CONFORMED 1.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1999 Commission file number 1-2940
HSBC USA Inc.
(Exact name of registrant as specified in its charter)
Delaware Corporation 22-1093160
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One HSBC Center, Buffalo, N.Y. 14203
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (716) 841-2424
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
All voting stock (1,001 shares of Common Stock, $5 par value) is owned by HSBC
Holdings B.V., an indirect wholly owned subsidiary of HSBC Holdings plc.
This report includes a total of 19 pages.
2.
Part I - FINANCIAL INFORMATION
Page
Item 1 - Financial Statements
Consolidated Balance Sheet
September 30, 1999 and December 31, 1998 3
Consolidated Statement of Income
For The Quarter and Nine Months
Ended September 30, 1999 and 1998 4
Consolidated Statement of Changes in
Shareholders' Equity For The Nine Months
Ended September 30, 1999 and 1998 5
Consolidated Statement of Cash Flows
For The Nine Months Ended
September 30, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Part II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 17
Signatures 18
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3.
HSBC USA Inc.
- -------------------------------------------------------------------------------
C O N S O L I D A T E D B A L A N C E S H E E T
September 30, December 31,
1999 1998
- -------------------------------------------------------------------------------
in thousands
<S> <C> <C>
Assets
Cash and due from banks $ 866,729 $ 1,262,423
Interest bearing deposits with banks 2,291,434 2,373,550
Federal funds sold and securities
purchased under resale agreements 2,141,850 86,919
Trading assets 979,022 826,019
Securities available for sale 3,308,207 4,237,679
Loans 23,540,623 24,049,499
Less - allowance for credit losses 368,269 379,652
- -------------------------------------------------------------------------------
Loans, net 23,172,354 23,669,847
Premises and equipment 197,756 207,685
Accrued interest receivable 211,102 238,790
Intangible assets 482,189 469,194
Other assets 725,921 571,980
- -------------------------------------------------------------------------------
Total assets $ 34,376,564 $ 33,944,086
===============================================================================
Liabilities
Deposits in domestic offices
Noninterest bearing $ 2,848,582 $ 3,552,303
Interest bearing 19,125,207 18,168,438
Interest bearing deposits in foreign offices 4,758,157 4,545,069
- -------------------------------------------------------------------------------
Total deposits 26,731,946 26,265,810
Short-term borrowings 2,637,405 2,961,063
Interest, taxes and other liabilities 808,457 741,269
Long-term debt 1,845,876 1,747,691
- -------------------------------------------------------------------------------
Total liabilities 32,023,684 31,715,833
- -------------------------------------------------------------------------------
Shareholders' equity
Preferred stock - -
Common stock 5 5
Capital surplus 1,809,149 1,806,563
Retained earnings 572,010 377,179
Accumulated other comprehensive income (loss) (28,284) 44,506
- -------------------------------------------------------------------------------
Total shareholders' equity 2,352,880 2,228,253
- -------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 34,376,564 $ 33,944,086
===============================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
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4.
HSBC USA Inc.
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C O N S O L I D A T E D S T A T E M E N T O F I N C O M E
Quarter ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
- ----------------------------------------------------------------------------------
in thousands
<S> <C> <C> <C> <C>
Interest income
Loans $ 456,846 $ 440,269 $ 1,379,579 $ 1,335,644
Securities 50,308 55,764 163,009 171,325
Trading assets 13,327 12,003 35,824 38,283
Deposits with banks 18,316 31,346 70,121 88,908
Federal funds sold and
securities purchased
under resale agreements 41,285 54,531 82,797 115,903
- ----------------------------------------------------------------------------------
Total interest income 580,082 593,913 1,731,330 1,750,063
- ----------------------------------------------------------------------------------
Interest expense
Deposits
In domestic offices 157,530 166,593 469,714 494,406
In foreign offices 58,061 66,460 155,741 154,495
Short-term borrowings 31,325 50,785 101,076 158,505
Long-term debt 27,657 22,266 81,104 72,614
- ----------------------------------------------------------------------------------
Total interest expense 274,573 306,104 807,635 880,020
- ----------------------------------------------------------------------------------
Net interest income 305,509 287,809 923,695 870,043
Provision for credit losses 22,500 20,000 67,500 59,000
- ----------------------------------------------------------------------------------
Net interest income, after
provision for credit losses 283,009 267,809 856,195 811,043
- ----------------------------------------------------------------------------------
Other operating income
Trust income 12,554 11,885 38,662 35,042
Service charges 33,205 28,746 92,914 85,230
Mortgage servicing revenue 6,086 11,518 26,076 35,429
Other fees and commissions 41,933 36,704 122,972 107,455
Trading revenues 1,801 1,385 7,277 5,545
Other income 12,531 11,825 50,704 61,354
- ----------------------------------------------------------------------------------
Total other operating income 108,110 102,063 338,605 330,055
- ----------------------------------------------------------------------------------
391,119 369,872 1,194,800 1,141,098
- ----------------------------------------------------------------------------------
Other operating expenses
Salaries and employee benefits 110,011 104,959 319,421 306,920
Net occupancy expense 23,051 23,106 67,314 66,945
Other expenses 67,297 64,629 223,984 206,195
- ----------------------------------------------------------------------------------
Total other operating expenses 200,359 192,694 610,719 580,060
- ----------------------------------------------------------------------------------
Income before taxes 190,760 177,178 584,081 561,038
Applicable income tax expense 75,850 58,100 234,250 192,600
- ----------------------------------------------------------------------------------
Net income $ 114,910 $ 119,078 $ 349,831 $ 368,438
==================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
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5.
