-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EA9eOQX7BEGBBJhgchme24vVAZJaS5MdRMdshTND+7P28eQaB8GWT+WLvIKF3NSS fbUjO8vDLBzibYZ57EiyCw== 0001169232-05-002701.txt : 20050516 0001169232-05-002701.hdr.sgml : 20050516 20050516070223 ACCESSION NUMBER: 0001169232-05-002701 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20050331 FILED AS OF DATE: 20050516 DATE AS OF CHANGE: 20050516 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HSBC USA INC /MD/ CENTRAL INDEX KEY: 0000083246 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 132764867 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-07436 FILM NUMBER: 05831323 BUSINESS ADDRESS: STREET 1: 452 FIFTH AVE CITY: NEW YORK STATE: NY ZIP: 10018 BUSINESS PHONE: 2125253735 MAIL ADDRESS: STREET 1: 452 FIFTH AVENUE CITY: NEW YORK STATE: NY ZIP: 10018 10-Q 1 d63856_10-q.txt FORM 10-Q CONFORMED 1. ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2005 or |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the transition period from ______ to ______ Commission file number 1-7436 HSBC USA Inc. (Exact name of registrant as specified in its charter) Maryland (State of Incorporation) 13-2764867 (IRS Employer Identification No.) 452 Fifth Avenue, New York, New York 10018 (Address of principal executive offices) (212) 525-3735 (Registrant's telephone number, including area code) 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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X| At April 30, 2005, all voting stock (706 shares of Common Stock, $5 par value) is owned by an indirect wholly owned subsidiary of HSBC Holdings plc. ================================================================================ HSBC USA Inc. Form 10-Q TABLE OF CONTENTS Part I FINANCIAL INFORMATION - -------------------------------------------------------------------------------- Page ---- Item 1. Consolidated Financial Statements Statement of Income .......................................... 3 Balance Sheet ................................................ 4 Statement of Changes in Shareholders' Equity ................. 5 Statement of Cash Flows ...................................... 6 Notes to Consolidated Financial Statements ................... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Average Balances and Interest Rates .......................... 16 Forward-Looking Statements ................................... 17 Executive Overview ........................................... 17 Basis of Reporting ........................................... 20 Results of Operations ........................................ 20 Business Segments ............................................ 27 Credit Quality ............................................... 31 Derivative Instruments and Hedging Activities ................ 34 Off-Balance Sheet Arrangements ............................... 35 Variable Interest Entities (VIEs) ............................ 36 Capital ...................................................... 36 Risk Management .............................................. 37 Item 3. Quantitative and Qualitative Disclosures About Market Risk ........ 41 Item 4. Controls and Procedures ........................................... 41 Part II OTHER INFORMATION - -------------------------------------------------------------------------------- Item 1. Legal Proceedings ................................................. 42 Item 5. Other Information ................................................. 42 Item 6. Exhibits .......................................................... 42 Signature ................................................................. 43 2 Part I FINANCIAL INFORMATION Item 1. Consolidated Financial Statements - -------------------------------------------------------------------------------- HSBC USA Inc. - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF INCOME
Three months ended March 31, 2005 2004 - --------------------------------------------------------------------------------------------------------- (in millions) Interest income: Loans ....................................................... $ 1,049 $ 613 Securities .................................................. 210 215 Trading assets .............................................. 59 33 Short-term investments ...................................... 49 18 Other ....................................................... 6 4 ------------ ------------ Total interest income ........................................... 1,373 883 ------------ ------------ Interest expense: Deposits .................................................... 327 160 Short-term borrowings ....................................... 52 18 Long-term debt .............................................. 219 51 ------------ ------------ Total interest expense .......................................... 598 229 ------------ ------------ Net interest income ............................................. 775 654 Provision (credit) for credit losses ............................ 107 (26) ------------ ------------ Net interest income after provision for credit losses ........... 668 680 ------------ ------------ Other revenues: Trust income ................................................ 23 24 Service charges ............................................. 52 51 Other fees and commissions .................................. 145 108 Securitization revenue ...................................... 44 -- Other income ................................................ 72 47 Residential mortgage banking revenue (expense) .............. 23 (24) Trading revenues ............................................ 96 90 Security gains, net ......................................... 23 38 ------------ ------------ Total other revenues ............................................ 478 334 ------------ ------------ Operating expenses: Salaries and employee benefits .............................. 266 252 Occupancy expense, net ...................................... 42 40 Support services from HSBC affiliates ....................... 218 86 Other expenses .............................................. 128 110 ------------ ------------ Total operating expenses ........................................ 654 488 ------------ ------------ Income before income tax expense ................................ 492 526 Income tax expense .............................................. 176 207 ------------ ------------ Net income ...................................................... $ 316 $ 319 ============ ============
The accompanying notes are an integral part of the consolidated financial statements. 3 HSBC USA Inc. - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEET
March 31, December 31, 2005 2004 - ------------------------------------------------------------------------------------------------------------------- (in millions) Assets Cash and due from banks ..................................................... $ 4,277 $ 2,682 Interest bearing deposits with banks ........................................ 3,090 2,776 Federal funds sold and securities purchased under resale agreements ......... 2,855 3,126 Trading assets .............................................................. 16,964 19,815 Securities available for sale ............................................... 15,625 14,655 Securities held to maturity (fair value $3,716 and $4,042) .................. 3,583 3,881 Loans ....................................................................... 86,247 84,947 Less - allowance for credit losses .......................................... 773 788 ----------- ----------- Loans, net ............................................................ 85,474 84,159 Properties and equipment, net ............................................... 584 594 Intangible assets, net ...................................................... 362 352 Goodwill .................................................................... 2,696 2,697 Other assets ................................................................ 6,095 6,313 ----------- ----------- Total assets ................................................................ $ 141,605 $ 141,050 =========== =========== Liabilities Deposits in domestic offices: Noninterest bearing ....................................................... $ 8,455 $ 7,639 Interest bearing .......................................................... 50,770 50,069 Deposits in foreign offices: Noninterest bearing ....................................................... 300 248 Interest bearing .......................................................... 23,469 22,025 ----------- ----------- Total deposits ........................................................ 82,994 79,981 ----------- ----------- Trading account liabilities ................................................. 11,163 12,120 Short-term borrowings ....................................................... 7,152 9,874 Interest, taxes and other liabilities ....................................... 5,486 4,370 Long-term debt .............................................................. 23,925 23,839 ----------- ----------- Total liabilities ........................................................... 130,720 130,184 ----------- ----------- Shareholders' equity Preferred stock ............................................................. 500 500 Common shareholder's equity: Common stock ($5 par; 150,000,000 shares authorized; 706 shares issued) .................................. --(1) --(1) Capital surplus ........................................................... 8,143 8,418 Retained earnings ......................................................... 2,227 1,917 Accumulated other comprehensive income .................................... 15 31 ----------- ----------- Total common shareholder's equity ..................................... 10,385 10,366 ----------- ----------- Total shareholders' equity .................................................. 10,885 10,866 ----------- ----------- Total liabilities and shareholders' equity .................................. $ 141,605 $ 141,050 =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. (1) Less than $500 thousand 4 HSBC USA Inc. - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Three months ended March 31, 2005 2004 - ------------------------------------------------------------------------------------------------------------------------ in millions Preferred stock Balance, January 1 and March 31, .................................................. $ 500 $ 500 ------------ ------------ Common stock Balance, January 1 and March 31, .................................................. --(1) --(1) ------------ ------------ Capital surplus Balance, January 1, ............................................................... 8,418 6,027 Capital contribution from parent .................................................. 4 5 Employee benefit plans and other .................................................. (279) (1) ------------ ------------ Balance, March 31, ................................................................ 8,143 6,031 ------------ ------------ Retained earnings Balance, January 1, ............................................................... 1,917 807 Net income ........................................................................ 316 319 Cash dividends declared: Preferred stock ............................................................... (6) (7) ------------ ------------ Balance, March 31, ................................................................ 2,227 1,119 ------------ ------------ Accumulated other comprehensive income Balance, January 1, ............................................................... 31 128 Net change in unrealized (losses) gains on securities ............................. (120) 48 Net change in unrealized gains on derivatives classified as cash flow hedges ...... 87 12 Net change in unrealized gains on interest only strip receivables ................. 18 -- Foreign currency translation adjustments .......................................... (1) 1 ------------ ------------ Other comprehensive (loss) income, net of tax ..................................... (16) 61 ------------ ------------ Balance, March 31, ................................................................ 15 189 ------------ ------------ Total shareholders' equity, March 31, ............................................. $ 10,885 $ 7,839 ============ ============ Comprehensive income Net income ........................................................................ $ 316 $ 319 Other comprehensive (loss) income ................................................. (16) 61 ------------ ------------ Comprehensive income .............................................................. $ 300 $ 380 ============ ============
The accompanying notes are an integral part of the consolidated financial statements. (1) Less than $500 thousand 5 HSBC USA Inc. - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF CASH FLOWS
Three months ended March 31, 2005 2004 - ----------------------------------------------------------------------------------------------------------------------------- (in millions) Cash flows from operating activities Net income ......................................................................... $ 316 $ 319 Adjustments to reconcile net income to net cash provided (used) by operating activities Depreciation, amortization and deferred taxes ................................. 188 178 Provision (credit) for credit losses .......................................... 107 (25) Net change in other accrual accounts .......................................... 444 (150) Net change in loans originated for sale ....................................... (205) (54) Net change in trading assets and liabilities .................................. 2,094 415 Other, net .................................................................... (235) (287) ------------ ------------ Net cash provided by operating activities ................................ 2,709 396 ------------ ------------ Cash flows from investing activities Net change in interest bearing deposits with banks ................................. (430) (54) Net change in short-term investments ............................................... 312 (1,568) Net change in securities available for sale: Purchases of securities available for sale .................................... (2,823) (2,228) Proceeds from sales of securities available for sale .......................... 1,659 1,983 Proceeds from maturities of securities available for sale ..................... 1,030 1,741 Net change in securities held to maturity: Purchases of securities held to maturity ...................................... (189) (465) Proceeds from maturities of securities held to maturity ....................... 487 340 Net change in loans: Net change in credit card receivables ......................................... (162) 38 Net change in other short-term loans .......................................... (184) (236) Net originations and maturities of long-term loans ............................ (1,055) (2,923) Loans purchased from HSBC Finance Corporation ................................. -- (870) Sales of loans/other .......................................................... 29 60 Net change in tax refund anticipation loans program: Net originations of loans ..................................................... (24,300) -- Sales of loans to HSBC Finance Corporation .................................... 24,298 -- Expenditures for properties and equipment .......................................... (11) (3) Net cash provided (used) in acquisitions (disposals), net of cash acquired ......... (24) 30 Other, net ......................................................................... (156) (536) ------------ ------------ Net cash used in investing activities .................................... (1,519) (4,691) ------------ ------------ Cash flows from financing activities Net change in deposits ............................................................. 2,990 3,851 Net change in short-term borrowings ................................................ (2,762) (685) Net change in long-term debt: Issuance of long-term debt .................................................... 345 1,186 Repayment of long-term debt ................................................... (166) (138) Capital contribution from parent ................................................... 4 5 Reduction of capital surplus ....................................................... -- (1) Dividends paid ..................................................................... (6) (7) ------------ ------------ Net cash provided by financing activities ................................ 405 4,211 ------------ ------------ Net change in cash and due from banks .................................................. 1,595 (84) Cash and due from banks at beginning of period ......................................... 2,682 2,534 ------------ ------------ Cash and due from banks at end of period ............................................... $ 4,277 $ 2,450 ============ ============ Cash paid for: Interest ................................................................ $ 505 $ 195 Income taxes ............................................................ 31 7
The accompanying notes are an integral part of the consolidated financial statements. Pending settlement receivables/payables related to securities and trading assets and liabilities are treated as non cash items for cash flows reporting. 6 Notes to Consolidated Financial Statements Note 1. Organization and Basis of Presentation - -------------------------------------------------------------------------------- HSBC USA Inc. is an indirect wholly owned subsidiary of HSBC North America Holdings Inc. (HNAH), which is a wholly owned subsidiary of HSBC Holdings plc (HSBC). HNAH's other principal indirect subsidiaries include: o HSBC Finance Corporation, a consumer finance company; o HSBC Markets (USA) Inc. (HSBC Markets), a holding company for investment banking and markets subsidiaries; o HSBC Technology & Services (USA) Inc. (HTSU), a provider of information technology services; and o HSBC Bank Canada (HBCA), a Canadian banking subsidiary. The accompanying unaudited consolidated financial statements of HSBC USA Inc. and its subsidiaries (collectively, HUSI), including its principal subsidiary, HSBC Bank USA, National Association (HBUS), have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information, with the instructions to Form 10-Q and with Article 10 of Regulation S-X, as well as in accordance with predominant practices within the banking industry. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all normal and recurring adjustments, considered necessary for a fair presentation of financial position, results of operations and cash flows for the interim periods have been made. These unaudited interim financial statements should be read in conjunction with HUSI's Annual Report on Form 10-K for the year ended December 31, 2004 (the 2004 Form 10-K). Certain reclassifications have been made to prior period amounts to conform to the current period presentations. The accounting and reporting policies of HUSI are consistent, in all material respects, with those used to prepare the 2004 Form 10-K, except for the impact of new accounting pronouncements summarized in Note 12. The preparation of financial statements in conformity with U.S. GAAP requires the use of estimates and assumptions that affect reported amounts and disclosures. Actual results could differ from those estimates. Interim results should not be considered indicative of results in future periods. Interim financial statement disclosures regarding business segments and off-balance sheet arrangements are included in the Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) section of this Form 10-Q. 7 Note 2. Securities - -------------------------------------------------------------------------------- At March 31, 2005 and December 31, 2004, HUSI held no securities of any single issuer (excluding the U.S. Treasury and federal agencies) with a book value that exceeded 10% of shareholders' equity. The following tables provide a summary of the amortized cost and fair value of the securities available for sale and securities held to maturity portfolios.
- ------------------------------------------------------------------------------------------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Fair March 31, 2005 Cost Gains Losses Value - ------------------------------------------------------------------------------------------------------------------------------------ (in millions) Securities available for sale: U.S. Treasury .................................................... $ 202 $ -- $ 7 $ 195 U.S. Government sponsored enterprises (1) ........................ 9,709 22 203 9,528 U.S. Government agency issued or guaranteed ...................... 3,471 22 75 3,418 Asset backed securities .......................................... 1,196 4 1 1,199 Other domestic debt securities ................................... 201 4 2 203 Foreign debt securities .......................................... 976 5 20 961 Equity securities ................................................ 64 59 2 121 --------- --------- --------- --------- $ 15,819 $ 116 $ 310 $ 15,625 ========= ========= ========= ========= Securities held to maturity: U.S. Treasury .................................................... $ 84 $ -- $ -- $ 84 U.S. Government sponsored enterprises (1) ........................ 2,060 72 15 2,117 U.S. Government agency issued or guaranteed ...................... 742 41 1 782 Obligations of U.S. states and political subdivisions ............ 443 31 -- 474 Other domestic debt securities ................................... 205 6 1 210 Foreign debt securities .......................................... 49 -- -- 49 --------- --------- --------- --------- $ 3,583 $ 150 $ 17 $ 3,716 ========= ========= ========= =========
(1) Includes primarily mortgage-backed securities issued by the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC).
- ------------------------------------------------------------------------------------------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Fair December 31, 2004 Cost Gains Losses Value - ------------------------------------------------------------------------------------------------------------------------------------ (in millions) Securities available for sale: U.S. Treasury .................................................... $ 203 $ -- $ 3 $ 200 U.S. Government sponsored enterprises (1) ........................ 8,136 47 90 8,093 U.S. Government agency issued or guaranteed ...................... 3,029 32 29 3,032 Asset backed securities .......................................... 1,122 3 1 1,124 Other domestic debt securities ................................... 990 6 2 994 Foreign debt securities .......................................... 1,090 15 2 1,103 Equity securities ................................................ 64 49 4 109 --------- --------- --------- --------- $ 14,634 $ 152 $ 131 $ 14,655 ========= ========= ========= ========= Securities held to maturity: U.S. Treasury .................................................... $ 122 $ -- $ -- $ 122 U.S. Government sponsored enterprises (1) ........................ 2,202 92 11 2,283 U.S. Government agency issued or guaranteed ...................... 716 40 2 754 Obligations of U.S. states and political subdivisions ............ 465 37 -- 502 Other domestic debt securities ................................... 231 6 1 236 Foreign debt securities .......................................... 145 -- -- 145 --------- --------- --------- --------- $ 3,881 $ 175 $ 14 $ 4,042 ========= ========= ========= =========
(1) Includes primarily mortgage-backed securities issued by the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC). 8 The following tables provide a summary of gross unrealized losses and related fair values, classified as to the length of time the losses have existed.
- ------------------------------------------------------------------------------------------------------------------------------------ Less Than One Year Greater Than One Year ----------------------------------------- ---------------------------------------- Number Gross Aggregate Number Gross Aggregate of Unrealized Fair Value of Unrealized Fair Value March 31, 2005 Securities Losses of Investment Securities Losses of Investment - ------------------------------------------------------------------------------------------------------------------------------------ (in millions) Securities available for sale: U.S. Treasury ...................... 1 $ 7 $ 195 -- $ -- $ -- U.S. Government sponsored enterprises (1) .................. 259 111 5,461 53 92 2,300 U.S. Government agency issued or guaranteed ............. 220 34 1,548 141 41 1,053 All other securities ............... 44 23 827 1 2 4 ------ ------ ------ ------ ------ ------ 524 $ 175 $8,031 195 $ 135 $3,357 ====== ====== ====== ====== ====== ====== Securities held to maturity: U.S. Government sponsored enterprises (1) .................. 10 $ 2 $ 262 10 $ 13 $ 191 U.S. Government agency issued or guaranteed ............. -- -- -- 3 1 35 All other securities ............... 35 1 14 -- -- -- ------ ------ ------ ------ ------ ------ 45 $ 3 $ 276 13 $ 14 $ 226 ====== ====== ====== ====== ====== ======
(1) Includes primarily mortgage-backed securities issued by FNMA and FHLMC.
- ------------------------------------------------------------------------------------------------------------------------------------ Less Than One Year Greater Than One Year ----------------------------------------- ---------------------------------------- Number Gross Aggregate Number Gross Aggregate of Unrealized Fair Value of Unrealized Fair Value December 31, 2004 Securities Losses of Investment Securities Losses of Investment - ------------------------------------------------------------------------------------------------------------------------------------ (in millions) Securities available for sale: U.S. Treasury ...................... 1 $ 3 $ 200 -- $ -- $ -- U.S. Government sponsored enterprises (1) .................. 78 36 3,118 51 54 1,344 U.S. Government agency issued or guaranteed ............. 62 11 646 115 18 532 All other securities ............... 31 6 487 21 3 103 ------ ------ ------ ------ ------ ------ 172 $ 56 $4,451 187 $ 75 $1,979 ====== ====== ====== ====== ====== ====== Securities held to maturity: U.S. Government sponsored enterprises (1) .................. 8 $ 2 $ 163 12 $ 9 $ 247 U.S. Government agency issued or guaranteed ............. 4 1 27 3 1 34 All other securities ............... 7 1 5 -- -- -- ------ ------ ------ ------ ------ ------ 19 $ 4 $ 195 15 $ 10 $ 281 ====== ====== ====== ====== ====== ======
(1) Includes primarily mortgage-backed securities issued by FNMA and FHLMC. The gross unrealized losses on securities available for sale increased during the three months ended March 31, 2005 due to the impact of a general increase in interest rates on fixed rate securities. Since substantially all of these securities are high credit grade (i.e., AAA or AA), and HUSI has the ability and intent to hold these securities until maturity or a market price recovery, these securities are not considered to be other than temporarily impaired. 9 Note 3. Loans - -------------------------------------------------------------------------------- The following table shows the composition of the loan portfolio.
- ---------------------------------------------------------------------------------------------------------- March 31, December 31, 2005 2004 - ---------------------------------------------------------------------------------------------------------- (in millions) Domestic: Commercial: Construction and mortgage loans ........................... $ 8,563 $ 8,281 Other business and financial .............................. 12,015 11,815 Consumer: Residential mortgages ..................................... 47,610 46,775 Credit card receivables ................................... 12,001 12,078 Other consumer loans ...................................... 3,152 3,122 International ...................................................... 2,906 2,876 --------- --------- Total loans ........................................................ $ 86,247 $ 84,947 ========= =========
Note 4. Allowance for Credit Losses - -------------------------------------------------------------------------------- The following provides a summary of changes in the allowance for credit losses.
- ---------------------------------------------------------------------------------------------------------- Quarter ended March 31 2005 2004 - ---------------------------------------------------------------------------------------------------------- (in millions) Balance at beginning of quarter .................................... $ 788 $ 399 Allowance related to acquisitions and (dispositions), net .......... -- (9) Charge offs ........................................................ 199 29 Recoveries ......................................................... 77 22 --------- --------- Net charge offs .............................................. 122 7 --------- --------- Provision charged (credited) to income ............................. 107 (26) --------- --------- Balance at end of quarter .......................................... $ 773 $ 357 ========= =========
Further analysis of credit quality and the allowance for credit losses are presented on pages 31-33 of this Form 10-Q. 10 Note 5. Intangible Assets, Net - -------------------------------------------------------------------------------- The following table summarizes the composition of intangible assets.
- ------------------------------------------------------------------------------------------------------------------------------ March 31, December 31, 2005 2004 - ------------------------------------------------------------------------------------------------------------------------------ (in millions) Mortgage servicing rights, net of accumulated amortization and valuation allowance ............ $ 320 $ 309 Favorable lease arrangements, net of accumulated depreciation ................................. 42 43 --------- --------- Intangible assets, net ........................................................................ $ 362 $ 352 ========= =========
Mortgage Servicing Rights (MSRs) The following table summarizes activity for MSRs and the related valuation allowance.
