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 March 31, 2000 Commission file number 1-7436
HSBC USA Inc.
(Exact name of registrant as specified in its charter)
Maryland Corporation 13-2764867
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
452 Fifth Avenue, New York, New York 10018
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 525-6100
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 (704 shares of Common Stock, $5 par value) is owned by HSBC
North America Inc., an indirect wholly owned subsidiary of HSBC Holdings plc.
This report includes a total of 20 pages.
2.
Part I - FINANCIAL INFORMATION
Page
Item 1 - Financial Statements
Consolidated Balance Sheet
March 31, 2000 and December 31, 1999 3
Consolidated Statement of Income
For The Three Months
Ended March 31, 2000 and 1999 4
Consolidated Statement of Changes in
Shareholders' Equity For The Three Months
Ended March 31, 2000 and 1999 5
Consolidated Statement of Cash Flows
For The Three Months Ended
March 31, 2000 and 1999 6
Notes to Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
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
March 31, December 31,
2000 1999
- -------------------------------------------------------------------------------
in thousands
<S> <C> <C>
Assets
Cash and due from banks $ 1,827,278 $ 1,977,756
Interest bearing deposits with banks 4,805,577 4,234,668
Federal funds sold and securities
purchased under resale agreements 4,197,256 2,318,361
Trading assets 4,355,631 4,526,988
Securities available for sale 19,017,311 25,973,805
Securities held to maturity
(fair value $4,789,025 and $4,811,695) 4,770,515 4,811,695
Loans 38,577,856 37,909,143
Less - allowance for credit losses 659,560 659,603
- -------------------------------------------------------------------------------
Loans, net 37,918,296 37,249,540
Premises and equipment 750,691 745,910
Accrued interest receivable 789,350 778,363
Equity investments 2,546,009 2,540,927
Goodwill and other acquisition intangibles 3,262,362 3,307,147
Other assets 2,199,795 1,774,459
- -------------------------------------------------------------------------------
Total assets $ 86,440,071 $ 90,239,619
===============================================================================
Liabilities
Deposits in domestic offices
Noninterest bearing $ 6,428,516 $ 6,003,813
Interest bearing 29,458,990 29,393,957
Deposits in foreign offices
Noninterest bearing 267,747 187,099
Interest bearing 18,052,196 20,865,022
- -------------------------------------------------------------------------------
Total deposits 54,207,449 56,449,891
- -------------------------------------------------------------------------------
Trading account liabilities 2,698,190 2,440,729
Short-term borrowings 10,205,206 5,271,597
Interest, taxes and other liabilities 3,434,362 3,059,993
Payable to shareholders of acquired company - 7,091,209
Subordinated long-term debt and perpetual
capital notes 3,426,094 3,427,649
Guaranteed mandatorily redeemable securities 710,628 710,259
Other long-term debt 1,750,789 1,747,131
- -------------------------------------------------------------------------------
Total liabilities 76,432,718 80,198,458
- -------------------------------------------------------------------------------
Shareholders' equity
Preferred stock 500,000 500,000
Common shareholder's equity
Common stock 4 4
Capital surplus 8,921,427 8,920,113
Retained earnings 623,745 671,578
Accumulated other comprehensive loss (37,823) (50,534)
- -------------------------------------------------------------------------------
Total common shareholder's equity 9,507,353 9,541,161
- -------------------------------------------------------------------------------
Total shareholders' equity 10,007,353 10,041,161
- -------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 86,440,071 $ 90,239,619
===============================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<TABLE>
<CAPTION>
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
Three months ended March 31,
2000 1999
- ------------------------------------------------------------------------------
in thousands
<S> <C> <C>
Interest income
Loans $ 721,021 $ 465,830
Securities 420,967 58,843
Trading assets 28,598 11,900
Other short-term investments 107,288 40,541
- ------------------------------------------------------------------------------
Total interest income 1,277,874 577,114
- ------------------------------------------------------------------------------
Interest expense
Deposits 525,440 200,933
Short-term borrowings 98,974 38,637
Long-term debt 104,183 26,290
- ------------------------------------------------------------------------------
Total interest expense 728,597 265,860
- ------------------------------------------------------------------------------
Net interest income 549,277 311,254
Provision for credit losses 27,993 22,500
- ------------------------------------------------------------------------------
Net interest income, after
provision for credit losses 521,284 288,754
- ------------------------------------------------------------------------------
Other operating income
Trust income 20,143 12,658
Service charges 43,508 29,194
Mortgage banking revenue 7,482 11,216
Other fees and commissions 79,443 39,962
Trading revenues 52,227 2,592
Security gains (losses) (3,280) 2,451
Earnings from equity investments 12,718 659
Other income 10,406 22,869
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Total other operating income 222,647 121,601
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Total income from operations 743,931 410,355
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Other operating expenses
Salaries and employee benefits 250,891 104,500