HSBC USA Inc.
- -------------------------------------------------------------------------------------------
C O N S O L I D A T E D S T A T E M E N T O F C H A N G E S
I N S H A R E H O L D E R S' E Q U I T Y
Nine months ended September 30,
1999 1998
- -------------------------------------------------------------------------------------------
Share- Compre- Share- Compre-
holders' hensive holders' hensive
Equity Income Equity Income
- -------------------------------------------------------------------------------------------
in thousands
<S> <C> <C> <C> <C>
Common stock
Balance, January 1, $ 5 $ 5
- ------------------------------------------------------------ ----------
Balance, September 30, 5 5
- ------------------------------------------------------------ ----------
Capital surplus
Balance, January 1, 1,806,563 1,804,527
Capital contribution from parent 2,586 1,340
- ------------------------------------------------------------ ----------
Balance, September 30, 1,809,149 1,805,867
- ------------------------------------------------------------ ----------
Retained earnings
Balance, January 1, 377,179 205,112
Net income 349,831 $ 349,831 368,438 $ 368,438
Cash dividends declared on common stock (155,000) (355,000)
- ------------------------------------------------------------ ----------
Balance, September 30, 572,010 218,550
- ------------------------------------------------------------ ----------
Accumulated other comprehensive income (loss)
Balance, January 1, 44,506 29,309
Net unrealized gains (losses) arising during
the period, less taxes of ($37,174) and $23,226
in 1999 and 1998, respectively (68,083) 42,796
Reclassification adjustment for net gains
included in net income, less taxes of $2,534 and
$3,693 in 1999 and 1998, respectively (4,707) (6,858)
Change in net unrealized gains on securities
available for sale, net of taxes (72,790) 35,938
--------- --------
Comprehensive income $ 277,041 $ 404,376
- ------------------------------------------------------------ ========= --------- =========
Balance, September 30, (28,284) 65,247
- ------------------------------------------------------------ ----------
Total shareholders' equity, September 30, $2,352,880 $2,089,669
============================================================ ==========
The accompanying notes are an integral part of the consolidated financial
statements.
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6.
HSBC USA Inc.
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C O N S O L I D A T E D S T A T E M E N T O F C A S H F L O W S
Nine months ended September 30,
1999 1998
- --------------------------------------------------------------------------------------
in thousands
<S> <C> <C>
Cash flows from operating activities
Net income $ 349,831 $ 368,438
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, amortization and deferred taxes 43,303 72,253
Provision for credit losses 67,500 59,000
Net change in other accrual accounts 91,583 (128,295)
Net change in loans originated for sale 789,980 (328,621)
Net change in trading assets (146,688) 68,448
Other, net (65,219) (96,402)
- --------------------------------------------------------------------------------------
Net cash provided by operating activities 1,130,290 14,821
- --------------------------------------------------------------------------------------
Cash flows from investing activities
Net change in interest bearing deposits with banks 106,034 (1,193,328)
Net change in short-term investments (2,054,931) (1,136,548)
Purchases of securities (1,900,500) (1,652,493)
Sales of securities 1,953,629 1,222,732
Maturities of securities 796,194 712,046
Sales of credit card portfolios - 395,148
Other net changes in credit card receivables (15,617) 56,500
Net change in other short-term loans 202,857 (31,070)
Net originations and maturities of long-term loans (471,907) 421,473
Expenditures for premises and equipment (20,910) (11,995)
Cash used in acquisitions, net of cash acquired (8,787) -
Other, net (118,345) (69,022)
- --------------------------------------------------------------------------------------
Net cash used by investing activities (1,532,283) (1,286,557)
- --------------------------------------------------------------------------------------
Cash flows from financing activities
Net change in deposits 385,882 2,841,123
Net change in short-term borrowings (323,658) (786,445)
Issuance of long-term debt 200,132 -
Repayment of long-term debt (101,057) (408,957)
Dividends paid (155,000) (365,000)
- --------------------------------------------------------------------------------------
Net cash provided by financing activities 6,299 1,280,721
- --------------------------------------------------------------------------------------
Net change in cash and due from banks (395,694) 8,985
Cash and due from banks at beginning of period 1,262,423 928,691
- --------------------------------------------------------------------------------------
Cash and due from banks at end of period $ 866,729 $ 937,676
======================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
7.