- ------------------------------------------------------------------------------------------------------------------------------ Three months ended March 31 2005 2004 - ------------------------------------------------------------------------------------------------------------------------------ (in millions) MSRs, net of accumulated amortization: Beginning balance ....................................................................... $ 416 $ 526 Additions related to loan sales ......................................................... 13 16 Net MSRs sales .......................................................................... -- (56) Permanent impairment charges ............................................................ (9) (1) Amortization ............................................................................ (19) (26) --------- --------- Ending balance .......................................................................... 401 459 --------- --------- Valuation allowance for MSRs: Beginning balance ....................................................................... (107) (23) Temporary impairment (provision) recovery ............................................... 17 (62) Permanent impairment charges ............................................................ 9 1 Release of allowance related to MSRs sold ............................................... -- 3 --------- --------- Ending balance .......................................................................... (81) (81) --------- --------- MSRs, net of accumulated amortization and valuation allowance ................................. $ 320 $ 378 ========= =========
Normal amortization for the current MSRs portfolios is expected to be approximately $78 million for the year ending December 31, 2005, declining gradually to approximately $34 million for the year ending December 31, 2009. Actual levels of amortization could increase or decrease depending upon changes in interest rates and loan prepayment activity. Actual levels of amortization are also dependent upon future levels of MSRs recorded. Favorable Lease Arrangements Favorable lease arrangements resulted from various business acquisitions. Scheduled amortization of favorable lease arrangements will approximate $5 million per year for 2005 through 2009. Note 6. Goodwill - -------------------------------------------------------------------------------- During the second quarter of 2004, HUSI completed its annual impairment test of goodwill and determined that the fair value of each of the reporting units exceeded its carrying value. As a result, no impairment loss was required to be recognized. During the first quarter of 2005, there were no events or transactions which warrant consideration for their impact on recorded book values assigned to goodwill. 11 Note 7. Income Taxes - -------------------------------------------------------------------------------- The following table presents HUSI's effective tax rates. - -------------------------------------------------------------------------------- Three months ended March 31 2005 2004 - -------------------------------------------------------------------------------- Effective tax rate ............................... 35.8% 39.4% In the first quarter of 2005, HUSI finalized certain prior year state and local tax returns and recorded a $20 million reduction of income tax expense, which represents the difference between its previous estimate of tax liability and the liability per the tax returns. During the first quarter of 2005, the prepaid pension asset previously carried on the balance sheet of HUSI was transferred to HNAH. The related deferred tax liability of approximately $203 million was also transferred to HNAH resulting in a significantly lower deferred tax liability as of March 31, 2005. Note 8. Long-Term Debt - -------------------------------------------------------------------------------- The following table presents a summary of long-term debt. - -------------------------------------------------------------------------------- March 31, December 31, 2005 2004 - -------------------------------------------------------------------------------- (in millions) Senior debt ...................................... $ 18,929 $ 18,831 Subordinated debt ................................ 4,976 4,988 All other ........................................ 20 20 --------- --------- Total long-term debt ............................. $ 23,925 $ 23,839 ========= ========= Note 9. Related Party Transactions - -------------------------------------------------------------------------------- In the normal course of business, HUSI conducts transactions with HSBC and its subsidiaries (HSBC affiliates). These transactions occur at prevailing market rates and terms. All extensions of credit by HUSI to other HSBC affiliates are legally required to be secured by eligible collateral. The following table presents related party balances and the income and expense generated by related party transactions. - -------------------------------------------------------------------------------- March 31, December 31, 2005 2004 - -------------------------------------------------------------------------------- (in millions) Assets: Interest bearing deposits with banks ....... $ 97 $ 436 Loans ...................................... 1,537 828 Trading assets ............................. 3,096 3,167 Other ...................................... 159 752 --------- --------- Total assets ............................... $ 4,889 $ 5,183 ========= ========= Liabilities: Deposits ................................... $ 11,113 $ 9,759 Trading account liabilities ................ 4,865 5,704 Short-term borrowings ...................... 1,139 1,089 Other ...................................... 180 77 --------- --------- Total liabilities .......................... $ 17,297 $ 16,629 ========= ========= 12
- ------------------------------------------------------------------------------------------------------------------- Three months ended March 31 2005 2004 - ------------------------------------------------------------------------------------------------------------------- (in millions) Interest income ............................................................. $ 1 $ 3 Interest expense ............................................................ 63 21 Trading losses .............................................................. (321) (127) Other revenues .............................................................. 36 10 Support services from HSBC affiliates: Fees paid to HTSU for technology services ............................. 48 39 Fees paid to HSBC Finance Corporation ................................. 106 4 Other fees, primarily treasury and traded markets services ............ 64 43
The following business transactions conducted with HSBC Finance Corporation impacted operations during the first quarter of 2005. o Trading losses primarily represent the mark to market of the intercompany components of interest rate and foreign currency derivative swap transactions entered into with HSBC Finance Corporation. Specifically, HSBC Finance Corporation enters into these swap contracts with HUSI in order to hedge its interest rate positions. HUSI, within its Corporate, Investment Banking and Markets business, accounts for these transactions on a mark to market basis, with the change in value on the intercompany component substantially offset by the mark to market of related contracts entered into with HSBC affiliates and third parties. o In December of 2004, approximately $12 billion of loans, primarily private label credit card receivables, were purchased from HSBC Finance Corporation. Residual interests in securitized private label credit card receivable pools of approximately $3 billion were also acquired. HSBC Finance Corporation retained the customer relationships and continues to service the loans. By agreement, HUSI is purchasing additional receivables generated under current and future private label accounts at fair value on a daily basis. During the first quarter of 2005, approximately $4 billion of additional receivables were acquired from HSBC Finance Corporation at a premium of $103 million, which is being amortized to interest income over the estimated life of the receivables purchased. o During the quarter ended March 31, 2005, HUSI purchased approximately $781 million of consumer loans, primarily domestic residential mortgage loans, at fair value from originating lenders pursuant to HSBC Finance Corporation correspondent loan programs. o In July of 2004, in order to centralize the servicing of credit card receivables within a common HSBC affiliate in the United States, certain consumer credit card customer relationships of HUSI were sold to HSBC Finance Corporation. Receivable balances associated with these relationships were not sold as part of the transaction. New receivable balances generated by these relationships are purchased at fair value from HSBC Finance Corporation on a daily basis. During the quarter ended March 31, 2005, approximately $467 million of receivables associated with these relationships were purchased from HSBC Finance Corporation at a premium of approximately $8 million, which is being amortized to interest income over the estimated life of the receivables purchased. Servicing for the majority of these relationships was also transferred to HSBC Finance Corporation. o Support services from HSBC affiliates includes charges by HSBC Finance Corporation under various service level agreements for loan origination and servicing as well as other operational and administrative support. o Effective October 1, 2004, HBUS is the originating lender for a federal income tax refund anticipation loan program for clients of various third party tax preparers, which is managed by HSBC Finance Corporation. By agreement, HBUS processes applications, funds and subsequently sells these loans to HSBC Finance Corporation. During the quarter ended March 31, 2005, approximately $24 billion of loans were originated by HUSI and sold to HSBC Finance Corporation, resulting in gains of approximately $17 million and fees paid to HSBC Finance Corporation of $3 million. o At March 31, 2005, HUSI had a $2 billion line of credit with HSBC Finance Corporation, of which $600 million was outstanding and included in short-term borrowings. 13 Effective January 1, 2004, HUSI's technology services employees, as well as technology services employees from other HSBC affiliates in North America, were transferred to HTSU. HTSU charges HUSI for technology services pursuant to a master service level agreement. These charges are included in other expenses as HSBC affiliate charges. HUSI utilizes HSBC Markets primarily for debt underwriting and for other treasury and traded markets related services, pursuant to service level agreements. Debt underwriting fees charged by HSBC Markets are deferred as a component of long-term debt and amortized to interest expense over the life of the related debt. All other fees charged by HSBC Markets are included in support services from HSBC affiliates. At March 31, 2005, HUSI had an unused line of credit with HSBC of $1,500 million. At March 31, 2005 and December 31, 2004, the aggregate notional amounts of all derivative contracts with other HSBC affiliates were approximately $355 billion and $302 billion respectively. The net credit risk exposure related to these contracts was approximately $2 billion at both March 31, 2005 and December 31, 2004. Employees of HUSI participate in one or more stock compensation plans sponsored by HSBC. HUSI's share of the expense of the plans for the first three months of 2005 and 2004 was $9 million and $19 million respectively. A description of these plans begins on page 99 of HUSI's 2004 Form 10-K. Note 10. Pledged Assets - -------------------------------------------------------------------------------- The following table presents pledged assets included in the consolidated balance sheet. - -------------------------------------------------------------------------------- March 31, December 31, 2005 2004 - -------------------------------------------------------------------------------- (in millions) Interest bearing deposits with banks .......... $ 1,047 $ 767 Trading assets ................................ 283 305 Securities available for sale ................. 5,813 6,096 Securities held to maturity ................... 577 655 Loans ......................................... 6,041 5,971 --------- --------- Total ......................................... $ 13,761 $ 13,794 ========= ========= Note 11. Pensions and Other Postretirement Benefits - -------------------------------------------------------------------------------- Through December 31, 2004, HUSI maintained noncontributory defined benefit pension plans covering substantially all of their employees hired prior to January 1, 1997 and those employees who joined HUSI through acquisitions and were participating in a defined benefit plan at the time of acquisition. Certain other HSBC subsidiaries participate in these plans. In addition, through December 31, 2004, HUSI also maintained unfunded noncontributory health and life insurance coverage for all employees who retired from HUSI and were eligible for immediate pension benefits from HUSI's retirement plan. Employees retiring after 1992 will absorb a portion of the cost of these benefits. Employees hired after that same date are not eligible for these benefits. A premium cap has been established for HUSI's share of retiree medical cost. In November 2004, sponsorship of the U.S. defined benefit pension plans and the health and life insurance plan of HUSI and HSBC Finance Corporation were transferred to HNAH. Effective January 1, 2005, the separate U.S. defined benefit pension plans were merged into a single defined benefit pension plan which facilitates the development of a unified employee benefit policy and unified employee benefit plan administration for HSBC affiliates operating in the U.S. As a result, HUSI's prepaid pension asset of $482 million, and a related deferred tax liability of $203 million, were transferred to HNAH. The net transfer amount of $279 million is reflected as a reduction of capital surplus on the consolidated statement of changes in shareholders' equity. 14 The following table presents the components of net periodic benefit cost as allocated to HUSI from HNAH.
- ------------------------------------------------------------------------------------------------------------------ Other Postretirement Pension Benefits Benefits ---------------------- --------------------- Three months ended March 31 2005 2004 2005 2004 - ------------------------------------------------------------------------------------------------------------------ (in millions) Net periodic benefit cost: Service cost ................................. $ 11 $ 7 $ 1 $ 1 Interest cost ................................ 17 15 2 2 Expected return on plan assets ............... (25) (20) -- -- Prior service cost amortization .............. -- -- -- -- Actuarial loss ............................... 1 7 -- -- Transition amount amortization ............... -- -- 1 1 ------ ------ ------ ------ Net periodic benefit cost .................... $ 4 $ 9 $ 4 $ 4 ====== ====== ====== ====== Amount recorded as pension expense by: HUSI ......................................... $ 1 $ 3 Other HSBC affiliates ........................ 3 6 ------ ------ $ 4 $ 9 ====== ======
HUSI expects to make no contribution for pension benefits and to contribute approximately $10 million for other postretirement benefits during fiscal year 2005. Note 12. New Accounting Pronouncements - -------------------------------------------------------------------------------- In March 2004, the Financial Accounting Standards Board (FASB) reached a consensus on EITF 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (EITF 03-1). EITF 03-1 provides guidance for determining when an investment is impaired and whether the impairment is other than temporary. EITF 03-1 also incorporates into its consensus the required disclosures about unrealized losses on investments announced by the EITF in late 2003 and adds new disclosure requirements relating to cost-method investments. The new disclosure requirements are effective for annual reporting periods ending after June 15, 2004, and the new impairment guidance was to become effective for reporting periods beginning after June 15, 2004. In September 2004, the FASB delayed the effective date of EITF 03-1 for measurement and recognition of impairment losses until implementation guidance is issued. Adoption of the impairment guidance contained in EITF 03-1 is not expected to have a material impact on HUSI's financial position or results of operations. In December 2004, FASB issued Statement of Financial Accounting Standards No. 123 (Revised), Share-Based Payment (SFAS 123R). SFAS 123R requires public entities to measure the cost of stock-based compensation based on the grant date fair value of the award, as well as other disclosure requirements. On March 28, 2005, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin 107 which amended the compliance date to allow public companies to comply with the provisions of SFAS 123R at the beginning of their next fiscal year that begins after June 15, 2005, instead of the next reporting period as originally required by SFAS 123R. HUSI was substantially in compliance with SFAS 123R as of December 31, 2004, and will be entirely compliant by the required adoption date. The adoption of SFAS 123R therefore will not have a significant effect on operating results. 15 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) - -------------------------------------------------------------------------------- HSBC USA Inc. - -------------------------------------------------------------------------------- CONSOLIDATED AVERAGE BALANCES AND INTEREST RATES The following table shows the average balances of the principal components of assets, liabilities and shareholders' equity, together with their respective interest amounts and rates earned or paid, presented on a taxable equivalent basis.
Three Months Ended March 31, --------------------------------------------------------------------------- 2005 2004 ----------------------------------- ----------------------------------- Balance Interest Rate* Balance Interest Rate* - ------------------------------------------------------------------------------------------------------------------------------------ Assets (in millions) Interest bearing deposits with banks ............... $ 3,850 $ 25 2.61% $ 1,577 $ 6 1.59% Federal funds sold and securities purchased under resale agreements .......................... 3,639 24 2.66 4,002 11 1.15 Trading assets ..................................... 18,379 59 1.28 15,708 33 0.85 Securities ......................................... 18,318 214 4.73 18,162 220 4.86 Loans Domestic Commercial ..................................... 19,167 229 4.84 15,061 165 4.40 Consumer Residential mortgages ..................... 47,463 579 4.88 27,645 358 5.18 Credit cards .............................. 12,169 158 5.26 1,126 29 10.19 Other consumer ............................ 3,645 62 6.93 2,045 33 6.49 --------- --------- ----- --------- --------- ----- Total domestic ............................... 82,444 1,028 5.06 45,877 585 5.12 International .................................... 3,336 21 2.58 3,876 29 3.05 --------- --------- ----- --------- --------- ----- Total loans .................................. 85,780 1,049 4.96 49,753 614 4.96 --------- --------- ----- --------- --------- ----- Other .............................................. 583 6 4.40 490 4 3.31 --------- --------- ----- --------- --------- ----- Total earning assets ............................... 130,549 $ 1,377 4.28% 89,692 $ 888 3.98% --------- --------- ----- --------- --------- ----- Allowance for credit losses ........................ (894) (391) Cash and due from banks ............................ 4,013 3,095 Other assets ....................................... 8,416 7,240 --------- --------- Total assets ....................................... $ 142,084 $ 99,636 ========= ========= Liabilities and Shareholders' Equity Deposits in domestic offices Savings deposits ................................. $ 27,090 $ 51 0.76% $ 26,636 $ 45 0.68% Other time deposits .............................. 23,478 148 2.56 11,696 53 1.82 Deposits in foreign offices ........................ 23,445 128 2.21 21,445 62 1.17 --------- --------- ----- --------- --------- ----- Total interest bearing deposits .................... 74,013 327 1.79 59,777 160 1.08 --------- --------- ----- --------- --------- ----- Short-term borrowings .............................. 8,896 52 2.40 8,540 18 0.83 Long-term debt ..................................... 23,870 219 3.72 3,952 51 5.17 --------- --------- ----- --------- --------- ----- Total interest bearing liabilities ................. 106,779 598 2.27 72,269 229 1.27 --------- --------- ----- --------- --------- ----- Net interest income / Interest rate spread ......... $ 779 2.01% $ 659 2.71% --------- ----- --------- ----- Noninterest bearing deposits ....................... 9,766 7,190 Other liabilities .................................. 14,596 12,550 Total shareholders' equity ......................... 10,943 7,627 --------- --------- Total liabilities and shareholders' equity ......... $ 142,084 $ 99,636 ========= ========= Net yield on average earning assets ................ 2.42% 2.96% ----- ----- Net yield on average total assets .................. 2.22 2.66 ===== =====
* Rates are calculated on unrounded numbers. Total weighted average rate earned on earning assets is interest and fee earnings divided by daily average amounts of total interest earning assets, including the daily average amount on nonperforming loans. Loan interest for the first quarter of 2005 and first quarter of 2004 included fees of $8 million and $17 million, respectively. 16 FORWARD-LOOKING STATEMENTS - -------------------------------------------------------------------------------- The MD&A should be read in conjunction with the consolidated financial statements, notes and tables included elsewhere in this Form 10-Q and with HUSI's 2004 Form 10-K. The MD&A may contain certain statements that may be forward-looking in nature within the meaning of the Private Securities Litigation Reform Act of 1995. HUSI's results may differ materially from those noted in the forward-looking statements. Words such as "believe", "expects", "estimates", "targeted", "anticipates", "goal" and similar expressions are intended to identify forward-looking statements but should not be considered as the only means through which these statements may be made. Statements that are not historical facts, including statements about management's beliefs and expectations, are forward-looking statements which involve inherent risks and uncertainties and are based on current views and assumptions. A number of factors could cause actual results to differ materially from those contained in any forward-looking statements. For a list of important factors that may affect HUSI's actual results, see Cautionary Statement on Forward-Looking Statements in Part I, Item 1 of HUSI's 2004 Form 10-K. EXECUTIVE OVERVIEW - -------------------------------------------------------------------------------- Net income decreased $3 million in the first quarter of 2005, as compared with the same 2004 period. Increased interest income and other revenues associated with the private label loan portfolio acquired from HSBC Finance Corporation in December 2004 were more than offset by amortization of the premium paid for the portfolio, and by increased provision for credit losses associated with the acquired portfolio. This resulted in reduced pre-tax income for HUSI's Consumer Finance business segment. Strong revenue growth within other business units materially offset the reduced Consumer Finance results. Although total assets grew less than 1% during the first quarter of 2005, average assets increased 43% in the quarter, as compared with the same 2004 period, reflecting the significant loans growth experienced during calendar year 2004. Private Label Loan Portfolio Purchase In December of 2004, HUSI acquired approximately $12 billion of loans, primarily private label credit card receivables, from HSBC Finance Corporation at fair value, without recourse. The resulting increase in interest income for the first quarter of 2005 was significantly reduced by amortization of the initial premium paid for the portfolios. Although the amortization period for the initial premium paid is two years, amortization is heavily "front loaded" for 2005 in relation to expected runoff of the loan balances. Credit card interest income was especially impacted by this portfolio acquisition, as addressed on page 21 of this Form 10-Q. Residual interests in securitized credit card receivable pools of approximately $3 billion were also acquired, from which approximately $44 million of securitization revenue was recorded in the first quarter of 2005. Refer to Other Revenues on page 23 of this Form 10-Q for further discussion of this revenue. Potential acquisitions of Mastercard and Visa receivables from HSBC Finance Corporation will be considered in the future based upon continuing evaluation of capital and liquidity at each entity. Balance Sheet Review Asset growth slowed to more normalized levels during the first quarter of 2005, as compared with calendar year 2004. Total deposit growth of $3 billion during the quarter was the primary funding source for increased loans and decreased short-term borrowings. HUSI utilizes borrowings from various sources to fund balance sheet growth, to meet cash and capital needs, and to fund investments in subsidiaries. Total long-term debt was approximately $24 billion at March 31, 2005 and December 31, 2004. Total deposits and borrowings from HSBC affiliates were $12 billion and $11 billion at March 31, 2005 and December 31, 2004 respectively. 17 Average earning assets and interest bearing liabilities increased significantly during the first quarter of 2005, as compared with the same 2004 period, primarily due to: o increased average residential loan balances from held portfolio growth in 2004; o increased average loan balances resulting from the private label loan portfolio purchase previously noted; o increased average loan and deposit balances resulting from targeted growth in small business and middle-market commercial customers; and o increased average balances for deposits, long-term debt and short-term borrowings, which were the primary funding sources for asset growth during 2004. Income Statement Review Increased net interest income in the first quarter of 2005, as compared with 2004, was primarily due to significantly increased interest income associated with increased average loan balances noted above, partially offset by increased interest expense associated with increased average balances for deposits and long-term debt. The provision for credit losses increased during the first quarter of 2005, as compared with the same 2004 period, primarily due to additional provision for credit losses associated with the loans acquired in December 2004 from HSBC Finance Corporation. Other revenues increased in the first quarter of 2005, as compared with 2004, primarily due to: o increased credit card and other fee income associated with the acquired private label loan portfolio; o increased securitization revenue associated with securitized trusts acquired as part of the private label loan portfolio; o increased residential mortgage banking revenue; and o gains on sale of tax refund anticipation loans to HSBC Finance Corporation's Taxpayer Financial Services business. Operating expenses increased in the first quarter of 2005, as compared with 2004, primarily due to increased fees charged by various HSBC affiliates for technology services, for broker-dealer services, for loan origination and servicing, and for other operational and administrative support functions. Further commentary regarding support services from HSBC affiliates is provided in Note 9 of the consolidated financial statements beginning on page 12 of this Form 10-Q. Decreased income tax expense is primarily attributable to a $20 million reduction of expense resulting from the difference between the estimate of prior year state and local tax liability and the liability per final tax returns. 18 The following table presents a five quarter summary of selected financial information.
