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CONFORMED 1.
SECURITIES AND EXCHANGE COMMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 2002
Commission file number 1-7436
HSBC USA INC.
(Exact name of registrant as specified in its charter)
Maryland Corporation
(State or other jurisdiction of
incorporation or organization)
13-2764867
(I.R.S. 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,
and (2) has been subject to such filing requirements for the
past 90 days.
Yes _X_ No ___
All voting stock (704 shares of Common Stock, $5 par value) is
owned by HSBC North America Inc., an indirect wholly owned
subsidiary of HSBC Holdings plc.
This report includes a total of 50 pages.
2.
Part I - FINANCIAL INFORMATION
- ----------------------------------------------------------------
Item 1 - Financial Statements Page
Consolidated Balance Sheet
June 30, 2002 and December 31, 2001 3
Consolidated Statement of Income
For The Quarter and Six Months
Ended June 30, 2002 and 2001 4
Consolidated Statement of Changes in
Shareholders' Equity For The Six Months
Ended June 30, 2002 and 2001 5
Consolidated Statement of Cash Flows
For The Six Months Ended
June 30, 2002 and 2001 6
Notes to Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Item 3 - Quantitative and Qualitative Disclosures
About Market Risk 24
Part II - OTHER INFORMATION
- ----------------------------------------------------------------
Item 6 - Exhibits and Reports on Form 8-K 30
Signature 31
3.
HSBC USA Inc.
- ------------------------------------------------------------------------
C O N S O L I D A T E D B A L A N C E S H E E T
June 30, December 31,
2002 2001
- ------------------------------------------------------------------------
in thousands
Assets
Cash and due from banks $ 1,816,659 $ 2,102,756
Interest bearing deposits with banks 1,791,675 3,560,873
Federal funds sold and securities
purchased under resale agreements 5,979,340 3,744,624
Trading assets 11,516,657 9,088,905
Securities available for sale (incl.$543,806
pledged to creditors at June 30, 2002) 13,738,056 15,267,790
Securities held to maturity (fair value
$4,176,975 and $4,839,705) 3,965,604 4,651,329
Loans 41,694,288 40,923,298
Less - allowance for credit losses 540,251 506,366
- ------------------------------------------------------------------------
Loans, net 41,154,037 40,416,932
Premises and equipment 739,167 750,041
Accrued interest receivable 364,254 416,545
Equity investments 276,123 271,402
Goodwill 2,766,826 2,777,521
Other assets 3,039,406 4,064,858
- ------------------------------------------------------------------------
Total assets $ 87,147,804 $ 87,113,576
========================================================================
Liabilities
Deposits in domestic offices
Noninterest bearing $ 5,043,366 $ 5,432,106
Interest bearing 33,511,762 31,695,955
Deposits in foreign offices
Noninterest bearing 426,703 428,252
Interest bearing 16,651,987 18,951,096
- ------------------------------------------------------------------------
Total deposits 55,633,818 56,507,409
- ------------------------------------------------------------------------
Trading account liabilities 6,319,737 3,799,817
Short-term borrowings 10,781,833 9,202,086
Interest, taxes and other liabilities 2,596,267 6,064,462
Subordinated long-term debt and perpetual
capital notes 2,568,953 2,711,549
Guaranteed mandatorily redeemable securities 734,960 728,341
Other long-term debt 1,311,210 1,050,882
- ------------------------------------------------------------------------
Total liabilities 79,946,778 80,064,546
- ------------------------------------------------------------------------
Shareholders' equity
Preferred stock 500,000 500,000
Common shareholder's equity
Common stock 4 4
Capital surplus 6,042,160 6,034,598
Retained earnings 552,126 415,821
Accumulated other comprehensive income 106,736 98,607
- ------------------------------------------------------------------------
Total common shareholder's equity 6,701,026 6,549,030
- ------------------------------------------------------------------------
Total shareholders' equity 7,201,026 7,049,030
- ------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 87,147,804 $ 87,113,576
========================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
4.
HSBC USA Inc.
------------------------------------------------------------------------------
C O N S O L I D A T E D S T A T E M E N T O F I N C O M E
Quarter ended June 30, Six months ended June 30,
2002 2001 2002 2001
------------------------------------------------------------------------------
in thousands
Interest income
Loans $ 630,720 $ 752,231 $ 1,265,732 $ 1,537,801
Securities 235,095 332,956 482,812 700,672
Trading assets 41,290 62,207 74,545 123,126
Short-term investments 42,166 99,610 87,308 215,033
Other interest income 6,194 7,266 11,625 15,212
------------------------------------------------------------------------------
Total interest income 955,465 1,254,270 1,922,022 2,591,844
------------------------------------------------------------------------------
Interest expense
Deposits 246,696 509,388 508,228 1,092,228
Short-term borrowings 65,742 88,485 118,833 208,873
Long-term debt 69,024 84,607 138,946 175,175
------------------------------------------------------------------------------
Total interest expense 381,462 682,480 766,007 1,476,276
------------------------------------------------------------------------------
Net interest income 574,003 571,790 1,156,015 1,115,568
Provision for credit losses 56,250 48,000 129,750 95,550
------------------------------------------------------------------------------
Net interest income, after
provision for credit losses 517,753 523,790 1,026,265 1,020,018
------------------------------------------------------------------------------
Other operating income
Trust income 22,598 22,004 47,497 44,843
Service charges 51,520 47,536 98,941 91,440
Mortgage banking revenue 32,188 7,417 49,469 19,614
Other fees and commissions 98,707 82,511 191,243 159,010
Trading revenues:
Treasury business and
other 3,799 39,949 47,053 97,065
Residential mortgage
business related (34,236) 11,897 (45,551) 5,178
---------- ------------ ----------- -----------
Total trading revenues (30,437) 51,846 1,502 102,243
Security gains, net 66,300 56,601 104,301 125,780
Other income 25,271 269 50,331 17,702
------------------------------------------------------------------------------
Total other operating income 266,147 268,184 543,284 560,632
------------------------------------------------------------------------------
783,900 791,974 1,569,549 1,580,650
------------------------------------------------------------------------------
Operating expenses
Salaries and employee
benefits 242,669 241,429 495,964 484,589
Occupancy expense, net 37,967 38,136 73,872 76,200
Goodwill amortization - 42,469 - 85,861
Other expenses 192,314 161,495 354,832 328,518
------------------------------------------------------------------------------
Total operating expenses 472,950 483,529 924,668 975,168
------------------------------------------------------------------------------
Income before taxes and cumulative
effect of accounting change 310,950 308,445 644,881 605,482
Applicable income tax expense 113,400 120,400 237,000 236,200
------------------------------------------------------------------------------
Income before cumulative effect
of accounting change 197,550 188,045 407,881 369,282
------------------------------------------------------------------------------
Cumulative effect of accounting
change - implementation
of SFAS 133 - - - (451)
------------------------------------------------------------------------------
Net income $ 197,550 $ 188,045 $ 407,881 $ 368,831
==============================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
5.