Notes to Consolidated Financial Statements
1. Basis of Presentation
The accounting and reporting policies of HSBC USA Inc. (the Company) and its
subsidiaries including its principal subsidiary, HSBC Bank USA conform to
generally accepted accounting principles and to predominant practice within
the banking industry. Such policies are consistent with those applied in the
presentation of the Company's annual financial statements.
The interim financial information in this report has not been audited. In the
opinion of the Company's management, all adjustments necessary for a fair
presentation of financial position, results of operations and cash flows for
the interim periods have been made. The interim financial information should
be read in conjunction with the 1998 Annual Report on Form 10-K.
2. Derivative Financial Instruments
The Company uses a variety of derivative instruments to manage interest rate
risk. These derivative instruments follow either the synthetic alteration or
hedge model of accounting. Interest rate risk is managed by achieving a mix
of derivative instruments and balance sheet assets and liabilities deemed
consistent and desirable given expectations of interest rate movements,
balance sheet changes and risk management strategies.
Under the synthetic alteration accounting model, the related derivative
contract must be linked to specific individual assets or liabilities or pools
of similar balance sheet assets or liabilities by the notional and interest
rate risk characteristics of the associated instruments.
Under the hedge accounting model, the related derivative likewise is linked to
specific individual or pools of similar balance sheet assets or liabilities by
the notional and interest rate risk characteristics of the associated
instruments.
In addition, 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 derivative
will substantially offset the effects of price or interest rate movement on
the hedged item.
To the extent these criteria are satisfied, the derivative contract is
accounted for on a basis consistent with that of the underlying hedged item.
For a derivative financial instrument synthetically altering an asset or
liability accounted for on an historical cost basis, accrual based accounting
is applied. Specifically, income or expense is recognized and accrued to the
next settlement date in accordance with the contractual terms of the agreement
as an adjustment to the income or expense associated with the underlying
balance sheet position. The derivative position would not be marked to
market. Derivative instruments that are entered into for the purpose of
generating trading revenues are accounted for on a mark to market basis.
Associated income and expense is recognized as trading revenue. For
derivatives linked to securities classified as available for sale, the mark to
market is considered a component of the market value of the related securities
and is recorded through shareholders' equity consistent with the valuation of
the assets. Derivatives used to limit the potential for loss associated with
the valuation of mortgage servicing rights are also considered in the
valuation of the related asset.
8.
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 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.
3. Pledged Financial Instruments
At September 30, 1999, securities, loans and other assets carried at $3.8
billion were pledged as collateral for borrowings, to secure public and trust
deposits and for other purposes.
4. Business Segments
The Company has four distinct segments that it utilizes for management
reporting and analysis purposes. These segments are described in the
Company's 1998 Annual Report on Form 10-K. The segment results show the
financial performance of the major business units. These results are
determined based on the Company's management accounting process, which assigns
balance sheet, revenue and expense items to each reportable business unit on a
systematic basis. With respect to segment results, management does not
analyze depreciation and amortization expense or expenditures for additions to
long-lived assets which are not considered significant. As such, these
amounts are included in other expenses and average assets, respectively, in
the table.
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Segments
-------------------------------------------
Corporate
Commercial Mortgage Personal and
Banking Banking Banking Treasury Other Total
- ---------------------------------------------------------------------------------------------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Nine months ended
September 30, 1999
Net interest income $ 304 $ 68 $ 419 $ 17 $ 116 $ 924
Other operating income 120 32 170 2 14 338
Total income 424 100 589 19 130 1,262
Provision for credit losses 26 (2) 58 - (15) 67
Other expenses 187 45 347 6 26 611
Pretax income 211 57 184 13 119 584
Average assets 11,734 8,457 4,028 4,805 5,016 34,040
Average liabilities & equity 6,688 334 15,032 6,476 5,510 34,040
Nine months ended
September 30, 1998
Net interest income $ 256 $ 55 $ 425 $ 13 $ 121 $ 870
Other operating income 97 43 164 4 22 330
Total income 353 98 589 17 143 1,200
Provision for credit losses - (13) 53 - 19 59
Other expenses 157 39 328 7 49 580
Pretax income 196 72 208 10 75 561
Average assets 8,800 8,584 4,385 5,743 5,062 32,574
Average liabilities & equity 5,676 328 14,714 6,679 5,177 32,574
- ---------------------------------------------------------------------------------------------
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9.
5. New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (FAS 133). FAS 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that all derivatives be recognized as either assets or liabilities in
the balance sheet and that those instruments be measured at fair value. The
accounting for changes in the fair value of a derivative (that is, gains and
losses) depends on the intended use of the derivative and the resulting
designation as described below.
