442 31,518
- -------------------------------------------------------------------------------------------------------
(5,209) 351 234 126 4,498
Effect of derivative contracts - (3,116) 550 (50) 2,616
- -------------------------------------------------------------------------------------------------------
Gap position $(5,209) $(2,765) $ 784 $ 76 $ 7,114
=======================================================================================================
</TABLE>
Liabilities and shareholder's equity at year-end 1997 include time deposits of
$100,000 or more with maturity dates as follows: $1,074 million, 0-90 days;
$507 million, 91-180 days; $213 million, 181-365 days, and $119 million over 1
year.
The position associated with derivative contracts has increased from prior
years reflecting a program of receive fix derivative additions designed to
reduce exposure to declines in interest rates.
The Company does not use the static "gap" measurement of interest rate risk
reflected in the table above as a primary management tool. See pages 28 and
29 for further description of earnings at risk measurements and dynamic
simulation modeling employed by the Company to manage interest rate risk.
18
<TABLE>
<CAPTION>
Commercial Loan Maturities and Sensitivity to Changes in Interest Rates
- -----------------------------------------------------------------------------
One Over One Over
Year Through Five
December 31, 1997 or Less Five Years Years
- -----------------------------------------------------------------------------
in millions
<S> <C> <C> <C>
Domestic:
Construction loans $ 168 $ 152 $ 39
Mortgage loans 267 740 869
Other business and financial 3,423 1,957 431
International 263 22 324
- -----------------------------------------------------------------------------
Total $4,121 $2,871 $1,663
=============================================================================
Loans with fixed or predetermined
interest rates $1,406 $1,538 $ 736
Loans having floating or adjustable
interest rates 2,715 1,333 927
- -----------------------------------------------------------------------------
Total $4,121 $2,871 $1,663
=============================================================================
The table presents the contractual maturity and interest sensitivity of
domestic commercial and international loans at year-end 1997.
</TABLE>
Securities Portfolios
Debt securities that the Company has the ability and intent to hold to
maturity are reported at amortized cost. Securities acquired principally for
the purpose of selling them in the near term are classified as trading
securities and reported at fair value, with unrealized gains and losses
included in earnings. All other securities are classified as available for
sale and carried at fair value, with unrealized gains and losses excluded from
earnings and reported as a separate component of shareholders' equity.
<TABLE>
<CAPTION>
The following table is an analysis of securities at the end of each of the
last three years.
- -----------------------------------------------------------------------------
December 31, 1997 1996 1995
- -----------------------------------------------------------------------------
in millions
<S> <C> <C> <C>
Available for sale:
U.S. Treasury $2,433 $2,275 $1,715
U.S. Government agency obligations 1,109 374 618
Other debt securities 280 149 202
Equity securities 177 72 79
- -----------------------------------------------------------------------------
Total $3,999 $2,870 $2,614
=============================================================================
</TABLE>
The following table reflects the distribution of maturities of debt securities
held in the available for sale portfolio at year-end 1997 together with the
approximate taxable equivalent yield of the portfolio. The yields shown are
calculated by dividing annual interest income, including the accretion of
discounts and the amortization of premiums, by the fair value of securities
outstanding at December 31, 1997. Yields on tax-exempt obligations have been
computed on a taxable equivalent basis using applicable statutory tax rates.
Equity securities include Federal Reserve Bank and Federal Home Loan Bank
stock totaling $147 million at December 31, 1997.
19
<TABLE>
<CAPTION>
Securities - Contractual Final Maturities and Yield
- -------------------------------------------------------------------------------------------------
Within After One After Five After
Taxable One but Within but Within Ten
equivalent Year Five Years Ten Years Years
basis Amount Yield Amount Yield Amount Yield Amount Yield
- -------------------------------------------------------------------------------------------------
in millions
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available for sale:
U.S. Treasury $570 5.54% $1,812 5.94% $ 51 5.91% $ - -%
U.S. Gov't agency 72 6.37 181 8.68 276 6.46 580 6.94
Other debt securities - - 43 6.19 136 5.73 101 8.78
- ------------------------------------------------------------------------------------------------
Total fair value $642 5.63% $2,036 6.19% $463 6.19% $681 7.22%
- ------------------------------------------------------------------------------------------------
Total amortized cost $638 $2,013 $460 $672
================================================================================================
</TABLE>
The maturity distribution of U.S. Government agency obligations and other
securities which include asset-backed securities, primarily mortgages, are
based on the contractual due date of the final payment. These securities have
an anticipated cash flow that includes contractual principal payments and
estimated prepayments. Based on the anticipated cash flows, the total
maturity distributions for the portfolio would be $888 million, $2,433
million, $324 million and $177 million for within one year, after one but
within five years, after five years but within ten years and after ten years,
respectively.
Credit Risk Management
The credit policy function is centralized under the control of the Chief
Credit Officer. The structure is designed to emphasize credit decision
accountability, optimize credit quality, facilitate control of credit policies
and procedures and encourage consistency in the approach to, and management
of, the credit process throughout the Company.
The Risk Management Committee is responsible for oversight of credit policy
and the credit risk profile of the loan portfolio. The Chief Credit Officer
is responsible for the design and management of the credit function including
monitoring and making changes, where appropriate, to written credit policies.
In addition to active supervision and evaluation by lending officers, periodic
reviews of the loan portfolio are made by internal auditors, independent
auditors, the Board of Directors and regulatory agency examiners. These
reviews cover selected borrowers' current financial position, past and
prospective earnings and cash flow, and realizable value of collateral and
guarantees. These reviews also serve as an early identification of problem
credits.
<TABLE>
<CAPTION>
Loans Outstanding
The following table provides a breakdown of major loan categories as of year
end for the past five years. The acquisition of assets acquired from First
Federal in 1997 included a commercial mortgage portfolio of approximately $400
million and a residential mortgage portfolio of $5.1 billion, and East River
Savings Bank in 1996 included a commercial mortgage portfolio of $600 million
and a residential mortgage portfolio of $300 million. With respect to other
20
business and financial commercial loans, no single industry group's aggregate
borrowings from the Company exceeded 10% of the total loan portfolio at
December 31, 1997.
- ---------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------
in millions
<S> <C> <C> <C> <C> <C>
Domestic:
Commercial:
Construction loans $ 359 $ 396 $ 428 $ 480 $ 730
Mortgage loans 1,876 1,689 999 931 915
Loans and advances to affiliates 40 96 343 302 160
Other business and financial 5,771 4,998 4,865 4,993 5,072
Consumer:
Residential mortgages 10,008 3,632 3,080 2,738 2,356
Credit card receivables 1,780 1,939 1,844 1,656 1,521
Other consumer loans 1,179 1,433 1,472 1,406 1,250
- ---------------------------------------------------------------------------------------------------
21,013 14,183 13,031 12,506 12,004
- ---------------------------------------------------------------------------------------------------
International:
Government and official institutions 345 359 373 383 381
Banks and other financial institutions 65 95 284 191 25
Commercial and industrial 199 55 84 54 111
- ---------------------------------------------------------------------------------------------------
609 509 741 628 517
- ---------------------------------------------------------------------------------------------------
Total loans $21,622 $14,692 $13,772 $13,134 $12,521
===================================================================================================
</TABLE>
Problem Loan Management
Borrowers who experience difficulties in meeting the contractual payment terms
of their loans receive special attention. Depending on circumstances,
decisions may be made to cease accruing interest on such loans or to record
interest at a reduced rate.
The Company complies with regulatory requirements which mandate that interest
not be accrued on commercial loans with principal or interest past due for a
period of ninety days unless the loan is both adequately secured and in
process of collection. In addition, commercial loans are designated as
nonaccruing when, in the opinion of management, reasonable doubt exists with
respect to collectibility of all interest and principal based on certain
factors, including adequacy of collateral.
Interest that has been recorded but unpaid on loans placed on nonaccruing
status is generally reversed and reduces current income at the time loans are
so categorized. Interest income on these loans may be recognized to the
extent of cash payments received. In those instances where there is doubt as
to collectibility of principal, any cash interest payments received are
applied as principal reductions. Loans are not reclassified as accruing until
interest and principal payments are brought current and future payments are
reasonably assured.
21
<TABLE>
<CAPTION>
Risk Elements in the Loan Portfolio at Year End
- --------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------
in millions
<S> <C> <C> <C> <C> <C>
Nonaccruing loans:
Domestic:
Construction and other commercial
real estate $ 129 $ 176 $ 170 $ 365 $ 595
Other domestic loans 181 181 298 696 525
- --------------------------------------------------------------------------------------------
Subtotal 310 357 468 1,061 1,120
International 1 - - - -
- --------------------------------------------------------------------------------------------
Total nonaccruing loans 311 357 468 1,061 1,120
Restructured accruing loans 6 25 13 10 -
- --------------------------------------------------------------------------------------------
Total nonaccruing and restructured loans 317 382 481 1,071 1,120
Other real estate 8 13 65 144 217
Owned assets 4 1 45 8 32
- --------------------------------------------------------------------------------------------
Total nonaccruing and restructured loans,
other real estate and owned assets $ 329 $ 396 $ 591 $1,223 $1,369
============================================================================================
Ratios:
Nonaccruing and restructured
loans to total loans 1.47% 2.60% 3.50% 8.16% 8.95%
Nonaccruing loans, restructured loans,
other real estate and owned assets
to total assets 1.04 1.68 2.88 6.40 6.74
- --------------------------------------------------------------------------------------------
Accruing loans contractually past due
90 days or more as to principal or
interest (all domestic):
Residential real estate mortgages $ 1 $ 12 $ 15 $ 18 $ 12
Credit card receivables 33 35 22 9 12
Other consumer loans 10 12 14 11 12
All other 13 16 9 17 25
- --------------------------------------------------------------------------------------------
Total accruing loans contractually past
due 90 days or more $ 57 $ 75 $ 60 $ 55 $ 61
============================================================================================
</TABLE>
In certain situations where the borrower is experiencing temporary cash flow
problems, and after careful examination by management, the interest rate and
payment terms may be adjusted from the original contractual agreement. When
this occurs and the revised terms at the time of renegotiation are less than
the Company would be willing to accept for a new loan with comparable risk,
the loan is separately identified as restructured.
Nonaccruing loans at December 31, 1997 totaled $311 million compared with $357
million a year ago. The reduced level of nonaccruing loans resulted from
aggressive management of problem credits as well as improvement in the
domestic economy. During 1995 the Company adopted an aggressive strategy of
accelerating the timing of gaining title to and/or disposing of problem
credits, primarily related to medical instrument and aircraft lending. The
majority of the decline in nonaccruing loans at December 31, 1996 compared
with year ends 1995 and 1994 occurred in this portfolio. Nonaccruing loans
that have been restructured but remain in nonaccruing status amounted to $34
million, $76 million and $70 million at December 31, 1997, 1996 and 1995,
respectively.
Of the nonaccruing loans at December 31, 1997 over 30% are less than 30 days
past due as to cash payment of principal and interest. Cash payments received
on loans on nonaccruing status during 1997, or since loans were placed on
nonaccruing status, whichever was later, totaled $63 million, $42 million of
which was recorded as interest income and $21 million as reduction of loan
principal.
22
Residential mortgages are generally designated as nonaccruing when delinquent
for more than ninety days. Other consumer loans are generally not designated
as nonaccruing and are charged off against the allowance for loan losses
according to an established delinquency schedule. Higher credit card
delinquencies (charged off when 180 days delinquent) during 1997 resulted in
increased net charge offs associated with this portfolio compared with prior
years.
The Company identified impaired loans totaling $153 million at December 31,
1997 of which $54 million had an allocation from the allowance of $21 million.
At December 31, 1996, the Company had identified impaired loans of $258
million, of which $61 million had an allocation from the allowance of $24
million. A loan is considered impaired when, based on current information and
events, it is probable that the Company will be unable to collect all amounts
due according to the contractual terms of the loan agreement. Impaired loans
so identified are valued at the present value of expected future cash flows,
discounted at the loan's original effective interest rate or, as a practical
expedient, at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent.
Other Problem Assets
In situations where loans are secured by real estate or other assets and the
borrower cannot continue to meet its obligations, the property can be acquired
through foreclosure. When property is so acquired, the lower of cost or fair
value (including cost to dispose) is reported on the balance sheet in other
assets. Any part of the loan exceeding the value of the property at the time
of transfer is charged against the loan loss allowance. Subsequent decreases
in fair value are included in other real estate and owned asset (income)
expense.
Foreign Country Outstandings and Risk
Outstandings which are shown by category of borrower in the following table
include loans, interest bearing deposits and other assets. Loans are
distributed primarily on the basis of the location of the head office or
residence of the borrower or, in the case of certain guaranteed loans, the
guarantor. Interest bearing deposits with banks and their branches are
grouped by the location of the head office of the foreign bank. Investments
and acceptances are distributed on the basis of the location of the borrower.
There were no loans to government and official institutions for the countries
listed.
23
<TABLE>
<CAPTION>
Foreign Country Outstandings Which Exceed .75% of Total Assets
- ----------------------------------------------------------------------------
Banks and
Other Commercial
Financial and
Institutions Industrial Total
- -----------------------------------------------------------------------------
in millions
<S> <C> <C> <C>
December 31, 1997: *
Canada $170 $ 82 $252
France 267 - 267
Japan 268 - 268
Netherlands 231 28 259
United Kingdom 56 185 241
December 31, 1996: *
Canada 208 108 316
Switzerland 178 - 178
United Kingdom 93 219 312
December 31, 1995: *
Canada 90 70 160
France 345 31 376
Japan 290 - 290
=============================================================================
* The table excludes bonds issued by the United Mexican States and the
Republic of Venezuela whose outstanding principal amounts are collateralized
by zero-coupon U.S. Treasury securities that will accrete to a face value at
maturity equal to that of the underlying bonds. They are known as "Brady
bonds." The fair value of such collateral for the $188 million of 6.25%
Mexican bonds due 2019 was approximately $34 million at year end 1997.
Interest payments are partially secured by cash equivalent instruments for an
18 month period. The fair value of such collateral for the $166 million book
value ($177 million face value) of 6.75% Venezuelan bonds due 2020 was
approximately $30 million at year end 1997. Interest payments are partially
secured by cash equivalent instruments for a 14 month period. The Mexican and
Venezuelan bonds had an aggregate fair value of $311 million at December 31,
1997.
</TABLE>
24
<TABLE>
<CAPTION>
Allowance for Loan Loss and Charge Offs
At year-end 1997, the allowance was $409.4 million, or 1.89% of total loans,
compared with $418.2 million, or 2.85% of total loans, a year ago.
Contributing to the decrease in the allowance to total loan ratio was the
First Federal acquisition which added approximately $5.1 billion in
residential mortgages. These loans generally require lower allowance levels.
The ratio of the allowance to nonaccruing loans was 131.62% at December 31,
1997 compared with 116.98% a year earlier. The Company's nonaccruing loans
were reduced to $311 million at December 31, 1997 from $357 million at
December 31, 1996.
- ---------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------
in millions
<S> <C> <C> <C> <C> <C>
Total loans at year end $21,622 $14,692 $13,772 $13,134 $12,521
Average total loans 20,049 13,905 13,200 12,714 12,469
Allowance for loan losses:
Balance at beginning of year $ 418.2 $ 477.5 $ 531.5 $ 524.3 $ 700.9
Allowance related to acquired
businesses 40.3 3.4 .4 1.2 -
Charge offs:
Commercial:
Construction loans - - 44.4 68.8 111.5
Mortgage loans - - .5 14.8 26.3
Other business and financial 28.3 69.8 174.8 92.2 142.4
Consumer:
Credit card receivables 129.9 91.7 53.8 50.5 40.4
Residential mortgages 7.7 2.6 2.0 7.3 20.0
Other consumer loans 20.8 17.4 10.3 10.2 17.8
- ---------------------------------------------------------------------------------------------
Total charge offs 186.7 181.5 285.8 243.8 358.4
- ---------------------------------------------------------------------------------------------
Recoveries on loans charged off:
Commercial:
Construction loans - 1.1 11.9 10.7 4.8
Mortgage loans - - - - -
Other business and financial 31.3 38.3 29.8 53.6 46.2
Consumer:
Credit card receivables 13.2 9.2 8.3 8.3 10.0
Residential mortgages 1.8 1.3 .8 1.1 1.4
Other consumer loans 3.9 4.2 5.3 7.4 10.9
- ---------------------------------------------------------------------------------------------
Total recoveries 50.2 54.1 56.1 81.1 73.3
- ---------------------------------------------------------------------------------------------
Total net charge offs 136.5 127.4 229.7 162.7 285.1
- ---------------------------------------------------------------------------------------------
Provision charged to income 87.4 64.7 175.3 168.7 108.5
- ---------------------------------------------------------------------------------------------
Balance at end of year $ 409.4 $ 418.2 $ 477.5 $ 531.5 $ 524.3
- ---------------------------------------------------------------------------------------------
Allowance ratios:
Total net charge offs to
average loans .68% .92% 1.74% 1.28% 2.29%
Year-end allowance to:
Year-end total loans 1.89 2.85 3.47 4.05 4.19
Year-end total nonaccruing loans 131.62 116.98 101.95 50.08 46.79
=============================================================================================
</TABLE>
The allowance for loan losses is an allowance for possible credit related
losses. The allowance is increased as provisions for loan losses are charged
to current operating income. The allowance is reduced as charge offs are
recorded. Recoveries are added to the allowance. In determining the amount
of provisions for loan losses, management considers a number of factors.