Occupancy expense, net 42,100 22,752
Goodwill amortization 43,731 9,582
Other expenses 138,157 69,679
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Total operating expenses 474,879 206,513
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Income before taxes 269,052 203,842
Applicable income tax expense 110,000 82,400
- ------------------------------------------------------------------------------
Net income $ 159,052 $ 121,442
==============================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<TABLE>
<CAPTION>
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
Three months ended March 31,
2000 1999
- ------------------------------------------------------------------------------
Share- Compre- Share- Compre-
holders' hensive holders' hensive
Equity Income Equity Income
- ------------------------------------------------------------------------------
in thousands
<S> <C> <C> <C> <C>
Preferred stock
Balance, January 1, $ 500,000 $ - *
- --------------------------------------- ---------
Balance, March 31, 500,000 -
- --------------------------------------- ---------
Common stock
Balance, January 1, 4 5
- --------------------------------------- ---------
Balance, March 31, 4 5
- --------------------------------------- ---------
Capital surplus
Balance, January 1, 8,920,113 1,806,563
Capital contribution from
parent 1,314 696
- --------------------------------------- ---------
Balance, March 31, 8,921,427 1,807,259
- --------------------------------------- ---------
Retained earnings
Balance, January 1, 671,578 377,179
Net income 159,052 $159,052 121,442 $121,442
Cash dividends declared:
Preferred stock (6,885) -
Common stock (200,000) (155,000)
- --------------------------------------- ---------
Balance, March 31, 623,745 343,621
- --------------------------------------- ---------
Accumulated other
comprehensive income (loss)
Balance, January 1, (50,534) 44,506
Change in unrealized gains
(losses) on securities
available for sale, net of
taxes and reclassification
adjustments 12,434 (27,801)
Foreign currency translation
adjustments, net of taxes 277 -
Change in accumulated other
comprehensive income, net 12,711 (27,801)
------- -------
Comprehensive income $171,763 $ 93,641
- --------------------------------------- ======= --------- =======
Balance, March 31, (37,823) 16,705
- --------------------------------------- ---------
Total shareholders' equity,
March 31, $10,007,353 $2,167,590
======================================= =========
The accompanying notes are an integral part of the consolidated financial
statements.
* $100 aggregate par value.
</TABLE>
<TABLE>
<CAPTION>
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
Three months ended March 31,
2000 1999
- ------------------------------------------------------------------------------
in thousands
<S> <C> <C>
Cash flows from operating activities
Net income $ 159,052 $ 121,442
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, amortization and deferred taxes 100,823 13,723
Provision for credit losses 27,993 22,500
Net change in other accrual accounts 6,385 104,734
Net change in loans originated for sale (251,041) 119,103
Net change in trading assets and liabilities 492,396 20,923
Other, net 69,517 (32,324)
- ------------------------------------------------------------------------------
Net cash provided by operating activities 605,125 370,101
- ------------------------------------------------------------------------------
Cash flows from investing activities
Net change in interest bearing deposits with
banks (570,909) (250,801)
Net change in short-term investments (1,878,895) (649,262)
Purchases of securities (7,547,746) (1,036,113)
Sales of securities 4,880,730 942,755
Maturities of securities 9,372,724 405,356
Payment to shareholders of acquired company (7,091,209) -
Net originations and maturities of loans (675,353) 340,469
Sales of loans 167,149 -
Expenditures for premises and equipment (27,734) (7,946)
Cash used in acquisitions, net of cash acquired - (8,787)
Other, net 121,811 (21,639)
- ------------------------------------------------------------------------------
Net cash used by investing activities (3,249,432) (285,968)
- ------------------------------------------------------------------------------
Cash flows from financing activities
Net change in deposits (2,242,442) (29,813)
Net change in short-term borrowings 4,933,609 (345,944)
Issuance of long-term debt 171,842 200,000
Repayment of long-term debt (169,140) (100,153)
Capital contributions 1,314 696
Dividends paid (201,354) (155,000)
- ------------------------------------------------------------------------------
Net cash provided (used) by financing
activities 2,493,829 (430,214)
- ------------------------------------------------------------------------------
Net change in cash and due from banks (150,478) (346,081)
Cash and due from banks at beginning of period 1,977,756 1,262,423
- ------------------------------------------------------------------------------
Cash and due from banks at end of period $ 1,827,278 $ 916,342
==============================================================================
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, except as described in Note 6 below, are
consistent with those applied in the presentation of the Company's annual
financial statements.
The interim financial information in this report has not been audited. In the
opinion of the Company's management, all adjustments necessary for a fair
presentation of financial position, results of operations and cash flows for
the interim periods have been made. The interim financial information should
be read in conjunction with the 1999 Annual Report on Form 10-K.