- - For a derivative designated as hedging the exposures to changes in the fair
value of a recognized asset or liability or a firm commitment, the gain or
loss is recognized in earnings in the period of change together with the
offsetting loss or gain on the hedged item attributable to the risk being
hedged.
- - For a derivative designated as hedging the exposure to variable cash flows,
the derivatives gain or loss associated with the effective portion of the
hedge is initially reported as a component of other comprehensive income
and subsequently reclassified into earnings when the forecasted transaction
affects earnings. The ineffective portion is reported in earnings
immediately.
- - For a derivative not designated as a hedging instrument, the gain or loss
is recognized in earnings in the period of change in fair value.
FAS 133 is effective for the Company beginning January 1, 2001. The Company
is in the process of evaluating the potential impact of FAS 133 including
reconsidering the Company's risk management strategies.
10.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
HSBC USA Inc. (the Company) reported pretax income of $190.8 million and
$584.1 million for the third quarter and first nine months of 1999,
respectively. This compared with pretax income of $177.2 million and $561.0
million for the third quarter and first nine months of 1998. The Company's
third quarter net income was $114.9 million, compared with a $119.1 million in
the 1998 third quarter. For the first nine months of 1999, net income was
$349.8 million, compared with $368.4 million for the first nine months of last
year.
Net Interest Income
Net interest income for the third quarter of 1999 was $305.5 million compared
with $287.8 million for the third quarter of 1998. For the first nine months
of 1999, net interest income was $923.7 million compared with $870.0 million
for the first nine months of 1998.
Interest income was $580.1 million in the third quarter of 1999 compared with
$593.9 million in the third quarter of 1998. Average earning assets of $32.0
billion for the third quarter of 1999 were approximately the same level as a
year ago. The average rate earned on earning assets was 7.19% for the third
quarter of 1999 compared with 7.47% a year ago. Interest income was $1,731.3
million for the first nine months of 1999 compared with $1,750.0 million in
the first nine months of 1998. Average earning assets of $31.8 billion for
the first nine months of 1999 were 3.9% higher than the first nine months of
1998. The average rate earned on earning assets was 7.28% for the first nine
months of 1999 compared with 7.65% a year ago.
Interest expense for the third quarter of 1999 was $274.6 million compared
with $306.1 million in the third quarter of 1998. Average interest bearing
liabilities for the third quarter of 1999 were $28.0 billion, 3.7% higher than
a year ago. The average rate paid on interest bearing liabilities was 3.90%
compared with 4.51% a year ago. Interest expense for the first nine months of
1999 was $807.6 million compared with $880.0 million in the first nine months
of 1998. Average interest bearing liabilities for the first nine months of
1999 were $27.9 billion, 7.1% higher than a year ago. The average rate paid
on interest bearing liabilities was 3.87% for the first nine months of 1999
compared with 4.52% a year ago.
The taxable equivalent net yield on average total assets for the third quarter
of 1999 was 3.55%, compared with 3.41% a year ago. The taxable equivalent net
yield on average total assets for the first nine months of 1999 was 3.63%,
compared with 3.58% a year ago. The positive impact of higher levels of
commercial loans and lower rates paid on deposit and wholesale liabilities
were partially offset by lower rates earned on loans (prime rate decreased 25
basis points) and wholesale/treasury assets.
Other Operating Income
For the third quarter of 1999, total other operating income was $108.1
million, compared with $102.1 million in the 1998 third quarter. For the first
nine months of 1999, total other operating income was $338.6 million, compared
with $330.1 million for the first nine months of 1998. Other operating income
continues to benefit from increases in service charges and commissions on the
sale of mutual funds and securities. Other income for the first nine months
of 1999 included a gain of $15.0 on the sale of a student loan business
compared with the first nine months of 1998 which included gains of $28.1
million on the sales of selected credit card portfolios.
11.
Other Operating Expenses
Other operating expenses were $200.4 million in the 1999 third quarter
compared with $192.7 million for the 1998 third quarter. Other operating
expenses were $610.7 million for the first nine months of 1999 compared with
$580.1 million a year ago. Operating costs associated with the commercial
loan portfolio acquired from The Hongkong and Shanghai Banking Corporation
Limited late in 1998 and expenses related to strategic business initiatives
accounted for increased operating costs. The cost:income ratio was 48.4% in
the third quarter of 1999 and 48.4% for the first nine months of 1999,
compared with 49.4% and 48.3% for the same periods of 1998, respectively.
Year 2000 Readiness Disclosure
The Company recognizes that with the approach of the new millennium the
inability of information technology (IT) and other systems around the world to
recognize the date change from December 31, 1999 to January 1, 2000 could pose
significant issues. The Company has assessed the impact of Year 2000 and does
not expect either its operations or service to customers to be significantly
disrupted as a result of its systems not being Year 2000 compliant. Steering
committees have been formed in all the key business units and progress on the
Year 2000 compliance program is reported to the Board of Directors at each
meeting.