- ------------------------------------------------------------------------------------------------------------------------------------ March 31, December 31, September 30, June 30, March 31, Quarter ended 2005 2004 2004 2004 2004 - ------------------------------------------------------------------------------------------------------------------------------------ (in millions) Net interest income ............................ $ 775 $ 700 $ 698 $ 689 $ 654 --------- --------- --------- --------- --------- Trading revenues ............................... 96 99 21 78 90 Residential mortgage banking revenue (expense) .................................... 23 (14) (65) (17) (24) Securities gains, net .......................... 23 26 18 3 38 Other income ................................... 336 214 388 234 230 --------- --------- --------- --------- --------- Total other revenues ........................... 478 325 362 298 334 --------- --------- --------- --------- --------- Operating expenses ............................. 654 613 480 520 488 Provision (credit) for credit losses ........... 107 (24) 27 6 (26) --------- --------- --------- --------- --------- Income before income tax expense ............... 492 436 553 461 526 Income tax expense ............................. 176 167 214 130 207 --------- --------- --------- --------- --------- Net income ..................................... $ 316 $ 269 $ 339 $ 331 $ 319 ========= ========= ========= ========= ========= Balances at quarter end: Loans: Commercial loans ......................... $ 23,484 $ 22,972 $ 20,869 $ 19,557 $ 19,072 Residential mortgages .................... 47,610 46,775 42,958 38,982 29,953 Credit card receivables .................. 12,001 12,078 1,127 1,093 1,052 Other consumer loans ..................... 3,152 3,122 2,086 2,434 2,355 --------- --------- --------- --------- --------- Total loans .............................. 86,247 84,947 67,040 62,066 52,432 Allowance for credit losses .............. (773) (788) (340) (347) (357) --------- --------- --------- --------- --------- Loans, net ............................... 85,474 84,159 66,700 61,719 52,075 Total assets ................................... 141,605 141,050 120,939 112,791 102,502 Total tangible assets .......................... 138,866 138,310 118,195 109,982 99,678 Total deposits ................................. 82,994 79,981 74,803 74,534 67,994 Short-term borrowings .......................... 7,152 9,874 7,967 8,499 5,906 Long-term debt ................................. 23,925 23,839 15,618 7,135 4,871 Common shareholder's equity .................... 10,385 10,366 8,053 7,315 7,339 Tangible common shareholder's equity ........... 7,646 7,611 5,336 4,673 4,341 Total shareholders' equity ..................... 10,885 10,866 8,553 7,815 7,839 Selected financial ratios: Total shareholders' equity to total assets ......................................... 7.69% 7.70% 7.07% 6.93% 7.65% Tangible common shareholder's equity to total tangible assets ..................... 5.51 5.50 4.51 4.25 4.36 Rate of return on (1): Total assets ............................. .90 .84 1.17 1.26 1.29 Total common shareholder's equity ........ 12.05 12.62 17.68 17.96 17.65 Net interest margin to (1): Earning assets ........................... 2.42 2.38 2.65 2.91 2.96 Total assets ............................. 2.22 2.19 2.42 2.63 2.66 Total shareholders' equity to total assets (1) ................................... 7.70 6.88 6.96 7.34 7.65 Cost:income ratio (1) .......................... 52.17 59.70 45.28 52.63 49.48
(1) Selected financial ratios are defined in the Glossary of Terms beginning on page 60 of the 2004 Form 10-K. 19 BASIS OF REPORTING - -------------------------------------------------------------------------------- HUSI's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP). International Financial Reporting Standards (IFRS) Prior to January 1, 2005, HSBC reported results in accordance with accounting principles generally accepted in the United Kingdom (U.K. GAAP). The European Union has determined that all European listed companies will be required to prepare their consolidated financial statements using IFRS by 2005. As a result, HSBC has announced that it will begin reporting its financial results under IFRS rather than U.K. GAAP beginning with its release of interim financial results for the six months ended June 30, 2005. Therefore, beginning in the second quarter of 2005, HUSI will present a reconciliation of U.S. GAAP net income to IFRS net income for the six months ended June 30, 2005 and on a quarterly basis thereafter. RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- Net Interest Income - ------------------- The following table presents a five quarter summary of net interest income.
- -------------------------------------------------------------------------------------------------------------------------- March 31, December 31, September 30, June 30, March 31, Three months ended 2005 2004 2004 2004 2004 - -------------------------------------------------------------------------------------------------------------------------- (in millions) Interest income: Loans ................................... $ 1,049 $ 851 $ 779 $ 669 $ 614 Securities .............................. 210 218 220 215 215 Trading assets .......................... 59 51 43 38 33 Short-term investments .................. 49 52 27 18 17 Other ................................... 6 5 5 4 4 -------- -------- -------- -------- -------- Total interest income ................... 1,373 1,177 1,074 944 883 -------- -------- -------- -------- -------- Interest expense: Deposits ................................ 327 281 226 158 160 Short-term borrowings ................... 52 20 59 35 18 Long-term debt .......................... 219 176 91 62 51 -------- -------- -------- -------- -------- Total interest expense .................. 598 477 376 255 229 -------- -------- -------- -------- -------- Net interest income ........................... $ 775 $ 700 $ 698 $ 689 $ 654 ======== ======== ======== ======== ========
In the discussion that follows, interest income and rates are presented and analyzed on a taxable equivalent basis to permit comparisons of yields on tax-exempt and taxable assets. An analysis of consolidated average balances and interest rates on a taxable equivalent basis is presented on page 16 of this Form 10-Q. All increases and decreases referenced below for the first quarter of 2005 represent comparisons with the same 2004 period. Interest Income - Loans Total interest income on loans increased $435 million (71%) in the first quarter of 2005. Average total loan balances increased approximately $36 billion (72%) in the quarter, resulting from significant increases in various consumer and commercial loan portfolios during 2004. In addition to significant organic residential mortgage loan growth, loans and receivables acquired directly from HSBC Finance Corporation, and from originating lenders pursuant to HSBC Finance Corporation correspondent loan programs, have had a significant impact on interest income for the first quarter of 2005. Increases in average 20 loan balances, and the resulting increases in interest income, were reduced by significant amortization of premiums paid for the specific portfolios, most notably private label credit card receivables acquired from HSBC Finance Corporation in December 2004. Residential Mortgage Loans Interest income earned from residential mortgage loans increased $221 million (62%) in the first quarter of 2005. HUSI significantly expanded the volume of adjustable rate residential mortgage loans originated during 2004, which were retained in its held loan portfolio. As a result, average residential mortgage loans held increased approximately $20 billion (72%) in the first quarter of 2005. Since the beginning of 2004, approximately $4 billion of residential mortgages have been purchased from HSBC Finance Corporation and from originating lenders pursuant to an HSBC Finance Corporation correspondent loan program. Originations of residential mortgage loans have decreased to more moderate levels in 2005 as compared with 2004, due to the contracting national originations market. The increased average loan balances, and their positive effect on earnings, were partially offset by continued decreases in the average yield earned on residential mortgages during the first quarter of 2005, as consumers continued to take advantage of lower coupon adjustable rate products, resulting in lower overall average yields. The residential mortgage loan portfolio is expected to remain relatively constant through the remainder of 2005. Loan originations, including those resulting from the relationship with HSBC Finance Corporation, are expected to be offset by the fact that HUSI has begun selling a significant portion of variable rate residential mortgage originations, which previously would have been retained in the held loan portfolio. Credit Card Receivables Interest earned from credit card receivables increased $129 million (445%) in the first quarter of 2005. Average credit card receivable balances increased $11 billion (981%) for the quarter. In December of 2004, HUSI acquired the $12 billion private label loan portfolio from HSBC Finance Corporation, which consisted primarily of credit card receivables. HUSI continues to purchase additional credit card receivables on a daily basis from customer relationships owned by HSBC Finance Corporation. For the first quarter of 2005, these additional purchased receivables were offset by customer payments and net charge offs of customer balances, resulting in minimal additional change in total credit card receivables. During the first quarter of 2005, the increase in interest income associated with the acquired portfolio was offset by approximately $166 million of amortization of the premium paid, which significantly reduced the overall average yield for credit card receivables in the quarter. Other Consumer Loans Interest earned from various other domestic consumer lending programs increased $29 million (88%) in the first quarter of 2005. Average balances increased approximately $1.6 billion (78%) in the first quarter of 2005, primarily due to automobile and other consumer loans purchased directly from HSBC Finance Corporation, or from originating lenders pursuant to HSBC Finance Corporation correspondent loan programs. Commercial Loans Interest income from commercial loans increased $64 million (39%) in the first quarter of 2005. Average commercial loan balances increased $4 billion (27%) in the quarter. Targeted growth in small business, middle market and real estate lending portfolios, which began in 2004, has continued to increase loan balances in 2005. HUSI plans to continue to build upon its status as the top small business lender in New York State. 21 Approximately $200 million of commercial loans were purchased directly from HSBC Finance Corporation in December 2004. After amortization of purchase premium, this acquired portfolio had a nominal impact on interest income for the first quarter of 2005. Interest Income - Trading Assets Interest income from trading assets increased $26 million (79%) in the first quarter of 2005. During the quarter, average trading assets increased approximately $3 billion (17%), while the average yield earned on these balances also increased 43 basis points (51%). Interest Income - Short-Term Investments Short-term investments include interest bearing deposits with banks, federal funds sold and securities purchased under resale agreements. Interest income from short-term investments increased $32 million (188%) in the first quarter of 2005. Average short-term investment balances grew $2 billion (34%) in the quarter, while average rates earned also increased significantly, primarily due to increases in the federal funds rate. Interest Expense - Deposits Total interest expense on interest bearing deposits increased $167 million (104%) in the first quarter of 2005. Interest expense increases were noted from both domestic and foreign deposits. Average interest bearing deposits increased $14 billion (24%) in the quarter. Average interest rates paid to these customers also increased significantly in the first quarter of 2005, due to increases in short-term interest rates. Additional resources and priority have been focused on core retail banking businesses, as well as high net worth individuals. Additional deposit products have been developed and offered in recent months, in conjunction with increased marketing efforts, to individuals, small businesses, and middle market commercial customers. Investment in the retail branch network has been, and will continue to be, expanded and reallocated to ensure coverage of high potential growth geographic areas. Continuation of these programs, coupled with additional product expansion and marketing efforts, are key growth initiatives for 2005. Interest Expense - Short-Term Borrowings Interest expense on short-term borrowings increased $34 million (189%) in the first quarter of 2005. Average short-term borrowings balances increased nominally (4%) in the quarter, while the average interest rate paid increased significantly, due primarily to increases in the federal funds rate. Interest Expense - Long-Term Debt Interest expense on long-term debt increased $168 million (329%) in the first quarter of 2005. Average long-term debt balances increased $20 billion (504%) in the quarter, due primarily to new debt issued during 2004 to fund balance sheet growth. A decrease in the average interest rate paid on long-term debt, which resulted from new debt being issued at significantly lower rates than existing debt, partially offset the average balance increases. For a summary of long-term debt outstanding, refer to Note 8 of the consolidated financial statements on page 12 of this Form 10-Q. 22 Other Revenues - -------------- The following table presents the components of other revenues.
- -------------------------------------------------------------------------------------------------------------------------- Increase (Decrease) ------------------------ Three months ended March 31 2005 2004 Amount % - -------------------------------------------------------------------------------------------------------------------------- (in millions) Trust income .......................................... $ 23 $ 24 $ (1) (4) Service charges: HSBC affiliate income ........................... 4 5 (1) (20) Other service charges ........................... 48 46 2 4 ------ ------ ------ ------ Total service charges ........................... 52 51 1 2 ------ ------ ------ ------ Other fees and commissions: Letter of credit fees ........................... 17 17 -- -- Credit card fees ................................ 57 18 39 217 Wealth and tax advisory services ................ 13 10 3 30 HSBC affiliate income ........................... 12 4 8 200 Other fee-based income .......................... 46 59 (13) (22) ------ ------ ------ ------ Total other fees and commissions ................ 145 108 37 34 ------ ------ ------ ------ Securitization revenue ................................ 44 -- 44 -- Other income: Insurance ....................................... 16 10 6 60 HSBC affiliate income ........................... 20 1 19 1,900 Other ........................................... 36 36 -- -- ------ ------ ------ ------ Total other income .............................. 72 47 25 53 ------ ------ ------ ------ Residential mortgage banking revenue (expense) ........ 23 (24) 47 196 Trading revenues ...................................... 96 90 6 7 Securities gains, net ................................. 23 38 (15) (39) ------ ------ ------ ------ Total other revenues .................................. $ 478 $ 334 $ 144 43 ====== ====== ====== ======
Other Fees and Commissions The increase in other fees and commissions in the first quarter of 2005 primarily resulted from credit card fees generated by the private label loan portfolio acquired from HSBC Finance Corporation in December 2004. Other Income Securitization revenue in the first quarter of 2005 resulted directly from the purchase of residual interests in securitized credit card receivables from HSBC Finance Corporation in December 2004. Securitization revenue is comprised of the following activity during the quarter:
- ------------------------------------------------------------------------------------ (in millions) Net replenishment gains, net of provision for credit losses ........... $ 20 Servicing revenue and excess spread ................................... 24 ------- Total ................................................................. $ 44 =======
The securitized trusts require replenishments of receivables to support previously issued securities. Receivables will continue to be sold to these trusts until their revolving periods end, the last of which is expected to occur in 2008. The replenishment gains result from these receivable sales to the trusts. The increase in HSBC affiliate income was primarily due to HBUS's new role, effective October 2004, as originating lender for HSBC Finance Corporation's Taxpayer Financial Services program. HUSI has agreed to sell property to an unaffiliated third party for a gain of approximately $29 million. It is anticipated that this sale will be completed sometime during the second quarter of 2005. 23 Residential Mortgage Banking Revenue The following table presents the components of residential mortgage banking revenue. Net interest income includes interest earned/paid on assets and liabilities of the residential mortgage banking business as well as an allocation of the funding benefit or cost associated with these balances. The net interest income component in the table is included in net interest income in the consolidated statement of income and reflects actual interest earned, net of cost of funds, and adjusted for corporate transfer pricing. Corporate transfer pricing methodology was revised in the first quarter of 2005 resulting in additional internal charges to the residential mortgage banking business from the Corporate, Investment Banking and Markets business segment. Net interest income for the first quarter of 2004 has been adjusted in the table to facilitate an accurate comparison.
- ----------------------------------------------------------------------------------------------------------------------------------- Increase (Decrease) -------------------- Three months ended March 31 2005 2004 Amount % - ----------------------------------------------------------------------------------------------------------------------------------- (in millions) Net interest income ............................................................ $ 129 $ 110 $ 19 17 ------- ------- ------- ------- Servicing related income (expense): Servicing fee income ..................................................... 19 22 (3) (14) MSRs amortization ........................................................ (19) (26) 7 27 MSRs temporary impairment (provision) recovery ........................... 17 (62) 79 127 Trading - Derivative instruments used to offset changes in value of MSRs .......................................................... (5) 36 (41) (114) Gains on sales of available for sale securities .......................... -- 8 (8) (100) ------- ------- ------- ------- Total net servicing related income (expense) ............................. 12 (22) 34 155 ------- ------- ------- ------- Originations and sales related income (expense): Gains on sales of mortgages .............................................. 3 1 2 200 Trading - Forward loan sale commitments .................................. 8 (3) 11 367 - Interest rate lock commitments ................................. (4) (1) (3) (300) Fair value hedge activity (1) ............................................ -- 1 (1) (100) ------- ------- ------- ------- Total net originations and sales related income (expense) ................ 7 (2) 9 450 ------- ------- ------- ------- Other mortgage income .......................................................... 4 -- 4 -- ------- ------- ------- ------- Total residential mortgage banking revenue (expense) included in other revenues ............................................................ 23 (24) 47 196 ------- ------- ------- ------- Total residential mortgage banking related revenue ............................. $ 152 $ 86 $ 66 77 ======= ======= ======= =======
(1) Includes SFAS 133 qualifying fair value adjustments related to residential mortgage banking warehouse fair value hedging activity. Overview Residential mortgage banking related revenue for the first three months of 2005 increased $66 million compared with the same 2004 period. All increases and decreases referenced below for the first quarter of 2005 represent comparisons with the same 2004 period. Net Interest Income Increased net interest income for the first quarter of 2005 resulted from overall growth in the held residential mortgage portfolio. Throughout 2004 there was a significant increase in the held portfolio as strong consumer demand for variable rate residential mortgage loans continued. Commentary regarding residential mortgage interest income is presented on page 21 of this Form 10-Q. 24 Servicing Related Income (Expense) Increased net servicing related income (expense) for the first three months of 2005 was attributable to decreased MSR amortization expense and increased recoveries of the temporary impairment valuation allowance. These were partially offset by decreases in income associated with derivative instruments used to offset changes in the economic value of MSRs. The recorded net book value of MSRs, as well as related amortization expense, are directly impacted by levels of residential mortgage prepayments. Higher levels of prepayments generally increase amortization expense and decrease the net book value of MSRs. During the first three months of 2005, prepayments of residential mortgages, mostly in the form of loan refinancings, have decreased in comparison with 2004 levels, resulting in decreased MSR amortization expense and increased recoveries of temporary MSR impairment compared with amounts recorded in prior periods. Mortgage rates generally rose through the first quarter of 2005 with loan refinance activity representing 45% of total originations in the quarter, as compared with 58% in the first three months of 2004 when rates declined. The positive impacts on MSR amortization and recoveries of the temporary impairment valuation allowance resulting from higher interest rates were offset by decreases in the value of derivative instruments used to offset changes in the economic value of MSRs. The net servicing related income amounts in the tables do not reflect approximately $11 million of unrealized losses, recorded as other comprehensive income, on available for sale securities used to offset changes in the economic value of MSRs as well as net interest income of $2 million on these securities. Additional commentary regarding risk management associated with the MSRs hedging program is presented on pages 39-40 of this Form 10-Q. Originations and Sales Related Income (Expense) The overall increase in originations and sales related income in the first three months of 2005 was attributable to an increase in the volume of loans originated for sale, and a higher basis point gain on each individual sale driven by less market volatility as compared with 2004. During the first three months of 2005, residential mortgages originated with the intention to sell increased 13% from the same 2004 period. A larger volume of adjustable rate residential mortgage loans is being sold in 2005, which previously would have been held on HUSI's balance sheet. Trading Revenues Trading revenues are generated by HUSI's participation in the foreign exchange, credit derivative and precious metals markets; from trading derivative contracts, including interest rate swaps and options; and from trading securities. Trading revenues related to the mortgage banking business are included in residential mortgage banking revenue. The following table presents trading related revenues by business. The data in the table includes interest income earned on trading instruments, net of allocated funding cost associated with the trading positions. The net interest income component is included in net interest income on the consolidated statement of income.
- ---------------------------------------------------------------------------------------------------------------- Increase (Decrease) ------------------------ Three months ended March 31 2005 2004 Amount % - ---------------------------------------------------------------------------------------------------------------- (in millions) Trading revenues .................................. $ 96 $ 90 $ 6 7 Net interest income ............................... 17 17 -- -- -------- -------- -------- -------- Trading related revenues .......................... $ 113 $ 107 $ 6 6 ======== ======== ======== ======== Business: Derivatives instruments ..................... $ 41 $ 43 $ (2) (5) Treasury (primarily securities) ............. 14 1 13 1300 Foreign exchange ............................ 37 34 3 9 Precious metals ............................. 17 17 -- -- Other trading ............................... 4 12 (8) (67) -------- -------- -------- -------- Trading related revenues .......................... $ 113 $ 107 $ 6 6 ======== ======== ======== ========
25 Improved trading results in the first quarter of 2005 were primarily driven by increased securities trading activity. In recent months, HUSI's CIBM business segment has expanded operations and securities products offered to clients, which has resulted in increased activity and improved results. Security Gains, Net The following table presents realized security gains and losses included in the consolidated statement of income.
- ---------------------------------------------------------------------------------------------------------------------------- 2005 2004 -------------------------------- ---------------------------------- Gross Gross Net Gross Gross Net Realized Realized Realized Realized Realized Realized Three months ended March 31 Gains (Losses) Gains Gains (Losses) Gains - ---------------------------------------------------------------------------------------------------------------------------- (in millions) Net security gains included in: Residential mortgage banking related revenue .......................... $ -- $ -- $ -- $ 8 $ -- $ 8 Security gains, net ........................ 23 -- 23 44 (6) 38 ------- ------- ------- ------- ------- ------- $ 23 $ -- $ 23 $ 52 $ (6) $ 46 ======= ======= ======= ======= ======= =======
HUSI maintains various securities portfolios as part of its overall liquidity, balance sheet diversification and risk management strategy. During the first quarter of 2005, approximately $12 million of gains were realized on securities sold to address interest rate sensitivity and balance sheet diversification needs, as compared with gains of $30 million for the same 2004 period. Also in the first quarter of 2005, HUSI realized $10 million of gains on Latin American securities, which were sold in order to reduce its foreign credit risk, as compared with $16 million for the first quarter of 2004. Operating Expenses - ------------------ The following table presents the components of operating expenses.