HSBC USA Inc.
- ------------------------------------------------------------------
C O N S O L I D A T E D S T A T E M E N T O F C H A N G E S
I N S H A R E H O L D E R S' E Q U I T Y
Six months ended June 30,
2002 2001
- ------------------------------------------------------------------
Preferred stock
Balance, January 1, $ 500,000 $ 500,000
- ------------------------------------------------------------------
Balance, June 30, 500,000 500,000
- ------------------------------------------------------------------
Common stock
Balance, January 1, 4 4
- ------------------------------------------------------------------
Balance, June 30, 4 4
- ------------------------------------------------------------------
Capital surplus
Balance, January 1, 6,034,598 6,104,264
Return of capital - (84,939)
Capital contribution from parent 7,562 5,688
- ------------------------------------------------------------------
Balance, June 30, 6,042,160 6,025,013
- ------------------------------------------------------------------
Retained earnings
Balance, January 1, 415,821 612,798
Net income 407,881 368,831
Cash dividends declared:
Preferred stock (11,576) (12,987)
Common stock (260,000) (175,000)
- ------------------------------------------------------------------
Balance, June 30, 552,126 793,642
- ------------------------------------------------------------------
Accumulated other comprehensive income (loss)
Balance, January 1, 98,607 116,851
Net change in unrealized gains
on securities (5,623) (58,254)
Net change in unrealized loss on
derivatives classified as cash flow
hedges 12,334 (19,024)
Unrealized net transitional gain related
to initial adoption of SFAS 133 - 2,853
Amortization of net unrealized
transitional SFAS 133 gains credited
to current income - (1,426)
Foreign currency translation adjustment 1,418 (2,741)
- ------------------------------------------------------------------
Other comprehensive income (loss),
net of tax 8,129 (78,592)
- ------------------------------------------------------------------
Balance, June 30, 106,736 38,259
- ------------------------------------------------------------------
Total shareholders' equity, June 30, $ 7,201,026 $ 7,356,918
==================================================================
Comprehensive income
Net income $ 407,881 $ 368,831
Other comprehensive income (loss) 8,129 (78,592)
- ------------------------------------------------------------------
Comprehensive income $ 416,010 $ 290,239
==================================================================
The accompanying notes are an integral part of the consolidated
financial statements.
6.
- -------------------------------------------------------------------------------
C O N S O L I D A T E D S T A T E M E N T O F C A S H F L O W S
Six months ended June 30,
2002 2001
- -------------------------------------------------------------------------------
in thousands
Cash flows from operating activities
Net income $ 407,881 $ 368,831
Adjustments to reconcile net income to net cash
(used) by operating activities
Depreciation, amortization and deferred taxes 260,725 125,129
Provision for credit losses 129,750 95,550
Net change in other accrual accounts (1,113,402) (124,937)
Net change in loans originated for sale (712,917) (267,460)
Net change in trading assets and liabilities (4,615) (1,645,717)
Other, net (258,056) (217,049)
- -------------------------------------------------------------------------------
Net cash (used) by operating activities (1,290,634) (1,665,653)
- -------------------------------------------------------------------------------
Cash flows from investing activities
Net change in interest bearing deposits with banks 1,769,198 486,641
Net change in short-term investments (3,307,526) (1,443,133)
Purchases of securities held to maturity (26,528) (109,979)
Proceeds from maturities of securities
held to maturity 698,937 506,413
Purchases of securities available for sale (7,399,715) (8,752,946)
Proceeds from sales of securities available for sale 5,506,583 8,464,532
Proceeds from maturities of securities available
for sale 2,049,680 2,663,011
Net change in credit card receivables 87,672 38,235
Net change in other short-term loans (337,580) 134,370
Net originations and maturities of long-term loans (47,426) (1,410,039)
Sales of loans 188,792 32,311
Expenditures for premises and equipment (39,285) (61,940)
Net cash used in acquisitions, net of
cash acquired - (21,547)
Other, net 325,311 102,023
- -------------------------------------------------------------------------------
Net cash provided (used) by investing activities (531,887) 627,952
- -------------------------------------------------------------------------------
Cash flows from financing activities
Net change in deposits (873,591) 1,547,801
Net change in short-term borrowings 2,558,818 12,386
Issuance of long-term debt 638,225 205,064
Repayment of long-term debt (515,701) (514,908)
Return of capital - (84,939)
Dividends paid (271,327) (188,615)
- -------------------------------------------------------------------------------
Net cash provided by financing activities 1,536,424 976,789
- -------------------------------------------------------------------------------
Net change in cash and due from banks (286,097) (60,912)
Cash and due from banks at beginning of period 2,102,756 1,860,713
- -------------------------------------------------------------------------------
Cash and due from banks at end of period $ 1,816,659 $ 1,799,801
===============================================================================
Non-cash activities:
Transfer of securities from held to maturity to
available for sale $ - $ 170,880
Transfer of securities from available for sale
to held to maturity - 1,041,911
-------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
7.
Notes to Consolidated Financial Statements
1. Basis of Presentation
- --------------------------------------------------------------
The accounting and reporting policies of HSBC USA Inc. (the
Company) and its subsidiaries including its principal
subsidiary, HSBC Bank USA (the Bank), conform to accounting
principles generally accepted in the United States of
America and to predominant practice within the banking
industry. Such policies, except as described in Note 3, are
consistent with those applied in the presentation of the
Company's 2001 annual financial statements.
The interim financial information in this report has not
been audited. In the opinion of the Company's management,
all adjustments necessary for a fair presentation of
financial position, results of operations and cash flows for
the interim periods have been made. The interim financial
information should be read in conjunction with the 2001
Annual Report on Form 10-K (the 2001 10-K). Certain
reclassifications which are of a normal recurring nature
have been made to prior period amounts to conform to current
period presentations.