2. Acquisition
Following the acquisition of Republic New York Corporation (Republic) by HSBC
Holdings plc (HSBC) on December 31, 1999, HSBC merged Republic with the
Company. Republic had total assets of $46.9 billion and deposits of $29.9
billion at that date. The transaction was accounted for as a purchase and the
operating results of Republic are included from January 1, 2000. Goodwill was
approximately $3.0 billion and is being amortized against income over 20
years.
<TABLE>
<CAPTION>
The following pro forma financial information presents the combined results
of the Company and Republic as if the acquisition had occurred as of the
beginning of 1999, after giving effect to certain adjustments, including
accounting adjustments related to fair value adjustments, amortization of
goodwill and related income tax effect. The proforma financial information
does not necessarily reflect the results of operations that would have
occurred had the Company and Republic constituted a single entity during such
period.
- ----------------------------------------------------------------------------------------
Historical Amortization
-------------------- of
HSBC Republic Acquisition Pro Forma
Three months ended March 31, 1999 USA Inc. NY Corp. Adjustments Combined
- ----------------------------------------------------------------------------------------
(in millions)
<S> <C> <C> <C> <C>
Net interest income $311 $257 $ (8) $560
Provision for credit losses 22 4 - 26
- ----------------------------------------------------------------------------------------
Net interest income after
provision for credit losses 289 253 (8) 534
Other operating income 122 155 (21) 256
- ----------------------------------------------------------------------------------------
411 408 (29) 790
Operating expenses 207 353 33 593
- ----------------------------------------------------------------------------------------
Income before taxes 204 55 (62) 197
Income tax expense (benefit) 83 8 (4) 87
- ----------------------------------------------------------------------------------------
Net income $121 $ 47 $(58) $110
- ----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
As a result of the acquisition as of December 31, 1999 the Company assumed
certain liabilities associated with merging Republic's operations with those
of the Company and recognized restructuring costs relating to the planned
severance of employees and exiting of businesses of the Company. The
following table represents the activity in these reserves through March 31,
2000.
- ----------------------------------------------------------------------------
Severance
Related Premises Other Total
- ----------------------------------------------------------------------------
(in millions)
<S> <C> <C> <C> <C>
Liabilities assumed $133.9 $ 9.7 $14.0 $157.6
Restructuring charges 5.7 21.0 - 26.7
- ----------------------------------------------------------------------------
Balance December 31, 1999 139.6 30.7 14.0 184.3
Payments 14.4 .1 8.0 22.5
- ----------------------------------------------------------------------------
Balance March 31, 2000 $125.2 $30.6 $ 6.0 $161.8
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</TABLE>
8.
3. Litigation
As described in Note 27 to the financial statements contained in the Company's
Annual Report on Form 10-K for 1999 (the 1999 10-K), the Company and certain
of its subsidiaries are defendants in a number of legal actions arising out of
the Princeton Note Matter (as defined in the 1999 10-K). Regulatory and law
enforcement agencies, including the U.S. Attorney for the Southern District of
New York, the Securities and Exchange Commission and the Commodity Futures
Trading Commission, are continuing to investigate the Princeton Note Matter,
including the activities of Republic New York Securities Corporation (RNYSC)
and Republic New York Corporation (Republic) (predecessor of the Company) with
respect to the Princeton Note Matter. In addition, in April and May 2000, two
additional civil actions arising from the Princeton Note Matter were commenced
in the United States District Court for the Southern District of New York
against RNYSC, the Company (as successor to Republic) and HSBC Bank USA (as
successor to Republic National Bank of New York) (together the Republic
Parties). Those actions, entitled Nichimen Europe, PLC v. Republic New York
Securities Corporation, et. al. and Kofuku Bank Ltd. and Namihaya Bank Ltd. v.
Republic New York Securities Corporation, et. al., allege unpaid notes of
approximately $15 million and $39.5 million, respectively, and assert common
law claims, claims under the federal securities laws, the Commodities Exchange
Act and the Racketeer Influenced and Corrupt Organizations Act (RICO). These
actions seek compensatory and punitive damages and treble damages under the
RICO statute. Proceedings in the eleven other civil actions arising from the
Princeton Note Matter which are described in the 1999 10-K have been
temporarily stayed by the court with the consent of all parties at the request
of the U.S. Attorney for the Southern District of New York and that stay will
likely also apply to the two new actions. It is not possible to assess the
outcome of these proceedings at present. The Republic Parties intend to
defend vigorously against these claims.
4. Derivative Financial Instruments
Derivatives used by the Company include futures, forwards, swaps, caps, floors
and options in the interest rate, and foreign exchange markets and, as a
result of the Republic acquisition, the precious metals markets. The Company
uses these instruments for trading purposes and as part of its asset and
liability management activities.