These include judgments covering possible losses on loans, loan evaluations
and examination classifications and expected performance of various categories
of loans within an anticipated range of economic conditions. This is an
ongoing process. Charge offs of commercial loans and residential mortgages
reflect management's judgment with respect to the ultimate collectibility of
all or part of a loan. Charge offs of consumer loans, excluding residential
25
mortgages, occur according to an established delinquency schedule. Recoveries
on loans previously charged off are added to the allowance.
The loan loss allowance is considered by management to be a general allowance
available to cover loan losses within the entire portfolio. The
classifications within the table below are based on management's current
assessment of the loss potential associated with specific loans and elements
of the portfolio. Allocation is especially problematical because of the
difficulties inherent in predicting and evaluating the impact of economic
events on fully performing loans, work-outs and previously charged off loans.
Amounts allocated to consumer loans represent estimates of charge offs based
on formulas appropriate to the type of loan. Management cautions that the
loan loss allowance allocation does not necessarily represent the total amount
which may be available for actual future losses in any one or more of the
categories. Management is of the opinion that the loan loss allowance as of
December 31, 1997 is adequate as a general allowance.
Effective January 1, 1995, allowances are established against impaired loans
equal to the difference between the recorded investment in the asset and the
present value of the cash flows to be received or the fair value of the
collateral, if the loan is collateral dependent. The allowance for loan
losses did not change as a result of this establishment.
<TABLE>
<CAPTION>
Allocation of Allowance for Loan Loss
1997 1996 1995 1994 1993
---------------------------------------------------------------------------------------
% of % of % of % of % of
Loans Loans Loans Loans Loans
to to to to to
Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
- ------------------------------------------------------------------------------------------------------------------
in millions
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Domestic:
Commercial:
Construction loans $ 5 1.7 $ 2 2.7 $ 3 3.1 $ 40 3.7 $ 56 5.8
Mortgage loans 26 8.7 19 11.5 10 7.3 12 7.1 10 7.3
Other business 53 26.9 75 34.7 149 37.8 221 40.3 186 41.8
Consumer:
Credit card receivables 60 8.2 55 13.2 40 13.4 42 12.6 47 12.2
Residential mortgages 30 46.3 7 24.7 6 22.3 5 20.8 3 18.8
Other consumer 17 5.4 9 9.8 8 10.7 7 10.7 11 10.0
International 26 2.8 26 3.4 28 5.4 2 4.8 1 4.1
Unallocated 192 - 225 - 234 - 202 - 210 -
- ------------------------------------------------------------------------------------------------------------------
Total $409 100.0 $418 100.0 $478 100.0 $531 100.0 $524 100.0
==================================================================================================================
</TABLE>
Capital Resources
Total shareholders' equity at year-end 1997 was $2,039 million, compared with
$1,973 million at year-end 1996. The equity base was increased by $471.0
million from net income and $18.5 million from the change in net unrealized
gains on securities available for sale, and reduced by $325 million for common
shareholder dividends paid to HSBC Holdings B.V., $98 million for the
redemption of preferred stock and $1.5 million for preferred shareholder
dividends. The capital contribution from the parent of $1.1 million relates
to an HSBC stock option plan in which almost all of the Company's employees
are eligible to participate.
The ratio of shareholders' equity to total year-end assets was 6.47% at
December 31, 1997 compared with 8.35% at December 31, 1996.
26
Capital Adequacy
The Federal Reserve Board has Risk-Based Capital Guidelines for assessing the
capital adequacy of U.S. banking organizations. The guidelines place balance
sheet assets into four categories of risk weights, primarily based on the
relative credit risk of the counterparty. Some off-balance sheet items such
as letters of credit and loan commitments are taken into account by applying
different categories of "credit conversion factors" to arrive at
credit-equivalent amounts, which are then weighted in the same manner as
balance sheet assets involving similar counterparties. For off-balance sheet
items relating to interest rate and foreign exchange rate contracts, the
credit-equivalent amounts are arrived at by estimating both the current
exposure, mark to market value and the potential exposure over the remaining
life of each contract. The credit-equivalent amount is similarly assigned to
the risk weight category appropriate to the counterparty.
The guidelines include the concept of Tier 1 capital and total capital.
Tier 1 capital is essentially common equity, excluding net unrealized gain
(loss) on securities available for sale and goodwill, plus certain types of
preferred stock including the $400 million of guaranteed mandatorily
redeemable preferred securities issued by subsidiaries of the Company in 1996
and 1997. Total capital includes Tier 1 capital and other forms of capital
such as the allowance for loan losses, subject to limitations, and
subordinated debt. The guidelines establish a minimum standard risk-based
target ratio of 8%, of which at least 4% must be in the form of Tier 1
capital.
The capital adequacy guidelines establish a limit on the amount of certain
deferred tax assets that may be included in (that is, not deducted from) Tier
1 capital for risk-based and leverage capital purposes. The deferred tax
asset recognized by the Company meets the criteria for capital recognition and
has been included in the calculation of the Company's capital ratios.
Under these guidelines, the Company's total risk adjusted assets and
off-balance sheet items at December 31, 1997 were approximately $21.8 billion.
Tier 1 capital was $2.0 billion and total capital was $2.9 billion resulting
in risk adjusted capital ratios of 9.36% at the Tier 1 level and 13.38% at the
total capital level. These ratios compared with 11.92% at the Tier 1 level
and 17.00% at the total capital level at December 31, 1996.
Banking industry regulators also have guidelines that set forth the leverage
ratios to be applied to banking organizations in conjunction with the
risk-based capital framework. Under these guidelines, strong bank holding
companies must maintain a minimum leverage ratio of Tier 1 capital to
quarterly average total assets of 3%. At December 31, 1997, the Company had a
6.68% leverage ratio compared with 9.54% at December 31, 1996.
The acquisition of First Federal was a major factor reducing the capital
ratios at December 31, 1997 from those at December 31, 1996 as the acquisition
was a cash purchase. Although the ratios have declined, they remain well
above U.S. regulatory requirements for well-capitalized institutions.
The bank regulators have amended their risk-based capital guidelines to
incorporate a measure for market risk inherent in the trading portfolio.
Under the new market risk requirements, capital will be allocated to support
27
the amount of market risk that relates to the Company's trading activities
including off-balance sheet derivative contracts associated with trading
activities. The market risk rules are not effective until 1998 and will only
apply to institutions with significant trading activities. It is currently
estimated that the new rules will not significantly affect the risk-based
capital ratios of the Company.
From time to time, the bank regulators propose amendments to or issue
interpretations of risk-based capital guidelines. Such proposals or
interpretations could, upon implementation, affect reported capital ratios and
net risk adjusted assets.
Forward-Looking Statements
The information relating to the Year 2000 and the section that follows,
Quantitative and Qualitative Disclosures About Market Risk, contain 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 in these forward-looking statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
In consideration of the degree of interest rate risk inherent in the banking
industry, the Company has implemented interest rate risk management policies
designed to meet performance objectives within defined risk/safety parameters.
In the course of managing interest rate risk, a combination of risk assessment
techniques, including dynamic simulation modeling, gap analysis, and capital
at risk analysis are employed. The combination of these tools enables
management to identify and assess the potential impacts of interest rate
movements and take appropriate action.
Certain limits and benchmarks that serve as guidelines in determining the
appropriate levels of interest rate risk for the institution have been
established. The overall institutional interest rate risk limit is expressed
in terms of the Present Value of a Basis Point or PVBP, which reflects the
change in value of the balance sheet for a one basis point movement in all
interest rates. The institutional limit is plus or minus $1 million, which
includes distinct limits associated with trading portfolio activities and off
balance sheet instruments. Thus, for a one basis point change in rates, the
policy dictates that the value of the balance sheet shall not change by more
than $1 million. As of December 31, 1997, the Company had a position of $.9
million PVBP.
In addition to the above mentioned limits, the Company's Asset and Liability
Policy Committee monitors, on a monthly basis, the impact of a number of
interest rate scenarios on net interest income. These scenarios include both
rate shock scenarios which assume immediate market rate movements of +/- 100
and 200 basis points, as well as rate change scenarios in which rates rise or
fall by 200 basis points over a twelve month period. Simulations are also
performed for other relevant interest rate scenarios including changes in the
28
shape of the yield curve or in competitive pricing policies. Net interest
income under the various scenarios is reviewed over a twelve month period, as
well as over a three year period. The simulations capture the effects of the
timing of the repricing of all on-balance sheet assets and liabilities, as
well as all off-balance sheet positions such as interest rate swaps, futures
and option contracts. Additionally, the simulations incorporate any
behavioral aspects such as prepayment sensitivity under various scenarios.
For purposes of simulation modeling, base case earnings reflect the existing
balance sheet composition, with balances generally maintained at current
levels by the anticipated reinvestment of expected runoff. These balance
sheet levels will however, factor in specific known or likely changes
including material increases, decreases or anticipated shifts in balances due
to management actions. Current rates and spreads are then applied to produce
base case earnings estimates on both a twelve month and three year time
horizon. Rate shocks are then modeled and compared to base earnings (earnings
at risk), and include behavioral assumptions as dictated by specific scenarios
relating to such factors as prepayment sensitivity and the tendency of
balances to shift among various products in different rate environments.
Utilizing these modeling techniques, an immediate hypothetical 100 basis point
parallel rise and fall in the yield curve on January 1, 1998, would decrease
projected 1998 net interest income by $10.0 million and $19.0 million,
respectively. A 200 basis point parallel rise and fall would decrease
projected net interest income by $37.0 million and $34.0 million,
respectively. Note that these projections include all assets and liabilities,
including those in the trading portfolio, although the effect of the trading
portfolio on these amounts is immaterial.
The projections also reflect the effect of the noted changes in interest rates
without taking into consideration complicating factors such as the effect of
changes in interest rates on the credit quality, size and composition of the
balance sheet. Therefore, although this provides a reasonable estimate of
interest rate sensitivity, actual results will vary from these estimates,
possibly by significant amounts.
Management of Primary Market Risk Exposures
The primary market risk exposure to the Company's earnings lies in sudden and
drastic shifts in interest rates, with exposure to other market factors such
as exchange rates being minimal. The management of this interest rate risk is
undertaken with the overall objective of meeting the Company's performance
objective within defined risk/safety parameters. The strategies developed
reflect the goal of minimizing exposure to upward and downward movements in
rates. These strategies entail the use of both on- and off-balance sheet
instruments to effectively mitigate the risk inherent in the Company's balance
sheet.
The acquisition of First Federal in March 1997 has had the effect of
increasing residential mortgage outstandings and mortgage servicing rights as
a percentage of the overall balance sheet. As a result, one of the
29
predominant risks facing the Company has been the increased exposure to
accelerated prepayment speeds in the mortgage portfolio that may result from
significant declines in the level of interest rates. In anticipation of this
increased exposure to falling rates, a program using a combination of both on-
and off-balance sheet instruments designed to increase levels of fixed rate
assets that will gain in value as rates decline was instituted in 1997. The
overall result of this program has been to increase base earnings and to
decrease potential benefits from higher rates in return for less exposure to
falling rates. The Company's interest rate risk position continues to be
actively monitored.
Material changes to the overall risks and strategies of the institution are
not anticipated, but may occur as a result of changes in the marketplace.
Trading Activities
The Company's trading portfolio has distinct limits pertaining to permissible
investments, interest rate risk exposure, stop loss, foreign exchange,
options, balance sheet size and product concentrations. The stop loss limits
are $1 million daily, $2 million monthly, and $4 million annually. "Stop
loss" refers to the maximum amount of loss that may be incurred before sale of
the items causing the loss is required.
30
Item 8. Financial Statements and Supplementary Data
Page
Report of Management 32
Report of Independent Auditors 33
HSBC Americas, Inc.:
Consolidated Balance Sheet 34
Consolidated Statement of Income 35
Consolidated Statement of Changes in
Shareholders' Equity 36
Consolidated Statement of Cash Flows 37
Marine Midland Bank:
Consolidated Balance Sheet 38
Summary of Significant Accounting Policies 39
Notes to Financial Statements 43
31
R E P O R T O F M A N A G E M E N T
Management of HSBC Americas, Inc. is responsible for the integrity of the
financial information presented in this annual report. Management has
prepared the financial statements in conformity with generally accepted
accounting principles. In preparing the financial statements, management
makes judgments and estimates of the expected effect of unsettled transactions
and events that are accounted for or disclosed.
The Company's systems of internal accounting control are designed to provide
reasonable assurance, but not absolute, that assets are safeguarded against
loss from unauthorized acquisition, use or disposition and that the financial
records are reliable for preparing financial statements. The selection and
training of qualified personnel and the establishment and communication of
accounting and administrative policies and procedures are elements of these
control systems. Management believes that the system of internal control,
which is subject to close scrutiny by management and by internal auditors,
supports the integrity and reliability of the financial statements.
The Board of Directors meets regularly with management, internal auditors and
the independent auditors to discuss internal control, internal auditing and
financial reporting matters, and also the scope of the annual audit and
interim reviews. Both the internal auditors and the independent auditors have
direct access to the Board of Directors.
32
R E P O R T O F I N D E P E N D E N T A U D I T O R S
The Board of Directors and Shareholders of
HSBC Americas, Inc.