2. Business Segments
- --------------------------------------------------------------
The Company reports and manages its business segments
consistently with the line of business groupings used by
HSBC Holdings plc (HSBC). As a result of HSBC line of
business changes, the Company altered its business segments
during the fourth quarter of 2001 as reported in the 2001
10-K. Prior period disclosures as reported in the second
quarter 2001 Form 10-Q have been conformed to the
presentation of current segments. The Company has four
business segments that it utilizes for management reporting
and analysis purposes. These segments are based upon
products and services offered and are identified in a manner
consistent with the requirements outlined in Statement of
Financial Accounting Standards No. 131, Disclosures about
Segments of an Enterprise and Related Information (SFAS
131). The segment results show the financial performance of
the major business units.
The Personal Financial Services Segment provides an
extensive array of products and services including
installment and revolving term loans, deposits, branch
services, mutual funds, insurance, estate planning and other
investment management services. These products are marketed
to individuals through the branch banking network.
Residential mortgage lending provides loan financing through
direct retail and wholesale origination channels. Mortgage
loans are originated through a network of brokers, wholesale
agents and retail originations offices. Servicing is
performed for the individual mortgage holder or on a
contractual basis for mortgages owned by third parties.
The Commercial Banking Segment provides a diversified range
of financial products and services. This segment provides
loan and deposit products to small and middle-market
corporations including specialized products such as
equipment and real estate financing. These products and
services are
8.
offered through multiple delivery systems, including the
branch banking network. In addition, various credit and
trade related products are offered such as standby
facilities, performance guarantees, acceptances and accounts
receivable factoring.
The Corporate, Investment Banking and Markets Segment is
comprised of Corporate/Institutional Banking (CIB) and
Investment Banking and Markets (IB&M). CIB provides deposit
and lending functionality to large corporate and multi-
national corporations and banks. U.S. dollar clearing
services are offered for domestic and international wire
transfer transactions. Corporate trust provides various
trustee, agency and custody products and services for both
corporate and municipal customers. Credit and trade related
products such as standby facilities, performance guarantees
and acceptances are also provided to large corporate
entities. The IB&M component includes treasury and traded
markets. The treasury function maintains overall
responsibility for the investment and borrowing of funds to
ensure liquidity, manage interest rate risk and capital at
risk. Traded markets encompasses the trading and sale of
foreign exchange, banknotes, derivatives, precious metals,
securities and emerging markets instruments, both
domestically and internationally.
The Private Banking Segment offers a full range of services
for high net worth individuals residing primarily outside
the United States including deposit, lending, trading, trust
and investment management.
Other consists of the average balance of the Princeton Note
settlement which was recorded in September of 2001 and paid
in January of 2002.
A detailed review comparing June 30, 2002 segment results
with the prior year period is included in the management's
discussion and analysis of financial condition and results.
3. New Accounting Standards
- --------------------------------------------------------------
In June 2001, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 143,
Accounting for Asset Retirement Obligations (SFAS 143),
which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-
lived assets and the associated asset retirement costs. The
standard applies to legal obligations associated with the
retirement of long-lived assets that result from the
acquisition, construction, development and (or) normal use
of the asset.
SFAS 143 requires the fair value of a liability for an asset
retirement obligation be recognized in the period in which
it is incurred if a reasonable estimate of fair value can be
made. The fair value of the liability is added to the
carrying amount of the associated asset and this additional
carrying amount is depreciated over the life of the asset.
The liability is accreted at the end of each period through
credits to operating expense. If the obligation is settled
for other than the carrying amount of the liability, the
Company will recognize a gain or loss on settlement.
9.
The Company is required and plans to adopt the provisions of
SFAS 143 for the quarter ending March 31, 2003. Adoption of
this standard is not expected to have a material effect on
the consolidated financial statements of the Company.
In October 2001, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of (SFAS 144). The
statement supersedes SFAS 121 and is effective for fiscal
years beginning after June 15, 2002 although early adoption
is encouraged. SFAS 144 retains many of the fundamental
principles of SFAS 121 but differs from it in that it
excludes goodwill and intangible assets from its provisions
and provides greater direction relating to the
implementation of its principles. Adoption is not expected
to have a material impact on the consolidated financial
statements of the Company.
In April 2002, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 145,
Rescission of FASB Statements No. 4, 44 and 64, Amendment of
FASB Statement No. 13 and Technical Corrections (SFAS 145).
The statement rescinds the requirement in SFAS 4 that
material gains and losses on the extinguishment of debt be
treated as extraordinary items. The statement also amends
the accounting guidance in SFAS 13 for transactions where a
capital lease is replaced by an operating lease, so that
transactions of this type are treated as sale and leaseback
transactions. Finally the standard makes a number of
consequential and other technical corrections to other
standards. The provisions of the statement relating to the
rescission of SFAS 4 are effective for fiscal years
beginning after May 15, 2002. Provisions of the statement
relating to the amendment of SFAS 13 are effective for
transactions occurring after May 15, 2002 and the other
provisions of the statement are effective for financial
statements issued on or after May 15, 2002. Adoption is not
expected to have a material effect on the consolidated
financial statements of the Company.
The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, Accounting for Exit
or Disposal Activities (SFAS 146) in July 2002, which will
prescribe the way in which costs associated with exit or
disposal activities are to be determined and the timing of
their recognition. The statement will also provide guidance
for the reporting and disclosure of these costs. The
Company is currently reviewing the impact of applying the
statement, which will be effective for disposal activities
inititated after December 31, 2002.
4. Goodwill and Intangible Assets
- --------------------------------------------------------------
The Company adopted the provisions of Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible
Assets (SFAS 142), on January 1, 2002. Under SFAS 142,
goodwill is no longer amortized, but is reviewed for
impairment at least annually at the reporting unit level.
Identifiable intangible assets acquired in a business
combination are amortized over their useful lives unless
their useful lives are indefinite,
10.
in which case those intangible assets are tested for
impairment annually. In accordance with SFAS 142, the
Company has completed its transitional goodwill impairment
test and its annual impairment test and determined that the
fair value of each of the reporting units exceeded its
carrying value at both test dates. As a result, no
impairment loss was recognized as of January 1, 2002 and
June 30, 2002.
The following table presents the consolidated results of
operations adjusted as though the adoption of SFAS 142
occurred as of January 1, 2001.