Derivatives that are used for trading purposes or are linked to other trading
instruments are carried on a mark to market basis with the resultant gains and
losses reported as trading revenue. Foreign exchange trading positions are
revalued daily by pricing spot foreign exchange and forward contracts for
foreign exchange at prevailing rates with the resultant gains and losses
reported as trading revenue. Unrealized gains and the balances of unamortized
option premiums paid are included in trading account assets while unrealized
losses and the unamortized balances of option premiums received are included
in trading account liabilities.
In conjunction with the Republic acquisition, the Company is involved in
various precious metals activities including arbitrage, purchases and sales of
precious metals for forward delivery, options on precious metals and precious
metals lending and borrowing. Precious metals inventory, outstanding open
positions in contracts for forward delivery, options contracts and precious
metals loans and borrowings are revalued monthly at prevailing market rates.
Precious metals interest arbitrage balances are recorded at cost, with the
difference between the fixed forward contract price and cost accreted into
trading revenue ratably over the life of the contracts.
The Company uses a variety of derivative instruments to manage interest rate
risk in conjunction with its asset and liability management process. Risk is
managed by achieving a mix of derivative instruments and balance sheet assets
and liabilities deemed consistent with expectations of interest rate
movements, balance sheet changes and risk management strategies.
9.
These instruments follow either the synthetic alteration or hedge model of
accounting with cash flows recognized on an accrual basis as an adjustment to
the interest income or interest expense associated with the balance sheet
items being synthetically altered or hedged. Under both the synthetic
alteration and hedge accounting models, derivative instruments are linked to
specific individual assets or liabilities or pools of similar assets or
liabilities by the notional and interest rate characteristics of the
associated instruments.
Under the hedge accounting model, it must be demonstrated that the hedged
asset, liability or event being hedged exposes the enterprise to price or
interest rate risk and that the related derivative reduces that risk.
Accordingly there must be high correlation between changes in the market value
of the derivative and the market value or cash flows associated with the
hedged items 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.
Derivatives that cease to qualify for synthetic alteration or hedge accounting
are marked to market prospectively through current period earnings with any
unrealized gains or losses at that time being deferred and amortized over the
life of the original hedge. When the altered or hedged position is
liquidated, any deferred amounts are immediately recognized in earnings.
Gains or losses realized on terminated derivatives that were used as hedges
are deferred and amortized over the life of the hedged item.
5. Pledged Financial Instruments
At March 31, 2000, securities, loans and other assets carried at $13.1 billion
were pledged as collateral for borrowings, to secure public and trust deposits
and for other purposes.
6. Business Segments
As a result of the Republic acquisition, the Company altered its business
segments that it uses to manage operations as of January 1, 2000. The Company
has four distinct segments that it utilizes for management reporting:
commercial banking, corporate and institutional banking, personal banking and
investment banking and markets.
The Commercial Banking Segment provides a diversified range of financial
products and services. This segment provides loan and deposit products to
small and middle-market corporations including specialized products such as
equipment and real estate financing. These products and services are offered
through multiple delivery systems, including the branch banking network. In
addition, various credit and trade related products are offered such as
standby facilities, performance guarantees, acceptances and accounts
receivable factoring.
The Corporate and Institutional Banking Segment provides deposit and lending
functionality to large corporate and multi-national corporations. U.S. dollar
clearing services are offered for domestic and international wire transfer
transactions. Corporate trust provides various trustee, agency and custody
products and services for both corporate and municipal customers. Credit and
trade related products such as standby facilities, performance guarantees and
acceptances are also provided to large corporate entities.
The Personal Banking Segment provides an extensive array of products and
services including installment and revolving term loans, deposits, branch
services, mutual funds, estate planning and other investment management
services. These products are marketed to individuals through the branch
banking network. Residential mortgage lending provides loan financing through
direct retail and wholesale origination channels. Mortgage loans are
originated through a network of brokers, wholesale agents and retail
originations offices. Servicing is performed for the individual mortgage
holder or on a contractual basis for mortgages owned by third parties.
10.
The Investment Banking and Markets Segment comprises treasury, traded markets
and international private banking businesses. The treasury function maintains
overall responsibility for the investment and borrowing of funds to ensure
liquidity, maximize return and manage interest rate risk. Traded markets
encompasses the trading and sale of foreign exchange, banknotes, derivatives,
precious metals, securities and emerging markets instruments, both
domestically and internationally. International private banking offers a full
range of services for high net worth individuals throughout the world
including deposit, lending, trading, trust and investment management.
Other consists of certain non-recurring expenses and the provision for credit
losses not assigned to business units.