We have audited the accompanying consolidated balance sheets of HSBC Americas,
Inc. and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for each of the years in the three year period ended December 31, 1997,
and the accompanying consolidated balance sheets of Marine Midland Bank and
subsidiaries as of December 31, 1997 and 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of HSBC
Americas, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three year period ended December 31, 1997, and the financial position of
Marine Midland Bank and subsidiaries as of December 31, 1997 and 1996, in
conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
Buffalo, New York
January 23, 1998
33
<TABLE>
<CAPTION>
HSBC Americas, Inc. 1997
- ------------------------------------------------------------------------------
C O N S O L I D A T E D B A L A N C E S H E E T
December 31, 1997 1996
- ------------------------------------------------------------------------------
in thousands
<S> <C> <C>
Assets
Cash and due from banks $ 928,691 $ 967,249
Interest bearing deposits with banks 2,643,010 1,933,036
Federal funds sold and securities
purchased under resale agreements 497,992 1,841,863
Trading assets 979,454 891,546
Securities available for sale 3,998,773 2,870,075
Loans 21,622,232 14,691,916
Less - allowance for loan losses 409,409 418,159
- ------------------------------------------------------------------------------
Loans, net 21,212,823 14,273,757
Premises and equipment 225,753 189,795
Accrued interest receivable 233,849 175,326
Intangible assets 481,953 192,355
Other assets 315,275 294,753
- ------------------------------------------------------------------------------
Total assets $ 31,517,573 $ 23,629,755
==============================================================================
Liabilities
Deposits in domestic offices
Noninterest bearing $ 4,195,248 $ 4,315,447
Interest bearing 15,981,866 11,621,213
Interest bearing deposits in foreign offices 2,640,050 1,773,159
- ------------------------------------------------------------------------------
Total deposits 22,817,164 17,709,819
Short-term borrowings 4,202,175 2,481,342
Interest, taxes and other liabilities 751,217 385,434
Long-term debt 1,708,064 1,080,183
- ------------------------------------------------------------------------------
Total liabilities 29,478,620 21,656,778
- ------------------------------------------------------------------------------
Commitments and contingent liabilities (Notes 22 and 23)
Shareholders' equity
Preferred stock (Note 13) - 98,063
Common shareholder's equity
Common stock, $5 par; Authorized - 1,100 shares
Issued - 1,001 shares 5 5
Capital surplus 1,804,527 1,803,427
Retained earnings 205,112 60,630
Net unrealized gain on securities
available for sale, net of taxes 29,309 10,852
- ------------------------------------------------------------------------------
Total common shareholder's equity 2,038,953 1,874,914
- ------------------------------------------------------------------------------
Total shareholders' equity 2,038,953 1,972,977
- ------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 31,517,573 $ 23,629,755
==============================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
34
<TABLE>
<CAPTION>
HSBC Americas, Inc. 1997
- ------------------------------------------------------------------------------
C O N S O L I D A T E D S T A T E M E N T O F I N C O M E
Year Ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------
in thousands
<S> <C> <C> <C>
Interest income
Loans $ 1,732,705 $ 1,278,681 $ 1,213,929
Securities 218,977 187,539 145,000
Trading assets 58,796 51,231 33,965
Deposits with banks 98,750 65,439 60,725
Federal funds sold and securities
purchased under resale agreements 51,786 28,831 34,906
- ------------------------------------------------------------------------------
Total interest income 2,161,014 1,611,721 1,488,525
- ------------------------------------------------------------------------------
Interest expense
Deposits
In domestic offices 583,904 412,679 391,808
In foreign offices 95,150 68,773 72,733
Short-term borrowings 196,727 120,873 81,426
Long-term debt 111,848 47,628 50,396
- ------------------------------------------------------------------------------
Total interest expense 987,629 649,953 596,363
- ------------------------------------------------------------------------------
Net interest income 1,173,385 961,768 892,162
Provision for loan losses 87,400 64,750 175,292
- ------------------------------------------------------------------------------
Net interest income, after
provision for loan losses 1,085,985 897,018 716,870
- ------------------------------------------------------------------------------
Other operating income
Trust income 42,887 41,155 46,724
Service charges 103,975 89,856 85,051
Mortgage servicing income 21,610 15,074 16,217
Other fees and commissions 134,781 116,057 120,905
Trading revenues 6,166 3,779 5,399
Other income 50,006 45,022 40,609
- ------------------------------------------------------------------------------
Total other operating income 359,425 310,943 314,905
- ------------------------------------------------------------------------------
1,445,410 1,207,961 1,031,775
- ------------------------------------------------------------------------------
Other operating expenses
Salaries and employee benefits 397,966 352,134 354,179
Net occupancy expense 90,989 78,541 76,356
Other expenses 292,505 226,098 265,315
- ------------------------------------------------------------------------------
Total other operating expenses 781,460 656,773 695,850
- ------------------------------------------------------------------------------
Income before taxes 663,950 551,188 335,925
Applicable income tax expense 193,000 171,000 52,341
- ------------------------------------------------------------------------------
Net income $ 470,950 $ 380,188 $ 283,584
==============================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
35
<TABLE>
<CAPTION>
HSBC Americas, Inc. 1997
- -----------------------------------------------------------------------------
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
1997 1996 1995
- -----------------------------------------------------------------------------
in thousands
<S> <C> <C> <C>
Preferred stock
Balance, January 1, $ 98,063 $ 98,063 $ 98,063
Redemption of stock (98,063) - -
- -----------------------------------------------------------------------------
Balance, December 31, - 98,063 98,063
- -----------------------------------------------------------------------------
Common stock
Balance, January 1, 5 5 5
- -----------------------------------------------------------------------------
Balance, December 31, 5 5 5
- -----------------------------------------------------------------------------
Capital surplus
Balance, January 1, 1,803,427 1,803,094 1,920,777
Capital contribution from parent 1,100 333 -
Return of capital to parent - - (117,683)
- -----------------------------------------------------------------------------
Balance, December 31, 1,804,527 1,803,427 1,803,094
- -----------------------------------------------------------------------------
Retained earnings (accumulated deficit)
Balance, January 1, 60,630 (233,686) (361,397)
Net income 470,950 380,188 283,584
Cash dividends declared:
$5.50 cumulative preferred stock (30) (122) (122)
Adjustable rate cumulative preferred
stock (1,438) (5,750) (5,751)
Common stock (325,000) (80,000) (150,000)
- -----------------------------------------------------------------------------
Balance, December 31, 205,112 60,630 (233,686)
- -----------------------------------------------------------------------------
Net unrealized gain on securities
available for sale, net of taxes
Balance, January 1, 10,852 29,390 -
Effect of transfer of securities held
to maturity to securities available
for sale - - 29,390
Net change in unrealized gains 18,457 (18,538) -
- -----------------------------------------------------------------------------
Balance, December 31, 29,309 10,852 29,390
- -----------------------------------------------------------------------------
Total shareholders' equity,
December 31, $ 2,038,953 $ 1,972,977 $ 1,696,866
=============================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
36
<TABLE>
<CAPTION>
HSBC Americas, Inc. 1997
- ------------------------------------------------------------------------------------------
C O N S O L I D A T E D S T A T E M E N T O F C A S H F L O W S
Year Ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------------------
in thousands
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 470,950 $ 380,188 $ 283,584
Adjustments to reconcile net income to net cash
provided (used) by operating activities
Depreciation, amortization and deferred taxes 109,988 103,055 (6,743)
Provision for loan losses 87,400 64,750 175,292
Net change in other accrual accounts 124,141 73,698 (424,005)
Net change in loans originated for sale (16,797) 325,109 (88,853)
Net change in trading assets (93,542) (270,047) (202,610)
Other, net (45,028) (49,107) (28,469)
- ------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 637,112 627,646 (291,804)
- ------------------------------------------------------------------------------------------
Cash flows from investing activities
Net change in interest bearing deposits with banks (709,974) (218,875) (182,054)
Net change in short-term investments 1,371,872 (378,485) 81,737
Purchases of securities (2,193,729) (956,647) (1,192,103)
Sales of securities 1,364,331 89,780 61,852
Maturities of securities 579,710 650,584 665,172
Net change in credit card receivables (101,372) (181,915) (234,858)
Net change in other short-term loans (51,067) 43,540 (74,725)
Net originations and maturities of long-term loans (952,442) (172,860) (698,367)
Expenditures for premises and equipment (40,400) (32,605) (24,906)
Net cash used in acquisitions, net
of cash acquired (607,388) (40,094) -
Other, net 54,569 85,803 523,648
- ------------------------------------------------------------------------------------------
Net cash used by investing activities (1,285,890) (1,111,774) (1,074,604)
- ------------------------------------------------------------------------------------------
Cash flows from financing activities
Net change in deposits 680,151 (21,173) 1,549,122
Net change in short-term borrowings 557,011 (56,768) 282,221
Issuance of long-term debt - 297,522 -
Repayment of long-term debt (527,043) (125,000) (47)
Guaranteed mandatorily redeemable preferred
securities of subsidiaries 200,000 200,000 -
Capital contributions 1,101 333 (117,683)
Redemption of preferred stock (98,063) - -
Dividends paid (202,937) (85,872) (155,873)
- ------------------------------------------------------------------------------------------
Net cash provided by financing activities 610,220 209,042 1,557,740
- ------------------------------------------------------------------------------------------
Net change in cash and due from banks (38,558) (275,086) 191,332
Cash and due from banks at beginning of year 967,249 1,242,335 1,051,003
- ------------------------------------------------------------------------------------------
Cash and due from banks at end of year $ 928,691 $ 967,249 $ 1,242,335
==========================================================================================
Cash paid for: Interest $ 941,851 $ 638,997 $ 592,194
Income taxes 173,930 76,788 185,453
Non-cash activities
Dividends declared but unpaid 125,000 1,468 1,468
Transfers of securities held to maturity
to available for sale - - 2,535,262
Fair value of liabilities assumed in
acquisitions 6,665,279 2,413,110 -
- ------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
37
<TABLE>
<CAPTION>
Marine Midland Bank 1997
- ------------------------------------------------------------------------------
C O N S O L I D A T E D B A L A N C E S H E E T
December 31, 1997 1996
- ------------------------------------------------------------------------------
in thousands
<S> <C> <C>
Assets
Cash and due from banks $ 928,754 $ 967,217
Interest bearing deposits with banks 2,571,410 1,867,936
Federal funds sold and securities
purchased under resale agreements 497,992 1,841,863
Trading assets 979,453 891,546
Securities available for sale 3,968,838 2,841,138
Loans 21,550,115 14,572,835
Less - allowance for loan losses 407,355 415,972
- ------------------------------------------------------------------------------
Loans, net 21,142,760 14,156,863
Premises and equipment 225,646 189,689
Intangible assets 479,713 187,259
Accrued interest receivable 232,874 174,321
Other assets 288,181 255,471
- ------------------------------------------------------------------------------
Total assets $ 31,315,621 $ 23,373,303
==============================================================================
Liabilities
Deposits in domestic offices:
Noninterest bearing $ 4,091,216 $ 4,242,772
Interest bearing 15,981,866 11,621,213
Interest bearing deposits in foreign offices 3,834,827 3,036,069
- ------------------------------------------------------------------------------
Total deposits 23,907,909 18,900,054
Short-term borrowings 3,354,745 1,724,709
Interest, taxes and other liabilities 746,501 409,868
Long-term debt 1,083,561 430,642
- ------------------------------------------------------------------------------
Total liabilities 29,092,716 21,465,273
- ------------------------------------------------------------------------------
Commitments and contingent liabilities (Notes 22 and 23)
Shareholder's equity
Common shareholder's equity
Common stock, $100 par; Authorized - 2,250,000 shares
Issued - 2,050,000 and 1,850,000 shares 205,000 185,000
Capital surplus 1,984,326 1,905,398
Retained earnings (accumulated deficit) 8,678 (191,514)
Net unrealized gain on securities
available for sale, net of taxes 24,901 9,146
- ------------------------------------------------------------------------------
Total shareholder's equity 2,222,905 1,908,030
- ------------------------------------------------------------------------------
Total liabilities and shareholder's equity $ 31,315,621 $ 23,373,303
==============================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
38
S U M M A R Y O F S I G N I F I C A N T A C C O U N T I N G
P O L I C I E S
HSBC Americas, Inc. (the Company) is a New York State based bank holding
company. All of the common stock of the Company is owned by HSBC Holdings
B.V., an indirect wholly owned subsidiary of HSBC Holdings plc (HSBC).
The accounting and reporting policies of the Company and its subsidiaries,
including its principal subsidiary, Marine Midland Bank (the Bank), conform to
generally accepted accounting principles and to predominant practice within
the banking industry. The preparation of financial statements in conformity
with generally accepted accounting principles requires the use of estimates
and assumptions relating principally to unsettled transactions and events as
of the balance sheet date of the financial statements. Accordingly, upon
settlement, actual results may differ from estimated amounts. Prior years'
financial statements have been reclassified to conform with the current
financial statement presentation.
The following is a description of the significant policies and practices.
Principles of Consolidation
The financial statements of the Company and the Bank are consolidated with
those of their respective wholly owned subsidiaries. All material
intercompany transactions and balances have been eliminated.
Investments in companies in which the percentage of ownership is at least 20%,
but not more than 50%, are accounted for under the equity method and are
included in other assets in the consolidated balance sheets.
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities
Effective January 1, 1997, the Company generally adopted Statement of
Financial Accounting Standards No. 125, Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities (FAS 125). The
Financial Accounting Standards Board delayed the effective date of certain of
the provisions until January 1, 1998. FAS 125 established criteria for
determining whether transfers of financial assets represent sales or secured
borrowings that focus on the concept of control. The prospective adoption of
FAS 125 in 1997 did not have a material effect on the Company's financial
position or results of operations. Further, the Company does not expect the
adoption of the delayed provisions will have a material effect on its
financial position or results of operation.
Securities
Debt securities that the Company has the ability and intent to hold to
maturity are reported at cost, adjusted for amortization of premiums and
accretion of discounts. Securities acquired principally for the purpose of
selling them in the near term are classified as trading assets and reported at
fair value, with unrealized gains and losses included in earnings. All other
securities are classified as available for sale and carried at fair value,
39
with unrealized gains and losses, net of related income taxes, excluded from
earnings and reported as a separate component of shareholders' equity.
Realized gains and losses on sales of securities are computed on a specific
identified cost basis and are reported within other income in the consolidated
statement of income. Adjustments of trading assets to fair value and gains
and losses on the sale of such securities are recorded in trading revenues.
Loans
Loans are stated at their principal amount outstanding, net of unearned
income, purchase premium, unamortized nonrefundable fees and related direct
loan origination costs. Loans held for sale are carried at the lower of
aggregate cost or market value. Interest income is recorded based on methods
that result in level rates of return over the terms of the loans.
Commercial loans are categorized as nonaccruing when, in the opinion of
management, reasonable doubt exists with respect to collectibility of interest
or principal based on certain factors including period of time past due
(principally ninety days) and adequacy of collateral. At the time a loan is
classified as nonaccruing, any accrued interest recorded on the loan is
generally reversed and charged against income. Interest income on these loans
is recognized only to the extent of cash received. In those instances where
there is doubt as to collectibility of principal, any interest payments
received are applied to principal. Loans are not reclassified as accruing
until interest and principal payments are brought current and future payments
are reasonably assured.
Residential mortgages are generally designated as nonaccruing when delinquent
for more than ninety days. Other consumer loans are generally not designated
as nonaccruing and are charged off against the allowance for loan losses
according to an established delinquency schedule.
A loan is considered impaired when, based on current information and events,
it is probable that the Company will be unable to collect all amounts due
according to the contractual terms of the loan agreement. Impaired loans are
valued at the present value of expected future cash flows, discounted at the
loan's original effective interest rate or, as a practical expedient, at the
loan's observable market price or the fair value of the collateral if the loan
is collateral dependent.
Restructured loans are loans for which the original contractual terms have
been modified to provide for terms that are less than the Company would be
willing to accept for new loans with comparable risk because of a
deterioration in the borrowers' financial condition. Interest on these loans
is accrued at the renegotiated rates.
Loan Fees
Nonrefundable fees and related direct costs associated with the origination or
purchase of loans are deferred and netted against outstanding loan balances.
The amortization of net deferred fees and costs are recognized in interest
income, generally by the interest method, based on the estimated lives of the
loans. Nonrefundable fees related to lending activities other than direct
40
loan origination are recognized as other income over the period the related
service is provided. This includes fees associated with the issuance of loan
commitments where the likelihood of the commitment being exercised is
considered remote. In the event of the exercise of the commitment, the
remaining unamortized fee is recognized in interest income over the loan term
using the interest method. Other credit-related fees, such as standby letter
of credit fees, loan syndication and agency fees and annual credit card fees
are recognized as other operating income over the period the related service
is performed.
Allowance for Loan Losses
The allowance for loan losses is an allowance for possible credit related
losses. Additions to the allowance are made by provisions charged to current
operating income. The determination of the balance of the allowance is based
on many factors including credit evaluation of the loan portfolio, current
economic conditions, and past loan loss experience. The allowance for loan
losses includes a general component which, in management's judgment, is
adequate to provide for unidentified losses in the loan portfolio.
Mortgage Servicing Rights
Mortgage servicing rights (MSRs) represent the right to service loans for
others, whether acquired directly or in conjunction with the acquisition of
mortgage loan assets. As originated or purchased loans are sold or
securitized, their total cost is allocated between MSRs and the loans, based
on relative fair values.
MSRs are amortized over the expected life of the loans serviced, including
expected prepayments, using a method that approximates the level yield method.
The carrying value of the MSRs is periodically evaluated for impairment based
on the difference between the carrying value of such rights and their current
fair value. For purposes of measuring impairment, which is recorded through
the use of a valuation reserve (prior to January 1, 1996 through direct
writedowns), MSRs are stratified based upon interest rates and whether or not
such rates are fixed or variable and other loan characteristics. The
evaluation of future net servicing income is based on a discounted and
disaggregated (individual portfolio) methodology.