- ---------------------------------------------------------------
Six months ended June 30, 2002 2001
- ---------------------------------------------------------------
in thousands
Reported net income $407,881 $368,831
Goodwill amortization add-back - 85,861
- ---------------------------------------------------------------
Adjusted net income $407,881 $454,692
===============================================================
The following table presents the changes in the carrying
amount of goodwill for each of the reported business
segments for the six months ended June 30, 2002.
- -----------------------------------------------------------------------------------------
Corporate,
Personal Investment
Financial Commercial Banking & Private
Services Banking Markets Banking Total
- -----------------------------------------------------------------------------------------
in thousands
Balance December 31, 2001 $1,189,536 $543,052 $637,627 $407,306 $2,777,521
Goodwill adjustments and
other (3,069) (1,741) (4,834) (1,051) (10,695)
- -----------------------------------------------------------------------------------------
Balance June 30, 2002 $1,186,467 $541,311 $632,793 $406,255 $2,766,826
=========================================================================================
The following table presents all acquired intangibles of the
Company that are being amortized. Amortization of the
acquired intangible assets was $5.4 million for the six
months ended June 30, 2002. Annual amortization is expected
to be approximately $11.0 million for the years ended
December 31, 2002 through 2006. The weighted average
amortization period for the acquired intangible assets is
approximately 11.2 years. At June 30, 2002 acquired
intangible assets are as follows.
- ---------------------------------------------------------------
Gross Carrying Accumulated
Amount Amortization
- ---------------------------------------------------------------
in thousands
Favorable lease arrangements $ 62,767 $11,245
Excess premium (SFAS 72) 101,940 40,776
- ---------------------------------------------------------------
Total $164,707 $52,021
===============================================================
5. Pledged Assets
- ---------------------------------------------------------------
At June 30, 2002, assets amounting to $8.3 billion were
pledged as collateral for borrowings, to secure public
deposits and for other purposes. The significant components
of the assets pledged at June 30, 2002 were as follows: $7.8
billion were securities and trading assets and $.4 billion
were loans.
11.
Debt securities pledged as collateral that can be sold or
repledged by the secured party continue to be reported on
the consolidated balance sheet. The fair value of
collateral for securities available for sale that can be
sold or repledged was $.5 billion at June 30, 2002 compared
with $1.8 billion at December 31, 2001.
6. Collateral
- --------------------------------------------------------------
The fair value of collateral accepted by the Company not
reported on the consolidated balance sheet that can be sold
or repledged at June 30, 2002, totalled $4.3 billion
compared with $1.4 billion at December 31, 2001. This
collateral was obtained under security resale agreements.
Of this collateral, $3.4 billion at June 30, 2002 has been
sold or repledged as collateral under repurchase agreements
or to cover short sales compared with $.6 billion at
December 31, 2001.
7. Litigation
- --------------------------------------------------------------
The Company 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
relating to the "Princeton Note Matter" that are described
below.
In relation to the Princeton Note Matter, as disclosed in
the Company's 2001 Annual Report on Form 10-K, the Company
has settled civil law suits brought by 51 of the 53 Japanese
plaintiffs. It has also resolved all of the previously
reported regulatory and criminal investigations arising from
the Princeton Note Matter. Two of the noteholders, whose
civil suits seek damages arising from unpaid Princeton Notes
with face amounts totaling approximately $125 million, are
not included in the settlement and their civil suits will
continue. The U.S. Government excluded one of them from the
restitution order because that noteholder is being
criminally prosecuted in Japan for its conduct relating to
its Princeton Notes, and excluded the other 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.
As previously reported, there is pending a purported class
action entitled Ravens v. Republic New York Corporation, et
al., that was filed in the United States District Court for
the Eastern District of Pennsylvania on October 7, 1999 on
behalf of former shareholders of Republic New York
Corporation (Republic) who acquired their common stock
between May 10, 1999 (when signing of the merger agreement
between Republic and HSBC was announced) and September 15,
1999. On October 16, 2000 an amended complaint in the
Ravens action was filed, alleging that the defendants
violated the federal securities laws in the merger
transaction between Republic and HSBC
12.
by failing to disclose facts relating to potential
liabilities with respect to the Princeton Note Matter. The
amended complaint seeks unspecified damages on behalf of the
class. On January 16, 2001, defendants filed a motion to
dismiss the Ravens action. On April 24, 2002, the court
denied in part the Company's motion to dismiss. The Company
intends to defend vigorously against these claims.
13.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------
The Company reported second quarter 2002 net income of
$197.6 million, compared with $188.0 million in the second
quarter of 2001. For the first six months of 2002, net
income was $407.9 million compared with $368.8 million for
the first six months of last year. Higher fee income in many
areas and the elimination of goodwill amortization (through
the implementation of SFAS 142) more than offset higher
credit costs, lower other operating income from the treasury
and mortgage businesses, and a higher underlying tax rate
during the first six months of 2002.
Net Interest Income
- --------------------------------------------------------------
2002 Compared to 2001
Net interest income for the second quarter of 2002 was
$574.0 million compared with $571.8 million for the second
quarter of 2001, with the benefit of a larger average
balance sheet partially offset by a slightly smaller
interest margin. For the first six months of 2002, net
interest income was $1,156.0 million compared with $1,115.6
million for the first six months of 2001. The 3.6% increase
in net interest income for the first six months of 2002
compared to 2001 reflects the impact of a larger average
balance sheet and a slightly wider interest margin.
The Federal Reserve lowered short-term interest rates eleven
times during 2001. The lower interest rate environment
continued to impact the Company in the first six months of
2002 and led to lower gross yields earned on assets and to
lower gross rates paid on liabilities compared to 2001. The
short-term rate cuts led to wider interest margins in the
residential mortgage business and treasury investment
operations.
Interest income was $955.5 million in the second quarter of
2002 compared with $1,254.3 million in the second quarter of
2001. Average earning assets were $78.5 billion for the
second quarter of 2002 compared with $76.8 billion a year
ago. The average rate earned on earning assets was 4.92%
for the second quarter of 2002 compared with 6.60% a year
ago. Interest income was $1,922.0 million for the first six
months of 2002 compared with $2,591.8 million in the first
six months of 2001. Average earning assets were $78.7
billion for the first six months of 2002 compared with $76.9
billion for the first six months of 2001. The average rate
earned on earning assets was 4.96% for the first six months
of 2002 compared with 6.84% a year ago.