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. Prior year results have been
restated according to the redefined segments.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Segments
-----------------------------------------------------
Corporate/ Investment
Commercial Institutional Personal Banking/
Banking Banking Banking Markets Other Total
- --------------------------------------------------------------------------------------------------------------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Three months ended March 31, 2000
Net interest income $ 129 $ 39 $ 276 $ 100 $ 5 $ 549
Other operating income 25 23 88 98 (11) 223
- --------------------------------------------------------------------------------------------------------------
Total income 154 62 364 198 (6) 772
Operating expenses 70 19 217 102 67 475
- --------------------------------------------------------------------------------------------------------------
Pretax income (loss) before
provision for credit losses 84 43 147 96 (73) 297
Provision for credit losses 19 6 17 8 (22) 28
- --------------------------------------------------------------------------------------------------------------
Pretax income 65 37 130 88 (51) 269
Taxes/preferred dividends 22 12 43 29 11 117
- --------------------------------------------------------------------------------------------------------------
Net income after preferred
dividends 43 25 87 59 (62) 152
- --------------------------------------------------------------------------------------------------------------
Average assets 12,190 6,569 19,994 42,375 3,174 84,302
Average liabilities/equity 7,960 5,747 29,993 33,201 7,401 84,302
- --------------------------------------------------------------------------------------------------------------
Three months ended March 31, 1999
Net interest income $ 87 $ 33 $ 176 $ 9 $ 6 $ 311
Other operating income 21 17 78 1 5 122
- --------------------------------------------------------------------------------------------------------------
Total income 108 50 254 10 11 433
Operating expenses 44 16 130 2 15 207
- --------------------------------------------------------------------------------------------------------------
Pretax income (loss) before
provision for credit losses 64 34 124 8 (4) 226
Provision for credit losses 2 - 22 - (2) 22
- --------------------------------------------------------------------------------------------------------------
Pretax income 62 34 102 8 (2) 204
Taxes/preferred dividends 25 14 41 3 - 83
- --------------------------------------------------------------------------------------------------------------
Net income after preferred
dividends 37 20 61 5 (2) 121
- --------------------------------------------------------------------------------------------------------------
Average assets 7,398 4,310 12,639 7,948 1,450 33,745
Average liabilities/equity 5,943 2,020 16,031 6,838 2,913 33,745
- --------------------------------------------------------------------------------------------------------------
</TABLE>
11.
6. New Accounting Standards
In 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 associated 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, as amended, 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.
12.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
HSBC USA Inc. (the Company) reported first quarter 2000 net income of $159.1
million, compared with $121.4 million in the first quarter of 1999. The
largest factor contributing to the increased net income between quarters was
the acquisition of Republic New York Corporation (Republic) on December 31,
1999. Republic had consolidated total assets of $46.9 billion and deposits of
$29.9 billion on December 31, 1999.
Net Interest Income
Net interest income for the first quarter of 2000 was $549.3 million compared
with $311.2 million for the first quarter of 1999. The Republic acquisition
was the principal factor contributing to the increase.
Interest income was $1,277.9 million in the first quarter of 2000 compared
with $577.1 million in the first quarter of 1999. Average earning assets were
$73.7 billion in the first quarter of 2000 compared with $31.4 billion a year
ago. The average rate earned on earning assets was 7.00% compared with 7.45%
a year ago. The reduced rate earned from 1999 relates primarily to higher
levels of lower yielding treasury assets as a result of the Republic
acquisition.
Interest expense for the first quarter of 2000 was $728.6 million, compared
with $265.9 million in the first quarter of 1999. Average interest bearing
liabilities for the first quarter of 2000 were $61.4 billion, compared with
$27.6 billion a year ago. The average rate paid on interest bearing
liabilities was 4.78% compared with 3.91% a year ago.
The taxable equivalent net yield on average total assets for the current
year's first quarter was 2.65% compared with 3.75% in the 1999 first quarter.
Other Operating Income
Total other operating income was $222.6 million in the first quarter of 2000,
compared with $121.6 million in the 1999 first quarter. Fee income categories
of trust, service charges and other fees and commissions were up 75.8% during
the first quarter of 2000 compared with the first quarter of 1999, primarily
as a result of the Republic acquisition. Mortgage banking revenue declined in
2000 due to lower gains on sales of mortgages compared with 1999.
<TABLE>
<CAPTION>
Republic was an active participant in trading activities including
derivatives, foreign exchange and precious metals. The following table
presents information related to trading revenues.
- ------------------------------------------------------------------------------
Three months ended March 31 2000 1999
- ------------------------------------------------------------------------------
(in millions)
<S> <C> <C>
Derivatives $19.6 $(.5)
Foreign exchange 27.2 1.4
Precious metals .3 -
Trading account profits and commissions 5.1 1.7
- -----------------------------------------------------------------------------
Total trading revenue $52.2 $2.6
- -----------------------------------------------------------------------------
</TABLE>
Earnings from equity investments includes $11.7 million earned from the
Company's 49% ownership in HSBC Republic Holdings (Luxembourg) S.A. (HSBC
Republic), formerly Safra Republic Holdings S.A. This amount includes the
impact of amortization expense of $20.1 million relating to the Company's
portion of goodwill of HSBC Republic acquired.