Income Taxes
Deferred tax assets and liabilities are recognized for the estimated future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, as well as the estimated future tax consequences attributable to net
operating loss and tax credit carryforwards. A valuation allowance is
established to reduce deferred tax assets to the amounts expected to be
realized.
The Company and its subsidiaries file a consolidated federal income tax
return. Taxes of each subsidiary of the Company are generally determined on
the basis of filing separate returns.
41
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 must be 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 must likewise be
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, it must be demonstrated that the asset,
liability or event that the derivative is associated with exposes the
enterprise to price or interest rate risk and that 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 future 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.
Similarly, 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 are marked to market through earnings. Derivatives that cease to
qualify as synthetic alterations or hedges are marked to market prospectively
with any gains or losses at that time being deferred and amortized to earnings
over the remaining life of the derivative or the altered or hedged item
provided the hedged balance sheet position has not been liquidated. When the
altered or hedged position is liquidated the gain or loss, including any
deferred amount is recognized in earnings.
42
N O T E S T O F I N A N C I A L S T A T E M E N T S
Note 1. Acquisitions
Effective March 1, 1997 the Company completed its acquisition of CTUS Inc.
(CTUS), a unitary thrift holding company. CTUS owned First Federal Savings
and Loan Association of Rochester (First Federal), a thrift institution which
had $7.0 billion in assets and deposits of $4.3 billion. First Federal
operated 79 branches in New York State.
The Company liquidated a portion of its short-term investments to fund the
acquisition price of $676 million. The transaction was accounted for as a
purchase and the results of CTUS operations are included in the Company's
financial statements from the date of acquisition. The excess fair value of
net assets acquired was $238 million and is being amortized against income
over fifteen years.
<TABLE>
<CAPTION>
The following pro forma financial information presents the combined results of
the Company and CTUS as if the acquisition had occurred as of the beginning of
1997 and 1996, after giving effect to certain adjustments, including
accounting adjustments relating to fair value adjustments, amortization of
goodwill and related income tax effect. The pro forma financial information
does not necessarily reflect the results of operations that would have
occurred had the Company and CTUS constituted a single entity during such
periods.
- ------------------------------------------------------------------------------
Year Ended December 31, 1997 1996
- ------------------------------------------------------------------------------
(unaudited)
in millions
<S> <C> <C>
Net interest income after
provision for loan losses $1,112 $1,040
Net income 468 426
- ------------------------------------------------------------------------------
</TABLE>
See Note 13 for preferred stock issued in connection with the CTUS Inc.
acquisition.
On January 1, 1996 the net assets of Oleifera Investments, Ltd. (OIL), an
indirect wholly owned subsidiary of HSBC, were transferred to the Company
through a contribution of stock. Assets of OIL totaling $183 million at
December 31, 1995 consisted primarily of commercial loans and other real
estate. The transaction was accounted for as a transfer of assets between
companies under common control, with the assets and liabilities of OIL
combined with those of the Company at their historical carrying values. The
Company's accompanying consolidated financial statements reflect a restatement
of prior periods to include the accounts and results of operations of OIL as
though the transactions occurred as of the beginning of the earliest period
presented. Net interest income has been increased by $8.7 million and net
income reduced by $8.1 million from that previously reported for the year
ended December 31, 1995 as a result of the restatement.
In January 1997, these assets and liabilities were merged into the Bank and
the accompanying consolidated balance sheet of the Bank as of December 31,
1996 has been restated to give effect to the combination.
43
The Company acquired the institutional dollar clearing activity of Morgan
Guaranty Trust Company of New York on December 31, 1996. The Company assumed
$945 million in deposit liabilities and acquired a like amount of Federal
funds sold. The transaction was accounted for as a purchase. The excess of
fair value of net assets acquired was $32 million and is being amortized
against income over ten years. Results of operations are included in the
financial statements since the acquisition date. The acquisition requires
payment of additional consideration contingent upon future revenues.
The Company acquired $1.1 billion in selected assets and assumed $1.2 billion
in deposits of East River Savings Bank for a purchase price of $93 million in
June 1996. The acquisition was accounted for as a purchase and the results of
its operations are included in the financial statements since the acquisition
date. The excess fair value of net assets acquired was approximately $102
million and is being amortized against income over fifteen years.
Note 2. Cash and Due from Banks
The Bank is required to maintain noninterest bearing balances at Federal
Reserve Banks as part of its membership requirements in the Federal Reserve
System. These balances averaged $211.8 million in 1997 and $233.7 million in
1996.
<TABLE>
<CAPTION>
Note 3. Trading Assets
An analysis of trading assets, which are valued at market, follows.
- ------------------------------------------------------------------------------
December 31, 1997 1996
- ------------------------------------------------------------------------------
in thousands
<S> <C> <C>
Mortgage and other asset
backed securities $970,782 $883,754
Other securities 7,231 5,483
Derivatives 1,441 2,309
- ------------------------------------------------------------------------------
$979,454 $891,546
- ------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
The net gains (losses) resulting from trading activities are summarized by
categories of financial instruments in the following table.
- ------------------------------------------------------------------------------
Year Ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------
in thousands
<S> <C> <C> <C>
U.S. Government $ 342 $ 1,830 $(2,302)
Mortgage and other asset
backed securities 451 (2,621) 5,660
Other securities 1,272 1,430 1,171
Derivatives (327) (835) (2,975)
- ------------------------------------------------------------------------------
Trading asset revenues (loss) 1,738 (196) 1,554
Foreign exchange revenue 4,428 3,975 3,845
- ------------------------------------------------------------------------------
Trading revenues $6,166 $ 3,779 $ 5,399
- ------------------------------------------------------------------------------
</TABLE>
44
<TABLE>
<CAPTION>
Note 4. Securities
In 1995 the Financial Accounting Standards Board issued a Special Report, "A
Guide to the Implementation of Statement 115 on Accounting for Certain
Investments in Debt and Equity Securities" which provided a one-time
opportunity for companies to reassess the appropriateness of the
classifications of securities under FAS 115. The Company reassessed the
classifications of its securities held and during 1995 transferred securities
from held to maturity with an amortized cost of $2.49 billion and a fair value
of $2.54 billion to available for sale. The redesignations were accounted for
at fair value resulting in an unrealized gain net of taxes of $29.4 million
recorded in shareholders' equity. The amortized cost and fair value of
securities available for sale follows.
- -----------------------------------------------------------------------------------------------------------------
1997 1996
-------------------------------------------------------- --------------------------
Gross Gross
Amortized Unrealized Unrealized Fair Amortized Fair
December 31, Cost Gains Losses Value Cost Value
- -----------------------------------------------------------------------------------------------------------------
in thousands
<S> <C> <C> <C> <C> <C> <C>>
U.S. Treasury $2,415,835 $18,634 $1,923 $2,432,546 $2,269,156 $2,274,825
U.S. Government agency 1,088,798 24,416 4,708 1,108,506 366,987 373,665
Other debt securities 279,135 2,011 901 280,245 148,641 148,890
Equity securities 170,695 6,781 - 177,476 70,070 72,695
- -----------------------------------------------------------------------------------------------------------------
$3,954,463 $51,842 $7,532 $3,998,773 $2,854,854 $2,870,075
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1996, with regard to securities available for sale, the
Company had gross unrealized gains of $11.2 million, $7.1 million and $2.9
million and gross unrealized losses of $5.5 million, and $.4 million related
to U.S. Treasury, U.S. Government agency and other securities, respectively.
The Company sold securities available for sale resulting in gross realized
gains of $19.7 million, $12.9 million and $16.7 million, and gross realized
losses of $.4 million, $5.0 million and $4.3 million in the years 1997, 1996
and 1995, respectively. Substantially all interest income on securities is
taxable.
<TABLE>
<CAPTION>
The amortized cost and fair values of debt securities available for sale at
December 31, 1997, by contractual maturity are shown in the following table.
Expected maturities differ from contractual maturities because borrowers have
the right to prepay obligations without prepayment penalties in certain cases.
The amounts reflected in the table exclude $170.7 million amortized cost,
($177.5 million fair value) of equity securities available for sale that do
not have fixed maturities.
- -----------------------------------------------------------------------------
Amortized Fair
December 31, 1997 Cost Value
- -----------------------------------------------------------------------------
in thousands
<S> <C> <C>
Within one year $ 638,677 $ 641,849
After one but within five years 2,013,170 2,036,312
After five but within ten years 459,608 462,109
After ten years 672,313 681,027
- -----------------------------------------------------------------------------
$3,783,768 $3,821,297
- -----------------------------------------------------------------------------
</TABLE>
45
<TABLE>
<CAPTION>
Note 5. Loans
Loans are presented net of unearned income, unamortized nonrefundable fees and
related direct loan origination costs of $129.3 million and $173.3 million at
December 31, 1997 and 1996, respectively. A distribution of the loan
portfolio follows.
- ------------------------------------------------------------------------------
December 31, 1997 1996
- ------------------------------------------------------------------------------
in thousands
<S> <C> <C>
Domestic:
Commercial:
Construction loans $ 359,021 $ 396,313
Mortgage loans 1,876,243 1,689,013
Loans and advances to affiliates 40,302 95,998
Other business and financial 5,771,130 4,998,045
Consumer:
Residential mortgages 10,007,694 3,632,232
Credit card receivables 1,780,055 1,938,427
Other consumer loans 1,178,337 1,432,740
International 609,450 509,148
- ------------------------------------------------------------------------------
$21,622,232 $14,691,916
- ------------------------------------------------------------------------------
</TABLE>
Residential mortgages include $329.6 million and $91.5 million of residential
mortgages held for sale at December 31, 1997 and 1996, respectively. Other
consumer loans include $366.0 million and $412.1 million of higher education
loans also held for sale at December 31, 1997 and 1996, respectively.
International loans include "Brady bonds" issued by the United Mexican States
and the Republic of Venezuela in the refinancing of their debt obligations.
These bonds had an aggregate carrying value of $353.3 million (face value
$365.6 million) and an aggregate fair value of $311.2 million, $273.0 million
and $228.7 million at year ends 1997, 1996 and 1995, respectively. The
Company's intent is to hold these instruments until maturity. The bonds are
fully secured as to principal by zero-coupon U.S. Treasury securities with
face value equal to that of the underlying bonds.
At December 31, 1997 and 1996, the Company's nonaccruing loans were
$311.1 million and $357.5 million, respectively. At December 31, 1997 and
1996, the Company had commitments to lend additional funds of $.9 million and
$4.7 million, respectively, to borrowers whose loans are classified as
nonaccruing. A significant portion of these commitments include clauses that
provide for cancellation in the event of a material adverse change in the
financial position of the borrower.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Year Ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------
in thousands
<S> <C> <C> <C>
Interest revenue on nonaccruing loans which
would have been recorded had they been
current in accordance with their original terms $23,922 $39,597 $70,166
Interest revenue recorded on nonaccruing loans 42,287 35,858 32,841
- ------------------------------------------------------------------------------
</TABLE>
Other real estate and owned assets included in other assets amounted to $11.7
million and $13.5 million net of allowances for losses of $21.6 million and
$32.4 million at December 31, 1997 and 1996, respectively.
The Company identified impaired loans totaling $152.6 million at December 31,
1997, of which $54.1 million had an allocation from the allowance of $20.7
million. At December 31, 1996, the Company had identified impaired loans of
46
$257.5 million of which $60.7 million had an allocation from the allowance of
$24.3 million. The average recorded investment in such impaired loans was
$183.5 million, $278.0 million and $445.3 million in 1997, 1996 and 1995,
respectively.
The Company has loans outstanding to certain executive officers, directors and
companies in which a director has a 10% or more voting interest. The loans
were made on substantially the same terms, including interest rates and
collateral, as those prevailing at the same time for comparable transactions
with other persons and do not involve more than normal risk of collectibility.
The aggregate amount of such loans did not exceed 5% of shareholders' equity
at December 31, 1997 and 1996.
<TABLE>
<CAPTION>
Note 6. Allowance for Loan Losses
An analysis of the allowance for loan losses follows.
- ------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------
in thousands
<S> <C> <C> <C>
Balance at beginning of year $ 418,159 $ 477,502 $ 531,496
Allowance related to acquired businesses 40,294 3,415 371
Provision charged to income 87,400 64,750 175,292
Recoveries on loans charged off 50,261 54,006 56,133
Loans charged off (186,705) (181,514) (285,790)
- ------------------------------------------------------------------------------
Balance at end of year $ 409,409 $ 418,159 $ 477,502
- ------------------------------------------------------------------------------
</TABLE>
Note 5 provides information on impaired loans and the related specific loan
loss allowance.
Note 7. Mortgage Servicing Rights
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of these loans
were $11.83 billion and $6.21 billion at December 31, 1997 and 1996,
respectively. Custodial balances maintained in connection with the
foregoing loan servicing, and included in noninterest bearing deposits in
domestic offices were $223.2 million and $101.2 million at December 31, 1997
and 1996, respectively.
<TABLE>
<CAPTION>
The following analysis reflects the changes in MSRs reported in intangible
assets.
- ------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------
in thousands
<S> <C> <C> <C>
Balance at beginning of year $ 33,897 $ 36,822 $ 52,810
Additions 102,312 11,385 1,739
Amortization (24,708) (14,310) (17,727)
- ------------------------------------------------------------------------------
Balance at end of year $111,501 $ 33,897 $ 36,822
- ------------------------------------------------------------------------------
</TABLE>
Additions reported for 1997 include $83.2 million in MSRs obtained in the
acquisition of First Federal. No valuation reserve has been established
against MSRs. The fair value of MSRs as of December 31, 1997 and 1996 was
approximately $166.9 million and $76.7 million, respectively.
47
Note 8. Goodwill and Other Acquisition Intangibles
Goodwill and other acquisition intangibles included in intangible assets
totaled $370.5 million and $158.5 million at December 31, 1997 and 1996,
respectively. These amounts are amortized over the estimated periods to be
benefited, not exceeding 15 years. Amortization totaled $34.4 million,
$14.4 million and $11.2 million during the years 1997, 1996, and 1995,
respectively.
<TABLE>
<CAPTION>
Note 9. Deposits
The aggregate amount of time deposit accounts (primarily certificates of
deposits) each with a minimum of $100,000 included in domestic office deposits
were $1.91 billion and $1.25 billion at December 31, 1997 and 1996,
respectively. Substantially all deposits in foreign offices exceed $100,000.
The scheduled maturities of time deposits at December 31, 1997 follows:
- ------------------------------------------------------------------------------
in thousands
<S> <C>
1998 $6,203,512
1999 939,721
2000 199,857
2001 95,388
2002 21,257
Later years 24,921
- ------------------------------------------------------------------------------
$7,484,656
- ------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Note 10. Short-Term Borrowings
The following table shows detail relating to short-term borrowings in 1997,
1996 and 1995. Average interest rates during each year are computed by
dividing total interest expense by the average amount borrowed.
- ------------------------------------------------------------------------------------------------------
1997 1996 1995
------------------- ------------------- -------------------
Average Average Average
Amount Rate Amount Rate Amount Rate
- ------------------------------------------------------------------------------------------------------
in thousands
<S> <C> <C> <C> <C> <C> <C>
Federal funds purchased
(day to day):
At December 31 $1,389,854 5.19% $1,225,738 5.36% $1,013,435 4.64%
Average during year 1,266,663 5.50 619,775 5.26 297,268 5.73
Maximum month-end balance 2,164,329 1,225,738 1,013,435
Securities sold under
repurchase agreements:
At December 31 617,628 4.34 58,491 4.98 123,041 5.48
Average during year 710,716 5.44 465,147 4.95 304,735 5.71
Maximum month-end balance 2,680,576 809,703 987,516
Commercial paper:
At December 31 847,431 5.61 473,633 5.30 276,590 5.49
Average during year 721,995 5.53 338,505 5.32 228,346 5.78
Maximum month-end balance 896,574 590,358 276,590
All other short-term borrowings:
At December 31 1,347,262 5.70 723,480 5.68 1,125,044 5.05
Average during year 862,856 5.62 950,020 4.97 490,079 6.89
Maximum month-end balance 1,670,339 1,231,399 1,125,044
- ------------------------------------------------------------------------------------------------------
</TABLE>
All other short-term borrowings at year end 1997 include $850 million from the
Federal Home Loan Bank. There were no short-term borrowings from HSBC at year
end 1997 compared with $283.0 million and $745.5 million at year ends 1996 and
1995, respectively. See Note 18, Transactions with Principal Shareholder.