Interest expense for the second quarter of 2002 was $381.5
million compared with $682.5 million in the second quarter
of 2001. Average interest bearing liabilities for the
second quarter of 2002 were $68.6 billion, compared with
$67.1 billion a year ago. The average rate paid on interest
bearing liabilities for the second quarter of 2002 was 2.23%
compared with 4.08% a
14.
year ago. Interest expense for the first six months of 2002
was $766.0 million compared with $1,476.3 million in the
first six months of 2001. Average interest bearing
liabilities for the first six months of 2002 were $68.8
billion, compared with $66.6 billion a year ago. The
average rate paid on interest bearing liabilities was 2.25%
for the first six months of 2002 compared with 4.47% a year
ago.
The taxable equivalent net yield on average total assets for
the second quarter of 2002 was 2.67%, compared with 2.72% a
year ago. The taxable equivalent net yield on average total
assets for the first six months of 2002 was 2.69%, compared
with 2.67% a year ago.
Average residential mortgages grew $2.2 billion compared to
the second quarter 2001, as the mortgage banking division
experienced particularly strong levels of production in the
later part of 2001 and first half of 2002, driven by a lower
rate environment. Lower margin corporate loans were reduced
during the first half of 2002. During the first half of
2002, the Company reduced its holdings in mortgage backed,
U.S. Treasury and Latin American securities to adjust to
interest rate changes and reduce its credit risk. Proceeds
from sales of securities were invested in trading assets and
other shorter term treasury assets. Average investment
securities decreased $1.5 billion compared to the second
quarter of 2001 as the Company sold securities, including
mortgage backed securities, during the first half of 2001,
to adjust to interest rate changes and to reconfigure
exposure to residential mortgages. The overall balance
sheet growth was funded largely by increased levels of
consumer savings and commercial money market deposits.
Forward Outlook
For the remainder of 2002, the Company will continue to
pursue modest growth in high quality commercial loans,
residential mortgages and core personal and commercial
deposits. Some less profitable commercial lending
relationships are expected to be exited during the remainder
of 2002. Although the steeper yield curve which benefited
the Company in the later part of 2001 and the first quarter
of 2002 has flattened slightly, the Company is expected to
continue to benefit from the steep yield curve for the
remainder of 2002.
Other Operating Income
- --------------------------------------------------------------
Total other operating income was $266.1 million in the
second quarter of 2002, compared with $268.2 million in the
second quarter of 2001. For the first six months of 2002,
total other operating income was $543.3 million compared
with $560.6 million for the first six months of 2001.
2002 Compared to 2001 - Nontrading Income
The quarter to quarter and year to date increases in other
fees and commissions were driven by increases in brokerage
revenues. Brokerage revenues for the first six months of
2002 were up $16.6 million or 44% due
15.
in part to sales of annuity products and increased
transaction volume. Higher bankcard, trade service and
commercial loan related fees also contributed to the above
noted increases in other fees.
The increase in service charges for the second quarter and
first half of 2002 compared with the same periods of 2001
reflects growth in personal and commercial deposit service
charges.
The quarter to quarter and year to date increases in other
income reflect higher levels of insurance revenues.
Insurance revenues increased over $7.4 million or 55%
compared to the first half of 2001. Over 1,500
professionals are now licensed to sell insurance and certain
annuity products through our retail network. Higher
earnings on investments, accounted for under the equity
method of accounting, also contributed to the increase in
other income for the second quarter and first six months of
2002 compared with the same periods of 2001.
Security gains for the first half 2002 included gains on
sales of mortgage backed, U.S. Treasury and Latin American
securities. The Company sold the securities to adjust to
interest rate changes and reduce its credit risk. During
the first half of 2001 the Company sold securities to adjust
to interest rate changes and to reconfigure exposure to
residential mortgages. Also during the first half of 2001,
a $19.3 million one-time security gain was realized on the
sale of shares in Canary Wharf, a retail/office development
project in London, England.
Forward Outlook - Nontrading Income
During the remainder of 2002, the Company will continue its
focus on growth in brokerage, insurance, trust, asset
management and trade service related fees. The Company will
utilize its strong retail distribution network, its
improving branch visibility in the United States as well as
its HSBC Group linkage to pursue revenue growth despite an
uncertain economy. The Company continues to face strong
competitive challenges from other banks and financial
service providers to maintain and grow market share in key
customer segments.
Trading Revenues
Trading revenues are generated by the Company's
participation in the foreign exchange and precious metal
markets, from trading derivative contracts, including
interest rate swaps and options, from trading securities,
and as a result of certain residential mortgage banking
activities classified as trading revenue due to the adoption
of SFAS 133 effective January 1, 2001.
The following table presents trading revenues by business.
The data in the table includes net interest income
earned/(paid) on trading instruments, as well as an
allocation by management to reflect the funding benefit or
cost associated with the trading positions.
16.
- --------------------------------------------------------------------------------------
Six months ended June 30, 2002 2001
- --------------------------------------------------------------------------------------
in millions
Trading revenues - treasury business and other $ 47.1 $ 97.0
Net interest income 29.0 26.8
- --------------------------------------------------------------------------------------
Trading related revenues - treasury business and other $ 76.1 $123.8
======================================================================================
Business:
Derivatives and treasury $ 22.6 $ 37.8
Foreign exchange (1.9) 37.0
Precious metals 35.8 29.8
Other trading 19.6 19.2
- --------------------------------------------------------------------------------------
Trading related revenues - treasury business and other $ 76.1 $123.8
======================================================================================
Trading revenues (loss) - residential mortgage business related $(45.6) $ 5.2
======================================================================================
Treasury Business and Other: 2002 Compared to 2001
Total treasury business and other trading related revenues
were $76.1 million in the first half of 2002 compared to
$123.8 million in the first half of 2001. The decline in
trading revenue in the 2002 first half results primarily
from foreign exchange losses due to a weakening U.S. dollar
and adverse exchange rate movements. The lower level of
earnings in derivatives and treasury are in part due to
trading positions the Company had taken in June 2002 to
protect against rising interest rates. When rates actually
declined these positions resulted in mark to market losses.
Treasury Business and Other: Forward Outlook
The Company expects to build on its expanded capabilities in
foreign exchange and interest rate derivatives to grow
related revenues. However, these revenues are subject to
market factors, among other things, and may vary
significantly from quarter to quarter.