13.
Other Operating Expenses
Other operating expenses were $474.9 million in the 2000 first quarter
compared with $206.5 million for the 1999 first quarter. The expense increase
relates directly to the Republic acquisition. Operating expenses in the first
quarter of 2000 included $3.6 million in additional restructuring costs
relating to integration activities associated with the Republic acquisition.
Since the acquisition was accounted for as a purchase, goodwill was recognized
and amortization of goodwill increased to $43.7 million for the first quarter
of 2000 compared with $9.6 million in the first quarter of 1999. The
cost:income ratio, excluding goodwill expense amortization as well as that
associated with the investment in HSBC Republic from costs, was 54.0% in the
first quarter of 2000 compared with 45.5% for the first quarter of 1999.
Income Taxes
The effective tax rate was 41% in the first quarter of 2000 compared with 40%
in the same quarter of 1999. The deferred tax asset at March 31, 2000 was
$100.0 million compared with $120.7 million at December 31, 1999.
<TABLE>
<CAPTION>
Asset Quality
The following table provides a summary of the allowance for credit losses and
nonaccruing loans.
- ----------------------------------------------------------------------------------
3 Months 3 Months Year
Ended Ended Ended
3/31/00 3/31/99 12/31/99
- ----------------------------------------------------------------------------------
(in millions)
<S> <C> <C> <C>
Allowance for Credit Losses
Balance at beginning
of period $659.6 $379.7 $ 379.7
Allowance related to
acquired companies - 1.1 290.2
Provision charged to income 28.0 22.5 90.0
Net charge offs (27.8) (17.0) (100.3)
Translation adjustment (.2) - -
- ----------------------------------------------------------------------------------
Balance at end of period $659.6 $386.3 $ 659.6
- ----------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
March 31, December 31, March 31,
2000 1999 1999
- ----------------------------------------------------------------------------------
(in millions)
<S> <C> <C> <C>
Nonaccruing Loans
Balance at end of period $344.1 $343.5 $321.0
As a percent of loans
outstanding .89% .91% 1.36%
Nonperforming Loans and Assets *
Balance at end of period $359.4 $357.5 $325.5
As a percent of total assets .42% .40% .96%
Allowance Ratios
Allowance for credit losses
as a percent of:
Loans 1.71% 1.74% 1.63%
Nonaccruing loans 191.66 192.01 120.36
- ----------------------------------------------------------------------------------
* Includes nonaccruing loans, other real estate and other owned assets.
</TABLE>
Provisions for credit losses were $28.0 million in the first quarter of 2000
compared with $22.5 million in the first quarter of 1999. Net charge offs
in the credit card portfolio were $14.2 million and $19.0 million in the
first quarters of 2000 and 1999, respectively. The delinquency rate for the
credit card portfolio was 3.37% at March 31, 2000, compared with 3.41% at
December 31, 1999 and 3.86% at March 31, 1999. Commercial loan credit quality
resulted in net charge offs of $11.7 million in the first quarter of 2000
compared with net recoveries of $4.4 million in the first quarter of 1999.
14.
The Company identified impaired loans totaling $199 million at March 31, 2000,
of which $122 million had a specific credit loss allowance of $61 million. At
December 31, 1999, impaired loans were $216 million of which $110 million had
a specific credit loss allowance of $65 million.
Derivative 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
March 31, 2000, $51.0 billion notional value of such positions, with an
estimated positive fair value of approximately $309 million were outstanding.
At December 31, 1999, $40.9 billion notional value of such positions, with an
estimated positive fair value of $759 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 for speculative purposes, as hedges in conjunction with the acquired
precious metals businesses, foreign exchange trading activities and to
facilitate customer transactions. These derivatives are carried at fair
value. At March 31, 2000, $237.0 billion notional value of such positions
with an estimated negative fair value of $401 million were outstanding. At
December 31, 1999, $220.2 billion of notional value of such positions with an
estimated positive fair value of $182 million were outstanding.
The Company controls the credit risk associated with these positions by
dealing with investment grade counterparties including other members of the
HSBC Group, obtaining collateral where appropriate and by using master netting
agreements where available.
Liquidity
The Company maintains a strong liquidity position which was further enhanced
by the Republic acquisition. 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 $600 million at March 31, 2000. Wholesale
liabilities increased to $28.8 billion at March 31, 2000 compared with $26.9
billion at December 31, 1999. The Company also has strong liquidity as a
result of a high level of immediately saleable or pledgeable assets including
its available for sale securities portfolio, trading assets, mortgages and
other assets.