48
At December 31, 1997, the Company had unused lines of credit with HSBC
aggregating $300 million. These lines of credit do not require compensating
balance arrangements and commitment fees are not significant.
<TABLE>
<CAPTION>
Note 11. Income Taxes
Total income tax expense (benefit) for the years ended 1997, 1996 and 1995 was
allocated as follows:
- ------------------------------------------------------------------------------
Year Ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------
in thousands
<S> <C> <C> <C>
To income from operations $193,000 $171,000 $ 52,341
To unrealized gain on securities
available for sale, net of taxes 10,182 (10,498) 15,825
- ------------------------------------------------------------------------------
$203,182 $160,502 $ 68,166
- ------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
The components of income tax expense from operations follows:
- ------------------------------------------------------------------------------
Year Ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------
in thousands
<S> <C> <C> <C>
Current:
Federal $109,570 $ 57,220 $ 74,816
State and local 67,117 70,280 52,484
Foreign - - (10,959)
- ------------------------------------------------------------------------------
Total current 176,687 127,500 116,341
- ------------------------------------------------------------------------------
Deferred:
Deferred tax expense 135,553 97,247 39,520
Decrease in valuation allowance
for deferred tax assets (119,240) (53,747) (103,520)
- ------------------------------------------------------------------------------
Total deferred 16,313 43,500 (64,000)
- ------------------------------------------------------------------------------
Total income taxes $193,000 $171,000 $ 52,341
- ------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
The following table is an analysis of the difference between effective rates
based on the total income tax provision attributable to income from operations
and the statutory U.S. Federal income tax rate.
- ------------------------------------------------------------------------------
Year Ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory rate 35.0% 35.0% 35.0%
Increase (decrease) due to:
State, local and foreign income taxes 6.5 8.3 8.0
Change in valuation allowance for
deferred tax assets (12.2) (9.8) (30.8)
Tax exempt interest income (.3) (.4) (.9)
Adjustment to deferred tax assets and
liabilities due to change in tax basis - (2.9) 1.8
Other items .1 .8 2.5
- ------------------------------------------------------------------------------
Effective income tax rate 29.1% 31.0% 15.6%
- ------------------------------------------------------------------------------
</TABLE>
49
<TABLE>
<CAPTION>
The components of the net deferred tax asset are summarized below.
- ------------------------------------------------------------------------------
December 31, 1997 1996
- ------------------------------------------------------------------------------
in thousands
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $141,131 $157,681
Deferred charge offs 20,472 20,472
Depreciation and amortization 17,011 17,376
Accrued expenses not currently deductible 53,561 51,107
Federal net operating loss carryforwards - 93,852
Mortgage servicing fees 3,075 3,075
Other 67,398 28,657
- ------------------------------------------------------------------------------
302,648 372,220
Less valuation allowance 130,702 249,942
- ------------------------------------------------------------------------------
Total deferred tax assets 171,946 122,278
- ------------------------------------------------------------------------------
Less deferred tax liabilities:
Lease financing income accrued 32,136 34,364
Accrued pension cost 2,948 5,811
Accrued income on foreign bonds 21,270 21,603
Deferred net operating loss recognition 38,018 -
Securities available for sale 15,509 5,327
Other 22,486 -
- ------------------------------------------------------------------------------
Total deferred tax liabilities 132,367 67,105
- ------------------------------------------------------------------------------
Net deferred tax asset $ 39,579 $ 55,173
- ------------------------------------------------------------------------------
</TABLE>
The net change in the total valuation allowance for the years ended December
31, 1997, 1996 and 1995 were decreases of $119.2 million, $53.7 million and
$103.5 million, respectively. The net change in deferred tax assets in 1997
includes an increase of $10.9 million related to net deferred tax assets
acquired in the First Federal acquisition.
Realization of deferred tax assets is contingent upon the generation of future
taxable income or the existence of sufficient taxable income within the
carryback period. A valuation allowance is provided when it is more likely
than not that some portion of the deferred tax assets will not be realized.
In assessing the need for a valuation allowance, management considers the
scheduled reversal of the deferred tax liabilities, the level of historical
taxable income, and projected future taxable income over the periods in which
the temporary differences comprising the deferred tax assets will be
deductible. Based upon the level of historical taxable income and the
scheduled reversal of the deferred tax liabilities over the periods which the
deferred tax assets are deductible, management believes it is more likely than
not the Company will realize the benefits of these deductible differences, net
of the existing valuation allowance.
50
<TABLE>
<CAPTION>
Note 12. Long-Term Debt
The following is a summary of long-term debt, net of unamortized original
issue debt discount, where applicable.
- ------------------------------------------------------------------------------------------
December 31, 1997 1996
- ------------------------------------------------------------------------------------------
in thousands
<S> <C> <C>
Issued by the Company or subsidiaries other than the Bank:
Floating rate subordinated notes due 2000 (6.1875%) $ 200,000 $ 200,000
Floating rate subordinated notes due 2009 (6.125%) 124,320 124,320
Floating rate subordinated capital notes due 1999 (6.0625%) 100,000 100,000
8 5/8% subordinated capital notes due 1997 - 125,000
7% subordinated notes due 2006 297,774 297,522
Guaranteed mandatorily redeemable preferred securities
7.808% Capital Securities due 2026 200,000 200,000
8.38% Capital Securities due 2027 200,000 -
Other notes payable 183 221
- ------------------------------------------------------------------------------------------
1,122,277 1,047,063
Issued or acquired by the Bank or its subsidiaries:
Fixed rate Federal Home Loan Bank of New York advances 498,741 -
Floating rate Federal Home Loan Bank of New York
advances (5.92%, 5.76%) 50,000 -
Collateralized mortgage obligations 5,942 -
Obligations under capital leases 31,104 33,120
- ------------------------------------------------------------------------------------------
$1,708,064 $1,080,183
- ------------------------------------------------------------------------------------------
</TABLE>
Debt issued by Marine Midland Bank or its subsidiaries excludes the following
notes payable to the Company; a floating rate note of $100 million due 2000, a
7.234% note of $298 million due 2006, and a floating rate note of $100 million
due 2012.
Interest rates on floating rate notes are determined periodically by formulas
based on certain money market rates or, in certain instances, by minimum
interest rates as specified in the agreements governing the respective issues.
Interest rates on the floating rate notes in effect at December 31, 1997 are
shown in parentheses.
At maturity, the floating rate subordinated capital notes due 1999 will be
exchanged by the Company for capital securities of the Company, or at the
Company's option, the principal amount may be paid from funds designated by
the Board of Governors of the Federal Reserve System as available for the
retirement or redemption of the notes.
The guaranteed mandatorily redeemable preferred securities (Capital
Securities) are issued by trusts all of whose outstanding common securities
are owned by the Company. The Capital Securities represent preferred
beneficial interests in the assets of the trusts and are guaranteed by the
Company. The sole assets of the trusts consist of junior subordinated
debentures of the Company. The Capital Securities qualify as Tier 1 capital
under the risk-based capital guidelines of the Federal Reserve Board.
The Capital Securities are redeemable at the option of the Company in the case
of a tax event or regulatory capital event at the prepayment price equal to
the greater of (i) 100% of the principal amount of the Capital Securities or
(ii) the sum of the present values of a stated percentage of the principal
amount of the Capital Securities plus the remaining scheduled payments of
interest thereon from the prepayment date. Tax event refers to notice that
the interest payable on the Capital Securities would not be deductible.
Regulatory capital event refers to notice that the Capital Securities would
not qualify as Tier 1 capital.
51
In the absence of a tax or regulatory capital event, the 7.808% Capital
Securities are redeemable at the option of the Company on December 15, 2006 at
a premium of 3.904% in the first twelve months after December 15, 2006 and
varying lesser amounts thereafter and without premium if redeemed after
December 15, 2016. Similarly, the 8.38% Capital Securities are redeemable at
the option of the Company on May 15, 2007 at a premium of 4.19% in the first
twelve months after May 15, 2007 and varying lesser amounts thereafter and
without premium if redeemed after May 15, 2017.
The Federal Home Loan Bank of New York advances and the collateralized
mortgage obligations were assumed by the Bank as a result of the acquisition
of First Federal. The fixed rate Federal Home Loan Bank advances have
interest rates ranging from 2.67% to 8.61%. The mortgage bonds are
collateralized by a pledge of FHLMC mortgage-backed securities. All payments
received on the pledged mortgage-backed securities, net of certain costs, must
be applied to repay the bonds. The stated maturity and stated rate for the
three bonds are: January, 2000 at 7.33%; September, 2002 at 7.89%; and
October, 2006 at 7.27%. It is expected that the actual life of the bonds will
be less than their stated maturity.
Contractual scheduled maturities for the debt, excluding obligations under
capital leases, over the next five years are as follows: 1998, $459.2 million;
1999, $109.7 million; 2000, $251.1 million; 2001, $21.4 million; and $1.5
million in 2002. Maturities for obligations under capital leases are reported
in Note 22, Commitments and Contingent Liabilities.
<TABLE>
<CAPTION>
Note 13. Preferred Stock
A summary of preferred stock outstanding at December 31, 1997 and 1996
follows:
- -------------------------------------------------------------------------------
December 31, 1997 1996
- -------------------------------------------------------------------------------
in thousands
<S> <C> <C>
Preferred shares $ * $ -
$5.50 Cumulative preferred stock, 22,154 shares - 2,216
Adjustable rate cumulative preferred stock, 1,916,950 shares - 95,847
- -------------------------------------------------------------------------------
$ * $98,063
- -------------------------------------------------------------------------------
* $100 par value
</TABLE>
The CTUS Inc. acquisition agreement provided that the Company issue preferred
shares to CT Financial Services Inc. (the Seller). The preferred shares
provide for, and only for, a contingent dividend or redemption equal to the
amount of recovery, net of taxes and costs, if any, by First Federal resulting
from the pending action against the United States government alleging breaches
by the government of contractual obligations to First Federal following
passage of the Financial Institutions Reform, Recovery and Enforcement Act of
1989. The Company issued 100 preferred shares at a par value of $1.00 per
share in connection with the acquisition.
On March 31, 1997 the Company redeemed its outstanding shares of $5.50
cumulative and adjustable rate cumulative preferred stock. The outstanding
22,154 shares of $5.50 cumulative preferred stock were redeemed at $100 plus
accrued and unpaid dividends of $1.375 per share. The outstanding 1,916,950
shares of adjustable rate cumulative preferred stock were redeemed at $50 plus
accrued and unpaid dividends of $.75 per share.
52
Note 14. Common Stock
All of the common stock of the Company is owned by HSBC Holdings B.V. Common
shares authorized and issued are 1,100 and 1,001, respectively, with a par
value of $5.00.
Note 15. Retained Earnings
Bank dividends are a major source of funds for payment by the Company of
shareholder dividends and along with interest earned on investments, cover the
Company's operating expenses which consist primarily of interest on
outstanding debt. The approval of the Federal Reserve Board is required if
the total of all dividends declared by the Bank in any year would exceed the
net profits for that year, combined with the retained profits for the two
preceding years. Under a separate restriction, payment of dividends are
prohibited in amounts greater than undivided profits then on hand, after
deducting actual losses and bad debts. Bad debts are debts due and unpaid for
a period of six months unless well secured and in the process of collection.
Under these rules the Bank can pay dividends to the Company as of December 31,
1997 of approximately $8.7 million, adjusted by the effect of its net income
(loss) for 1998 up to the date of such dividend declaration.
Note 16. Impact of Recently Issued Accounting Standards
In June 1997, FASB issued 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 items
that are required to be recognized under accounting standards as components of
comprehensive income 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 and bypass net income. The
provisions of FAS 130 are effective beginning with 1998 interim reporting.
These disclosure requirements will have no impact on the financial position or
results of operations of the Company.
In June 1997, 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 enterprise's operating segments in annual and interim
financial reports. FAS 131 defines an operating segment as a component of an
enterprise that engages in business activities that generate revenue and incur
expense, whose operating results are reviewed by the chief operating decision
maker in the determination of resource allocation and performance, and for
which discrete financial information is available. FAS 131 is effective for
fiscal years beginning in 1998, however, it is not required to be applied for
interim reporting in the initial year of application. The Company is
currently evaluating the impact of FAS 131 on the disclosures included in its
annual and interim period financial statements.
53
Note 17. Regulatory Matters
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary actions by regulators that, if undertaken, could have
a direct material effect on the financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, specific
capital guidelines must be met that involve quantitative measures of assets,
liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The capital amounts and classification are
also subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the maintenance of minimum amounts and ratios of total and Tier 1
capital (as defined in the regulations) to risk-weighted assets (as defined),
and of Tier 1 capital (as defined) to average assets (as defined).
As of December 31, 1997, the most recent notification from the Federal Reserve
Board categorized the Company and the Bank as well-capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, a banking institution must have minimum total risk-based ratio of
at least 10%, Tier 1 risk-based ratio of at least 6%, and Tier 1 leverage
ratios of at least 5%. There are no conditions or events since that
notification that management believes have changed the categories.
<TABLE>
<CAPTION>
The capital amounts and ratios are presented in the table.
- ---------------------------------------------------------------------------------------------
1997 1996
---------------------------- -----------------------------
Actual Actual
---------------- Minimum ---------------- Minimum
December 31, Amount Ratio Amount Amount Ratio Amount
- ---------------------------------------------------------------------------------------------
in millions
<S> <C> <C> <C> <C> <C> <C>
Total capital
(to risk weighted assets)
Company $2,915 13.38% $1,744 $2,860 17.00% $1,346
Bank 2,540 11.75 1,730 2,288 13.83 1,324
Tier 1 capital
(to risk weighted assets)
Company 2,039 9.36 872 2,005 11.92 673
Bank 1,830 8.46 865 1,721 10.40 662
Tier 1 capital
(to average assets)
Company 2,039 6.68 915 2,005 9.54 631
Bank 1,830 6.04 1,212 1,721 8.26 834
- ---------------------------------------------------------------------------------------------
</TABLE>
Under the framework, the Bank's capital levels allow the Bank to accept
brokered deposits without prior regulatory approval. As of December 31, 1997,
the Bank had no brokered deposits.
Note 18. Transactions with Principal Shareholder
The Company's common stock is owned by HSBC Holdings B.V., an indirect wholly
owned subsidiary of HSBC. In the normal course of business, the Company
conducts transactions with HSBC, including its 25% or more owned subsidiaries
(HSBC Group). These transactions occur at prevailing market rates and terms
and include deposits taken and placed, short-term borrowings and interest rate
contracts.
54
At December 31, 1997 and 1996 assets of $47.1 million and $255.9 million,
respectively, and liabilities of $1,496.7 million and $1,096.6 million,
respectively, related to such transactions with the HSBC Group were included
in the Company's balance sheet. Borrowings from HSBC, included in short-term
borrowings on the balance sheet, were $283.0 million at December 31, 1996. No
borrowings from HSBC were outstanding at December 31, 1997.
Interest rate forward and futures contracts and interest rate swap contracts
entered into with the HSBC Group are used primarily as an asset and liability
management tool to manage interest rate risk. At December 31, 1997 and 1996,
the notional amount of these contracts with members of the HSBC Group were
$9.04 billion and $23.72 billion, respectively.
Legal restrictions on extensions of credit by the Bank to the HSBC Group
require that such extensions be secured by eligible collateral. At
December 31, 1997 and 1996, outstanding extensions of credit secured by
eligible collateral were $204.7 million and $192.8 million, respectively.
During 1997 and 1996 the Company purchased commercial loans having aggregate
book values of $178.7 million and $260.5 million, respectively, from a wholly
owned subsidiary of HSBC for fair value which approximates book value.
Note 19. Stock Option Plans
Effective January 1, 1996, the Company prospectively adopted Statement of
Financial Accounting Standards No. 123, Accounting for Stock Based
Compensation (FAS 123). Options have been granted under the HSBC Holdings
Executive Share Option Scheme (the Executive Plan) and under the HSBC Savings
Related Share Option Contribution Program (the Savings Plan). Compensation
expense associated with such options is recognized over the vesting period
based on the estimated fair value of such options at grant date.