Residential Mortgage Business Related
In conjunction with the adoption of the Statement of
Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities (SFAS 133) on
January 1, 2001, certain derivative financial instruments
including interest rate lock commitments granted to
customers, forward sales commitments associated with
originated mortgage loans held for sale, and instruments
used to protect against the decline in economic value of
mortgage servicing rights, are recorded as trading
positions. The mark to market of these instruments
recognized during the first six months of 2002 was a gain of
$2.6 million relating to mortgage servicing rights and a
loss of $48.1 million relating to mortgage loans held for
sale. When the underlying mortgage loans held for sale at
June 30, 2002 are sold during the third quarter, higher
gains will be recognized as mortgage banking revenue. These
loans are carried at the lower of aggregate cost or market
value and as a result do not reflect unrealized gains at
June 30, 2002.
17.
Operating Expenses
- --------------------------------------------------------------
2002 Compared to 2001
Operating expenses were $472.9 million in the second quarter
of 2002 compared with $483.5 million for the second quarter
of 2001. Operating expenses were $924.7 million for the
first six months of 2002 compared with $975.2 million a year
ago. The decrease in operating expenses was primarily a
result of the adoption of SFAS 142. See Note 4 for a
discussion of SFAS 142. Under SFAS 142, goodwill is no
longer being amortized through operating expenses. The
increase in salaries and employee benefits for the first six
months of 2002 compared to the first six months of 2001
reflects higher fringe benefit costs, primarily related to
health care and pension costs. The quarter to quarter and
year to date increases in other expenses were primarily due
to changes related to reserves for letters of credit and for
a leveraged lease which is fully reserved.
Forward Outlook
The Company continues to position itself to operate in an
uncertain economy. Improving efficiencies and maintaining
strict cost disciplines will be a priority for the remainder
of 2002. Limited infrastructure and personnel related
expansion are anticipated to support continued growth in
wealth management and selected trading related businesses.
Income Taxes
- --------------------------------------------------------------
The effective tax rate was 36% in the second quarter of 2002
compared with 39% in the same period of 2001. The effective
tax rate was 37% in the first half of 2002 compared with 39%
in the same period of 2001. The net deferred tax asset at
June 30, 2002 was $181 million compared with $328 million at
December 31, 2001. The decrease in the effective tax rate
was primarily attributable to the effect of excluding
nontaxable goodwill amortization expense, offset in part by
the decline in tax advantaged income associated with certain
liquidated investments. The underlying tax rate for the
first half of 2002 excluding goodwill amortization from last
year's expenses, rose approximately 2.5 percentage points
over 2001.
Business Segments
- --------------------------------------------------------------
The Company reports and manages its business segments
consistently with the line of business groupings used by
HSBC. As a result of HSBC line of business changes, the
Company altered its business segments during the fourth
quarter of 2001 as reported in the 2001 10-K. Prior period
disclosures as reported in the second quarter 2001 Form 10-Q
have been conformed to the presentation of current segments.
The Company has four business segments that it uses for
management reporting: personal financial services;
commercial banking; corporate, investment banking and
markets; and private banking. A description of each segment
and the methodologies used to measure financial performance
are included in Note 2, Business Segments. The following
summarizes the results for each segment.
18.
- ------------------------------------------------------------------------------------------------
Corporate,
Personal Investment
Financial Commercial Banking and Private
Services Banking Markets Banking Other Total
- ------------------------------------------------------------------------------------------------
in millions
Six months ended June 30, 2002
- ------------------------------
Net interest income (1) $ 618 $ 313 $ 181 $ 44 $ - $ 1,156
Other operating income 229 81 198 36 - 544
- ------------------------------------------------------------------------------------------------
Total income 847 394 379 80 - 1,700
Operating expenses (2) 474 218 179 54 - 925
- ------------------------------------------------------------------------------------------------
Working contribution 373 176 200 26 - 775
Provision for credit losses (3) 38 79 7 6 - 130
- ------------------------------------------------------------------------------------------------
CMBT * 335 97 193 20 - 645
- ------------------------------------------------------------------------------------------------
Average assets 26,937 15,369 43,300 2,145 - 87,751
Average liabilities/equity (4) 33,071 12,652 33,765 8,232 31 87,751
- ------------------------------------------------------------------------------------------------
Six months ended June 30, 2001
- ------------------------------
Net interest income (1) $ 540 $ 298 $ 228 $ 50 $ - $ 1,116
Other operating income 203 84 236 37 - 560
- ------------------------------------------------------------------------------------------------
Total income 743 382 464 87 - 1,676
Operating expenses (2) 449 203 174 63 - 889
- ------------------------------------------------------------------------------------------------
Working contribution 294 179 290 24 - 787
Provision for credit losses (3) 62 14 12 8 - 96
- ------------------------------------------------------------------------------------------------
CMBT * 232 165 278 16 - 691
- ------------------------------------------------------------------------------------------------
Average assets 23,638 15,802 42,537 3,386 - 85,363
Average liabilities/equity (4) 31,979 12,569 29,075 11,740 - 85,363
================================================================================================
* Contribution margin before tax represents pretax income
(excluding goodwill amortization in the 2001 period).
(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.
Personal Financial Services
This segment contributed $335 million to CMBT in the first
six months of 2002. Growth in CMBT over the same period of
2001 was $103 million or 44%. The increase in net interest
income for 2002 reflects the impact of a larger
balance sheet and a wider interest margin. Asset growth
reflects increases in residential mortgages driven by a
lower interest rate environment. The balance sheet growth
was funded by increased levels of consumer savings and
commercial money market deposits. The increase in other
operating income reflects growth in brokerage fees,
insurance revenue and deposit service charges. Improved
credit quality resulted in a lower level of provision for
credit losses in the first six months of 2002 compared to
2001.
19.
Commercial Banking
This segment contributed $97 million to CMBT in the first
six months of 2002 compared with $165 million in 2001.
Overall credit quality declined slightly in the first six
months of 2002. The higher provision for credit losses for
2002 is due to a small number of problem loans. The
increase in net interest income for 2002 compared to 2001 is
primarily due to the availablility of low cost deposits to
fund asset portfolios.