- ---------------------------------------------------------------------------------------------------------------------------- Increase (Decrease) ------------------------ Three months ended March 31 2005 2004 Amount % - ---------------------------------------------------------------------------------------------------------------------------- (in millions) Salaries and employee benefits ............................ $ 266 $ 252 $ 14 6 Occupancy expense, net .................................... 42 40 2 5 Support services from HSBC affiliates: Fees paid to HTSU for technology services ........... 48 39 9 23 Fees paid to HSBC Finance Corporation for loan servicing and other administrative support ........ 106 4 102 2,550 Other fees, primarily treasury and traded markets services .................................. 64 43 21 49 ------- ------- ------- ------- 218 86 132 153 ------- ------- ------- ------- Other expenses: Equipment and software .............................. 24 29 (5) (17) Marketing ........................................... 14 11 3 27 Outside services .................................... 26 24 2 8 Professional fees ................................... 14 8 6 75 Telecommunications .................................. 5 4 1 25 Postage, printing and office supplies ............... 6 6 -- -- Insurance business .................................. 6 3 3 100 Other ............................................... 33 25 8 32 ------- ------- ------- ------- Total other expenses ................................ 128 110 18 16 ------- ------- ------- ------- Total operating expenses .................................. $ 654 $ 488 $ 166 34 ======= ======= ======= ======= Personnel - average number ................................ 10,830 12,018 (1,188) (10)
All increases and decreases referred to below for the first quarter of 2005 represent comparisons with the same 2004 periods. 26 Overview Total operating expenses increased $166 million (34%) in the first quarter of 2005. Increases in various HSBC affiliate charges and in salaries and employee benefits were the primary drivers of increased expenses. Salaries and Employee Benefits Salaries and employee benefits increased approximately 6% in the first quarter of 2005. Increased payroll taxes and fringe benefit expenses were partially offset by the impact on salaries of a decrease in the average number of personnel employed and by decreased incentive compensation expenses. During 2004, HUSI transferred its brokerage subsidiary and most of its branch operations in Panama to HSBC affiliates, resulting in decreased salaries and related expenses, which were offset by business unit expansions in regional banking, residential mortgage banking, and treasury and traded markets businesses. Support Services From HSBC Affiliates Fees are charged by various related HSBC affiliate entities for technology services, for underwriting and broker-dealer services, for loan origination and servicing, and for other operational and administrative support functions. Additional details regarding HSBC affiliate charges are presented in Note 9 of the consolidated financial statements beginning on page 12 of this Form 10-Q. The overall increases in HSBC affiliate charges are due primarily to the following activity: o fees charged by HTSU for technology services expenses increased in the first quarter of 2005, as HUSI continued to upgrade its automated technology environment; o fees charged by HSBC Finance Corporation for loan origination and servicing expenses have increased significantly due to increased services related to various loan portfolios and other loan balances acquired from HSBC Finance Corporation, and from their correspondents, in 2004. Fees charged by HSBC Finance Corporation for various administrative services have also increased as a result of specific initiatives to centralize administrative functions; and o increased fees charged by HSBC Markets and other HSBC affiliates for treasury and traded markets services provided to HUSI's CIBM business segment. BUSINESS SEGMENTS - -------------------------------------------------------------------------------- Business segments are managed consistently with the line of business groupings used by HSBC. The segments are based upon customer groupings, products and services offered. The Personal Financial Services (PFS), Commercial Banking (CMB), Corporate, Investment Banking and Markets (CIBM), Private Banking (PB) and Other segments are described on pages 5-6 of HUSI's 2004 Form 10-K. Effective for the first quarter of 2005, the table below reflects a new business segment, Consumer Finance (CF), which was reported as a component of PFS in prior periods. The CF segment includes point of sale and other lending activities primarily to meet the financial needs of individuals. Specifically, operating activity within the CF segment relates to various consumer loans and retained interests in securitized receivable trusts purchased from HSBC Finance Corporation, and from originating lenders pursuant to HSBC Finance Corporation correspondent loan programs, begun in 2003. The net interest income component in the following table reflects actual interest earned, net of cost of funds as determined by corporate transfer pricing methodology. The corporate transfer pricing methodology was revised in the first quarter of 2005 resulting in additional internal charges to the residential mortgage banking business, included in PFS, from CIBM. Net interest income for the first quarter of 2004 has been adjusted in the table to facilitate an accurate comparison. As a result, net interest income for CIBM and PFS have been increased and decreased, respectively, by approximately $39 million for the quarter ended March 31, 2004. 27 The following table summarizes the results for each segment.
- ------------------------------------------------------------------------------------------------------------------------ Three months ended March 31 PFS CF CMB CIBM PB Other Total - ------------------------------------------------------------------------------------------------------------------------ (in millions) 2005 Net interest income (1) ..... $ 300 $ 130 $ 154 $ 154 $ 40 $ (3) $ 775 Other revenues .............. 128 80 38 167 58 7 478 ------- ------- ------- ------- ------- ------- ------- Total revenues .............. 428 210 192 321 98 4 1,253 Operating expenses (2) ...... 251 107 98 134 64 -- 654 ------- ------- ------- ------- ------- ------- ------- Working contribution ........ 177 103 94 187 34 4 599 Provision for credit losses (3) 22 109 (5) (18) (1) -- 107 ------- ------- ------- ------- ------- ------- ------- Income before income tax expense ............... $ 155 $ (6) $ 99 $ 205 $ 35 $ 4 $ 492 ======= ======= ======= ======= ======= ======= ======= Average assets .............. $50,752 $18,282 $14,920 $53,101 $ 4,720 $ 309 $142,084 Average liabilities/ equity (4) ................ 43,733 533 16,176 72,243 9,399 -- 142,084 Goodwill at March 31 (5) .... 1,169 -- 468 631 428 -- 2,696 2004 Net interest income (1) ..... $ 268 $ 37 $ 142 $ 179 $ 31 $ (3) $ 654 Other revenues .............. 63 -- 37 166 61 7 334 ------- ------- ------- ------- ------- ------- ------- Total revenues .............. 331 37 179 345 92 4 988 Operating expenses (2) ...... 230 2 86 108 62 -- 488 ------- ------- ------- ------- ------- ------- ------- Working contribution ........ 101 35 93 237 30 4 500 Provision for credit losses (3) ................ 17 2 (9) (34) (2) -- (26) ------- ------- ------- ------- ------- ------- ------- Income before income tax expense ............... $ 84 $ 33 $ 102 $ 271 $ 32 $ 4 $ 526 ======= ======= ======= ======= ======= ======= ======= Average assets .............. $33,082 $ 2,795 $13,069 $46,779 $ 3,614 $ 297 $99,636 Average liabilities/ equity (4) ................ 31,623 (1) 12,656 46,011 9,347 -- 99,636 Goodwill at March 31 (5) .... 1,223 -- 495 631 428 -- 2,777
(1) Net interest income of each segment represents the difference between actual interest earned on assets and interest paid on liabilities of the segment adjusted for a funding charge or credit. Segments are charged a cost to fund assets (e.g. customer loans) and receive a funding credit for funds provided (e.g. customer deposits) based on equivalent market rates. (2) Expenses for the segments include fully apportioned corporate overhead expenses. (3) The provision apportioned to the segments is based on the segments' net charge offs and the change in allowance for credit losses. Credit loss reserves are established at a level sufficient to absorb the losses considered to be inherent in the portfolio. (4) Common shareholder's equity and earnings on common shareholder's equity are allocated back to the segments based on the percentage of capital assigned to the business. (5) The reduction in goodwill from March 31, 2004 to March 31, 2005 resulted from the sale or transfer of certain domestic and foreign operations during 2004. All increases and decreases referred to below for the first quarter 2005 represent comparisons with the same 2004 period. The term "interest rate spread", as used in the following commentary, refers to either: o the percentage difference between the interest rate earned on earning assets, net of amortized premiums and loan fees, and the cost of funds utilized to fund those assets, as calculated using corporate transfer pricing methodology; or o the percentage difference between the interest rate paid on deposits specifically assigned to a business segment and the associated value of funds as calculated using corporate transfer pricing methodology. 28 Personal Financial Services (PFS) Net interest income increased $32 million (12%) in the first quarter of 2005, due primarily to: o significant growth in average balances for residential mortgage and other consumer loan portfolios; and o a more favorable net interest rate spread on deposits. Other revenues increased $65 million (103%) in the first quarter of 2005, due primarily to the following: o non-interest residential mortgage banking revenue increased $47 million in the quarter. See commentary regarding residential mortgage banking revenue beginning on page 24 of this Form 10-Q; and o effective in October 2004, HBUS is the originating lender for HSBC Finance Corporation's Taxpayer Financial Services program. Gains recognized for tax refund anticipation loans sold to HSBC Finance Corporation were approximately $17 million in the first quarter of 2005. Operating expenses increased $21 million in the first quarter of 2005, due primarily to: o increased direct expenses associated with expanded residential mortgage banking, other consumer lending and retail banking operations; and o increased fees paid to HTSU, as HUSI has continued to upgrade its technology environment. Consumer Finance (CF) Net interest income increased $93 million (251%) in the first quarter of 2005, due primarily to average loan growth associated with loans and receivables acquired in 2004 from HSBC Finance Corporation, and from originating lenders pursuant to HSBC Finance Corporation correspondent loan programs. Refer to the Executive Overview on page 17 of this Form 10-Q for further discussion. Other revenues increased $80 million in the first quarter of 2005, due primarily to: o additional credit card and other fees from loans and receivables acquired from HSBC Finance Corporation; and o securitization revenue from residual interests in securitized credit card receivables acquired from HSBC Finance Corporation in December 2004. Operating expenses increased $105 million in the first quarter of 2005, due primarily to increased fees paid to HSBC Finance Corporation for loan origination and servicing. The provision for credit losses increased $107 million, which resulted from the private label loan portfolio acquired from HSBC Finance Corporation in December 2004. Refer to commentary regarding credit quality beginning on page 31 of this Form 10-Q. As previously discussed, new domestic private label credit card receivable originations are purchased from HSBC Finance Corporation on a daily basis. In the second half of 2005, the required minimum monthly payment amounts for these accounts will be revised, in accordance with Federal Financial Institutions Examination Council guidance. Changes to the minimum monthly payment amounts will likely reduce the premiums associated with the daily purchases of receivables, beginning in 2006. The magnitude of the impact is currently being assessed and will depend on the actual payment patterns of customers after the change and other factors that are difficult to predict or quantify. Commercial Banking (CMB) Net interest income and operating expenses increased $12 million (8%) and $12 million (14%) respectively, in the first quarter of 2005. These increases resulted from planned expansion of various small business, middle-market and real estate commercial lending programs. CMB also benefited from more favorable interest rate spreads on deposits during the quarter. Increased expenses also resulted from increased fees paid to HTSU for technology services as HUSI has continued to upgrade its technology environment. 29 Corporate, Investment Banking and Markets (CIBM) Net interest income decreased $25 million (14%) in the first quarter of 2005. Recent increases in short-term interest rates, which have favorably impacted interest rate spreads for deposit generating businesses such as PFS and CMB, had an adverse impact on CIBM funding costs in the first quarter of 2005. Increased trading revenues and other fee-based income were offset by reduced gains on sale of securities, resulting in a nominal net change in other revenues. Operating expenses increased $26 million (24%) in the first quarter of 2005, due to: o increased direct expenses associated with expanded operations in foreign exchange, risk management products, and transaction banking business; o increased expenses associated with development of an infrastructure to support the growing complexity of the CIBM business; o increased fees paid to HTSU for technology services, as CIBM required additional information technology resources to support system conversions and business expansion; and o partially offsetting the above increases was a decrease in compensation expense resulting from a change in the amortization period utilized for share-based compensation. The provision for credit losses increased $16 million in the first quarter of 2005. The net provision credit of $34 million for the first quarter of 2004 reflected a period of unusually low loan charge offs and relatively high recoveries of amounts previously charged off. The net provision credit of $18 million for the first quarter of 2005 resulted from continuation of relatively low charge offs, and a specific $17 million recovery of a loan previously charged off. Private Banking (PB) Net interest income increased $9 million (29%) in the first quarter of 2005. Average earning assets associated with this segment, primarily domestic earning assets, increased approximately 38% for the quarter. Nominal increases in operating expenses and provision for credit losses were also noted for the quarter. Additional priority and resources have been allocated to this segment to expand services provided to high net worth domestic and foreign individuals. During the first quarter of 2005, HUSI recognized a nominal gain on the sale of a portion of its personal trust business which was recorded in other revenues. During the first quarter of 2004, HUSI realized higher revenue from a foreign equity investment, recorded in other revenues, as compared with the first quarter of 2005. 30 CREDIT QUALITY - -------------------------------------------------------------------------------- HUSI's policies and critical estimates associated with its allowance for credit losses are summarized on pages 15, 37-38 and 77-78 of HUSI's 2004 Form 10-K. There have been no material revisions to policies or methodologies in the first quarter of 2005. The following table provides an analysis of changes in the allowance for credit losses and related ratios.
- ------------------------------------------------------------------------------------------------------------------------------------ March 31, December 31, September 30, June 30, March 31, Quarter ended 2005 2004 2004 2004 2004 - ------------------------------------------------------------------------------------------------------------------------------------ (in millions) Balance at beginning of quarter ........................... $ 788 $ 340 $ 347 $ 357 $ 399 Allowance related to acquisitions and (dispositions), net ..................................... -- 505 (11) -- (9) Charge offs: Commercial ....................................... 6 22 18 11 3 Consumer: Residential mortgages ......................... 4 5 2 3 6 Credit card receivables ....................... 159 17 17 16 15 Other consumer loans .......................... 30 6 6 5 5 -------- -------- -------- -------- -------- Total consumer loans .......................... 193 28 25 24 26 -------- -------- -------- -------- -------- Total charge offs ................................ 199 50 43 35 29 -------- -------- -------- -------- -------- Recoveries on loans charged off: Commercial ....................................... 23 12 16 14 18 Consumer: Residential mortgages ......................... -- 1 -- 1 -- Credit card receivables ....................... 44 2 2 2 2 Other consumer loans .......................... 10 2 2 2 2 -------- -------- -------- -------- -------- Total consumer loans .......................... 54 5 4 5 4 -------- -------- -------- -------- -------- Total recoveries ................................ 77 17 20 19 22 -------- -------- -------- -------- -------- Total net charge offs ............................... 122 33 23 16 7 -------- -------- -------- -------- -------- Provision charged (credited) to income .............. 107 (24) 27 6 (26) -------- -------- -------- -------- -------- Balance at end of quarter ........................... $ 773 $ 788 $ 340 $ 347 $ 357 ======== ======== ======== ======== ======== Allowance ratios: Annualized net charge offs to average loans .......................................... .58% .19% .14% .11% .06% Quarter-end allowance to: Quarter-end total loans ....................... .90% .93% .51% .56% .68% Quarter-end total nonaccruing loans ........... 318.11% 298.48% 117.24% 116.05% 108.51%
31 The following table provides a summary of credit quality statistics.
- --------------------------------------------------------------------------------------------------------------------------------- March 31, December 31, September 30, June 30, March 31, 2005 2004 2004 2004 2004 - --------------------------------------------------------------------------------------------------------------------------------- (in millions) Nonaccruing loans Balance at end of period: Domestic: Construction and other real estate .............. $ 28 $ 33 $ 24 $ 32 $ 30 Other commercial ................................ 87 103 136 153 200 ------- ------- ------- ------- ------- Total commercial ................................ 115 136 160 185 230 ------- ------- ------- ------- ------- Residential mortgages ........................... 116 113 94 77 66 Credit card receivables ......................... -- -- 19 20 20 Other consumer loans ............................ -- 1 1 2 2 ------- ------- ------- ------- ------- Total consumer loans ............................ 116 114 114 99 88 ------- ------- ------- ------- ------- Total domestic ..................................... 231 250 274 284 318 ------- ------- ------- ------- ------- International ...................................... 12 14 16 15 11 ------- ------- ------- ------- ------- Total nonaccruing loans ............................... $ 243 $ 264 $ 290 $ 299 $ 329 ======= ======= ======= ======= ======= As a percent of loans: Domestic: Construction and other real estate .............. .33% .40% .30% .42% .41% Other commercial ................................ .72 .87 1.37 1.71 2.33 ------- ------- ------- ------- ------- Total commercial ................................ .56 .68 .90 1.11 1.44 ------- ------- ------- ------- ------- Residential mortgages ........................... .24 .24 .22 .20 .22 Credit card receivables ......................... -- -- 1.69 1.83 1.90 Other consumer loans ............................ -- .03 .05 .10 .11 ------- ------- ------- ------- ------- Total consumer loans ............................ .18 .18 .25 .24 .27 ------- ------- ------- ------- ------- Total domestic ..................................... .28 .30 .43 .48 .65 International ...................................... .41 .49 .53 .44 .31 ------- ------- ------- ------- ------- Total ................................................. .28% .31% .43% .48% .63% ======= ======= ======= ======= ======= Interest income on nonaccruing loans (quarterly total): Amount which would have been recorded had the associated loans been current in accordance with their original terms ................ $ 5 $ 6 $ 5 $ 5 $ 7 Amount actually recorded .............................. 3 5 5 4 3 Accruing loans contractually past due 90 days or more as to principal or interest: Total commercial ...................................... $ 13 $ 13 $ 15 $ 6 $ 12 ------- ------- ------- ------- ------- Residential mortgages ................................. 1 1 2 1 1 Credit card receivables ............................... 210 223 3 2 -- Other consumer loans .................................. 15 22 16 13 10 ------- ------- ------- ------- ------- Total consumer loans ............................... 226 246 21 16 11 Total accruing loans contractually past due 90 days or more ...................................... $ 239 $ 259 $ 36 $ 22 $ 23 ======= ======= ======= ======= ======= Criticized assets (balance at end of period): Special mention ....................................... $ 728 $ 784 $ 734 $ 673 $ 707 Substandard ........................................... 535 590 383 532 632 Doubtful .............................................. 34 46 67 66 87 ------- ------- ------- ------- ------- Total ................................................. $ 1,297 $ 1,420 $ 1,184 $ 1,271 $ 1,426 ======= ======= ======= ======= ======= Impaired loans: Balance at end of period .............................. $ 119 $ 236 $ 252 $ 281 $ 314 Amount with impairment reserve ........................ 96 210 233 263 296 Impairment reserve .................................... 21 18 38 38 61 Other real estate and owned assets: Balance at end of period .............................. $ 20 $ 15 $ 14 $ 17 $ 16 Ratio of total nonaccruing loans, other real estate and owned assets to total assets ............. .19% .20% .25% .28% .34%
32 Overview The allowance for credit losses decreased $15 million during the first quarter of 2005. The provision for credit losses of $107 million was more than offset by total net charge offs of $122 million during the quarter. The allowance for credit losses increased $416 million from March 31, 2004 to March 31, 2005, primarily due to the addition of reserves associated with the acquisition of approximately $12 billion of loans, primarily private label credit card receivables, from HSBC Finance Corporation in December of 2004. Commercial Loan Credit Quality The allowance for credit losses associated with commercial loan portfolios decreased $9 million during the first quarter of 2005. Net recoveries of $17 million during the quarter were more than offset by a $26 million credit in the provision for loan losses associated with commercial loans. General improvement of commercial loan credit quality continued during the first quarter, as evidenced by decreased nonaccruing loan balances, decreased criticized asset balances, decreased impaired loans balances, a relatively low level of charge offs, and a relatively high level of recoveries of balances previously charged off. HUSI expects that a more normalized commercial credit environment for the remainder of 2005 will result in lower recoveries and higher provision expense. Although overall commercial credit quality is expected to remain stable and well controlled, any sudden and/or unexpected adverse economic events or trends could significantly affect credit quality and increase provisions for credit losses. Credit Card Receivable Credit Quality The allowance for credit losses associated with credit card receivables decreased $7 million during the first quarter of 2005. Net charge offs of $115 million were substantially offset by provision expense for the quarter of $108 million. This activity is a direct result of the $12 billion private label loan portfolio acquired from HSBC Finance Corporation in December of 2004, which primarily consisted of credit card receivables. The acquired portfolio is considered to be prime credit quality, with historical credit losses ranging from 5%-6% over the past few years. The following table provides credit quality data for credit card receivables. The March 31, 2004 data pertains to HUSI's credit card portfolio held prior to acquisition of the private label portfolio.
- --------------------------------------------------------------------------------------------------------------------------------- March 31, December 31, March 31, 2005 2004 2004 - --------------------------------------------------------------------------------------------------------------------------------- (in millions) Accruing balances contractually past due 90 days or more: Balance at end of quarter ................................................... $ 210 $ 223 $ -- As a percent of total credit card receivables ............................... 1.74% 1.85% --% Allowance for credit losses associated with credit card receivables: Balance at end of quarter ................................................... $ 541 $ 548 $ 46 As a percent of total credit card receivables ............................... 4.51% 4.54% 4.37% Net charge offs of credit card receivables: Total for the quarter ended ................................................. $ 115 $ 15 $ 13 As a percent of average credit card receivables for the quarter ............. .95% 1.01% 1.15%
Receivables included in the private label credit card portfolio are generally maintained in accruing status until being charged off six months after delinquency. Other Consumer Loan Credit Quality The allowance for credit losses associated with residential mortgage and other consumer loans was unchanged for the first quarter of 2005, as net charge offs of $24 million were offset by the same amount of provision expense. Net charge offs and the provision for credit losses increased $15 million and $11 million respectively, as compared with the prior quarter, due to activity associated with loans acquired from HSBC Finance Corporation during 2004. 33 DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - -------------------------------------------------------------------------------- HUSI is party to various derivative financial instruments as an end user, as an international dealer in derivative instruments, and for purely trading purposes in order to realize profits from short-term movements in interest rates, commodity prices, foreign exchange rates and credit spreads. Additional information regarding the use of various derivative instruments is included on pages 79-80 and pages 107-109 of HUSI's 2004 Form 10-K. Notional Values of Derivative Contracts The following table summarizes the notional values of derivative contracts. - -------------------------------------------------------------------------------- March 31, December 31, 2005 2004 - -------------------------------------------------------------------------------- (in millions) Interest rate: Futures and forwards ..................... $ 74,626 $ 79,830 Swaps .................................... 1,361,052 1,219,657 Options written .......................... 131,469 105,582 Options purchased ........................ 153,886 90,635 ---------- ---------- 1,721,033 1,495,704 ---------- ---------- Foreign exchange: Swaps, futures and forwards .............. 268,420 234,424 Options written .......................... 33,053 42,719 Options purchased ........................ 34,254 43,200 Spot ..................................... 38,836 21,927 ---------- ---------- 374,563 342,270 ---------- ---------- Commodities, equities and precious metals: Swaps, futures and forwards .............. 50,932 40,876 Options written .......................... 11,814 10,648 Options purchased ........................ 13,193 11,729 Credit derivatives ....................... 187,372 135,937 ---------- ---------- 263,311 199,190 ---------- ---------- Total .......................................... $2,358,907 $2,037,164 ========== ========== Credit and Market Risk Associated with Derivative Contracts The notional value of derivative contracts only provides an indicator of the transaction volume in these types of instruments. It does not represent exposure to market or credit risks under these contracts. Credit (or repayment) risk in derivative instruments is minimized by entering into transactions with high quality counterparties including other HSBC group entities. Counterparties include financial institutions, government agencies, both foreign and domestic, corporations, funds (mutual funds, hedge funds, etc.), insurance companies and private clients. These counterparties are subject to regular credit review by the credit risk management department. Most derivative contracts are governed by an International Swaps and Derivatives Association Master Agreement. Depending on the type of counterparty and the level of expected activity, bilateral collateral arrangements may be required as well. 34 The following table presents credit risk exposure and net fair value associated with derivative contracts. Total fair value of derivative receivables reflects revaluation gains from the marking to market of derivative contracts held for trading purposes, for all counterparties with an International Swaps and Derivatives Association Master Agreement in place. The net fair value of all derivative contracts represents the total fair value previously described, less the net liability balance representing revaluation losses from the marking to market of derivative contracts held for trading purposes.