The Year 2000 Program involves testing all the Company's relevant systems to
ensure that they are Year 2000 compliant and seeking confirmation from
suppliers and service providers that their products and services are Year 2000
compliant. The Company is also assessing its customers' commitment to
achieving compliance and is providing information and assistance to help
customers understand the risks and issues. Relevant credit and investment
policies have been revised and relationship managers trained to ensure that
Year 2000 risks are taken account of in credit and investment evaluations.
All lines of program code in the Company's computer systems have already been
reviewed for Year 2000 compliance and the required amendments or replacements
have been made. As of September 30, 1999 all mission critical systems have
been tested and are in use. In other areas of IT, the Company is reviewing
its end-user computing applications, networks, centralized data systems, and
the desktop environment for Year 2000 compliance. Substantially all of the
end-user computing applications and inventory items related to the Company's
networks have already been made compliant. The program to ensure the hardware
and software elements of the data center systems have been made Year 2000
compliant is complete.
The Company evaluated the potential effect of the Year 2000 on its non-IT
systems, including its facilities and other business processes. The Company's
facilities and related systems are now compliant.
Revisions to Company-wide business contingency plans have been finalized to
address the perceived risks associated with the arrival of the Year 2000.
These plans include mitigating the effects of any failure to complete remedial
work on critical business systems, business resumption contingency plans to
address the possibility of systems failure, and market resumption contingency
plans to address the possibility of the failure of systems or processes
outside the Company's control. The Company is, however, unable to predict the
effect if any of the efforts to address the Year 2000 problem fail.
Lack of readiness on the part of third parties could expose the Company to the
potential for loss, impairment of business processes and activities, and
disruption of financial markets. The Company has been actively communicating
with third parties concerning the status of their Year 2000 readiness. An
12.
inventory of the status of all vendors and suppliers has been completed and
their products and services have been tested for Year 2000 compliance.
Information received from third parties is being analyzed as part of the
process of evaluating options and mitigating third-party risk.
The Company estimated the total cost of the project to be $60 million,
including $10 million relating to non-IT projects. Approximately $57.4
million has been incurred to date for the total project, including $10.6
million in the first nine months of 1999. These costs include estimated
capitalizable costs of $15.5 million for upgrading personal computers and
replacing software, including $3.8 million incurred in 1999. No material
incremental costs were incurred in any single period as generally the costs
represented the redeployment of existing IT resources. Although the
redeployment has resulted in deferral of some IT projects and the acceleration
of others, the Company does not expect the deferrals to have a material effect
on its financial position or results of operations.
Income Taxes
The effective rate was 40% in the first nine months of 1999 compared with 34%
in the first nine months of 1998. Tax loss carryforwards which had led to
reduced tax charges in the past have been generally utilized, causing the
effective tax rate to rise toward the statutory rate.
The net deferred tax asset at September 30, 1999 was $100 million, compared
with $59 million at December 31, 1998.
<TABLE>
<CAPTION>
Asset Quality
The following tables provide a summary of the allowance for credit losses and
nonperforming assets.
3rd 3rd 9 Months Year 9 Months
Quarter Quarter Ended Ended Ended
1999 1998 9/30/99 12/31/98 9/30/98
---- ---- ------- -------- -------
(in millions)
<S> <C> <C> <C> <C> <C>
Allowance for Credit Losses
Balance at beginning of period $371.6 $406.2 $379.7 $409.4 $409.4
Allowance related to acquired
companies - - 1.1 - -
Provision charged to income 22.5 20.0 67.5 80.0 59.0
Net charge offs 25.8 23.5 80.0 109.7 65.7
----- ----- ----- ----- -----
Balance at end of period $368.3 $402.7 $368.3 $379.7 $402.7
===== ===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1999 1998 1998
---- ---- ----
(in millions)
<S> <C> <C> <C>
Nonaccruing Loans
Balance at end of period $293.9 $336.8 $287.9
As a percent of loans outstanding 1.25% 1.40% 1.37%
Nonperforming Loans and Assets*
Balance at end of period $296.2 $345.6 $301.3
As a percent of total assets .86% 1.02% .90%
Allowance Ratios
Allowance for credit losses as
a percent of:
Loans 1.56% 1.58% 1.91%
Nonaccruing loans 125.32 112.74 139.85
* Includes nonaccruing loans, other real estate and other owned assets.
</TABLE>
Provisions for credit losses were $22.5 million in the third quarter of 1999
compared with $20.0 million in the third quarter of 1998. Provisions for
credit losses for the first nine months of 1999 were $67.5 million compared
with $59.0 million during the first nine months of 1998. Net charge offs in
13.
the credit card portfolio were $56.5 million and $65.8 million in the first
nine months of 1999 and 1998, respectively. The delinquency rate for the
credit card portfolio was 3.58% at September 30, 1999, compared with 3.91% at
December 31, 1998 and 4.34% at September 30, 1998. Commercial loan credit
quality resulted in net charge-offs of $10.1 million in the first nine months
of 1999 compared with net recoveries of $10.7 million in the first nine months
of 1998.