Under the Executive Plan, options have been awarded to certain officers of the
Company to acquire shares of HSBC. The exercise price of each option is equal
to the market price of the stock of HSBC on the date of grant. The maximum
term of the options is ten years and they vest at the end of three years.
Additionally, the Company adopted the Savings Plan effective July 1, 1996
whereby eligible employees can elect to participate in the Savings Plan
through the Company's 401(k) plan and acquire contributions based on HSBC
stock at 85% of market on date of grant. An employee's agreement to
participate is a five year commitment. At the end of each five year period
employees receive the appreciation of the HSBC stock over the initial exercise
price in the form of stock of HSBC.
Since the shares and contribution commitment have been granted directly by
HSBC, the offset to compensation cost was a credit to capital surplus
representing a contribution of capital from HSBC. The adoption of FAS 123 had
an immaterial impact since the options granted and their related compensation
cost were insignificant to the financial results of the Company.
55
<TABLE>
<CAPTION>
Note 20. Employee Benefit Plans
The Company, the Bank and certain other subsidiaries maintain a
noncontributory pension plan covering substantially all of their employees.
Certain other HSBC subsidiaries participate in this plan. Benefits under the
plan are based on age, years of service and employee's compensation during the
last five years of employment. The following table sets forth the plan's
funded status. The merger of the First Federal plan into the Company's plan
in 1997 is included.
- ------------------------------------------------------------------------------
December 31, 1997 1996
- ------------------------------------------------------------------------------
in thousands
<S> <C> <C>
Plan assets at fair value, primarily
marketable securities $424,530 $291,513
- ------------------------------------------------------------------------------
Actuarial present value of benefits
for service rendered to date:
Vested benefits based on
salaries to date 320,663 219,449
Additional benefits for nonvested
participants 19,180 11,987
- ------------------------------------------------------------------------------
Accumulated benefits based on
salaries to date 339,843 231,436
Additional benefits based on
estimated future salary levels 80,757 68,880
- ------------------------------------------------------------------------------
Projected benefit obligation 420,600 300,316
- ------------------------------------------------------------------------------
Projected benefit obligation (in excess of)
less than plan assets 3,930 (8,803)
Unrecognized net asset existing at January 1,
1985 being amortized over 14 years (1,340) (2,681)
Unrecognized prior service cost 7,779 4,545
Unrecognized net (gain) loss (2,182) 21,853
- ------------------------------------------------------------------------------
Prepaid pension liability $ 8,187 $ 14,914
- ------------------------------------------------------------------------------
Assumptions used:
Discount rate 7.25% 7.75%
Weighted average salary increase 4.90 5.40
Expected long-term rate of return on assets 9.50 9.50
- ------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Net pension expense for 1997, 1996 and 1995 included the following components.
- ------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------
in thousands
<S> <C> <C> <C>
Service cost-benefits earned during the year $ 17,220 $ 14,696 $ 10,260
Interest cost 27,751 20,789 17,496
Actual return on assets (69,357) (31,396) (38,321)
Net amortization and deferral 34,575 6,942 21,545
- ------------------------------------------------------------------------------
Net pension expense $ 10,189 $ 11,031 $ 10,980
- ------------------------------------------------------------------------------
</TABLE>
Net pension expense includes $2.0 million, $1.2 million and $.9 million for
1997, 1996 and 1995, respectively, recognized in the financial statements of
other HSBC subsidiaries participating in the Company's pension plan.
<TABLE>
<CAPTION>
The Company maintains unfunded noncontributory health and life insurance
coverage for all employees who retired from the Company and were eligible for
immediate pension benefits from the Company's retirement plan. Employees
retiring after January 1, 1993 will absorb a portion of the cost of these
benefits. Employees hired after this same date are not eligible for these
56
benefits. A premium cap has been established for the Company's share of
retiree medical costs. The following table sets forth the status of the plan
with the amounts included in the balance sheet at December 31, 1997 and 1996.
- ------------------------------------------------------------------------------
December 31, 1997 1996
- ------------------------------------------------------------------------------
in thousands
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $ 40,657 $ 42,823
Fully eligible active plan participants 3,468 2,938
Other active plan participants 31,092 24,419
- ------------------------------------------------------------------------------
(75,217) (70,180)
Plan assets at fair value - -
- ------------------------------------------------------------------------------
Funded status (75,217) (70,180)
Unrecognized transition obligation 48,706 51,953
Unrecognized net gain (7,596) (5,487)
- ------------------------------------------------------------------------------
Accrued postretirement benefit cost $(34,107) $(23,714)
- ------------------------------------------------------------------------------
Assumptions used:
Discount rate 6.75% 7.50%
Health care cost trend rate 12.00 13.00
- ------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Net periodic postretirement benefit cost for 1997, 1996 and 1995 included the
following components.
- ----------------------------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------
in thousands
<S> <C> <C> <C>
Service cost-benefits earned during the year $1,890 $ 2,024 $1,694
Interest cost on accumulated postretirement benefit
obligation 4,871 4,794 4,839
Amortization of unrecognized transition obligation 2,761 3,247 3,247
- ----------------------------------------------------------------------------------
Net periodic postretirement benefit cost $9,522 $10,065 $9,780
- ----------------------------------------------------------------------------------
</TABLE>
For measurement purposes, the health care cost trend rate is assumed to
decrease 1% per year to an ultimate rate of 7% in the year 2002. The health
care cost trend rate assumption has an effect on the amounts reported. For
example, increasing the assumed health care cost trend rates by 1% point would
have increased the accumulated postretirement benefit obligation as of
December 31, 1997 by $1.2 million and the aggregate of the interest cost and
service cost components of the 1997 net periodic cost by $.1 million.
<TABLE>
<CAPTION>
Note 21. International Operations
International activities are defined as those conducted with non-U.S.
domiciled customers. In the following table, international loans are
distributed geographically primarily on the basis of the location of the head
office or residence of the borrowers or, in the case of certain guaranteed
loans, the guarantors. Interest bearing deposits with banks are grouped by
the location of the head office of the bank. Investments and acceptances are
distributed on the basis of the location of the issuers or borrowers. The
following tables summarize the Company's international activities.
- -----------------------------------------------------------------------------
International Assets by Geographic Distribution and Domestic Assets
December 31, 1997 1996
- -----------------------------------------------------------------------------
in millions
<S> <C> <C>
International:
Europe/Middle East/Africa $ 1,499 $ 815
Asia/Pacific 564 459
Other Western Hemisphere 634 637
Less: allowance for loan losses (26) (26)
- -----------------------------------------------------------------------------
Total international 2,671 1,885
Domestic 28,847 21,745
- -----------------------------------------------------------------------------
Total domestic/international $31,518 $23,630
- -----------------------------------------------------------------------------
</TABLE>
57
<TABLE>
<CAPTION>
Total international assets averaged $2.31 billion, $1.28 billion and $1.61
billion, or 7.9%, 6.2% and 8.5% of total average assets, during 1997, 1996 and
1995, respectively. Total international liabilities averaged $2.16 billion,
$1.18 billion and $1.48 billion, or 8.0%, 6.2% and 8.6% of total average
liabilities, during 1997, 1996 and 1995, respectively.
- ---------------------------------------------------------------------------------------------------------------------
Revenues and Earnings - International
Total Operating Income Income (Loss) Before Taxes Net Income (Loss)
- ---------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1997 1996 1995 1997 1996 1995 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
in millions
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
International:
Europe/MiddleEast/
Africa $ 71.4 $ 29.1 $ 38.7 $ 29.5 $ 5.8 $ 10.7 $ 16.8 $ 3.3 $ 6.1
Asia/Pacific 48.2 36.2 46.7 25.9 24.9 27.5 14.7 14.2 15.7
Other Western
Hemisphere 44.0 37.0 38.9 16.6 14.6 (13.8) 9.5 8.3 (7.9)
United States 19.4 16.2 13.0 14.0 12.5 10.1 8.0 7.2 5.8
- ---------------------------------------------------------------------------------------------------------------------
Total international 183.0 118.5 137.3 86.0 57.8 34.5 49.0 33.0 19.7
Domestic 2,337.4 1,804.2 1,666.1 578.0 493.4 301.4 422.0 347.2 263.9
- ---------------------------------------------------------------------------------------------------------------------
Total domestic/
international $2,520.4 $1,922.7 $1,803.4 $664.0 $551.2 $335.9 $471.0 $380.2 $283.6
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Interest and fee related income on international assets is distributed
geographically on the same basis as the related asset. Other international
operating income is distributed to the geographic area where the service or
operation is performed. Included in consolidated other income are foreign
currency exchange gains of $4.4 million, $4.0 million and $3.8 million for
1997, 1996 and 1995, respectively.
In order to arrive at income before taxes by geographic areas, various
allocations, some of which are subjective by necessity, have been made. In
addition to estimating a provision for loan losses, allocations of indirect
expenses and administrative overhead are made among areas to best reflect
services provided and a charge or credit is made at market rates for use of
funds after consideration has been given for the use of capital. Taxes are
estimated for international operations and are allocated geographically in
proportion to income before taxes.
58
Note 22. Commitments and Contingent Liabilities
At December 31, 1997 securities, loans and other assets carried in the
consolidated balance sheet at $3.52 billion were pledged as collateral for
borrowings, to secure governmental and trust deposits and for other purposes.
<TABLE>
<CAPTION>
The Company and its subsidiaries are obligated under a number of
noncancellable leases for premises and equipment. Certain leases contain
renewal options and escalation clauses. Minimum future rental commitments on
leases in effect at December 3l, l997 were:
- -------------------------------------------------------------------------------------------
Capital Operating
Leases Leases
- -------------------------------------------------------------------------------------------
in thousands
<S> <C> <C>
1998 $ 6,510 $ 33,387
1999 6,504 30,114
2000 6,408 26,342
2001 6,377 22,704
2002 6,309 14,560
Later years 60,089 57,432
- -------------------------------------------------------------------------------------------
Total minimum lease payments 92,197 $184,539
Less: executory costs 34,633
- -------------------------------------------------------------------------------------------
Net minimum obligation 57,564
Less: amount representing interest 26,460
- -------------------------------------------------------------------------------------------
Present value of net minimum lease payments at December 31, 1997 $31,104
- -------------------------------------------------------------------------------------------
</TABLE>
Operating expenses include rental expense, net of sublease rentals, of $42.1
million, $36.7 million and $36.6 million in 1997, 1996 and 1995, respectively.
The Company and its subsidiaries are defendants in a number of legal
proceedings arising out of, and incidental to, their businesses. Management
of the Company, based on its review with counsel of the development of these
matters to date, is of the opinion that the ultimate resolution of these
pending proceedings will not have a material adverse effect on the business or
financial position of the Company.
Note 23. Financial Instruments With Off-Balance Sheet Risk
The Company is party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers, to
reduce its own exposure to fluctuations in interest rates and to realize
profits. These financial instruments involve, to varying degrees, elements of
credit and market risk in excess of the amount recognized in the consolidated
balance sheet. Credit risk represents the possibility of loss resulting from
the failure of another party to perform in accordance with the terms of a
contract. The Company uses the same credit policies in making commitments and
conditional obligations as it does for balance sheet instruments.
Market risk represents the exposure to future loss resulting from the decrease
in value of an on- or off-balance sheet financial instrument caused by changes
in interest rates. Market risk is a function of the type of financial
instrument involved, transaction volume, tenor and terms of the agreement and
the overall interest rate environment. The Company controls market risk by
managing the mix of the aggregate financial instrument portfolio and by
entering into offsetting positions.
59
<TABLE>
<CAPTION>
A summary of financial instruments with off-balance sheet risk follows.
- -----------------------------------------------------------------------------------------------------
December 31, 1997 1996
- -----------------------------------------------------------------------------------------------------
in millions
<S> <C> <C>
Financial instruments whose contractual amounts represent the associated risk:
Standby letters of credit and financial guarantees
Guarantees for certain debt obligations of borrowers
State and municipal $ 147 $ 163
Industrial revenue 287 291
Other, primarily corporate 10 19
Other 601 384
Other letters of credit 295 278
Commitments to extend credit 10,588 5,415
Financial instruments whose notional or contractual amounts do not represent
the associated risk:
Interest rate swaps 6,908 14,440
Forward rate agreements 600 8,510
Futures contracts 3,786 1,303
Interest rate caps and floors 1,671 918
Options on futures contracts 600 2,721
Foreign exchange contracts 134 205
Commitments to deliver mortgaged-backed securities 275 235
- -----------------------------------------------------------------------------------------------------
</TABLE>
For commitments to extend credit, standby letters of credit and guarantees,
the Company's exposure to credit loss in the event of non-performance by the
counterparty to the financial instrument, is represented by the contractual
amount of those instruments. Management does not anticipate any significant
loss as a result of these transactions.
For those financial instruments whose contractual or notional amount does not
represent the amount exposed to credit loss, risk at any point in time
represents the cost, on a present value basis, of replacing these existing
instruments at current interest and exchange rates. Based on this
measurement, $85.6 million was at risk at December 31, 1997. The reduction
during 1997 from 1996 in contractual or notional amounts is primarily
attributable to management's decision to close out rather than offset certain
open positions in derivative contracts. See Note 24 for further discussion of
activities in derivative financial instruments. The Company controls the
credit risk associated with off-balance sheet derivative financial instruments
established for each counterparty through the normal credit approval process.
See Note 18 for contracts entered into with the HSBC Group. Collateral is
maintained on these positions, the amount of which is consistent with the
measurement of exposure used in the risk-based capital ratio calculations
under the banking regulators' guidelines.
Standby letters of credit and guarantees have been reduced by $15.8 million
and $21.2 million at December 31, 1997 and 1996, respectively, which represent
the amounts participated to other institutions. Maturities of guarantees for
certain debt obligations of borrowers range from 1998 to 2016. Fees received
are generally recognized as revenue over the life of the guarantee.
Foreign exchange contracts represent the gross amount of contracts to purchase
and sell foreign currencies. The extent to which offsets may exist are not
considered.
Note 24. Derivative Financial Instruments
As principally an end user of off-balance sheet financial instruments, the
Company uses various derivative products to manage its overall interest rate
risk within the context of a comprehensive asset and liability strategy. The
Company also uses derivatives to offset risk associated with changes in the
60
market value in its trading and available for sale securities portfolios, to
protect against the impairment in value of mortgage servicing rights and to
satisfy the foreign currency requirements of customers.
The derivative instrument portfolios are actively managed in response to
changes in overall and specific balance sheet positions, cash requirements,
expectations of future interest rates, market environments and business
strategies. Associated credit risk is controlled through the establishment
and monitoring of approved limits in derivative positions. Credit risk is
also mitigated by executing almost all derivative contracts with members of
the HSBC Group, and such contracts are subject to enforceable master netting
agreements.
<TABLE>
<CAPTION>
The following table summarizes the outstanding positions of derivative
contracts.
- -------------------------------------------------------------------------------------
Notional Fair Value
December 31, 1997 1996 1997 1996
- -------------------------------------------------------------------------------------
in millions
<S> <C> <C> <C> <C>
Asset/liability management positions
Interest rate swaps $6,323 $13,664 $56 $(13)
Forward rate agreements 600 8,510 - (3)
Futures contracts 2,650 850 (1) -
Interest rate caps and floors 10 17 - -
Options on futures contracts 600 2,721 - (1)
Available for sale portfolio positions
Interest rate swaps 445 425 (4) (2)
Futures contracts 225 - 1 -
Interest rate caps and floors 300 300 - (2)
Mortgage servicing rights portfolio positions
Interest rate caps and floors 1,361 601 12 3
Trading positions
Interest rate swaps 140 351 - -
Futures contracts 911 453 - -
Foreign exchange contracts 134 205 - -
- -------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
The following represents a maturity analysis of notional values of the
outstanding positions of derivative contracts (excluding trading positions)
at December 31, 1997.