- ----------------------------------------------------------------------------------------------------------- March 31, December 31, 2005 2004 - ----------------------------------------------------------------------------------------------------------- (in millions) Credit risk exposure associated with derivative contracts: Total fair value of derivative receivables ...................... $ 8,246 $ 9,607 Collateral held against exposure ................................ (3,366) (4,091) ---------- ---------- Net credit risk exposure .............................................. $ 4,880 $ 5,516 ========== ========== Net fair value of all derivative contracts ............................ $ (476) $ (249) ========== ==========
OFF-BALANCE SHEET ARRANGEMENTS - -------------------------------------------------------------------------------- The following table provides maturity information related to off-balance sheet arrangements and lending and sales commitments. Descriptions of these arrangements are found on pages 43-44 of HUSI's 2004 Form 10-K.
- ------------------------------------------------------------------------------------------------------------------------- One Over One Over Year Through Five March 31, 2005 or Less Five Years Years Total - ------------------------------------------------------------------------------------------------------------------------- (in millions) Standby letters of credit, net of participations ......... $ 3,521 $ 1,857 $ 155 $ 5,533(1) Commercial letters of credit ............................. 881 27 -- 908 Loan sales with recourse ................................. -- 1 9 10(2) Credit derivative contracts .............................. 1,844 88,530 10,866 101,240(3) Commitments to extend credit: Commercial ......................................... 21,558 18,219 2,532 42,309 Consumer ........................................... 5,962 -- -- 5,962 Commitments to deliver mortgage backed securities ........ 2,832 -- -- 2,832 Securities lending indemnifications ...................... 5,101 -- -- 5,101 --------- --------- --------- --------- Total .................................................... $ 41,699 $ 108,634 $ 13,562 $ 163,895 ========= ========= ========= =========
(1) Includes $398 million issued for the benefit of related parties. (2) $8 million of this amount is indemnified by third parties. (3) Includes $12,546 million issued for the benefit of related parties. Letters of Credit Fees are charged for issuing letters of credit commensurate with the customer's credit evaluation and the nature of any collateral. Included in other liabilities are deferred fees on standby letters of credit, representing the fair value of the "stand ready obligation to perform" under these guarantees, amounting to $18 million and $15 million at March 31, 2005 and December 31, 2004 respectively. Also included in other liabilities is an allowance for credit losses on unfunded standby letters of credit of $22 million and $28 million at March 31, 2005 and December 31, 2004 respectively. Securities Lending Indemnifications HUSI may lend securities of customers, on a fully collateralized basis, as an agent to third party borrowers. Customers are indemnified against the risk of loss, and collateral is obtained from the borrower with a market value exceeding the value of the loaned securities. At March 31, 2005, the fair value of that collateral was approximately $5,206 million. 35 VARIABLE INTEREST ENTITIES (VIEs) - -------------------------------------------------------------------------------- The following table provides information for unconsolidated VIEs at March 31, 2005. Descriptions of these VIE relationships are included in pages 111-112 of HUSI's 2004 Form 10-K. - -------------------------------------------------------------------------------- Maximum Total Exposure March 31, 2005 Assets to Loss - -------------------------------------------------------------------------------- (in millions) Asset backed commercial paper conduits ............. $ 6,869 $ 5,339 Securitization vehicles ............................ 1,034 551 Investment funds ................................... 3,908 109 Capital funding vehicles ........................... 1,115 32 Low income housing tax credits ..................... 986 134 --------- --------- Total .............................................. $ 13,912 $ 6,165 ========= ========= Asset Backed Commercial Paper Conduits In the normal course of business, HUSI provides liquidity facilities to asset backed commercial paper conduits sponsored by unrelated third parties. HUSI does not transfer their own receivables into the financing entity, has no ownership interest, no administrative duties, and does not service any assets of these conduits. The only interest HUSI has in these entities are liquidity facilities in the amount of approximately $1.3 billion at March 31, 2005. These facilities are excluded from the table summarizing HUSI's involvement in VIEs. CAPITAL - -------------------------------------------------------------------------------- The following table presents the capital ratios of HUSI and HBUS calculated in accordance with banking regulations. To be categorized as "well-capitalized" under the Federal Reserve Board and Federal Deposit Insurance Corporation guidelines, a banking institution must have the minimum ratios reflected in the table, and must not be subject to a directive, order, or written agreement to meet and maintain specific capital levels.
- ----------------------------------------------------------------------------------------------------------------- "Well-Capitalized" March 31, December 31, Minimum 2005 2004 - ----------------------------------------------------------------------------------------------------------------- Total capital (to risk weighted assets) HUSI ............................................... 10.00% 12.47% 12.53% HBUS ............................................... 10.00 12.51 12.46 Tier 1 capital (to risk weighted assets) HUSI ............................................... 6.00 8.37 8.34 HBUS ............................................... 6.00 8.72 8.66 Tier 1 capital (to average assets) HUSI ............................................... 3.00 6.48 7.20 HBUS ............................................... 5.00 6.78 7.51 Tangible common equity (to risk weighted assets) HUSI ............................................... 7.11 7.07 HBUS ............................................... 8.75 8.69
36 RISK MANAGEMENT - -------------------------------------------------------------------------------- Overview Some degree of risk is inherent in virtually all of HUSI's activities. For the principal activities undertaken by HUSI, the most important types of risks are considered to be credit, interest rate, market, liquidity, operational, fiduciary and reputational. Market risk broadly refers to price risk inherent in mark to market positions taken on trading and non-trading instruments. Operational risk technically includes legal and compliance risk. However, since compliance risk, including anti-money laundering (AML) risk, has such broad scope within HUSI's businesses, it is addressed as a separate functional discipline. During the first three months of 2005, there have been no significant changes in policies or approach for managing various types of risk. Liquidity Management HUSI's approach to address liquidity risk is summarized on pages 49-50 of HUSI's 2004 Form 10-K. HUSI's ability to regularly attract wholesale funds at a competitive cost is enhanced by strong ratings from the major credit ratings agencies. Long-term credit ratings are unchanged from December 31, 2004. HUSI periodically issues capital instruments to fund balance sheet growth, to meet cash and capital needs, or to fund investments in subsidiaries. In April 2005, HUSI issued 20,700,000 floating rate non-cumulative preferred shares. Total proceeds of this issuance, net of transaction fees, were approximately $500 million. Commentary regarding growth and composition of the consolidated balance sheet is provided on pages 17-18 of this Form 10-Q. Interest Rate Risk Management Various techniques are utilized to quantify and monitor risks associated with the repricing characteristics of HUSI's assets, liabilities, and derivative contracts. The approach toward managing interest rate risk is summarized on pages 51-56 of HUSI's 2004 Form 10-K. During the first quarter of 2005, there were no significant changes in policies or approach for managing interest rate risk. Present Value of a Basis Point (PVBP) Analysis PVBP is the change in value of the balance sheet for a one basis point upward movement in all interest rates. The following table reflects the PVBP position at March 31, 2005.
- ------------------------------------------------------------------------------------------------------------------- March 31, 2005 Values - ------------------------------------------------------------------------------------------------------------------- (in millions) Institutional PVBP movement limit ................................................................ +/- $ 6.5 PVBP position at period end ...................................................................... (3.4)
Capital at Risk Capital at risk is the change in base case valuation of the balance sheet for either a 200 basis point gradual rate increase or a 100 basis point gradual rate decrease. The projected changes in valuation are reflected on an after tax basis. The following table reflects the capital at risk position at March 31, 2005.
- ------------------------------------------------------------------------------------------------------------------- March 31, 2005 Values - ------------------------------------------------------------------------------------------------------------------- Institutional capital at risk movement limit ..................................................... +/- 10% Projected change in value resulting from a gradual 200 basis point increase in interest rates .... (7) Projected change in value resulting from a gradual 100 basis point decrease in interest rates .... (2)
37 The projected drop in value for a 100 basis point gradual decrease in rates is primarily related to the anticipated acceleration of prepayments for the held mortgage and mortgage backed securities portfolios in this lower rate environment. This assumes that no management actions are taken to manage exposures to the changing interest rate environment. Dynamic Simulation Modeling Various modeling techniques are utilized to monitor a number of interest rate scenarios for their impact on net interest income. These techniques include both rate shock scenarios which assume immediate market rate movements of 200 basis points, as well as scenarios in which rates rise or fall by as much as 200 basis points over a twelve month period. The following table reflects the impact on net interest income of the scenarios utilized by these modeling techniques.
- ----------------------------------------------------------------------------------------------------------------------------- March 31, 2005 Values ----------------------- Amount % - ----------------------------------------------------------------------------------------------------------------------------- (in millions) Projected change in net interest income (reflects projected rate movements on April 1, 2005): Institutional base earnings movement limit ................................................. - 10 Change resulting from a gradual 200 basis point increase in the yield curve ................ $ (72) (2) Change resulting from a gradual 200 basis point decrease in the yield curve ................ 464 15 Other significant scenarios monitored (reflects projected rate movements on April 1, 2005): Change resulting from an immediate 100 basis point increase in the yield curve ............. (6) Change resulting from an immediate 100 basis point decrease in the yield curve ............. 218 Change resulting from an immediate 200 basis point increase in the yield curve ............. (120) Change resulting from an immediate 200 basis point decrease in the yield curve ............. 431 Change resulting from an immediate 75-100 basis point decrease in long-term rates and a decrease of 50 basis points in short-term rates ........................................ 117 Change resulting from an immediate 100 basis point increase in short-term rates ............ (97)
The projections do not take into consideration possible complicating factors such as the effect of changes in interest rates on the credit quality, size and composition of the balance sheet. Therefore, although this provides a reasonable estimate of interest rate sensitivity, actual results will vary from these estimates, possibly by significant amounts. Capital Risk/Sensitivity of Other Comprehensive Income Large movements of interest rates could directly affect some reported capital and capital ratios. The mark to market valuation of available for sale securities is credited on a tax effective basis through other comprehensive income in the consolidated statement of changes in shareholders' equity. This valuation mark is excluded from Tier 1 and Tier 2 capital ratios but it would be included in two important accounting based capital ratios: the tangible common equity to tangible assets and the tangible common equity to risk weighted assets. As of March 31, 2005, HUSI had an available for sale securities portfolio of approximately $16 billion with a net negative mark to market of $194 million included in tangible common equity of $8 billion. An increase of 25 basis points in interest rates of all maturities would lower the mark to market by approximately $165 million to a net loss of $359 million with the following results on the tangible capital ratios.
- -------------------------------------------------------------------------------------------------------------- Proforma - Reflecting 25 Basis Points March 31, 2005 Actual Increase in Rates - -------------------------------------------------------------------------------------------------------------- Tangible common equity to tangible assets ................................. 5.51% 5.44% Tangible common equity to risk weighted assets ............................ 7.11 7.02
Value at Risk (VAR) VAR analysis is also used to measure interest rate risk and to calculate the economic capital required to cover potential losses due to interest risk. The approach toward using VAR to measure interest rate risk is summarized on pages 53-54 of HUSI's 2004 Form 10-K. 38 Trading Activities Trading portfolios reside primarily in the CIBM and residential mortgage banking areas and include foreign exchange, derivatives, precious metals (gold, silver, platinum), commodities, equities and money market instruments. The trading portfolios have defined limits pertaining to items such as permissible investments, risk exposures, loss review, balance sheet size and product concentrations. Loss review refers to the maximum amount of loss that may be incurred before senior management intervention is required. Trading Activities - Treasury Value at Risk The following table summarizes trading VAR, assuming a 99% confidence level for a two year observation period and a 10 day holding period.
- -------------------------------------------------------------------------------------------------------- Three Months Ended March 31, 2005 March 31, ----------------------------------- December 31, 2005 Minimum Maximum Average 2004 - -------------------------------------------------------------------------------------------------------- (in millions) Total trading ..................... $ 44 $ 16 $ 51 $ 31 $ 41 Commodities ....................... 3 1 10 3 11 Credit derivatives ................ 23 5 29 11 9 Equities .......................... -- -- 3 1 1 Foreign exchange .................. 6 1 13 5 1 Interest rate ..................... 36 17 48 25 27
Trading Volatility The following tables summarize the frequency distribution of daily market risk-related revenues for Treasury trading activities. Market risk-related Treasury trading revenues include realized and unrealized gains (losses) related to Treasury trading activities, but exclude the related net interest income. Analysis of gain (loss) data for the first three months of 2005 shows that the largest daily gain was $13 million and the largest daily loss was $2 million.
- -------------------------------------------------------------------------------------------------------- Three months ended March 31, 2005 - -------------------------------------------------------------------------------------------------------- Ranges of daily Treasury trading revenue earned from market risk-related activities $(2) to $0 to $2 to $4 to Over (in millions) $0 $2 $4 $6 $6 Number of trading days market risk-related revenue was within the stated range ............ 10 27 14 6 4
Trading Activities - Mortgage Banking HUSI's MSRs hedging program is constantly monitored to ensure that the program in place supports anticipated business growth while at the same time limiting volatility in the mortgage banking results. The economic value of the net hedged MSRs portfolio is monitored on a daily basis for interest rate sensitivity. If the economic value declines by more than established limits for one day or one month, various levels of management review, intervention and/or corrective actions are required. 39 Rate Shock Analysis Modeling techniques are used to monitor certain interest rate scenarios for their impact on the economic value of net hedged MSRs, as reflected in the following table.
- ------------------------------------------------------------------------------------------------------------------------ March 31, 2005 Values ---------------------- Amount % - ------------------------------------------------------------------------------------------------------------------------ (in millions) Projected change in net market value of hedged MSRs portfolio (reflects projected rate movements on April 1, 2005): Value of hedged MSRs portfolio ......................................................... $ 320 Change resulting from an immediate 50 basis point decrease in the yield curve: Change limit (no worse than) ........................................................ - 4 Calculated change in net market value ............................................... (3) - 1 Change resulting from an immediate 50 basis point increase in the yield curve: Change limit (no worse than) ........................................................ - 2 Calculated change in net market value ............................................... 4 + 1 Change resulting from an immediate 100 basis point increase in the yield curve: Change limit (no worse than) ........................................................ - 3 Calculated change in net market value ............................................... 8 + 2
Hedge Volatility The following tables summarize the frequency distribution of the weekly economic value of the MSR asset, net of changes in the market value of the related hedge positions.