Corporate, Investment Banking and Markets
This segment contributed $193 million to CMBT in the first
six months of 2002 compared with $278 million in the same
period of 2001. The decrease in CMBT was mainly due to
lower levels of foreign exchange, and derivative and
treasury related trading revenues during 2002.
Private Banking
This segment contributed $20 million to CMBT in the first
six months of 2002, compared with $16 million in the same
period of 2001. The transfer of Asian private banking
customers to other HSBC Group members reduced both income
and operating expenses for this segment.
Asset Quality
- --------------------------------------------------------------
The following table provides a summary of the allowance for
credit losses and nonaccruing loans.
- --------------------------------------------------------------------------------------
2nd 2nd 6 Months Year 6 Months
Quarter Quarter Ended Ended Ended
2002 2001 6/30/02 12/31/01 6/30/01
- --------------------------------------------------------------------------------------
in millions
Balance at beginning of period $518.5 $552.7 $506.4 $525.0 $525.0
Other (2.0) (19.0) (2.0) (19.0) (19.0)
Provision charged to income 56.3 48.0 129.8 238.4 95.6
Charge offs:
Commercial 20.4 35.2 69.7 188.0 43.9
Consumer 19.6 22.7 39.4 80.0 41.0
International 4.1 1.2 5.7 12.5 1.7
- --------------------------------------------------------------------------------------
Total charge offs 44.1 59.1 114.8 280.5 86.6
- --------------------------------------------------------------------------------------
Recoveries on loans charged off:
Commercial 8.4 12.4 14.3 29.0 15.8
Consumer 3.3 3.8 6.6 13.7 7.3
International .1 - .2 .1 -
- --------------------------------------------------------------------------------------
Total recoveries 11.8 16.2 21.1 42.8 23.1
- --------------------------------------------------------------------------------------
Total net charge offs 32.3 42.9 93.7 237.7 63.5
- --------------------------------------------------------------------------------------
Translation adjustment (.2) (.9) (.2) (.3) (.2)
- --------------------------------------------------------------------------------------
Balance at end of period $540.3 $537.9 $540.3 $506.4 $537.9
- --------------------------------------------------------------------------------------
20.
- --------------------------------------------------------------------------------------
June 30, December 31, June 30,
2002 2001 2001
- --------------------------------------------------------------------------------------
in millions
Nonaccruing Loans
Balance at end of period $ 416.6 $ 416.8 $ 389.8
As a percent of loans outstanding 1.00% 1.02% .93%
Nonperforming Loans and Assets *
Balance at end of period $ 427.9 $ 434.5 $ 408.3
As a percent of total assets .49% .50% .48%
Allowance Ratios
Allowance for credit losses as
a percent of:
Loans 1.30% 1.24% 1.28%
Nonaccruing loans 129.67 121.50 137.98
- ---------------------------------------------------------------------------------------
* Includes nonaccruing loans, other real estate and other
owned assets.
The provision for credit losses for the quarter ended
June 30, 2002 was $56.3 million compared with $48.0 million
a year ago. The provision for credit losses for the first
half of 2002 was $129.8 million compared with $95.6 million
during the first half of 2001. The Company has experienced
some deterioration in credit quality reflecting the general
weakness in the U.S. economy coupled with specific
deterioration in markets and business segments served by the
Company including large corporate and middle market
commercial business and international sites.
Total nonaccruing loans increased by $26.8 million to $416.6
million at June 30, 2002 from $389.8 million at June 30,
2001. The increase reflects the unconditional sale of $89.5
million of nonaccruing loans since June 30, 2001, offset by
an increase in loans migrating to nonaccrual status.
Nonaccrual loans remained substantially unchanged from
December 31, 2001 to June 30, 2002 reflecting lower levels
of delinquent residential mortgages, charge-offs and
paydowns of certain nonaccrual commercial credits, offset by
a continuing migration of commercial loans to nonaccrual
status. Criticized assets increased $202.5 million from
June 30, 2001 to December 31, 2001 and by $278.8 million
from December 31, 2001 to June 30, 2002. Net charge offs
during the second quarter of 2002 of $32.3 million were
$10.6 million lower than the second quarter of 2001. Net
charge offs during the first six months of 2002 were $93.7
million compared with $63.5 million for the first six months
of 2001. Overall, key coverage statistics remained strong.
The allowance for credit losses at June 30, 2002 represented
1.30% of total loans as compared with 1.24% at December 31,
2001 and 1.28% at June 30, 2001. The allowance for credit
losses at June 30, 2002 as a percentage of nonaccruing loans
decreased to 129.67% from 137.98% at June 30, 2001 but
increased from 121.50% at December 31, 2001.
The Company identified impaired loans totaling $330 million
at June 30, 2002, of which $190 million had an allocation
from the allowance of $113 million. At December 31, 2001,
impaired loans were $243 million of which $151 million had
an allocation from the allowance of $83 million.
21.
As regards to credit, the Company remains cautious in light
of recent world events and the overall uncertainty with
regard to domestic and foreign economies. The impact on
credit quality that may result from change in governmental
and corporate spending priorities, consumer confidence and
the general business climate as a result of these events and
conditions is uncertain.
Derivative Instruments and Hedging Activities
- --------------------------------------------------------------
The Company is party to various derivative financial
instruments as an end user (1) for asset and liability
management purposes; (2) in order to offset the risk
associated with changes in the value of various assets and
liabilities accounted for in the trading account; (3) to
protect against changes in value of its mortgage servicing
rights portfolio, and (4) for speculative trading in its own
account. The Company is also an international dealer in
derivative instruments denominated in U.S. dollars and other
currencies which include futures, forwards, swaps and
options related to interest rates, foreign exchange rates,
equity indices and commodity prices, focusing on structuring
of transactions to meet clients' needs.
Other contracts, such as interest rate swaps, involve
commitments to make periodic cash settlements based upon the
differential between specified rates or indices applied to a
stated notional amount. Purchased option contracts give the
right, but do not obligate the holder, to acquire or sell
for a limited time a financial instrument, precious metal or
commodity at a designated price upon payment for assuming the
risk of unfavorable changes in the price of the underlying
instrument or index.
The Company enters into certain derivative contracts for
purely speculative trading purposes in order to realize
profits from short-term movements in interest rates,
commodity prices and foreign exchange rates. In addition,
certain contracts do not qualify as SFAS 133 hedges and are
accounted for on a full mark to market basis through current
earnings even though they were not acquired for trading
purposes.