The Federal Financial Institutions Examination Council revised its policy for
classification and charge offs for consumer installment credit including
residential mortgages. Certain revisions were implemented in June 1999. The
Company recognized charge offs associated with the revised policy of $5.3
million in the second quarter of 1999.
The Company identified impaired loans as defined by FAS 114 totaling $187
million at September 30, 1999, of which $93 million had a specific credit loss
allowance of $37 million. At December 31, 1998, impaired loans were $183
million, of which $81 million had a specific credit loss allowance of $32
million.
Derivative Financial Instruments
As principally an end-user of off-balance sheet financial instruments, the
Company uses various derivative financial instruments to manage its overall
interest rate risk and to reduce the risk associated with changes in the
income stream of certain on-balance sheet assets and liabilities. At
September 30, 1999, $12.1 billion notional value of such positions, with an
estimated positive fair value of approximately $17.0 million were outstanding.
At December 31, 1998, $12.4 billion notional value of such positions, with an
estimated positive fair value of $165.0 million were outstanding.
The Company also maintains various derivatives in its trading portfolio to
offset risk associated with changes in market value of certain trading assets,
and to satisfy the foreign currency requirements of retail customers. These
derivatives are carried at fair value. At September 30, 1999, $1.2 billion
notional value of such positions, with an estimated positive fair value of $.3
million were outstanding. At December 31, 1998, $.5 billion of notional value
of such positions, with a nominal fair value were outstanding.
The Company's credit risk associated with off-balance sheet positions is not
considered material, since almost all derivative contracts are executed with
counterparties affiliated through common ownership. Collateral is maintained
on these positions, the amount of which is consistent with the measurement of
exposure used in the risk-based capital ratio calculations under the banking
regulators' guidelines.
Liquidity
The Company maintains a strong liquidity position. The size and stability of
its deposit base are complemented by its maintenance of a surplus borrowing
capacity in the money markets, including the ability to issue additional
commercial paper and access unused lines of credit of $500 million at
September 30, 1999. Wholesale liabilities were $8.2 billion at September 30,
1999, compared with $8.0 billion at December 31, 1998. The Company also has
strong liquidity as a result of a high level of immediately saleable or
pledgeable assets including its securities available for sale portfolio,
mortgages and other assets.
14.
Capital
Shareholders' equity was $2.4 billion at September 30, 1999 compared with $2.2
billion at December 31, 1998.
Under risk-based capital guidelines, the Company's capital ratios were 9.69%
at the Tier 1 level and 13.57% at the total capital level at September 30,
1999. These ratios compare with 8.62% at the Tier 1 level and 12.04% at the
total capital level at December 31, 1998.
Under guidelines for leverage ratios, the Company's ratio of Tier 1 capital to
quarterly average total assets was 7.24% at September 30, 1999 compared with
6.76% at December 31, 1998.
Pending Acquisition
On May 10, 1999, HSBC Holdings plc, the ultimate parent of the Company
(Parent), Republic New York Corporation (Republic), and Safra Republic
Holdings S.A. (SRH), which is owned 49% by Republic, entered into a
Transaction Agreement and Plan of Merger. Republic is the parent corporation
of Republic National Bank of New York, which at December 31, 1998 had reported
total assets of $46.5 billion and 83 branches in New York State. In
accordance with the agreement, Republic will become a subsidiary of Parent and
Parent will offer to acquire all of the outstanding shares of SRH not already
owned by Republic. The pending acquisition, which is subject to required
approvals by Republic's stockholders and regulatory agencies, is expected to
close by the end of 1999.
Following the merger, it is expected that HSBC Bank USA will be merged with
Republic National Bank of New York. In addition, Parent may determine,
subject to regulatory approval, to combine certain other businesses of
Republic or SRH with those of the Company.
Forward-Looking Statements
This report includes forward-looking statements that involve inherent risks
and uncertainties. Statements that are not historical facts, including
statements about management's beliefs and expectations, are forward-looking
statements. A number of important factors could cause actual results to
differ materially from those contained in any forward-looking statements.
Such factors include, but are not limited to: sharp and/or rapid changes in
interest rates; significant changes in the economic conditions which could
materially change anticipated credit quality trends and the ability to
generate loans; technology changes and challenges such as Year 2000 systems
remediation as well as uncertainties relating to the ability of third parties
with whom the Company does business to address the Year 2000 issue in a timely
and adequate manner; significant changes in accounting, tax or regulatory
requirements; and competition in the geographic and business areas in which
the Company conducts its operations.
<TABLE>
<CAPTION>
15.
HSBC USA Inc.