- ------------------------------------------------------------------------------------------------------------------- Three months ended March 31, 2005 - ------------------------------------------------------------------------------------------------------------------- Ranges of mortgage trading revenue earned from market risk-related activities Below $(4) to $(2) to $0 to Over (in millions) $(4) $(2) $0 $2 $2 Number of trading weeks market risk-related revenue was within the stated range ....................... 1 2 1 6 2
40 Item 3. Quantitative and Qualitative Disclosures About Market Risk - -------------------------------------------------------------------------------- Refer to Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, under the captions "Interest Rate Risk Management" and "Trading Activities", beginning on page 37 of this Form 10-Q. Item 4. Controls and Procedures - -------------------------------------------------------------------------------- Disclosure Controls With the participation of the Chief Executive Officer and Chief Financial Officer, the effectiveness of HUSI's disclosure controls and procedures was evaluated as of the end of the period covered by this report. The disclosure controls and procedures are designed to ensure that information required to be disclosed by HUSI in the reports we file under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported on a timely basis. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that disclosure controls and procedures were effective as of the end of the period covered by this report so as to alert them in a timely fashion to material information required to be disclosed in reports filed under the Exchange Act. Internal Controls There have not been any changes in HUSI's internal control over financial reporting during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, HUSI's internal controls over financial reporting. Sarbanes-Oxley Section 404 Compliance As an SEC registrant of public debt and preferred shares HUSI is required to comply with the Sarbanes-Oxley Act of 2002 (the Act). Section 404 of the Act (Section 404) requires registrants and their auditors to assess and report on internal controls over financial reporting on an annual basis. As a subsidiary of a foreign registrant, HUSI is required to comply with Section 404 of the Act for the fiscal year ending December 31, 2006. 41 Part II - OTHER INFORMATION - -------------------------------------------------------------------------------- Item 1 - Legal Proceedings HUSI is named in and is defending legal actions in various jurisdictions arising from its normal business. None of these proceedings is regarded as material litigation. In addition, there are certain proceedings related to the "Princeton Note Matter" that are described below. In relation to the Princeton Note Matter, as disclosed in HUSI's 2002 Annual Report on Form 10-K, two of the noteholders were not included in the settlement and their civil suits are continuing. The U.S. Government excluded one of them from the restitution order (Yakult Honsha Co., Ltd.) because a senior officer of the noteholder was being criminally prosecuted in Japan for his conduct relating to its Princeton Notes. The senior officer in question was convicted during September 2002 of various criminal charges related to the sale of the Princeton Notes. The U.S. Government excluded the other noteholder (Maruzen Company, Limited) because the sum it is likely to recover from the Princeton Receiver exceeds its losses attributable to its funds transfers with Republic New York Securities Corporation as calculated by the U.S. Government. Both of these civil suits seek compensatory, punitive, and treble damages pursuant to RICO and assorted fraud and breach of duty claims arising from unpaid Princeton Notes with face amounts totaling approximately $125 million. No amount of compensatory damages is specified in either complaint. These two complaints name HUSI, HBUS, and Republic New York Securities Corporation as defendants. HUSI and HBUS have moved to dismiss both complaints. The motion is fully briefed and sub judice. Mutual production of documents took place in 2001, but additional discovery proceedings have been suspended pending the Court's resolution of the motions to dismiss. Item 5 - Other Information As approved by the Audit and Examining Committee of the Board of Directors, HUSI has engaged KPMG to perform certain non-audit services during 2005, including tax compliance and consultation services, litigation support services and general accounting consultation services. Item 6 - Exhibits 3(i) Registrant's Restated Certificate of Incorporation and Amendments thereto, effective March 30, 2005. (ii) Registrant's By-Laws, as Amended and Restated, effective April 21, 2005. 4 Instruments Defining the Rights of Security Holders, including Indentures, incorporated by reference to previously filed periodic reports. 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.0 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 42 SIGNATURE - -------------------------------------------------------------------------------- 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 16, 2005 /s/ Joseph R. Simpson ------------------------------- Joseph R. Simpson Chief Accounting Officer (On behalf of Registrant) 43 EX-3.(I) 2 d63856_ex3-i.txt REGISTRANT'S RESTATED CERTIFICATE OF INCORP Exhibit 3 (i) HSBC USA INC. ARTICLES OF AMENDMENT HSBC USA Inc., a Maryland corporation (hereinafter referred to as the "Corporation"), hereby certifies to the State Department of Assessments and Taxation of Maryland that: FIRST: The charter of the Corporation is hereby amended by striking out the first paragraph of Article FIFTH of the Articles of Incorporation and inserting in lieu thereof the following: "FIFTH: The total number of shares of all classes of capital stock which the Corporation shall have the authority to issue is 190,999,000 shares, of which 40,999,000 shares shall be shares of Preferred Stock without par value (hereinafter called "Preferred Stock") and 150,000,000 shares shall be shares of Common Stock of the par value of FIVE DOLLARS ($5.00) per share (hereinafter call "Common Stock") having an aggregate par value of SEVEN HUNDRED FIFTY MILLION dollars ($750,000,000)." SECOND: The Board of Directors of the Corporation, at a meeting held on March 28, 2005, duly adopted a resolution in which was set forth the foregoing amendment to the charter, declaring that said amendment of the charter as proposed was advisable and directing that it be submitted for action thereon by the sole holder of the common stock of the Corporation. THIRD: The amendment of the charter of the Corporation as hereinabove set forth was approved by the sole holder of the common stock of the Corporation by written consent in lieu of a meeting dated March 30, 2005 in accordance with Sections 2-505 and 2-604 of the Maryland General Corporation Law and Article II, Section 9 of the bylaws of the Corporation. FOURTH: (a) As of immediately before this amendment, the total shares of all classes of stock which the Corporation was authorized to issue is 169,999,000 shares, divided into 19,999,000 shares of Preferred Stock without par value and 150,000,000 shares of Common Stock with the par value of Five Dollars ($5.00) per share having an aggregate par value of Seven Hundred Fifty Million Dollars ($750,000,000). (b) As amended, the total number of shares of all classes of stock which the Corporation has authority to issue is 190,999,000 shares, divided into 40,999,000 shares of Preferred Stock without par value and 150,000,000 shares of Common Stock of the par value of Five Dollars ($5.00) per share having an aggregate par value of Seven Hundred Fifty Million Dollars ($750,000,000). (c) A description of each class of stock of the Corporation with the preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualification and terms and conditions of redemption, of each class of the authorized capital stock as increased, is set forth in the charter of the Corporation, and such description has not been changed by the amendment of the charter of the Corporation herein set forth. The undersigned officer, on behalf of the Corporation, acknowledges this instrument to be the corporate act of the Corporation and states under the penalties of perjury that to the best of her knowledge, information and belief the matters and facts herein set forth with respect to approval are true in all material respects. 44 IN WITNESS WHEREOF, HSBC USA INC. has caused these presents to be signed in its name and on its behalf on March 30, 2005. HSBC USA Inc. By: /s/ Janet L. Burak --------------------------------- Name: Janet L. Burak Title: Senior Executive Vice President, General Counsel and Secretary Witnessed: /s/ Laurence Stern - -------------------------------- Name: Laurence Stern Title: Assistant Secretary 45 HSBC USA INC. ARTICLES SUPPLEMENTARY HSBC USA INC., a Maryland corporation having its principal Maryland office in the City of Baltimore, State of Maryland (hereinafter called the "Corporation"), hereby certifies to the State Department of Assessments and Taxation of Maryland that: FIRST: Pursuant to authority expressly vested in the Board of Directors of the Corporation by Article FIFTH of the Charter of the Corporation, the Board of Directors has authorized the classification of 27,600,000 of the 40,990,000 shares of Preferred Stock (the "Preferred Stock") that the Corporation now has authority to issue into a series designated the Floating Rate Non-Cumulative Preferred Stock, Series F, and has provided for the issuance of such series. SECOND: The number of shares and terms of the Floating Rate Non-Cumulative Preferred Stock, Series F, as established by the authorized officers of the Corporation pursuant to authority duly delegated by the Board of Directors, are as follows: 1. Series F Preferred Stock. 27,600,000 shares of Preferred Stock of the Corporation, without par value, are hereby constituted as the original number of shares of a series of Preferred Stock designated as Floating Rate Non-Cumulative Preferred Stock, Series F (the "Series F Preferred Stock"). The Series F Preferred Stock is issuable in whole shares only. The Series F Preferred Stock shall be of a stated value of $25 per share. The term "Charter" when used herein shall include the Corporation's Articles of Incorporation and all amendments and supplements thereto. 2. Dividends. (i) Holders of shares of Series F Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors of the Corporation or a duly authorized committee thereof out of funds of the Corporation legally available for payment, non-cumulative cash dividends at the Applicable Rate (as defined below). Dividends on the Series F Preferred Stock shall accrue from the date of original issuance and shall be payable quarterly, in arrears, on the first day of January, April, July and October of each year, with the first such dividend being payable on July 1, 2005 (each a "dividend payment date"); provided, that the first dividend shall accrue, without interest, from and including the date of original issuance of the Series F Preferred Stock to but excluding July 1, 2005 (the "Initial Period"), and will be payable on July 1, 2005; provided further, that if any date on which dividends would otherwise be payable is not a New York business day, then the dividend payment date will be the next succeeding New York business day, unless such day falls in the next calendar month, in which case the dividend payment date will be the immediately preceding New York business day. "New York business day" means any day that is not a Saturday or Sunday and that, in New York City, is not a day on which banking institutions generally are authorized or obligated by law or executive order to be closed. Dividends on shares of the Series F Preferred Stock shall be non-cumulative and shall accrue (whether or not earned or declared) on a daily basis, without interest, from and including the previous dividend payment date to but excluding the current dividend payment date (for avoidance of doubt, in each case as such dividend payment date may have been postponed or accelerated as aforesaid). Accrued and unpaid dividends shall not bear interest. Dividends shall be payable to holders of record as they appear on the stock books of the Corporation on each record date, which shall be the date, not more than 60 nor less than 10 days preceding each dividend payment date, as shall be fixed by the Board of Directors of the Corporation. Dividends payable on the Series F Preferred Stock shall be computed on the basis of a 360-day year and the actual number of days elapsed. Dividends shall cease to accrue on the Series F Preferred Stock on the date of their earlier redemption pursuant to paragraph 6 below, unless the Corporation shall default in providing funds for the payment of the redemption price on the shares called for redemption pursuant thereto. (ii) Notwithstanding paragraph (i) above, if on or prior to any dividend payment date the Board of Directors determines in its absolute discretion that the dividend that would have otherwise been declared and payable on that dividend payment date should not be paid, or should be paid only in part, then the dividend for that dividend period shall, in accordance with such determination, either not be declared and payable at all or only be 46 declared and payable in part. "Dividend period" means the period from and including each dividend payment date to but excluding the next succeeding dividend payment date, except that the initial dividend period will be the period from and including the date of original issue to but excluding July 1, 2005 (iii) If a dividend on the Series F Preferred Stock is not paid, or is paid only in part, pursuant to paragraph (ii) above, the holders of the Series F Preferred Stock shall have no claim in respect of such non-payment or non-payment in part, as applicable. The Corporation shall have no obligation to pay the dividend accrued for the relevant dividend period or to pay interest thereon, whether or not dividends on the Series F Preferred Stock are declared for any subsequent dividend period. (iv) If in any dividend period or, in the case of the Initial Period, from the date of original issuance to but excluding July 1, 2005) dividends at the Applicable Rate per share per annum shall not have been paid or declared and set apart for payment on all outstanding shares of Series F Preferred Stock for such dividend period, the Corporation may not (i) declare or pay any dividends or other distributions (excluding dividends paid in shares of, or options, warrants or rights to subscribe for or purchase shares of, Common Stock of the Corporation or shares of any other capital stock of the Corporation ranking junior to the Series F Preferred Stock with respect to the payment of dividends and distribution of assets upon liquidation, dissolution or winding up of the Corporation) or set funds apart for payment on the Common Stock or on any other capital stock of the Corporation ranking junior to the Series F Preferred Stock with respect to the payment of dividends, or (ii) purchase, redeem or otherwise acquire any shares of Preferred Stock or any shares of capital stock of the Corporation ranking on a parity with or junior to the Series F Preferred Stock with respect to the payment of dividends, except by conversion into or exchange for capital stock of the Corporation ranking junior to the Series F Preferred Stock with respect to the payment of dividends and distribution of assets upon liquidation, dissolution or winding up of the Corporation, until the earlier of (A) the date on which the Corporation next declares and pays (or sets aside funds for payment of) in full dividends on the Series F Preferred Stock at the Applicable Rate per share per annum for any subsequent dividend period or (B) the date on or by which all of the Series F Preferred Stock are either redeemed in full or purchased by or for the account of the Corporation, in each case in accordance with the Charter of the Corporation and the terms of the Series F Preferred Stock; provided, however, that any moneys set aside in trust as a sinking fund payment for any series of Preferred Stock pursuant to the resolutions providing for the issue of shares of such series may thereafter be applied to the purchase or redemption of Preferred Stock of such series whether or not at the time of such application full accrued dividends upon the outstanding Series F Preferred Stock shall have been paid or declared and set apart for payment. 3. Floating Rate Dividends. Except as provided below in this paragraph, the "Applicable Rate" for any dividend period will be equal to 0.75% above three-month LIBOR (as defined below); provided, however, that the Applicable Rate shall not be less than 3.50% per annum. "LIBOR," with respect to a dividend period, means the rate (expressed as a percentage per annum) for deposits in U.S. dollars for a three-month period that appears on Telerate Page 3750 as of 11:00 a.m. (London time) on the second London business day immediately preceding the first day of such dividend period. "London business day" means any day other than a Saturday or a Sunday on which dealings in deposits in dollars are transacted, or with respect to any future date are expected to be transacted, in the London interbank market. The term "Telerate Page 3750" means the display on Bridge Telerate, Inc. on page 3750, or any successor service or page for the purpose of displaying the London interbank offered rates of major banks. If LIBOR cannot be determined as described above, the Corporation will select four major banks in the London interbank market. The Corporation will request that the principal London offices of those four selected banks provide their offered quotations to prime banks in the London interbank market approximately 11:00 a.m., London time, on the second London business day immediately preceding the first day of such dividend period. These quotations will be for deposits in U.S. dollars for a three-month period. Offered quotations must be based on a principal amount equal to any amount that is representative of a single transaction in U.S. dollars in the market at the time. If two or more quotations are provided, LIBOR for the dividend period will be the arithmetic mean of the quotations. If fewer than two quotations are provided, the Corporation will select three major banks in New York City and will then determine LIBOR for the dividend period as the arithmetic mean of the rates quoted by those three major banks in New York City to leading European banks at approximately 3:00 p.m., New York City time, on 47 the second London business day immediately preceding the first day of such dividend period. The rates quoted will be for loans in U.S. dollars for a three-month period. Rates quoted must be based on a principal amount equal to an amount that is representative of a single transaction in U.S. dollars in the market at the time. If fewer than three New York City banks selected by the Corporation are quoting rates, LIBOR for the applicable dividend period will be the same as for the immediately preceding dividend period. The Applicable Rate with respect to each dividend period will be calculated as promptly as practicable by the Corporation in accordance with the method described above. The Corporation will cause notice of each Applicable Rate to be enclosed with the dividend payment checks next mailed to the holders of the Series F Preferred Stock. 4. Voting Rights. (i) Holders of the Series F Preferred Stock shall have no voting rights, either general or special, except as expressly required by applicable law, the Charter and as specified in this paragraph 4. (ii) Whenever, at any time or times, dividends payable on the shares of Series F Preferred Stock shall not have been declared and paid for six calendar quarters, whether or not consecutive, then at the next annual meeting of stockholders and at any annual meeting thereafter and at any meeting called for the election of directors, until the date on which the Corporation next declares and pays (or sets aside funds for payment of) in full dividends on the Series F Preferred Stock at the Applicable Rate per share per annum for any subsequent dividend period, the holders of the Series F Preferred Stock either alone or together with the holders of one or more other series of Preferred Stock at the time outstanding that are granted such voting rights, voting as a class, shall be entitled, to the exclusion of the holders of one or more other series or classes of stock having general voting rights, to vote for and elect two additional members of the Board of Directors of the Corporation, and the holders of Common Stock together with the holders of any series or class or classes of stock of the Corporation having general voting rights and not then entitled to elect two members of the Board of Directors pursuant to this paragraph 4 to the exclusion of the holders of all series then so entitled, shall be entitled to vote and elect the balance of the Board of Directors. In such case, the Board of Directors of the Corporation shall, as of the date of the annual meeting of stockholders or at any meeting called for the election of directors aforesaid, be increased by two directors. The rights of the holders of the Series F Preferred Stock to participate (either alone or together with the holders of one or more other series of Preferred Stock at the time outstanding that are granted such voting rights) in the exclusive election of two members of the Board of Directors of the Corporation pursuant to this paragraph 4 shall continue in effect until the date on which the Corporation next declares and pays (or sets aside funds for payment of) in full dividends on the Series F Preferred Stock at the Applicable Rate per share per annum for any subsequent dividend period. At elections for such directors, each holder of Series F Preferred Stock shall be entitled to one-half vote for each share of Series F Preferred Stock held of record on the record date established for the meeting. The holders of Series F Preferred Stock shall have no right to cumulate such shares in voting for the election of directors. At the annual meeting of stockholders next following the termination (by reason of the payment of all accumulated and defaulted dividends on such stock or provision for the payment thereof by declaration and setting apart thereof) of the exclusive voting power of the holders of Series F Preferred Stock and the holders of all other series of Preferred Stock that have been entitled to vote for and elect such two members of the Board of Directors of the Corporation pursuant to this paragraph 4, the terms of office of all persons who may have been elected directors of the Corporation by vote of such holders shall terminate and the two vacancies created pursuant to this paragraph 4 to accommodate the exclusive right of election conferred hereunder shall thereupon be eliminated and the Board of Directors shall be decreased by two directors. (iii) So long as any shares of Series F Preferred Stock remain outstanding, the affirmative vote of the holders of at least two-thirds of the shares of Series F Preferred Stock outstanding at the time given in person or by proxy, at any special or annual meeting called for the purpose, shall be necessary to permit, effect or validate any one or more of the following: (a) The authorization, creation or issuance, or any increase in the authorized or issued amount, of any class or series of stock (including any class or series of Preferred Stock) ranking prior (as set forth in paragraph 5(a)) to the Series F Preferred Stock, or (b) The authorization, creation or issuance, or any increase in the authorized or issued amount, of any class or series of stock (including any class or series of Preferred Stock) ranking on a parity (as set forth in paragraph 5(b)) with the Series F Preferred Stock unless the Articles Supplementary or other provisions 48 of the Charter creating or authorizing such class or series shall provide that if in any case the stated dividends or amounts payable on liquidation, dissolution or winding up of the Corporation are not paid in full on the Series F Preferred Stock and all outstanding shares of stock ranking on a parity with the Series F Preferred Stock (the Series F Preferred Stock and all such other stock being herein called "Parity Stock"), the shares of all Parity Stock shall share ratably (x) in the payment of dividends, including accumulations (if any) in accordance with the sums that would be payable on all Parity Stock if all dividends in respect of all shares of Parity Stock were paid in full and (y) on any distribution of assets upon liquidation, dissolution or winding up of the Corporation in accordance with the sums that would be payable in respect of all shares of Parity Stock if all sums payable were discharged in full, or (c) The amendment, alteration or repeal, whether by merger, consolidation or otherwise, of any of the provisions of the Charter of the Corporation, including these Articles Supplementary, which would materially and adversely affect any right, preference, privilege or voting power of the Series F Preferred Stock or of the holders thereof; provided, however, that any increase in the amount of authorized Preferred Stock or the Corporation's Series A and Series B Dutch Auction Rate Transferable Securities Preferred Stock, the Adjustable Rate Cumulative Preferred Stock, Series D, the $1.8125 Cumulative Preferred Stock, the $2.8575 Cumulative Preferred Stock or the Series F Preferred Stock, or any other capital stock of the Corporation, or the creation and issuance of other series of Preferred Stock, including convertible Preferred Stock, or any other capital stock of the Corporation, in each case ranking on a parity with or junior to the Series F Preferred Stock with respect to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up of the Corporation, shall not be deemed to affect materially and adversely such rights, preferences, privileges or voting powers. (iv) So long as any shares of Series F Preferred Stock remain outstanding and notwithstanding any provision of the Charter of the Corporation requiring a lesser percentage, the Corporation shall not, without the affirmative vote of the holders of at least a majority of the votes of all Parity Stock entitled to vote outstanding at the time, given in person or by proxy, by resolution duly adopted at a meeting at which a quorum was present and acting and at which the holders of Series F Preferred Stock (alone or together with the holders of one or more other series of Parity Stock at the time outstanding and entitled to vote) vote separately as a class, (a) directly or indirectly, sell, transfer or otherwise dispose of, or permit HSBC Bank USA, National Association (the "Bank") or any other subsidiary of the Corporation, to issue, sell, transfer or otherwise dispose of any shares of voting stock of the Bank, or securities convertible into or options, warrants or rights to acquire voting stock of the Bank, unless after giving effect to any such transaction the Bank remains a Controlled Subsidiary (as hereinafter defined) of the Corporation or of a Qualified Successor Company (as hereinafter defined); (b) merge or consolidate with, or convey substantially all of its assets, to any person or corporation unless the entity surviving such merger or consolidation or the transferee of such assets is the Corporation or a Qualified Successor Company; or (c) permit the Bank to merge, consolidate with, or convey substantially all of its assets to, any person or corporation unless the entity surviving such merger or consolidation or the transferee of such assets is a Controlled Subsidiary of the Corporation or of a Qualified Successor Company, except in any of the foregoing cases as required to comply with applicable law, including, without limitation, any court or regulatory order. The term "Qualified Successor Company" shall mean a corporation (or other similar organization or entity whether organized under or pursuant to the laws of the United States or any state thereof or of another jurisdiction) which (i) is or is required to be a registered bank holding company under the United States Bank Holding Company Act of 1956, as amended, or any successor legislation, (ii) issues to the holders of the Series F Preferred Stock in exchange for the Series F Preferred Stock shares of preferred stock having at least the same relative rights and preferences as the Series F Preferred Stock (the "Exchanged Stock"), (iii) immediately after such transaction has not outstanding or authorized any class of stock or equity securities ranking prior to the Exchanged Stock with respect to the payment of dividends or the distribution of assets upon liquidation, dissolution or winding up of the Corporation, and (iv) holds, as a Controlled Subsidiary or Subsidiaries, either the Bank or one or more other banking corporations which, collectively, immediately after such transaction hold substantially all of the assets and liabilities which the Bank held immediately prior to such transaction (which may be in addition to other assets and liabilities acquired in such transaction). "Controlled Subsidiary" shall mean any corporation at least 80% of the outstanding shares of voting stock of which shall at the time be owned directly or indirectly by the Corporation or a Qualified Successor Company. In connection with the exercise of the voting rights contained in this paragraph 4(iv), holders of all series of Parity Stock which are granted such voting rights shall vote as a class, and each holder of Series F Preferred Stock shall have one-half vote for each share of stock held, and each other series shall have such number of votes, if any, for each share of stock held as may be granted them. 49 The foregoing voting provisions shall not apply as to any shares of Series F Preferred Stock if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding shares of Series F Preferred Stock shall have been redeemed or sufficient funds shall have been deposited in trust in accordance with paragraph 6 to effect such redemption. 5. Rank. For the purposes of these Articles Supplementary, any class or classes of stock of the Corporation shall be deemed to rank: (a) prior to the Series F Preferred Stock, as to dividends or as to distribution of assets upon liquidation, dissolution or winding up of the Corporation, if the holders of such class shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of the Series F Preferred Stock; (b) on a parity with the Series F Preferred Stock, as to dividends or as to distribution of assets upon liquidation, dissolution or winding up of the Corporation, whether or not the dividend rates, dividend payment dates, or redemption or liquidation preference per share thereof be different from those of the Series F Preferred Stock, if the holders of such class of stock and the Series F Preferred Stock shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in proportion to their respective dividend rates or liquidation preference, without preference or priority one over the other; and (c) junior to the Series F Preferred Stock, either as to dividends or as to distribution of assets upon liquidation, dissolution or winding up of the Corporation, or both, if such class shall be Common Stock or if the holders of the Series F Preferred Stock shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up of the Corporation, as the case may be, in preference or priority to the holders of stock of such class or classes. The Series F Preferred Stock shall rank prior, as to dividends and upon liquidation, dissolution or winding up, to the Common Stock and on a parity with the Corporation's Series A and Series B Dutch Auction Rate Transferable Securities Preferred Stock, the Adjustable Rate Cumulative Preferred Stock, Series D, the $1.8125 Cumulative Preferred Stock and the $2.8575 Cumulative Preferred Stock. 