- ----------------------------------------------------------------------------------------------------------
2003-
December 31, 1998 1999 2000 2001 2002 2026 Total
- ----------------------------------------------------------------------------------------------------------
in millions
<S> <C> <C> <C> <C> <C> <C> <C>
Asset/liability management positions
Interest rate swaps $3,230 $185 $633 $1,500 $ 5 $770 $6,323
Forward rate agreements 300 300 - - - - 600
Futures contracts 2,650 - - - - - 2,650
Interest rate caps and floors 10 - - - - - 10
Options on futures contracts 600 - - - - - 600
Available for sale portfolio positions
Interest rate swaps - 200 - - 120 125 445
Futures contracts - 60 60 60 45 - 225
Interest rate caps and floors - - - - 200 100 300
Mortgage servicing rights portfolio
positions
Interest rate caps and floors - - 156 445 760 - 1,361
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Asset/liability management positions - Through the normal course of
operations, the Company is subject to the risk associated with changes in
interest rates to the extent that interest bearing earnings assets and
interest bearing liabilities mature or reprice at different times or by
differing amounts. Pursuant to an overall balance sheet risk management
strategy, derivative financial instruments are used to alter the cash flows
and maturity characteristics of certain of these assets and liabilities and
61
hedge anticipated repricing in order to maintain net interest margin within a
range that management considers acceptable given various assumptions as to
changes in interest rates.
Currently, the Company manages risk within the context of an asset sensitive
balance sheet position. That is, interest earning assets tend to respond to
changes in interest rates by repricing in advance of interest bearing
liabilities. While increasing net interest margin in upward rate
environments, net interest margin decreases when rates fall. As such,
interest rate swaps, along with put and call options are used to synthetically
alter the cash flow associated with certain long-term floating rate assets and
fixed rate liabilities. Swaps, put and call options are utilized to extend
the maturities and financial futures are used to hedge the anticipated re-
pricing of certain short-term assets and liabilities in order to limit
exposure to changes in interest rates.
<TABLE>
<CAPTION>
The following table summarizes the linkage of notional value derivative
financial instruments utilized for asset/liability management positions to
balance sheet assets and liabilities at December 31, 1997:
- -------------------------------------------------------------------------------------------------
Interest Forward Interest Options
Rate Rate Futures Rate Caps/ on Futures
December 31, 1997 Swaps Agreements Contracts Floors Contracts
- -------------------------------------------------------------------------------------------------
in millions
<S> <C> <C> <C> <C> <C>
Loans $2,515 $ - $ - $10 $ -
Federal funds sold/deposits placed 400 - 120 - -
Federal funds/purchased deposits - - 2,530 - 600
Deposits 2,718 600 - - -
Debt 690 - - - -
- -------------------------------------------------------------------------------------------------
</TABLE>
Available for sale portfolio positions - In addition, the Company uses
derivative contracts to synthetically convert fixed rate investment securities
held in the available for sale portfolio to variable in order to mitigate the
effects of changes in interest rates on the market valuation of these assets.
Mortgage servicing rights portfolio positions - Interest rate floor contracts
are used to limit the potential for loss on the valuation of mortgage
servicing rights. As interest rates decline, mortgage prepayments generally
accelerate, thereby eroding the value of the rights and requiring the Company
to increase amortization. As interest rates decline below a specified level,
the value of the derivative increases. The increased value of the derivative
effectively offsets the decline in value of the rights.
Trading activities - The Company deploys excess liquidity by maintaining
active trading positions in a variety of highly-liquid debt instruments
including U.S. Government obligations, non-high risk mortgage and asset-backed
and other securities. The trading portfolio is managed to realize profits
from short-term price movements associated with holding high credit quality
securities and associated off-balance sheet derivative instruments.
The majority of derivative instruments held in the trading portfolio are used
to hedge market and interest rate risk associated with the on-balance sheet
cash instruments to which they are linked. That is, changes in value of cash
instruments are effectively offset by changes in value of the related
derivative to the extent the on-balance sheet positions are hedged. The
Company had no speculative derivative positions at December 31, 1997 outside
the trading portfolio.
62
The Company's derivative trading positions are subject to interest rate risk,
maturity and credit exposure limits. Stop loss limits have been imposed on
all trading positions, including derivatives, to mitigate exposure to price
movements.
Derivative trading positions are marked to market with gains and losses
recorded as a component of net trading revenues. Generally, as individual
trading assets are sold, the corresponding derivative positions are liquidated
and gains and losses realized. See Note 3 for net revenues associated with
trading activities during 1997, 1996 and 1995.
<TABLE>
<CAPTION>
The following summarizes by instrument type, the year-end and average fair
values of derivative trading positions.
- -----------------------------------------------------------------------------
Fair Value
December 31, 1997 Year-end Average
- -----------------------------------------------------------------------------
in millions
<S> <C> <C>
Interest rate swaps
Assets $ .5 $ 2.4
Liabilities (.7) (3.0)
Futures contracts
Assets .2 .2
Liabilities (.3) (.3)
Foreign exchange contracts
Assets 1.4 2.5
Liabilities (1.3) (2.3)
- ------------------------------------------------------------------------------
</TABLE>
Foreign exchange trading activities - The Company maintains open positions in
various foreign exchange contracts, principally to accommodate customer
demands for specific currencies. Foreign currencies are purchased and sold on
a spot basis, with settlement occurring within a two day period. Also,
certain forward purchase and sale agreements are entered into in order to
match customer requests with settlement requirements associated with foreign
markets. Additionally a limited number of open positions are maintained. Net
revenues from foreign exchange trading were $4.4 million, $4.0 million and
$3.8 million in 1997, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
The following summarizes the foreign currency trading contracts outstanding.
- ------------------------------------------------------------------------------
Notional Fair
December 31, 1997 Amount Value
- ------------------------------------------------------------------------------
in millions
<S> <C> <C>
Spot contracts $ 7.0 $ -
Forward contracts 127.0 -
- ------------------------------------------------------------------------------
</TABLE>
Approximately 70% of the foreign currency contracts outstanding are
denominated in major currencies. All open foreign exchange contracts are
marked to market on a daily basis with gains and losses recorded as a
component of net trading revenues.
Relating to certain contracts, the Company records unrealized gains as assets
and unrealized losses as liabilities on the balance sheet. Offsetting of
unrealized gains and losses is recognized for multiple contracts executed with
the same counterparty if a valid right and intent to set off exists. The
majority of the Company's arrangements are subject to legally enforceable
master netting agreements with affiliated companies which provide for the
right of set off.
63
Note 25. Concentrations of Credit Risk
The Company enters into a variety of transactions in the normal course of
business that involve both on- and off-balance sheet credit risk. Principal
among these activities is lending to various commercial, institutional,
governmental and individual customers. Although the Company actively
participates in lending activity throughout the United States and on a limited
basis abroad, credit risk is concentrated in the Northeastern United States.
The ability of individual borrowers to repay is generally linked to the
economic stability of the regions from where the loans originate, as well as
the creditworthiness of the borrower. With emphasis on the Western, Central
and Metropolitan regions of New York State, the Company maintains a
diversified portfolio of loan assets.
In general, the Company controls the varying degrees of credit risk involved
in on- and off-balance sheet transactions through specific credit policies.
These policies and procedures provide for a strict approval, monitoring and
reporting process.
<TABLE>
<CAPTION>
The following table summarizes the Company's significant concentrations of
credit risk at December 31, 1997.
- -----------------------------------------------------------------------------------
Off-Balance
On-Balance Sheet
Sheet Commitments
- -----------------------------------------------------------------------------------
in millions
<S> <C> <C>
Consumer:
Credit card receivables $ 1,780 $7,102
Residential mortgages 10,008 727
Real estate - commercial construction and mortgage loans 2,236 165
- -----------------------------------------------------------------------------------
</TABLE>
At December 31, 1997 51% of credit card receivables, 59% of residential
mortgages and 75% of commercial construction and mortgage loans were located
within the Northeastern United States. It is the Company's policy to require
collateral in support of on- and off-balance sheet transactions, when it is
deemed appropriate. Varying degrees and types of collateral are secured
depending upon management's credit evaluation.
Note 26. Fair Value of Financial Instruments
The following disclosures represent the Company's best estimate of the fair
value of on- and off-balance sheet financial instruments. The Company has
employed the following methods and assumptions to estimate the fair value of
each class of financial instrument for which it is practicable to do so.
Financial instruments with carrying value equal to fair value - The carrying
value of certain financial assets including cash and due from banks, interest
bearing deposits with banks, federal funds sold and securities purchased under
resale agreements, accrued interest receivable, and customers' acceptance
liability and certain financial liabilities including short-term borrowings,
interest, taxes and other liabilities and acceptances outstanding, as a result
of their short-term nature, are considered to be equal to fair value.
Securities and trading assets - Fair value has been based upon current market
quotations, where available. If quoted market prices are not available, fair
value has been estimated based upon the quoted price of similar instruments.
64
Loans - The fair value of the performing loan portfolio has been determined
principally based upon a discounted analysis of the anticipated cash flows,
adjusted for expected credit losses. The loans have been grouped to the
extent possible, into homogeneous pools, segregated by maturity and the
weighted average maturity and average coupon rate of the loans within each
pool. Depending upon the type of loan involved, maturity assumptions have
been based on either contractual or expected maturity.
Pursuant to the valuation methodology, credit risk has been factored into the
present value analysis of cash flows associated with each loan type, by
allocating the allowance for loan losses. The allocated portion of the
allowance, adjusted by a present value factor based upon the timing of
expected losses, has been deducted from the gross cash flows prior to
calculating the present value.
As a result of the allocation of the allowance to adjust the anticipated cash
flows for credit risk, a published interest rate that equates as closely as
possible to a "risk-free" or "low-risk" loan has been selected for the purpose
of discounting the commercial loan portfolio, adjusted for a liquidity factor
where appropriate.
Consumer loans have been discounted at the estimated rate of return an
investor would demand for the product, without regard to credit risk. This
rate has been formulated based upon reference to current market rates. The
fair value of the residential mortgage portfolio has been determined by
reference to quoted market prices for loans with similar characteristics and
maturities.
The portion of the allowance attributable to nonperforming loans has been
deducted from carrying value to arrive at an estimate of fair value for
nonperforming loans.
Intangible assets - The Company has elected not to specifically disclose the
fair value of certain intangible assets. In addition, the Company has not
estimated the fair value of unrecorded intangible assets associated with its
own portfolio of core deposits and credit card receivables. The fair value of
the Company's intangibles is believed to be significant.
Deposits - The fair value of demand, savings and certain money market deposits
is equal to the amount payable on demand at the reporting date. For deposits
with fixed maturities, fair value has been estimated based upon interest rates
currently being offered on deposits with similar characteristics and
maturities.
Long-term debt - Fair value has been estimated based upon interest rates
currently available to the Company for borrowings with similar characteristics
and maturities.
65
<TABLE>
<CAPTION>
The following, which is provided for disclosure purposes only, provides a
comparison of the carrying value and fair value of the Company's on-balance
sheet financial instruments. Fair values have been determined based on
applicable requirements and do not necessarily represent the amount that would
be realized upon their liquidation.
- --------------------------------------------------------------------------------
1997 1996
------------------- -------------------
Carrying Fair Carrying Fair
December 31, Value Value Value Value
- --------------------------------------------------------------------------------
in millions
<S> <C> <C> <C> <C>
Financial assets:
Instruments with carrying value
equal to fair value $ 4,328 $ 4,328 $ 4,935 $ 4,935
Related derivatives - - - (1)
Trading assets 979 979 891 891
Related derivatives - - - -
Securities available for sale 4,002 4,002 2,874 2,874
Related derivatives (3) (3) (4) (4)
Loans, net of allowance for
loan losses 21,219 21,461 14,274 14,420
Related derivatives 6 29 75 (14)
Financial liabilities:
Instruments with carrying value
equal to fair value 4,953 4,955 2,867 2,867
Related derivatives - 2 - -
Deposits:
Without fixed maturities 15,636 15,636 10,818 10,818
Fixed maturities 7,157 7,194 6,891 6,905
Related derivatives (24) 2 (2) -
Long-term debt 1,704 1,731 1,081 1,078
Related derivatives (4) (30) (1) 2
- --------------------------------------------------------------------------------
</TABLE>
The above table excludes $1,361 million of notional value interest rate floors
with a fair value of $12 million associated with mortgage servicing rights and
$113 million of notional value customer facilitation interest rate swaps with
a nominal fair value which are outside of the scope required in this footnote.
The fair value of derivative financial instruments is disclosed in Note 24,
Derivative Financial Instruments.
The fair value of commitments to extend credit, standby letters of credit and
financial guarantees, is not included in the previous table. These
instruments generate fees which approximate those currently charged to
originate similar commitments. Further detail with respect to off-balance
sheet financial instruments is provided in Note 23, Financial Instruments With
Off-Balance Sheet Risk.
66
<TABLE>
<CAPTION>
Note 27. Financial Statements of HSBC Americas, Inc. (parent)
Condensed parent company financial statements follow.
- ------------------------------------------------------------------------------------
Balance Sheet
December 31, 1997 1996
- ------------------------------------------------------------------------------------
in thousands
<S> <C> <C>
Assets:
Cash and due from banks $ - $ 4,578
Interest bearing deposits with banks (including
$1,070,400 and $1,152,100 in banking subsidiary) 1,135,400 1,217,100
Securities available for sale 29,935 28,937
Loans (net of allowance for loan losses of $1,284) 57,628 113,286
Receivable from subsidiaries 627,461 415,841
Investment in subsidiaries at amount of their
net assets
Banking 2,222,905 1,908,030
Other 43,668 35,257
Other assets 42,180 80,042
- ------------------------------------------------------------------------------------
Total assets $4,159,177 $3,803,071
- ------------------------------------------------------------------------------------
Liabilities:
Interest, taxes and other liabilities $ 138,327 $ 20,433
Short-term borrowings 847,431 756,633
Long-term debt 722,094 846,842
Long-term debt due to subsidiary 412,372 206,186
- ------------------------------------------------------------------------------------
Total liabilities 2,120,224 1,830,094
Shareholders' equity 2,038,953 1,972,977
- ------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $4,159,177 $3,803,071
- ------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
Statement of Income
Year Ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------------
in thousands
<S> <C> <C> <C>
Income:
Dividends from banking subsidiaries $275,000 $130,000 $ -
Dividends from other subsidiaries 804 7,465 661
Interest from banking subsidiaries 84,599 65,963 48,801
Interest from other subsidiaries - 27 349
Other interest income 12,290 5,429 8,354
Securities transactions 12,650 7,915 12,335
Other income 2,492 2,369 (5)
- ------------------------------------------------------------------------------------
Total income 387,835 219,168 70,495
- ------------------------------------------------------------------------------------
Expenses:
Interest (including $26,813, $852,
and $4 paid to subsidiaries) 114,294 81,554 64,595
Other expenses 7,535 6,302 5,046
- ------------------------------------------------------------------------------------
Total expenses 121,829 87,856 69,641
- ------------------------------------------------------------------------------------
Income before taxes and equity
in undistributed income of
subsidiaries 266,006 131,312 854
Income taxes (benefit) (2,527) (3,312) 1,631
- ------------------------------------------------------------------------------------
Income (loss) before equity in
undistributed income
of subsidiaries 268,533 134,624 (777)
Equity in undistributed income
of subsidiaries 202,417 245,564 284,361
- ------------------------------------------------------------------------------------
Net income $470,950 $380,188 $283,584
- ------------------------------------------------------------------------------------
</TABLE>
67
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
Statement of Cash Flows
Year Ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------------
in thousands
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 470,950 $ 380,188 $ 283,584
Adjustments to reconcile net income
to net cash provided (used) by
operating activities:
Depreciation and amortization 3,693 3,278 3,012
Net change in other accrued accounts 49,380 (15,155) 496
Undistributed income of subsidiaries (202,417) (245,564) (284,361)
Other, net (149,056) (8,190) (9,146)
- ------------------------------------------------------------------------------------
Net cash provided (used) by
operating activities 172,550 114,557 (6,415)
- ------------------------------------------------------------------------------------
Cash flows from investing activities:
Net change in interest bearing
deposits with banks 81,700 61,300 186,800
Purchases of securities (5,000) (125) (8,881)
Sales of securities 20,785 12,829 23,185
Net change in other short-term loans - 78,000 50,000
Principal collected on long-term loans 55,658 5,592 9,554
Long-term loans advanced (100,000) (414,333) (3,139)
Investment in banking subsidiary (95,298) - 125,000
Investment in nonbanking subsidiary, net - - 118,079
Proceeds from transfer of affiliate
to parent - - 145
Other, net 229 219 (16,787)
- ------------------------------------------------------------------------------------
Net cash provided (used) by
investing activities (41,926) (256,518) 483,956
- ------------------------------------------------------------------------------------
Cash flows from financing activities:
Net change in short-term borrowings 90,798 (265,458) (204,062)
Issuance of long-term debt 200,000 497,480 -
Repayment of long-term debt (125,000) - -
Capital contributions from parent, net - - (117,683)
Redemption of preferred stock (98,063) - -
Dividends paid (202,937) (85,872) (155,873)
- ------------------------------------------------------------------------------------
Net cash provided (used) by
financing activities (135,202) 146,150 (477,618)
- ------------------------------------------------------------------------------------
Net change in cash and due from banks (4,578) 4,189 (77)
Cash and due from banks at beginning of year 4,578 389 466
- ------------------------------------------------------------------------------------
Cash and due from banks at end of year $ - $ 4,578 $ 389
- ------------------------------------------------------------------------------------
Supplementary data
Interest paid $ 120,840 $ 72,662 $ 66,850
Income taxes paid - 5,155 21,687
- ------------------------------------------------------------------------------------
</TABLE>
The Bank is subject to legal restrictions on certain transactions with its
nonbank affiliates in addition to the restrictions on the payment of dividends
to the Company (see Note 15).