- -----------------------------------------------------------------------------
CONSOLIDATED AVERAGE BALANCES AND INTEREST RATES*
Third Quarter 1999 Third Quarter 1998
Balance Interest Rate Balance Interest Rate
- -----------------------------------------------------------------------------
in millions
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest bearing deposits
with banks $ 1,346 $ 18.3 5.40 % $ 2,147 $ 31.4 5.79 %
Federal funds sold and
securities purchased under
resale agreements 3,097 41.3 5.29 3,859 54.5 5.61
Trading assets 974 13.4 5.49 816 12.0 5.90
Securities 3,370 50.3 5.93 3,810 55.8 5.81
Loans
Domestic
Commercial 10,491 205.2 7.76 8,464 182.1 8.54
Consumer
Residential mortgages 9,231 162.3 7.03 9,288 169.7 7.31
Other consumer 2,437 70.6 11.47 2,562 77.5 11.99
- -----------------------------------------------------------------------------
Total domestic 22,159 438.1 7.84 20,314 429.3 8.38
International 1,083 19.2 7.05 646 11.5 7.07
- -----------------------------------------------------------------------------
Total loans 23,242 457.3 7.81 20,960 440.8 8.34
- -----------------------------------------------------------------------------
Total earning assets 32,029 $580.6 7.19 % 31,592 $594.5 7.47 %
- -----------------------------------------------------------------------------
Allowance for credit losses (374) (406)
Cash and due from banks 982 1,106
Other assets 1,591 1,296
- -----------------------------------------------------------------------------
Total assets $34,228 $33,588
=============================================================================
Liabilities and Shareholders' Equity
Interest bearing demand
deposits $ 2,245 $ 5.1 0.91 % $ 2,093 $ 5.8 1.09 %
Consumer savings deposits 5,682 36.2 2.53 5,593 38.4 2.72
Other consumer time deposits 6,892 79.9 4.60 6,298 88.7 5.59
Commercial, public savings
and other time deposits 4,067 36.3 3.54 3,095 33.8 4.33
Deposits in foreign offices,
primarily banks 4,751 58.1 4.85 4,932 66.4 5.35
- -----------------------------------------------------------------------------
Total interest bearing deposits 23,637 215.6 3.62 22,011 233.1 4.20
- -----------------------------------------------------------------------------
Federal funds purchased and
securities sold under
repurchase agreements 915 11.4 4.96 696 9.0 5.16
Other short-term borrowings 1,556 19.9 5.07 2,907 41.7 5.69
Long-term debt 1,846 27.7 5.94 1,342 22.3 6.58
- -----------------------------------------------------------------------------
Total interest bearing
liabilities 27,954 $274.6 3.90 % 26,956 $306.1 4.51 %
- -----------------------------------------------------------------------------
Interest rate spread 3.29 % 2.96 %
- -----------------------------------------------------------------------------
Noninterest bearing deposits 3,041 3,802
Other liabilities 938 727
Shareholders' equity 2,295 2,103
- -----------------------------------------------------------------------------
Total liabilities and
shareholders' equity $34,228 $33,588
=============================================================================
Net yield on average earning assets 3.79 % 3.62 %
Net yield on average total assets 3.55 3.41
=============================================================================
* Interest and rates are presented on a taxable equivalent basis.
</TABLE>
<TABLE>
<CAPTION>
16.
HSBC USA Inc.
- ---------------------------------------------------------------------------------
CONSOLIDATED AVERAGE BALANCES AND INTEREST RATES*
Nine Months 1999 Nine Months 1998
Balance Interest Rate Balance Interest Rate
- ---------------------------------------------------------------------------------
in millions
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest bearing deposits
with banks $ 1,778 $ 70.1 5.27 % $ 2,018 $ 88.9 5.89 %
Federal funds sold and
securities purchased under
resale agreements 2,176 82.8 5.09 2,766 115.9 5.60
Trading assets 877 35.9 5.46 848 38.4 6.04
Securities 3,656 163.2 5.97 3,811 171.5 6.01
Loans
Domestic
Commercial 10,470 621.7 7.94 8,238 542.4 8.80
Consumer
Residential mortgages 9,392 490.7 6.97 9,632 518.7 7.18
Other consumer 2,448 216.7 11.83 2,681 242.9 12.12
- ---------------------------------------------------------------------------------
Total domestic 22,310 1,329.1 7.97 20,551 1,304.0 8.48
International 1,020 51.8 6.79 615 33.3 7.24
- ---------------------------------------------------------------------------------
Total loans 23,330 1,380.9 7.91 21,166 1,337.3 8.45
- ---------------------------------------------------------------------------------
Total earning assets 31,817 $1,732.9 7.28 % 30,609 $1,752.0 7.65 %
- ---------------------------------------------------------------------------------
Allowance for credit losses (381) (407)
Cash and due from banks 1,051 1,120
Other assets 1,553 1,252
- ---------------------------------------------------------------------------------