6. Optional Redemption. The shares of the Series F Preferred Stock may be redeemed on or after April 7, 2010, at the option of the Corporation, for cash, on at least 30 but not more than 60 days' notice at any time or from time to time, as a whole or in part, at $25 per share, plus, in each case, dividends accrued but unpaid for the then-current dividend period to the redemption date (whether or not earned or declared). The Series F Preferred Stock will not be subject to any sinking fund or other obligation of the Corporation to purchase or redeem the Series F Preferred Stock. Any such redemption may be effected only with the prior approval of the Federal Reserve Board and the Financial Services Authority of the United Kingdom (unless at such time it is determined that such approval is not required). If fewer than all outstanding shares of the Series F Preferred Stock are to be redeemed, the number of shares to be redeemed will be determined by the Board of Directors of the Corporation and such shares will be redeemed pro rata from the holders of record of such shares in proportion to the number of such shares held by such holders (with adjustments to avoid the redemption of fractional shares) or by lot in a manner determined by the Board of Directors of the Corporation. Notwithstanding the foregoing, if the full dividends on all outstanding shares of Series F Preferred Stock for the then-current dividend period have not been paid or declared and a sum sufficient for payment set aside, no Series F Preferred Stock shall be redeemed unless all outstanding Series F Preferred Stock is simultaneously redeemed, and the Corporation shall not purchase or otherwise acquire any Series F Preferred Stock; provided, however, that the foregoing shall not prevent the purchase or acquisition of Series F Preferred Stock pursuant to a purchase or exchange offer so long as such offer is made on the same terms to all holders of the Series F Preferred Stock. 50 Notice of redemption shall be given by mailing the same to each record holder of the Series F Preferred Stock not less than 30 nor more than 60 days prior to the date fixed for redemption thereof, at the address of such holder as the same shall appear on the stock books of the Corporation. Each notice shall state: (i) the redemption date; (ii) the number of shares of Series F Preferred Stock to be redeemed; (iii) the redemption price; (iv) the place or places where certificates for such shares of Series F Preferred Stock are to be surrendered for payment of the redemption price; (v) that dividends on the shares to be redeemed will cease to accrue on such redemption date; and (vi) the date upon which the holders' exchange rights, if any, as to such shares, shall terminate. If fewer than all the shares of the Series F Preferred Stock are to be redeemed, the notice mailed to each such holder thereof shall also specify the number of shares of Series F Preferred Stock to be redeemed from each such holder. If notice of redemption of any shares of the Series F Preferred Stock has been given and if the funds necessary for such redemption have been set aside by the Corporation separate and apart from its other funds, in trust for the pro rata benefit of the holders of any shares of Series F Preferred Stock so called for redemption, from and after the redemption date for such shares, dividends on such shares shall cease to accrue and such shares shall no longer be deemed to be outstanding, and all rights of the holders thereof as stockholders of the Corporation (except the right to receive the redemption price) shall cease. Upon surrender, in accordance with such notice, of the certificates representing any such shares (properly endorsed or assigned for transfer, if the Board of Directors of the Corporation shall so require and the notice shall so state), the redemption price set forth above shall be paid out of the funds provided by the Corporation. If fewer than all shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares without cost to the holder thereof. Subject to applicable escheat laws, any moneys so set aside by the Corporation and unclaimed at the end of 90 days from the redemption date shall revert to the general funds of the Corporation, after which reversion the holders of such shares so called for redemption shall look only to the general funds of the Corporation for the payment of the amounts payable upon such redemption. Any interest accrued on funds so deposited shall be paid to the Corporation from time to time. 7. Liquidation. (i) Upon any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of the Series F Preferred Stock shall be entitled, whether from capital or surplus, before any assets of the Corporation shall be distributed among or paid over to holders of Common Stock or any other class or series of stock of the Corporation junior to the Series F Preferred Stock as to preference in respect to liquidation, dissolution or winding up, to be paid the amount of $25 per share (the "liquidation preference") of the Series F Preferred Stock plus an amount equal to all accrued and unpaid dividends thereon for the then-current dividend period (whether or not earned or declared) to and including the date of final distribution. The holders of the Series F Preferred Stock will not be entitled to receive the liquidation preference until the liquidation preference of any other class of stock of the Corporation ranking senior to the Series F Preferred Stock as to rights upon liquidation, dissolution or winding up shall have been paid (or a sum set aside therefore sufficient to provide for payment) in full. After any such liquidation preference payment, the holders of the Series F Preferred Stock shall not be entitled to any further participation in any distribution of assets of the Corporation. (ii) If, upon any such liquidation, dissolution or winding up of the Corporation, the assets of the Corporation shall be insufficient to make such full payments to the holders of the Series F Preferred Stock and the holders of any Preferred Stock ranking as to liquidation, dissolution or winding up on a parity with the Series F Preferred Stock, then such assets shall be distributed among the holders of the Series F Preferred Stock ratably in accordance with the respective amounts which would be payable on such shares of Series F Preferred Stock and any other such Preferred Stock if all amounts thereon were paid in full. (iii) Neither the sale, lease or exchange (for cash, shares of stock, securities or other consideration) of all or substantially all of the property and assets of the Corporation, nor the merger or consolidation of any other corporation into or with the Corporation nor a reorganization of the Corporation, shall be deemed to be a liquidation, dissolution or winding up of the Corporation. 8. Parity Stock. So long as any shares of Series F Preferred Stock shall remain outstanding, in case the stated dividends or amounts payable on liquidation, dissolution or winding up of the Corporation are not paid in full with respect to all outstanding shares of Parity Stock, all such shares shall share ratably (x) in the payment of dividends, including accumulations (if any) in accordance with the sums which would be payable in respect of all 51 outstanding shares of Parity Stock if all dividends were paid in full and (y) in any distribution of assets upon liquidation, dissolution or winding up of the Corporation, in accordance with the sums which would be payable in respect of all outstanding Parity Stock if all sums payable were discharged in full. 9. Certain Definitions. (i) The term "outstanding," when used in reference to shares of stock, shall mean issued shares, excluding shares reacquired by the Corporation. (ii) The amount of dividends "accrued" on any share of Series F Preferred Stock as at any quarterly dividend payment date, shall be deemed to be the amount of any unpaid dividends accumulated thereon (if any) from and including the preceding quarterly dividend payment date to and including the end of the day preceding such quarterly dividend payment date; and the amount of dividends "accrued" on any share of Series F Preferred Stock as at any date other than a quarterly dividend payment date, shall be calculated as the amount of any unpaid dividends accumulated thereon (if any) from and including the preceding quarterly dividend payment date to and including the date as of which the calculation is made, calculated in accordance with the provisions of paragraph 2. 10. Exclusion of Other Rights. Unless otherwise required by law, shares of the Series F Preferred Stock shall not have any rights, including preemptive rights, or preferences other than those specifically set forth herein, in the Charter or as provided by applicable law. 11. Notice. All notices or communications unless otherwise specified in the Bylaws of the Corporation or these Articles Supplementary shall be sufficiently given if in writing and delivered in person or mailed by first-class mail, postage prepaid. Notice shall be deemed given on the earlier of the date received or the date such notice is mailed. 12. Interpretation or Adjustment By Board of Directors. The Board of Directors of the Corporation may, consistent with Maryland law, interpret or adjust the provisions of these Articles Supplementary to resolve any inconsistency or ambiguity, remedy any formal defect or make any other change or modification which does not adversely affect the rights of beneficial owners of the Series F Preferred Stock, and if such inconsistency or ambiguity reflects any typographical error, error in transcription or other error, the Board of Directors may authorize the filing of a Certificate of Correction. THIRD: The shares of Series F Preferred Stock have been classified and designated by the Board of Directors under the authority contained in the Charter of the Corporation. FOURTH: The terms and provisions of the Series F Preferred Stock as set forth in these Articles Supplementary have been approved by the Board of Directors in the manner and by the vote required by law. 52 IN WITNESS WHEREOF, HSBC USA Inc. has caused these presents to be signed in its name and on its behalf by its authorized officer and its corporate seal to be hereunto affixed and attested by its Secretary, and the said officers of the Corporation further acknowledge said instrument to be the corporate act of the Corporation and state under the penalties of perjury that to the best of their knowledge, information and belief the matters and facts therein set forth with respect to approval are true in all material respects, all on March 30, 2005. HSBC USA Inc. By: /s/ Janet L. Burak -------------------------------- Name: Janet L. Burak Title: Senior Executive Vice President, General Counsel and Secretary Attest: /s/ Laurence Stern - ---------------------------- Name: Laurence Stern Title: Assistant Secretary 53 EX-3.(II) 3 d63856_ex3-ii.txt REGISTRANT'S BY-LAWS, AS AMENDED AND RESTATED Exhibit 3 (ii) HSBC USA INC. BY-LAWS (As Amended and Restated effective April 21, 2005) 54 BY-LAWS OF HSBC USA INC. ARTICLE I OFFICES Section 1.1 The principal office of HSBC USA Inc. (the "Corporation") in the State of Maryland shall be in the City of Baltimore, State of Maryland. Section 1.2 The Corporation may also have offices at such other place or places, both within and without the State of Maryland, as the Board of Directors, or the President of the Corporation acting under delegated authority, may from time to time determine. ARTICLE II STOCKHOLDERS Section 2.1 Place of Stockholders' Meetings. Meetings of the Corporation's stockholders shall be held at such place in the United States as is set from time to time by the Corporation's Board of Directors. Section 2.2 Annual Meetings of Stockholders. An annual meeting of the Corporation's stockholders shall be held in April each year. At each annual meeting, the Corporation's stockholders shall elect a Board of Directors and transact such other business as may properly be brought before the meeting in accordance with these By-Laws. Except as the Charter or statute provides otherwise, any business may be considered at an annual meeting without the purpose of the meeting having been specified in the notice. Failure to hold an annual meeting does not invalidate the Corporation's corporate existence or affect any otherwise valid corporate acts of the Corporation. Section 2.3 Special Meetings of Stockholders. At any time in the interval between annual meetings, a special meeting of the Corporation's stockholders may be called by the Chairman of the Board or the President or by a majority of the Corporation's Board of Directors by vote at a meeting or in writing (addressed to the Corporate Secretary of the Corporation) with or without a meeting. Special meetings of the Corporation's stockholders shall be called by the Corporate Secretary on the written request of stockholders of the Corporation entitled to cast at least 25 percent of all the votes entitled to be cast at the meeting. A stockholders' request for a special meeting shall state the purpose of the meeting and the matters proposed to be acted on at it. The Corporate Secretary shall inform the stockholders who make the request of the reasonably estimated costs of preparing and mailing a notice of meeting and, on payment of these costs to the Corporation, notify each stockholder entitled to notice of the meeting. Unless requested by stockholders entitled to cast a majority of all the votes entitled to be cast at the meeting, a special meeting need not be called to consider any matter which is substantially the same as a matter voted on at any special meeting of stockholders of the Corporation held in the preceding 12 months. Business transacted at any special meeting of stockholders shall be limited to the purpose stated in the notice thereof. Section 2.4 Notice of Stockholders' Meetings; Waiver of Notice. Not less than 10 days nor more than 90 days before the date of every stockholders' meeting, the Corporate Secretary shall give to each stockholder entitled to vote at such meeting written notice stating the time and place of the meeting and, in the case of a special meeting or if notice of the purpose is required by statute, the purpose or purposes for which the meeting is called, either by mail or by presenting it to him personally or by leaving it at his residence or usual place of business. If mailed, such notice shall be deemed to be given when deposited in the United States mail addressed to the stockholder at his address as it appears on the records of the Corporation, with postage thereon prepaid. Notwithstanding the foregoing 55 provisions, a waiver of notice in writing, signed by the person or persons entitled to such notice and filed with the records of the meeting, whether before or after the holding thereof, or actual attendance at the meeting in person or by proxy, shall be deemed equivalent to the giving of such notice to such persons. Section 2.5 Quorum at Stockholders' Meetings; Voting; Adjournments. Unless any statute or the Charter provides otherwise, at each meeting of the Corporation's stockholders, the presence in person or by proxy of stockholders entitled to cast a majority of all the votes entitled to be cast at the meeting constitutes a quorum, and a majority of all the votes cast at a meeting at which a quorum is present is sufficient to approve any matter which properly comes before the meeting, except that a plurality of all votes cast at a meeting at which a quorum is present is sufficient to elect a director. Whether or not a quorum is present, a meeting of stockholders convened on the date for which it was called may be adjourned from time to time without further notice by a majority vote of the stockholders present in person or by proxy to a date not more than 120 days after the original record date. Any business which might have been transacted at the meeting as originally notified may be deferred and transacted at any such adjourned meeting at which a quorum is present. Section 2.6 General Right to Vote; Proxies. Unless the Charter provides for a greater or lesser number of votes per share or limits or denies voting rights, each outstanding share of stock, regardless of class, is entitled to one vote on each matter submitted to a vote at a meeting of stockholders; however, a share is not entitled to be voted if any installment payable on it is overdue and unpaid. In all elections of directors, each share of stock may be voted for as many persons as there are directors to be elected and for whose election the share is entitled to be voted. A stockholder may vote the stock the stockholder owns of record either in person or by proxy. A stockholder may sign a writing authorizing another person to act as proxy. Signing may be accomplished by the stockholder or the stockholder's authorized agent signing the writing or causing the stockholder's signature to be affixed to the writing by any reasonable means, including facsimile signature. A stockholder may authorize another person to act as proxy by transmitting, or authorizing the transmission of, a telegram, cablegram, datagram, or other means of electronic transmission to the person authorized to act as proxy or to a proxy solicitation firm, proxy support service organization, or other person authorized by the person who will act as proxy to receive the transmission. Unless a proxy provides for a longer period, it is not valid more than eleven months after its date. A proxy is revocable by a stockholder at any time without condition or qualification unless the proxy states that it is irrevocable and the proxy is coupled with an interest. The interest with which a proxy may be coupled includes an interest in the stock to be voted under the proxy or another general interest in the Corporation or its assets or liabilities. Section 2.7 List of Stockholders. At each meeting of stockholders, a full, true and complete list of all stockholders entitled to vote at such meeting, showing the number and class of shares held by each and certified by the transfer agent for such class or by the Corporate Secretary, shall be furnished by the Corporate Secretary. Section 2.8 Conduct of Voting. At all meetings of stockholders, unless the voting is conducted by inspectors, the proxies and ballots shall be received, and all questions touching the qualification of voters and the validity of proxies, the acceptance or rejection of votes and procedures for the conduct of business not otherwise specified by these By-Laws, the Charter or law, shall be decided or determined by the chairman of the meeting. If demanded by stockholders, present in person or by proxy, entitled to cast 10% in number of votes entitled to be cast, or if ordered by the chairman of the meeting, the vote upon any election or question shall be taken by ballot. Before any meeting of the stockholders, the Board of Directors may appoint persons to act as inspectors of election at the meeting and any adjournment thereof. If no inspectors of election are so appointed, the chairman of the meeting may, and on the request of stockholders, present in person or by proxy, entitled to cast 10% in number of votes entitled to be cast, shall, appoint inspectors of election at the meeting. The number of inspectors shall be either one or more. If inspectors are appointed at a meeting on the request of stockholders, the holders of a majority of shares present in person or by proxy shall determine whether one or more inspectors are to be appointed. No candidate for election as a director at a meeting shall serve as an inspector thereat. If any person appointed as inspector fails to appear or fails or refuses to act, the chairman of the meeting may, and upon the request of a stockholder shall, appoint a person to fill that vacancy. The inspectors shall determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, and the authenticity, validity and effect of proxies; receive votes, ballots or consents; hear and determine all challenges and questions in any way arising in connection with the right to vote; count and tabulate all votes or consents; determine when polls shall close; determine the result; and do any other acts that may be proper to conduct the election or vote with fairness to all stockholders. Unless so demanded or ordered, no vote need be by ballot and voting need not be conducted by inspectors. 56 Section 2.9. Advance Notice Provisions for Election of Directors. Only persons who are nominated in accordance with the following procedures shall be eligible for election as directors of the Corporation. Nominations of persons for election to the Board of Directors may be made at any annual meeting of stockholders, or at any special meeting of stockholders called for the purpose of electing directors, (a) by or at the direction of the Board of Directors (or any duly authorized committee thereof) or (b) by any stockholder of the Corporation (i) who is a stockholder of record on the date of the giving of the notice provided for in this Section 2.9 and on the record date for the determination of stockholders entitled to vote at such meeting and (ii) who complies with the notice procedures set forth in this Section 2.9. To be timely, a stockholder's notice must be delivered to or mailed and received by the Corporate Secretary at the principal executive offices of the Corporation (a) in the case of an annual meeting, not less than 120 days nor more than 150 days prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is advanced by more than 30 days or delayed by more than 60 days from such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the 150th day prior to such annual meeting and not later than the close of business on the later of the 120th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made; and (b) in the case of a special meeting of stockholders called for the purpose of electing directors, not later than the close of business on the 10th day following the day on which notice of the date of the special meeting was mailed or public disclosure of the date of the special meeting was made, whichever first occurs. To be in proper written form, a stockholder's notice to the Corporate Secretary must set forth (a) as to each person whom the stockholder proposes to nominate for election as a director, all information relating to such person that is required to be disclosed in connection with solicitations of proxies for election of directors pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations promulgated thereunder; and (b) as to the stockholder giving the notice, (i) the name and address of such stockholder as they appear on the Corporation's books and of the beneficial owner, if any, on whose behalf the nomination is made, (ii) the class or series and number of shares of capital stock of the Corporation which are owned beneficially or of record by such stockholder and such beneficial owner, (iii) a description of all arrangements or understandings between such stockholder and each proposed nominee and any other person or persons (including their names) pursuant to which the nomination(s) are to be made by such stockholder, (iv) a representation that such stockholder intends to appear in person or by proxy at the meeting to nominate the persons named in its notice and (v) any other information relating to such stockholder that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Regulation 14A of the Exchange Act and the rules and regulations promulgated thereunder. Such notice must be accompanied by a written consent of each proposed nominee to be named as a nominee and to serve as a director if elected. No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth in this Section 2.9. If the chairman of the meeting determines that nomination was not made in accordance with the foregoing procedures, the chairman shall declare to the meeting that the nomination was defective and such defective nomination shall be disregarded. No adjournment or postponement of a meeting of stockholders shall commence a new period for the giving of notice of a stockholder proposal hereunder. Section 2.10. Advance Notice Provisions for Business to be Transacted at Annual Meeting. No business may be transacted at an annual meeting of stockholders, other than business that is either (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors (or any duly authorized committee thereof), (b) otherwise properly brought before the annual meeting by or at the direction of the Board of Directors (or any duly authorized committee thereof) or (c) otherwise properly brought before the annual meeting by any stockholder of the Corporation (i) who is a stockholder of record on the date of the giving of the notice provided for in this Section 2.10 and on the record date for the determination of stockholders entitled to vote at such annual meeting and (ii) who complies with the notice procedures set forth in this Section 2.10. To be timely, a stockholder's notice must be delivered to or mailed and received by the Corporate Secretary at the principal executive offices of the Corporation not less than 120 days nor more than 150 days prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual 57 meeting is advanced by more than 30 days or delayed by more than 60 days from such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the 150th day prior to such annual meeting and not later than the close of business on the later of the 120th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made. To be in proper written form, a stockholder's notice to the Corporate Secretary must set forth as to each matter such stockholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and address of such stockholder as they appear on the Corporation's books and of the beneficial owner, if any, on whose behalf the proposal is made, (iii) the class or series and number of shares of capital stock of the Corporation which are owned beneficially or of record by such stockholder and such beneficial owner, (iv) a description of all arrangements or understandings between such stockholder and any other person or persons (including their names) in connection with the proposal of such business by such stockholder and any material interest of such stockholder in such business, and (v) a representation that such stockholder intends to appear in person or by proxy at the annual meeting to bring such business before the meeting. No business shall be conducted at the annual meeting of stockholders except business brought before the annual meeting in accordance with the procedures set forth in Section 2.09 or in this Section 2.10, provided, however, that once business has been properly brought before the annual meeting in accordance with such procedures, nothing in Section 2.09 nor in this Section 2.10 shall be deemed to preclude discussion by any stockholder of any such business. If the chairman of an annual meeting determines that business was not properly brought before the annual meeting in accordance with the foregoing procedures, the chairman shall declare to the meeting that the business was not properly brought before the meeting and such business shall not be transacted. No adjournment or postponement of a meeting of stockholders shall commence a new period for the giving of notice of a stockholder proposal hereunder. ARTICLE III DIRECTORS Section 3.1 The number of directors of the Corporation which shall constitute the whole of the Corporation's Board of Directors (the "Board") shall not be less than three nor more than thirty. Within the limits above specified, the number of directors constituting the Board shall be determined by resolution of the Board or by the Corporation's stockholders at the Annual Meeting, but the tenure of office of a director shall not be affected by any decrease in the number of directors so made by the Board. The directors shall be elected at the Annual Meeting of stockholders, except as provided in Section 3.2 of this Article, and each director elected shall hold office until the succeeding Annual Meeting of stockholders or until his successor is elected and qualified. Directors need not be stockholders. Section 3.2 Vacancies and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office, though less than a quorum, or by a sole remaining director, and the directors so chosen shall hold office until the next Annual Meeting and until their successors are duly elected and shall qualify, unless sooner displaced. Section 3.3 The business of the Corporation shall be managed by its Board, which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the Articles of Incorporation or by these By-Laws directed or required to be exercised or done by the stockholders. The directors shall choose from among their number a Chairman of the Board. Section 3.4 At any meeting of stockholders, duly called and at which a quorum is present, the stockholders may, by the affirmative vote of the holders of a majority of the votes entitled to be cast on the election or removal of such director, remove any director or directors from office and may elect a successor or successors to fill any resulting vacancies for the unexpired terms of removed directors. In case such a removal occurs but the stockholders entitled to vote thereon fail to fill any resulting vacancies, such vacancies may be filled by the Board of Directors pursuant to Section 3.2. 58 MEETINGS OF THE BOARD OF DIRECTORS Section 3.5 The Board may hold meetings, both regular and special, either within or without the State of Maryland. Section 3.6 After each meeting of stockholders at which a Board of Directors shall have been elected, the Board of Directors so elected shall meet, as soon as practicable, for the purpose of organization and the transaction of other business; and, in the event that no other time is designated by the stockholders, the Board of Directors shall meet one hour after the time for such stockholders' meeting or immediately following the close of such meeting, whichever is later, on the day of such meeting. No notice of such meeting shall be necessary if held as hereinabove provided. Section 3.7 Regular meetings of the Board shall be held at such time and place as designated by the Board. No notice of a Regular Meeting shall be required if the meeting is held according to a Schedule of Regular Meetings approved by the Board. Section 3.8 Special Meetings of the Board may be called by the Chairman or the President upon notice to each director, either personally, by mail, by telex or by telegram. Special Meetings shall be called by the President or Secretary in like manner and on like notice upon the written request of three or more directors. Notice of the place, day and hour of every Special Meeting shall be given to each director at least twenty-four (24) hours before the time of the meeting, by delivering the same to him personally, by telephone, by telex, by telegraph, or by delivering the same at his residence or usual place of business, or, in the alternative, by mailing such notice at least seventy-two (72) hours before the time of the meeting, postage paid, and addressed to him at his last known post office address, according to the records of the Corporation. Unless required by the By-Laws or by resolution of the Board of Directors, no notice of any meeting of the Board of Directors need state the business to be transacted thereat. No notice of any meeting of the Board of Directors need be given to any director who attends, or to any director who, in writing executed and filed with the records of the meeting either before or after the holding thereof, waives such notice. Any meeting of the Board of Directors, Annual or Special, may adjourn from time to time to reconvene at the same or some other place, and no notice need be given of any such adjourned meeting other than by announcement. Section 3.9 One third of the entire Board shall constitute a quorum at any meeting except as may be otherwise specifically provided by statute or by the Articles of Incorporation. If a quorum shall not be present at any meeting of the Board, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Members of the Board or any committee designated thereby may participate in a meeting of the Board or any such committee by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other at the same time and participation by such means shall constitute presence in person at such meeting. Section 3.10 Unless otherwise restricted by the Articles of Incorporation or these By-Laws, any action required or permitted to be taken at any meeting of the Board or of any committee thereof may be taken without a meeting, if all members of the Board or committee, as the case may be, consent thereto, in writing or writings and the writing or writings are filed with the minutes of the proceedings of the Board or committee. Section 3.11 On any question on which the Board of Directors shall vote, the names of those voting and their votes shall be entered in the minutes of the meeting when any member of the Board so requests. 