68
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There were no disagreements on accounting and financial disclosure matters
between the Company and its independent accountants during 1997.
P A R T III
Item 10. Directors and Executive Officers of the Registrant
Directors
Set forth below is certain biographical information relating to the members of
the Company's Board of Directors. Each director is elected annually. The
information includes principal occupation, age, the year first elected a
director of the Company, and other directorships. There are no family
relationships among the directors.
John R. H. Bond, age 56, Chairman of the Company and the Bank since January 1,
1997 and Group Chief Executive Officer of HSBC since 1993. Formerly President
and Chief Executive Officer of the Company and the Bank from 1991 through
1992. Previously Executive Director Banking, HongkongBank from 1990 to 1991
and Executive Director Americas from 1988 to 1990. Mr. Bond is director and
Chairman of HSBC Finance (Netherlands) Limited, Chairman of Midland Bank plc,
and a director of HSBC, HongkongBank, the London Stock Exchange, Saudi British
Bank and Orange plc. Elected in 1987.
I. Malcolm Burnett, age 50, President and Chief Executive Officer of the
Company and the Bank from January 1998 and director of the Bank since 1996.
Formerly Chief Operating Officer of the Bank since 1992. He joined the HSBC
Group in 1966 and has served in various positions in the United Kingdom, Hong
Kong, India, Indonesia and the Solomon Islands. Prior to joining the Bank he
was Chief Operating Officer of HongkongBank Singapore, a position held since
1989. Mr. Burnett is also a director of HSBC Markets Holdings (USA), Inc. and
VISA U.S.A. Incorporated. Elected in 1997.
James H. Cleave, age 55, formerly President and Chief Executive Officer of the
Company and the Bank from 1992 through 1997 and formerly Executive Director
from June 1992 through December 1992. Previously Director, President and
Chief Executive Officer of Hongkong Bank of Canada since 1987. Mr. Cleave is
also Chairman of Hongkong Bank of Canada and a director of the Bank. Elected
in 1991.
Youssef A. Nasr, age 43, Director, President and Chief Executive Officer of
Hongkong Bank of Canada since January 1998. Previously he was Deputy Chief
Executive and he has held various executive positions with Hongkong Bank of
Canada since 1990. He has been a member of the HSBC Group since 1976.
Elected February 1, 1998.
Sir William Purves, age 66, Chairman, HSBC. Formerly Chairman and Chief
Executive Officer, HSBC, from 1990 to 1992. Formerly Chairman and Chief
Executive Officer, Deputy Chairman, Executive Director Banking and General
Manager International, HongkongBank. Sir William is Chairman of The British
Bank of the Middle East. He is a director of HongkongBank, Midland Bank plc,
The "Shell" Transport and Trading Company, plc and The East Asiatic Company
Ltd. Elected in 1984.
69
Directors' Compensation
Directors who are employees of the Company, HSBC or other group affiliates do
not receive compensation for their services as Company directors. The
Directors' Retirement Plan covers nonemployee directors of the Company except
those serving as directors at the request of HSBC. Currently no active
directors participate in this Plan.
<TABLE>
<CAPTION>
Executive Officers
The table below shows the names and ages of all executive officers of the
Company and the positions held by them as of February 27, 1998 and the dates
when elected an executive officer of the Company or the Bank.
- -------------------------------------------------------------------------------
Year
Name Age Elected Present Position with the Company
- -------------------------------------------------------------------------------
<S> <C> <C> <S>
I. Malcolm Burnett 50 1998 President and Chief Executive Officer
Robert B. Engel 44 1994 Chief Banking Officer
Robert H. Muth 45 1993 Chief Administrative Officer
Colin L. Bamford 55 1995 Senior Executive Vice President
Robert M. Butcher 54 1988 Executive Vice President &
Chief Financial Officer
Vincent J. Mancuso 51 1996 Executive Vice President &
Group Audit Executive, USA
Paul E. Martin 45 1998 Executive Vice President &
Chief Credit Officer
Gerald A. Ronning 50 1991 Executive Vice President & Controller
Philip S. Toohey 54 1990 Legal Advisor, Americas and Secretary
- --------------------------------------------------------------------------------
</TABLE>
Colin L. Bamford joined the Company as Senior Executive Vice President in
1995. Mr. Bamford had been Chief Executive Officer, HongkongBank Japan since
1990.
Robert H. Muth joined the Bank and the Company as Senior Executive Vice
President, Operations in 1993. Mr. Muth had been Vice President, Operations
Hongkong Bank of Canada since 1991 and previously Senior Manager, Operations,
HSBC Hong Kong since 1989.
All other executive officers have served the Company or the Bank in executive
capacities for more than five years. There are no family relationships among
the above officers.
70
Item 11. Executive Compensation
The following table sets forth information as to the compensation earned
through December 31, 1997 by James H. Cleave, President and Chief Executive
Officer and by the four most highly compensated officers of the Company and
the Bank. Two executive officers have been seconded to the Bank by HSBC,
which pays their salary and other benefits pursuant to arrangements applicable
to international HSBC officers. The two officers are: I. Malcolm Burnett,
Chief Operating Officer and John A.D. Hamilton, Executive Vice President,
Information Technology. The Bank reimbursed HSBC for the salary and certain
benefits paid to these officers and that reimbursement amounted to $1,529,089.
<TABLE>
<CAPTION>
Summary Compensation Table
- ------------------------------------------------------------------------------------------------
Annual Compensation All
Name and Other
Principal Position Year Salary Bonus Other Compensation
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
James H. Cleave 1997 $729,769 $800,000 $172,340 $26,391
President and 1996 700,000 650,000 167,396 26,000
Chief Executive Officer 1995 660,000 550,000 178,319 24,000
Colin L. Bamford 1997 308,668 25,751 53,034 -
Senior Executive Vice President 1996 300,014 25,001 52,112 -
1995 60,003 - 9,605 -
Robert M. Butcher 1997 307,015 184,250 9,315 6,844
Executive Vice President & 1996 300,554 144,775 9,165 5,960
Chief Financial Officer 1995 295,042 127,000 9,629 5,926
Robert H. Muth 1997 231,985 135,025 4,588 9,194
Chief Administrative Officer 1996 202,573 104,600 3,561 7,595
1995 193,790 80,425 3,826 6,800
Philip S. Toohey 1997 228,110 146,925 9,315 7,600
Legal Advisor, Americas and 1996 221,635 91,775 9,165 6,800
Secretary 1995 199,490 79,650 9,629 6,600
- ------------------------------------------------------------------------------------------------
</TABLE>
Other Annual Compensation for Mr. Cleave includes $131,286, $128,434, and
$109,917 for 1997, 1996 and 1995, respectively, received for housing allowance
together with miscellaneous other benefit payments. Mr. Bamford's Other
Annual Compensation includes housing supplements of $44,450, $46,167 and
$8,400 in 1997, 1996 and 1995, respectively. Other Annual Compensation for
the other named executives includes health and insurance benefits.
Amounts reported as All Other Compensation include the Company's contributions
to its 401(k) plan and a four percent credit on salary deferred under the
Company's deferred salary plan. Since deferred salary is not eligible for the
company matching contributions under the 401(k) plan, salary deferrals are
increased by four percent, which is the maximum matching contribution
available under the 401(k) plan. HSBC secondees to the Company do not
participate in these benefit plans.
HSBC has granted options on HSBC common stock to the named executives.
Options were granted on March 24, 1997, exercisable beginning March 24, 2000
conditional upon the growth in earnings per share of HSBC over the three year
period and expiring March 24, 2007.
<TABLE>
<CAPTION>
The following table shows the estimated annual retirement benefit payable upon
normal retirement on a straight life annuity basis to participating employees,
including officers, in the compensation and years of service classifications
indicated under the Company's retirement plans which cover most officers and
71
employees on a non-contributory basis. The amounts shown are before
application of social security reductions. Years of service credited for
benefit purposes is limited to 30 years in the aggregate.
- --------------------------------------------------------------------------------------------------------
Five-Year Average Estimated Annual Retirement Benefits for Representative Years of Credited Service
Compensation 15 20 25 30 35
- --------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
$125,000 $ 36,938 $ 49,438 $ 61,938 $ 74,438 $ 74,750
150,000 44,325 59,325 74,325 89,325 89,700
175,000 51,713 69,213 86,713 104,213 104,650
200,000 59,100 79,100 99,100 119,100 119,600
225,000 66,488 88,988 111,488 133,988 134,550
250,000 73,875 98,875 123,875 148,875 149,500
300,000 88,650 118,650 148,650 178,650 179,400
350,000 103,425 138,425 173,425 208,425 209,300
400,000 118,200 158,200 198,200 238,200 239,200
450,000 132,975 177,975 222,975 267,975 269,100
500,000 147,750 197,750 247,750 297,750 299,000
600,000 177,300 237,300 297,300 357,300 358,800
- --------------------------------------------------------------------------------------------------------
</TABLE>
The Pension Plan is a non-contributory defined benefit pension plan under
which the Bank and other participating subsidiaries of the Company make
contributions in actuarially determined amounts. Compensation covered by the
Pension Plan includes regular basic earnings (including salary reduction
contributions to the 401(k) plan), but not incentive awards, bonuses, special
payments or deferred salary. The Company maintains supplemental benefit plans
which provide for the difference between the benefits actually payable under
the Pension Plan and those that would have been payable if certain other
awards, special payments and deferred salaries were taken into account and if
compensation in excess of the limitations set by the Internal Revenue Code
could be counted. Payments under these plans are unfunded and will be made
out of the general funds of the Bank or other participating subsidiaries. The
calculation of retirement benefits is based on the highest five-consecutive
year compensation.
Members of the Senior Management Committee of the Bank receive two times their
normal credited service for each year and fraction thereof served as a
committee member in determining pension and severance benefits to a maximum of
30 years of credited service in total. This additional service accrual is
unfunded and payments will be made from the general funds of the Bank or other
subsidiaries. As of December 31, 1997, the individuals listed in the Summary
Compensation Table, with the exception of Mr. Bamford who is not a member of
the Senior Management Committee, have total years of credited service in
determining benefits payable under the plans as follows: Mr. Cleave, 11.2;
Mr. Butcher, 17.7; Mr. Muth, 9.5; Mr. Toohey, 18.5. Mr. Bamford has 2.2 years
of credited service. HSBC secondees to the Company do not participate in the
retirement plans.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Principal Holder of Securities
The Company is 100 percent owned by HSBC Holdings B.V. HSBC Holdings B.V. is
an indirect wholly owned subsidiary of HSBC Holdings plc.
Messrs. Purves and Bond are officers and directors of HSBC.
None of the directors or executive officers owned any of the Company's common
stock at December 31, 1997.
72
Item 13. Certain Relationships and Related Transactions
Directors and officers of the Company, members of their immediate families and
HSBC and its affiliates were customers of, and had transactions with, the
Company, the Bank and other subsidiaries of the Company in the ordinary course
of business during 1997. Similar transactions in the ordinary course of
business may be expected to take place in the future.
All loans to executive officers and directors and members of their immediate
families and to HSBC and its affiliates were made on substantially the same
terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons and did not involve more
than normal risk of collectibility or present other unfavorable features.
73
P A R T I V
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
A
1. and 2. Financial Statements and Schedules
The following financial statements and schedules of the Company and
its subsidiaries are included in Item 8:
Report of Independent Auditors
HSBC Americas, Inc.:
Consolidated Balance Sheet
Consolidated Statement of Income
Consolidated Statement of Changes in Shareholders' Equity
Consolidated Statement of Cash Flows
Marine Midland Bank:
Consolidated Balance Sheet
Summary of Significant Accounting Policies
Notes to Financial Statements
3. Exhibits
3 a Registrant's Restated Certificate of Incorporation and
Amendments Thereto
b Registrant's By-Laws, as Amended to Date
4 Instruments Defining the Rights of Security Holders, Including
Indentures
Registrant has previously filed with the Commission as Exhibits
to various registration statements and periodic reports the
Restated Certificate of Incorporation, as amended, By-Laws and
all Indentures and other Instruments Defining the Rights of
Security Holders
22 Subsidiaries of the Registrant
The Company's only significant subsidiary, as defined, is Marine
Midland Bank, a state bank organized under the laws of New York
State.
23 Consent of independent accountants
B
Reports on Form 8-K
None
74
S I G N A T U R E S
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
HSBC Americas, Inc.
Registrant
/s/ Philip S. Toohey
Philip S. Toohey
Legal Advisor, Americas
and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed on February 27, 1998 by the following persons on behalf
of the Registrant and in the capacities indicated:
John R. H. Bond*
/s/ Robert M. Butcher Chairman of the Board
I. Malcolm Burnett*
Robert M. Butcher Director, President & Chief Executive Officer
Executive Vice President & James H. Cleave* Director
Chief Financial Officer Youssef A. Nasr* Director
(Principal Financial Officer) William Purves* Director
/s/ Gerald A. Ronning
Gerald A. Ronning
Executive Vice President &
Controller
(Principal Accounting Officer)
*/s/ Philip S. Toohey
Philip S. Toohey
Attorney-in-fact
75
Exhibit 23
The Board of Directors
HSBC Americas, Inc.:
We consent to incorporation by reference in the registration statement (No.
333-5801) on Form S-3 of HSBC Americas, Inc. of our report dated January 23,
1998, relating to the consolidated balance sheets of HSBC Americas, Inc. and
subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of income, changes in shareholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1997, and the
consolidated balance sheets of Marine Midland Bank and subsidiaries as of
December 31, 1997 and 1996, which report appears in the December 31, 1997
annual report on Form 10-K of HSBC Americas, Inc.
/s/ KPMG PEAT MARWICK LLP
Buffalo, New York
March 25, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 929
<INT-BEARING-DEPOSITS> 2,643
<FED-FUNDS-SOLD> 498
<TRADING-ASSETS> 979
<INVESTMENTS-HELD-FOR-SALE> 3,999
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 21,622
<ALLOWANCE> 409
<TOTAL-ASSETS> 31,518
<DEPOSITS> 22,817
<SHORT-TERM> 4,202
<LIABILITIES-OTHER> 752
<LONG-TERM> 1,308
400
0
<COMMON> 0
<OTHER-SE> 2,039
<TOTAL-LIABILITIES-AND-EQUITY> 31,518
<INTEREST-LOAN> 1,733
<INTEREST-INVEST> 219
<INTEREST-OTHER> 209
<INTEREST-TOTAL> 2,161
<INTEREST-DEPOSIT> 679
<INTEREST-EXPENSE> 988
<INTEREST-INCOME-NET> 1,173
<LOAN-LOSSES> 87
<SECURITIES-GAINS> 17
<EXPENSE-OTHER> 781
<INCOME-PRETAX> 664
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 471
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 4.31
<LOANS-NON> 311
<LOANS-PAST> 57
<LOANS-TROUBLED> 6
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 418
<CHARGE-OFFS> 187
<RECOVERIES> 50
<ALLOWANCE-CLOSE> 409
<ALLOWANCE-DOMESTIC> 191
<ALLOWANCE-FOREIGN> 26
<ALLOWANCE-UNALLOCATED> 192
</TABLE>