Total assets $34,040 $32,574
=================================================================================
Liabilities and Shareholders' Equity
Interest bearing demand
deposits $ 2,238 $ 15.2 0.91 % $ 2,094 $ 17.6 1.12 %
Consumer savings deposits 5,674 106.7 2.51 5,539 112.3 2.71
Other consumer time deposits 6,855 237.5 4.63 6,299 264.8 5.62
Commercial, public savings
and other time deposits 4,087 110.4 3.61 3,058 99.7 4.36
Deposits in foreign offices,
primarily banks 4,487 155.7 4.64 3,864 154.5 5.35
- ---------------------------------------------------------------------------------
Total interest bearing deposits 23,341 625.5 3.58 20,854 648.9 4.16
- ---------------------------------------------------------------------------------
Federal funds purchased and
securities sold under
repurchase agreements 930 31.8 4.58 865 35.8 5.53
Other short-term borrowings 1,769 69.2 5.23 2,854 122.7 5.75
Long-term debt 1,832 81.1 5.92 1,463 72.6 6.63
- ---------------------------------------------------------------------------------
Total interest bearing
liabilities 27,872 $ 807.6 3.87 % 26,036 $ 880.0 4.52 %
- ---------------------------------------------------------------------------------
Interest rate spread 3.41 % 3.13 %
- ---------------------------------------------------------------------------------
Noninterest bearing deposits 3,106 3,768
Other liabilities 837 673
Shareholders' equity 2,225 2,097
- ---------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $34,040 $32,574
=================================================================================
Net yield on average earning assets 3.89 % 3.81 %
Net yield on average total assets 3.63 3.58
=================================================================================
* Interest and rates are presented on a taxable equivalent basis.
</TABLE>
17.
Part II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
12 Computation of Ratio of Earnings to Fixed Charges
(b) Report on Form 8-K
None
18.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HSBC USA Inc.
(Registrant)
Date: November 12, 1999 /s/ Gerald A. Ronning
Gerald A. Ronning
Executive Vice President & Controller
(On behalf of Registrant and
as Chief Accounting Officer)
<TABLE>
<CAPTION>
19.
Exhibit 12
HSBC USA Inc.
Computation of Ratio of Earnings to Fixed Charges
(in millions, except ratios)
- ---------------------------------------------------------------------------
Nine months ended September 30,
1999 1998
- ---------------------------------------------------------------------------
<S> <C> <C>
Net income $ 350 $ 368
Applicable income tax expense 234 193
Less undistributed equity earnings 3 2
Fixed charges:
Interest on:
Borrowed funds 101 159
Long-term debt 81 73
One third of rents, net of income from
subleases 11 11
- ---------------------------------------------------------------------------
Total fixed charges 193 243
Earnings before taxes based on income
and fixed charges $ 774 $ 802
- ---------------------------------------------------------------------------
Ratio of earnings to fixed charges 4.01 3.30
- ---------------------------------------------------------------------------
Including interest on deposits
Total fixed charges (as above) $ 193 $ 243
Add: interest on deposits 625 649
- ---------------------------------------------------------------------------
Total fixed charges and interest on deposits $ 818 $ 892
- ---------------------------------------------------------------------------
Earnings before taxes based on income and
fixed charges (as above) $ 774 $ 802
Add: interest on deposits 625 649
- ---------------------------------------------------------------------------
Total $1,399 $1,451
- ---------------------------------------------------------------------------
Ratio of earnings to fixed charges 1.71 1.63
- ---------------------------------------------------------------------------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 867
<INT-BEARING-DEPOSITS> 2,291
<FED-FUNDS-SOLD> 2,142
<TRADING-ASSETS> 979
<INVESTMENTS-HELD-FOR-SALE> 3,308
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 23,541
<ALLOWANCE> 368
<TOTAL-ASSETS> 34,377
<DEPOSITS> 26,732
<SHORT-TERM> 2,637
<LIABILITIES-OTHER> 809
<LONG-TERM> 1,446
400
0
<COMMON> 0
<OTHER-SE> 2,353
<TOTAL-LIABILITIES-AND-EQUITY> 34,377
<INTEREST-LOAN> 1,379
<INTEREST-INVEST> 163
<INTEREST-OTHER> 189
<INTEREST-TOTAL> 1,731
<INTEREST-DEPOSIT> 625
<INTEREST-EXPENSE> 807
<INTEREST-INCOME-NET> 924
<LOAN-LOSSES> 68
<SECURITIES-GAINS> 7
<EXPENSE-OTHER> 611
<INCOME-PRETAX> 584
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 350
<EPS-BASIC> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 3.89
<LOANS-NON> 294
<LOANS-PAST> 23
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 380
<CHARGE-OFFS> 104
<RECOVERIES> 24
<ALLOWANCE-CLOSE> 368
<ALLOWANCE-DOMESTIC> 143
<ALLOWANCE-FOREIGN> 36
<ALLOWANCE-UNALLOCATED> 189
</TABLE>