59 COMMITTEES OF DIRECTORS Section 3.12 Executive Committee. The Board of Directors may appoint from among its members an Executive Committee of not less than three directors and one of which shall be appointed Chairman of the Executive Committee. When the Board of Directors is not in session, the Executive Committee shall have and may exercise, in the absence of or subject to any restrictions which the Board of Directors may from time to time impose, all of the powers of the Board of Directors in the management of the business and affairs of the Corporation, except the power to authorize dividends on stock, elect directors, issue stock other than as provided in the next sentence, recommend to the stockholders any action which requires stockholder approval, amend these By-Laws, or approve any merger or share exchange which does not require stockholder approval. If the Board of Directors has given general authorization for the issuance of stock providing for or establishing a method or procedure for determining the number of shares to be issued, a committee of the Board, in accordance with that general authorization or any stock option or other plan or program adopted by the Board of Directors, may authorize or fix the terms of stock subject to classification or reclassification and the terms on which any stock may be issued, including all terms and conditions required or permitted to be established or authorized by the Board of Directors. Section 3.13 Audit & Examining Committee. The Board shall designate an Audit & Examining Committee, which shall hold office until the next annual meeting of the Board following the annual meeting of stockholders, consisting of not less than three of its members, other than officers of the Corporation, and whose duty it shall be to make an examination at least once during each calendar year and within 15 months of the last such examination into the affairs of the Corporation including the administration of fiduciary powers, or cause suitable examinations to be made by auditors responsible only to the Board and to report the result of such examination in writing to the Board. Such report shall state whether the Corporation is in a sound condition, whether adequate internal controls and procedures are being maintained and shall recommend to the Board such changes in the manner of conducting the affairs of the Corporation as shall be deemed advisable. Section 3.14 Other Committees. The Board of Directors may appoint any other committees, each of which shall be composed of one or more directors, as determined by the Board from time to time. Such other committees shall have such powers, subject to the same limitations as are applicable to the Executive Committee under Section 3.12, as shall be designated by the Board from time to time. Section 3.15 Committee Procedure. Each committee shall keep minutes of its proceedings when exercising powers of the Board of Directors and may fix rules of procedure for its business. A majority of the members of a committee shall constitute a quorum for the transaction of business and the act of a majority of those present at a meeting at which a quorum is present shall be the act of the committee. The members of a committee present at any meeting, whether or not they constitute a quorum, may appoint an eligible director to act in the place of an absent member. Any action required or permitted to be taken at a meeting of a committee may be taken without a meeting, if an unanimous written consent which sets forth the action is signed by each member of the committee and filed with the minutes of the committee. The members of a committee may conduct any meeting thereof by conference telephone in accordance with the provisions of Section 3.9. COMPENSATION OF DIRECTORS Section 3.16 The Board shall fix the amounts to be paid directors for their services as directors and for their attendance at the meetings of the Board or of committees or otherwise. No director who receives a salary from the Corporation shall receive any fee for attending meetings of the Board or of any of its committees. RESIGNATION OF DIRECTORS Section 3.17 Any director may resign at any time either by oral tender of such resignation at any meeting of the Board or to the Chairman or President or by giving written notice thereof to the Corporation. Any resignation shall be effective immediately, unless a date certain is specified for it to take effect. 60 ARTICLE IV OFFICERS Section 4.1 The Corporation shall have a President, a Corporate Secretary and a Treasurer who shall be the Chief Financial Officer, and who need not be directors. The Corporation shall also have a Chairman of the Board and a Chairman of the Executive Committee, and may have one or more Vice Chairmen, each of whom shall be directors. The Board shall designate who shall serve as Chief Executive Officer, who shall have general supervision of the business and affairs of the Corporation. The Corporation may also have one or more Vice-Presidents, assistant and subordinate officers, other officers not designated by these By-Laws, and agents as it shall deem necessary, none of whom need be a director. A person may hold more than one office in the Corporation except that no person may serve concurrently as both President and Vice-President of the Corporation. Section 4.2 Chairman of the Board. The Chairman of the Board shall be a director and shall preside at all meetings of the Board and of the Stockholders at which he shall be present. Section 4.3 Chairman of the Executive Committee. The Chairman of the Executive Committee shall be a director and shall chair meetings of the Executive Committee, supervise and carry out policies adopted or approved by the Board and exercise such further powers and duties as are, from time to time, conferred upon or assigned to him by the Board. The Chairman of the Executive Committee shall also serve as Lead Director for the Board. The duties and responsibilities of the Chairman of the Executive Committee as Lead Director are as follows: i) The Chairman of the Executive Committee shall be informed by, and counsel, the Chairman and Chief Executive Officer on material strategy, policy, and management matters. ii) The Chairman of the Executive Committee shall be available to advise and counsel the Chief Executive Officer on any matter relating to the Corporation. iii) The Chairman of the Executive Committee shall offer the Chief Executive Officer counsel as to special interests and concerns of Directors and will act as principal liaison between the Independent Directors and the Chairman. iv) In the absence or inability of the Chairman or Chief Executive Officer to act, the Chairman of the Executive Committee shall perform those duties of the Chairman pertaining to Board functions. v) The Chairman of the Executive Committee shall recommend to the Chairman the retention of consultants or other experts who would report directly to the Board. vi) The Chairman of the Executive Committee shall advise the Chairman as to the quality, quantity and timeliness of the flow of information from the Corporation that is necessary for the Directors to effectively and responsibly perform their duties. vii) The Chairman of the Executive Committee shall chair in camera discussions requested by the Independent Directors. viii) The Chairman of the Executive Committee shall serve as an ex-officio member of each of the committees of the Board. ix) The Chairman of the Executive Committee shall work with the Chairman and other independent directors to give advice to the Chairman in the development of Board membership. Section 4.4 Vice Chairman. Each Vice Chairman, if one or more be elected, shall be a director and shall perform such duties and may have such other powers as are, from time to time, assigned to him by the Board. 61 Section 4.5 President. The President shall be a director. The President may execute, in the name of the Corporation, all authorized deeds, mortgages, bonds, contracts or other instruments, except in cases in which the execution thereof shall have been expressly delegated to some other officer or agent of the Corporation. In general, he shall perform such duties usually performed by a president of a corporation and shall perform such other duties and may have such other powers as are from time to time assigned to him by the Board. Section 4.6 Chief Executive Officer. The Chief Executive Officer shall exercise general supervision over the policies and business affairs of the Corporation and the carrying out of the policies adopted or approved by the Board. The Chairman of the Board or the President may at the same time be appointed Chief Executive Officer. Except as otherwise provided by these By-Laws, he shall have power to determine the duties to be performed by the officers appointed as provided in Section 4.9 of these By-Laws, and to employ and discharge officers and employees. Except as otherwise provided by the By-Laws or the Board, he shall be a member ex officio of all committees authorized by these By-Laws or created by the Board. In the absence of the Chairman of the Board and the President, he shall preside at all meetings of the Board and of shareholders. Section 4.7 Corporate Secretary. The Corporate Secretary shall attend all meetings of the stockholders and all meetings of the Board and record, or cause to be recorded, all the procedures of the meetings of the stockholders and the Board in books to be kept for that purpose. The Corporate Secretary may perform like duties for the standing committees when required. He shall, as required, give, or cause to be given, notice of all meetings of the stockholders and meetings of the Board. He shall have custody of the corporate seal of the Corporation and he, or a Deputy or Associate or Assistant Corporate Secretary, shall affix the same to any instrument which is required or desired to be under its seal and when so affixed, it may be attested by his signature or by the signature of such Deputy or Associate or Assistant Corporate Secretary. The Board may give general authority to any other officer to affix the seal of the Corporation and to attest the affixing by his signature. In general, the Corporate Secretary shall perform all duties incident to the office of a secretary of a corporation, and shall perform such other duties and may have such other powers as are from time to time assigned to him by the Board, the Chief Executive Officer or the President. Section 4.8 Deputy Corporate Secretary, Associate Corporate Secretary and Assistant Corporate Secretary. The Deputy Corporate Secretary or the Associate Corporate Secretary or the Assistant Corporate Secretary, or if there be more than one, each of them, may, in the absence of the Corporate Secretary or during his inability or refusal to act, perform the duties and exercise the powers of the Corporate Secretary and shall perform such other duties and have such other powers as are from time to time assigned to each of them by the Board, the Chief Executive Officer, the President or the Corporate Secretary. Section 4.9 Treasurer. The Treasurer shall be the Chief Financial Officer and shall have charge of and be responsible for all corporate funds and securities and shall keep, or cause to be kept, full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit, or cause to be deposited, all moneys and other valuable effects, in the name and to the credit of the Corporation, in such depositories as may from time to time be designated. He shall render to the Board, the Chief Executive Officer or the President, when so required, an account of the financial condition of the Corporation. In general, the Treasurer shall perform all the duties incident to the office of a treasurer of a corporation, and shall perform such other duties and may have such other powers as are from time to time assigned to him by the Board, the Chief Executive Officer or the President. Section 4.10 Executive and Other Senior Officers. The Board shall by resolution determine from time to time those officers whose appointment shall require approval by the Board or a committee of the Board. Each such officer shall have such powers and duties as may be assigned by the Board, a committee of the Board, the President or the Chief Executive Officer. Section 4.11 Other Officers. The President or the Chief Executive Officer or his designee may appoint all officers whose appointment does not require approval by the Board or a committee of the Board, and assign to them such titles, as from time to time may appear to be required or desirable to transact the business of the Corporation. Each such officer shall have such powers and duties as may be assigned by the Board, the President or the Chief Executive Officer. 62 Section 4.12 Tenure of Office. The Chairman of the Board, the President and the Chief Executive Officer shall hold office for the current year for which the Board was elected, unless they shall resign, become disqualified, or be removed. All other officers shall hold office until their successors have been appointed and qualify unless they shall resign, become disqualified or be removed. The Board shall have the power to remove the Chairman of the Board, the President and the Chief Executive Officer. The Board or the President or the Chief Executive Officer or his designee shall have the power to remove all other officers and employees. Any vacancy occurring in the offices of Chairman of the Board, President or Chief Executive Officer shall be filled promptly by the Board. Section 4.13 Compensation. The Board shall by resolution determine from time to time the officers whose compensation will require approval by the Board or a committee of the Board. The Chief Executive Officer shall fix the compensation of all officers and employees whose compensation does not require approval by the Board. ARTICLE V CERTIFICATES OF STOCK Section 5.1 Every holder of stock in the Corporation shall be entitled to have a certificate, signed by, or in the name of the Corporation by the Chairman of the Board or President or a Vice President and the Treasurer or an Assistant Treasurer, or the Secretary or a Deputy or Associate or Assistant Secretary of the Corporation, certifying the number of shares owned by him in the Corporation. Section 5.2 Where a certificate is manually countersigned (1) by a transfer agent, other than the Corporation or its employee, or, (2) by a registrar, other than the Corporation or its employee, any other signature on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is signed, it may be issued by the Corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. LOST CERTIFICATES Section 5.3 The Board may authorize a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the Board may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen or destroyed. TRANSFER OF STOCK Section 5.4 Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Section 5.5 The Board may, at its discretion, appoint one or more banks or trust companies in New York City, and in such other city or cities as the Board may deem advisable, including any banking subsidiary of the Corporation, from time to time, to act as transfer agent(s) and registrar(s) of the stock of the Corporation. 63 FIXING RECORD DATE Section 5.6 The Board is hereby empowered to fix, in advance, a date as the record date for the purpose of determining stockholders, or stockholders entitled to receive payment of any dividend or the allotment of any rights, or in order to make determination of stockholders for any other proper purpose. Such date in any case shall be not more than ninety (90) days, and in case of a meeting of stockholders, not less than ten (10) days, prior to the date of which the particular action, requiring such determination of stockholders is to be taken. In lieu of fixing a record date, the Board may provide that the stock transfer books shall be closed for a stated period but not to exceed, in any case, twenty (20) days. If the stock transfer books are closed for the purpose of determining stockholders entitled to notice of or to vote at a meeting of stockholders, such books shall be closed for at least ten (10) days immediately preceding such meeting. STOCK LEDGER Section 5.7 Original or duplicate stock ledgers, containing the name and addresses of the stockholders of the Corporation and the number of shares of each class held by them respectively, shall be kept at the offices of a transfer agent for the particular class of stock, within or without the State of Maryland, or, if none, at a principal office or the principal executive offices of the Corporation. REGISTERED STOCKHOLDERS Section 5.8 The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Maryland. ARTICLE VI GENERAL PROVISIONS DIVIDENDS Section 6.1 Subject to the provisions of the Articles of Incorporation, dividends, if any, may be declared by the Board at any meeting, pursuant to the law. EXECUTION OF INSTRUMENTS Section 6.2 All agreements, indentures, mortgages, deeds, conveyances, transfers, certificates, declarations, receipts, discharges, releases, satisfactions, settlements, petitions, schedules, accounts, affidavits, bonds, undertakings, proxies and other instruments or documents may be signed, executed, acknowledged, verified, delivered or accepted on behalf of the Corporation by the Chairman of the Board, or the President, or the Chief Executive Officer, or the Secretary, or any Vice President, or any other officer or employee designated by the Board or the Chief Executive Officer or his designee. Any such instruments may also be executed, acknowledged, verified, delivered or accepted in behalf of the Corporation in such other manner and by such other officers as the Board may from time to time direct. The provisions of this Section 6.2 are supplementary to any other provisions of these By-Laws. Each of the foregoing authorizations shall be at the pleasure of the Board, and each such authorization by the Chief Executive Officer or his designee also shall be at the pleasure of the Chief Executive Officer. 64 FISCAL YEAR Section 6.3 The fiscal year of the Corporation shall be the calendar year. SEAL Section 6.4 The Corporation's seal shall have inscribed thereon the name of the Corporation and the words "Corporate Seal, Maryland". The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. SHARES OF OTHER CORPORATIONS Section 6.5 The Chairman of the Board, the President, any Vice President, and the Secretary is each authorized to vote, represent and exercise on behalf of the Corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of the Corporation. The authority herein granted to said officer to vote or represent on behalf of the Corporation any and all shares held by the Corporation in any other corporation or corporations may be exercised either by said officer in person or by any other person authorized so to do by proxy or power of attorney duly executed by said officers. Notwithstanding the above, however, the Board, in its discretion, may designate by resolution the person to vote or represent said shares of other corporations. RECORDS Section 6.6 The By-Laws and the proceedings of all meeting of the shareholders, the Board, and standing committees of the Board, shall be recorded in appropriate minute books provided for the purpose. The minutes of each meeting shall be signed by the Secretary or other officer appointed to act as Secretary of the meeting. EMERGENCY OPERATIONS Section 6.7 In the event of war or warlike damage or disaster of sufficient severity to prevent the conduct and management of the affairs, business, and property of the Corporation by its directors and officers as contemplated by these By-Laws, any two or more available members of the then incumbent Board shall constitute a quorum for the full conduct and management of the affairs, business, and property of the Corporation. This By-Law shall be subject to implementation by resolutions of the Board passed from time to time for that purpose, and any provisions of these By-Laws (other than this Section) and any resolutions which are contrary to the provisions of this Section or to the provisions of any such implementary resolutions shall be suspended until it shall be determined by any interim Board acting under this Section that it shall be to the advantage of the Corporation to resume the conduct and management of its affairs, business, and property under all of the other provisions of these By-Laws. RIGHT TO INDEMNIFICATION Section 6.8 (a) . Each person who was or is made a party or is threatened to be made a party to or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was a director or officer of the Corporation or, while a director or officer of the Corporation is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to an employee benefit plan (an "Indemnitee"), whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director or officer, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Annotated Code of Maryland, as the same exists or may hereafter be amended, against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid in settlement) reasonably incurred or suffered by such Indemnitee in connection therewith and such indemnification shall continue as to an Indemnitee who has ceased to be a director or officer and shall inure to the benefit of the Indemnitee's heirs, executors and administrators; provided, however, that, except as provided in Section 6.8(b) hereof with respect to proceedings to enforce rights to indemnification, the Corporation shall indemnify any such Indemnitee in connection with a proceeding (or party 65 thereof) initiated by such Indemnitee only if such proceeding (or part thereof) was authorized by the Board. The right to indemnification conferred in this Section 6.8 shall be a contract right and shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that, if the Annotated Code of Maryland so requires, an advancement of expenses incurred by an Indemnitee shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such Indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal that such Indemnitee is not entitled to be indemnified for such expenses under this Section or otherwise. (b) Right of Indemnitee to Bring Suit. If a claim under paragraph (a) of this Section 6.8 is not paid in full by the Corporation within sixty days after a written claim has been received by the Corporation, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be twenty days, the Indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of such Indemnitee's undertaking the Indemnitee shall be entitled to be paid the expense of prosecuting or defending such suit. In any suit brought by the Indemnitee to enforce a right to indemnification hereunder it shall be a defense that, and in any suit by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking the Corporation shall be entitled to recover such expenses upon a final adjudication that, the Indemnitee has not met the applicable standard of conduct set forth in the Annotated Code of Maryland. Neither the failure of the Corporation to have made a determination prior to the commencement of such suit that indemnification of the Indemnitee is proper in the circumstances because the Indemnitee has met the applicable standard of conduct set forth in the Annotated Code of Maryland, nor an actual determination by the Corporation that the Indemnitee has not met such applicable standard of conduct, shall create a presumption that the Indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the Indemnitee, be a defense to such suit. In any suit brought by the Indemnitee to enforce a right to indemnification or to an advancement of expenses hereunder, or by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking by the Indemnitee, the Corporation shall have the burden of proving that the Indemnitee is not entitled to be indemnified, or to such advancement of expenses, under this Section 6.8 or otherwise. (c) Non-Exclusivity of Rights. The rights to indemnification and to the advancement of expenses conferred in this Section 6.8 shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, the Corporation's Certificate of Incorporation, By-Law, agreement, vote of shareholders or disinterested directors or otherwise. (d) Indemnification of Employees and Agents of the Corporation. The Corporation may, to the extent authorized from time to time by the Board, grant rights to indemnification, and to the advancement of expenses to any employee or agent of the Corporation to the fullest extent of the provisions of this Section 6.8 with respect to the indemnification and advancement of expenses of directors and officers of the Corporation. (e) Insurance. The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense liability or loss under the Delaware General Corporation Law, as the same exists or may hereafter be amended. ARTICLE VII AMENDMENTS Section 7.1 The By-Laws may be added to, amended, altered or repealed at any regular meeting of the Board, by a vote of a majority of the total number of the directors, or at any meeting of shareholders, duly called and held, by a majority of the stock represented at such meeting. 66 ARTICLE VIII Section 8.1 Notwithstanding any other provision of the charter of the Corporation or these By-Laws, Title 3, Subtitle 7 of the Corporations and Associations Article of the Annotated Code of Maryland (or any successor statute) shall not apply to the acquisition of all of the common stock, $5.00 par value per share, of the Corporation by HSBC Holdings plc, an English public limited company, pursuant to that certain Transaction Agreement and Plan of Merger, dated May 10, 1999, as amended by Amendment No. 1, dated November 8, 1999, and as may be further amended from time to time, by and among HSBC Holdings Plc, the Corporation, Safra Republic Holdings S.A., a societe anonyme organized and existing under the laws of Luxembourg, and RNYC Merger Corporation, a Maryland corporation, and to the other transactions contemplated thereby. Section 8.2 Notwithstanding any other provision of the charter of the Corporation or these By-Laws, Title 3, Subtitle 7 of the Corporations and Associations Article of the Annotated Code of Maryland (or any successor statute) shall not apply to the grant by the Corporation of the option to HSBC Holdings Plc, an English public limited company, pursuant to that certain Stock Option Agreement, dated May 10, 1999, between the Corporation and HSBC of shares of the Corporation's common stock pursuant thereto. Section 8.3 Notwithstanding any other provision of the charter of the Corporation or these By-Laws, Title 3, Subtitle 7 of the Corporations and Associations Article of the Annotated Code of Maryland (or any successor statute) shall not apply to the Stockholders Agreement, dated May 10, 1999, as amended by Amendment No. 1 to the Stockholders Agreement, dated November 8, 1999, and as may be further amended from time to time, among HSBC, an English public limited company, RNYC Holdings Limited, a Gibraltar corporation, Congregation Beit Yaakov, Saban S.A., a Panamanian corporation, Mr. Edmond J. Safra, HSBC North America Inc., a Delaware corporation, and in part, the Corporation, or the exercise by HSBC of its rights thereunder. 67 EX-31.1 4 d63856_ex31-1.txt SECTION 302 CERTIFICATION OF CEO Exhibit 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. - -------------------------------------------------------------------------------- I, Martin J. G. Glynn, certify that: 1. I have reviewed this report on Form 10-Q for the quarterly period ended March 31, 2005 of HSBC USA Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal controls over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal controls over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: May 16, 2005 /s/ Martin J. G. Glynn ------------------------------------- Martin J. G. Glynn President and Chief Executive Officer 68 EX-31.2 5 d63856_ex31-2.txt SECTION 302 CERTIFICATION OF CFO Exhibit 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. - -------------------------------------------------------------------------------- I, Roger K. McGregor, certify that: 1. I have reviewed this report on Form 10-Q for the quarterly period ended March 31, 2005 of HSBC USA Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal controls over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal controls over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: May 16, 2005 /s/ Roger K. McGregor ------------------------------------ Roger K. McGregor Senior Executive Vice President and Chief Financial Officer 69 EX-32 6 d63856_ex32.txt SECTION 906 CERTIFICATION OF CEO AND CFO Exhibit 32.0 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. - -------------------------------------------------------------------------------- Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), each of the undersigned officers of HSBC USA Inc., a Maryland corporation (HUSI), does hereby certify, to such officer's knowledge, that: The Quarterly Report on Form 10-Q for the quarter ended March 31, 2005 (the Form 10-Q) of HUSI fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of HUSI. Date: May 16, 2005 /s/ Martin J. G. Glynn -------------------------------------- Martin J. G. Glynn President and Chief Executive Officer Date: May 16, 2005 /s/ Roger K. McGregor -------------------------------------- Roger K. McGregor Senior Executive Vice President and Chief Financial Officer The foregoing certification is being furnished solely pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code) and is not being filed as part of the Form 10-Q or as a separate disclosure document. A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to HSBC USA Inc. and will be retained by HSBC USA Inc. and furnished to the United States Securities and Exchange Commission or its staff upon request. 70 -----END PRIVACY-ENHANCED MESSAGE-----