Capital
Total common shareholder's equity was $9.5 billion at March 31, 2000,
approximately the same level as December 31, 1999.
Under risk-based capital guidelines, the Company's capital ratios were 13.33%
at the Tier 1 level and 15.18% at the total capital level at March 31, 2000.
These ratios compared with 13.42% at the Tier 1 level and 15.53% at the total
capital level at December 31, 1999.
Under guidelines for leverage ratios, the Company's ratio of Tier 1 capital to
quarterly average total assets was 9.08% at March 31, 2000 compared with
23.41% at December 31, 1999. Based on period end assets, the ratio was 8.48%
at December 31, 1999.
15.
Forward-Looking Statements
This report includes forward-looking statements. Statements that are not
historical facts, including statements about management's beliefs and
expectations, are forward-looking statements and involve inherent risks and
uncertainties. 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; 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>
16.
HSBC USA Inc.
- --------------------------------------------------------------------------------------------------------
CONSOLIDATED AVERAGE BALANCES AND INTEREST RATES*
First Quarter 2000 First Quarter 1999
Balance Interest Rate Balance Interest Rate
- --------------------------------------------------------------------------------------------------------
in millions
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest bearing deposits
with banks $ 3,582 $ 58.9 6.61% $ 2,092 $ 27.6 5.34%
Federal funds sold and
securities purchased under
resale agreements 2,974 48.4 6.54 1,079 13.0 4.88
Trading assets 5,281 28.6 2.17 875 11.9 5.46
Securities 23,767 427.1 7.22 3,999 58.9 5.97
Loans
Domestic
Commercial 18,043 332.6 7.41 10,415 208.3 8.11
Consumer
Residential mortgages 13,441 242.3 7.21 9,524 165.6 6.95
Other consumer 2,586 72.5 11.28 2,474 74.4 12.19
- -------------------------------------------------------------------------------------------------------
Total domestic 34,070 647.4 7.64 22,413 448.3 8.11
International 4,063 73.9 7.32 979 18.0 7.46
- -------------------------------------------------------------------------------------------------------
Total loans 38,133 721.3 7.61 23,392 466.3 8.08
- -------------------------------------------------------------------------------------------------------
Total earning assets 73,737 $1,284.3 7.00% 31,437 $ 577.7 7.45%
- -------------------------------------------------------------------------------------------------------
Allowance for credit losses (663) (383)
Cash and due from banks 1,767 1,154
Other assets 9,461 1,537
- -------------------------------------------------------------------------------------------------------
Total assets $84,302 $33,745
=======================================================================================================
Liabilities and Shareholders' Equity
Interest bearing demand
deposits $ 2,827 $ 6.8 0.97% $ 2,214 $ 4.9 0.91%
Consumer savings deposits 10,576 68.1 2.59 5,625 34.7 2.50
Other consumer time deposits 8,135 99.1 4.90 6,835 79.8 4.73
Commercial, public savings
and other time deposits 7,412 96.8 5.26 3,913 35.6 3.69
Deposits in foreign offices 18,432 254.6 5.55 4,139 45.9 4.49
- -------------------------------------------------------------------------------------------------------
Total interest bearing deposits 47,382 525.4 4.46 22,726 200.9 3.59
- -------------------------------------------------------------------------------------------------------
Federal funds purchased and
securities sold under
repurchase agreements 1,832 24.7 5.38 974 10.5 4.37
Other short-term borrowings 6,262 74.3 4.77 2,094 28.2 5.45
Long-term debt 5,878 104.2 7.13 1,803 26.3 5.91
- -------------------------------------------------------------------------------------------------------
Total interest bearing
liabilities 61,354 $ 728.6 4.78% 27,597 $ 265.9 3.91%
- -------------------------------------------------------------------------------------------------------
Interest rate spread 2.23% 3.54%
- -------------------------------------------------------------------------------------------------------
Noninterest bearing deposits 6,302 3,241
Other liabilities 6,685 744
Shareholders' equity 9,961 2,163
- -------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $84,302 $33,745
=======================================================================================================
Net yield on average earning assets 3.03% 4.02%
Net yield on average total assets 2.65 3.75
=======================================================================================================
* 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) Exhibit
12.01 Computation of Ratio of Earnings to Fixed Charges
12.02 Computation of Ratio of Earnings to Combined Fixed Charges and
Preferred Dividends.
(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: May 12, 2000 /s/ Gerald A. Ronning
Gerald A.Ronning
Executive Vice President & Controller
(On behalf of Registrant and
as Chief Accounting Officer)
<TABLE>
<CAPTION>
19.
Exhibit 12.01
HSBC USA Inc.
Computation of Ratio of Earnings to Fixed Charges
(in millions, except ratios)
- -------------------------------------------------------------------------------
Three months ended March 31,
2000 1999
- -------------------------------------------------------------------------------
<S> <C> <C>
Excluding interest on deposits
Net income $ 159 $ 121
Applicable income tax expense 110 82
Less undistributed equity earnings 13 1
Fixed charges:
Interest on:
Borrowed funds 99 39
Long-term debt 104 26
One third of rents, net of income from
subleases 6 4
- -------------------------------------------------------------------------------
Total fixed charges 209 69
Earnings before taxes based on income
and fixed charges $ 465 $ 271
- -------------------------------------------------------------------------------
Ratio of earnings to fixed charges 2.22 3.93
- -------------------------------------------------------------------------------
Including interest on deposits
Total fixed charges (as above) $ 209 $ 69
Add: Interest on deposits 525 201
- ------------------------------------------------------------------------------
Total fixed charges and interest on deposits $ 734 $ 270
- -------------------------------------------------------------------------------
Earnings before taxes based on income and
fixed charges (as above) $ 465 $ 271
Add: Interest on deposits 525 201
- -------------------------------------------------------------------------------
Total $ 990 $ 472
- -------------------------------------------------------------------------------
Ratio of earnings to fixed charges 1.35 1.75
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
20.
Exhibit 12.02
HSBC USA Inc.
Computation of Ratio of Earnings to Combined Fixed Charges
and Preferred Dividends
(in millions, except ratios)
- -------------------------------------------------------------------------------
Three months ended March 31,
2000 1999
- -------------------------------------------------------------------------------
<S> <C> <C>
Excluding interest on deposits
Net income $ 159 $ 121
Applicable income tax expense 110 82
Less undistributed equity earnings 13 1
Fixed charges:
Interest on:
Borrowed funds 99 39
Long-term debt 104 26
One third of rents, net of income from
subleases 6 4
- -------------------------------------------------------------------------------
Total fixed charges 209 69
Earnings before taxes based on income
and fixed charges $ 465 $ 271
- -------------------------------------------------------------------------------
Total fixed charges $ 209 $69
Preferred dividends 7 -
Ratio of pretax income to income
after applicable income tax expense 1.69 1.68
- -------------------------------------------------------------------------------
Total preferred stock dividend factor 12 -
Fixed charges, including preferred stock
dividend factor $ 221 $ 69
- -------------------------------------------------------------------------------
Ratio of earnings to combined fixed charges
and preferred dividends 2.10 3.93
- -------------------------------------------------------------------------------
Including interest on deposits
Total fixed charges, including preferred
stock dividend factor (as above) $ 221 $ 69
Add: Interest on deposits 525 201
- -------------------------------------------------------------------------------
Fixed charges, including preferred stock
dividend factor and interest on deposits $ 746 $ 270
- -------------------------------------------------------------------------------
Earnings before taxes based on
income and fixed charges (as above) $ 465 $ 271
Add: Interest on deposits 525 201
- -------------------------------------------------------------------------------
Total $ 990 $ 472
- -------------------------------------------------------------------------------
Ratio of earnings to combined fixed charges
and preferred dividends 1.33 1.75
- -------------------------------------------------------------------------------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 1,827
<INT-BEARING-DEPOSITS> 4,806
<FED-FUNDS-SOLD> 4,197
<TRADING-ASSETS> 4,356
<INVESTMENTS-HELD-FOR-SALE> 19,017
<INVESTMENTS-CARRYING> 4,771
<INVESTMENTS-MARKET> 4,789
<LOANS> 38,578
<ALLOWANCE> 660
<TOTAL-ASSETS> 86,440
<DEPOSITS> 54,207
<SHORT-TERM> 10,205
<LIABILITIES-OTHER> 6,133
<LONG-TERM> 5,177
711
500
<COMMON> 0
<OTHER-SE> 9,507
<TOTAL-LIABILITIES-AND-EQUITY> 86,440
<INTEREST-LOAN> 721
<INTEREST-INVEST> 421
<INTEREST-OTHER> 136
<INTEREST-TOTAL> 1,278
<INTEREST-DEPOSIT> 525
<INTEREST-EXPENSE> 729
<INTEREST-INCOME-NET> 549
<LOAN-LOSSES> 28
<SECURITIES-GAINS> (3)
<EXPENSE-OTHER> 475
<INCOME-PRETAX> 269
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 159
<EPS-BASIC> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 3.03
<LOANS-NON> 344
<LOANS-PAST> 82
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 660
<CHARGE-OFFS> 38
<RECOVERIES> 10
<ALLOWANCE-CLOSE> 660
<ALLOWANCE-DOMESTIC> 332
<ALLOWANCE-FOREIGN> 119
<ALLOWANCE-UNALLOCATED> 209
</TABLE>