By using derivative instruments, the Company is exposed to
credit and market risk. If the counterparty fails to
perform, credit risk is equal to the fair value gain in a
derivative. When the fair value of a derivative contract is
positive, this generally indicates that the counterparty
owes the Company, and, therefore, creates a repayment risk
for the Company. When the fair value of a derivative
contract is negative, the Company owes the counterparty and,
therefore, it has no repayment risk.
The Company minimizes the credit (or repayment) risk in
derivative instruments by entering into transactions with
high quality counterparties including other members of the
HSBC Group. Counterparties generally include financial
institutions including banks, other government agencies,
both foreign and domestic, and insurance companies. These
counterparties are
22.
subject to regular credit review by the Company's credit
risk management department. The Company also maintains a
policy of requiring that all derivative contracts be
governed by an International Swaps and Derivatives
Association Master Agreement; depending on the nature of the
derivative transaction, bilateral collateral arrangements
may be required as well.
Market risk is the adverse effect that a change in interest
rates, currency, or implied volatility rates has on the
value of a financial instrument. The Company manages the
market risk associated with interest rate and foreign
exchange contracts by establishing and monitoring limits as
to the types and degree of risk that may be undertaken. The
Company periodically measures this risk by using Value at
Risk (VaR) and other methodologies.
The Company's Asset and Liability Management Committee is
responsible for implementing various hedging strategies that
are developed through its analysis of data from financial
simulation models and other internal and industry sources.
The resulting hedge strategies are then incorporated into
the Company's overall interest rate risk management and
trading strategies.
Liquidity Management
- --------------------------------------------------------------
Liquidity is managed to provide the ability to generate cash
to meet lending, deposit withdrawal and other commitments at
a reasonable cost in a reasonable amount of time, while
maintaining routine operations and market confidence. The
Asset and Liability Management Committee is responsible for
the development and implementation of related policies and
procedures to ensure that the minimum liquidity ratios and a
strong overall liquidity position are maintained.
In carrying out this responsibility, the Asset and Liability
Management Committee projects cash flow requirements and
determines the optimal level of liquid assets and available
funding sources to have at the Company's disposal, with
consideration given to anticipated deposit and balance sheet
growth, contingent liabilities, and the ability to access
short-term wholesale funding markets. In addition, the
Committee must monitor deposit and funding concentrations in
terms of overall mix and to avoid undue reliance on
individual funding sources and large deposit relationships.
They must also maintain a liquidity management contingency
plan, which identifies certain potential early indicators of
liquidity problems, and actions which can be taken both
initially and in the event of a liquidity crisis to minimize
the long-term impact on the Company's business and customer
relationships.
Deposit accounts from a diverse mix of "core" retail,
commercial and public sources represent a significant, cost-
effective source of liquidity under normal operating
conditions. The Company's ability to regularly attract
wholesale funds at a competitive cost is enhanced by strong
ratings from the major credit ratings agencies. As of
June 30, 2002, the Company and its principal operating
subsidiary, HSBC Bank USA, maintained the following long and
short-term debt ratings:
23.
Short-Term Debt Long-Term Debt
-------------------- -------------------
Moody's S&P Fitch Moody's S&P Fitch
------- ---- ----- ------- --- -----
HSBC USA Inc. P-1 A-1 F1+ A1 A+ AA-
HSBC Bank USA P-1 A-1+ F1+ Aa3 AA- AA-
The Company has filed a shelf registration statement with
the Securities and Exchange Commission under which it may
issue up to $1.1 billion in debt and equity securities and
has ready access to the capital markets for long-term
funding through the issuance of registered debt. In
addition, the Company maintains an unused $500 million bank
line of credit with HSBC, and as member of the New York
Federal Home Loan Bank, a secured borrowing facility in
excess of $5 billion collateralized by residential mortgage
loan assets. Off-balance sheet special purpose vehicles or
other off-balance sheet mechanisms are not utilized as a
source of liquidity or funding.
Assets, principally consisting of a portfolio of highly
rated investment securities in excess of $16 billion,
approximately $4 billion of which is scheduled to mature
within the next twelve months, a liquid trading portfolio of
approximately $11 billion, and residential mortgages are a
primary source of liquidity to the extent that they can be
sold or used as collateral for borrowing. The economics and
long-term business impact of obtaining liquidity from assets
must be weighed against the economics of obtaining liquidity
from liabilities, along with consideration given to the
associated capital ramifications of these two alternatives.
Currently, assets supplement liquidity derived from
liabilities, only in a crisis scenario.
It is the policy of the Bank to maintain both primary and
secondary collateral in order to ensure precautionary
borrowing availability from the Federal Reserve. Primary
collateral is that which is physically maintained at the
Federal Reserve, and serves as a safety net against any
unexpected funding shortfalls that may occur. Secondary
collateral is collateral that is acceptable to the Federal
Reserve, but is not maintained there. If unutilized
borrowing capacity were to be low, secondary collateral
would be identified and maintained as necessary.
The Company projects, as part of normal ongoing contingency
planning, that in the event of a severe liquidity problem
there would be sources of cash exceeding projected uses of
cash by over $10 billion. This also assumes that the
Company no longer has access to the wholesale funds market.
In addition, the Company maintains residential mortgages and
eligible collateral at the Federal Reserve that could
provide additional liquidity if needed.
24.
Capital
- --------------------------------------------------------------
Total common shareholder's equity was $6.7 billion at
June 30, 2002, compared with $6.5 billion as December 31,
2001.
The following table presents the capital ratios of the
Company. To be categorized as well-capitalized under the
Federal Reserve Board guidelines, a banking institution must
have a minimum total risk-based capital ratio of at least
10%, a Tier 1 risk-based ratio of at least 6%, and Tier 1
leverage ratio of at least 5%.
- ---------------------------------------------------------------
June 30, December 31,
2002 2001
- ---------------------------------------------------------------
Total capital (to risk weighted assets) 13.69% 13.31%
Tier 1 capital (to risk weighted assets) 8.63 8.34
Tier 1 capital (to average assets) 5.68 5.48
- ---------------------------------------------------------------
Quantitative and Qualitative Disclosures About Market Risk
- ---------------------------------------------------------------
In consideration of the degree of interest rate risk
inherent in the banking industry, the Company has interest
rate risk management policies designed to meet performance
objectives within defined risk/safety parameters. In the
course of managing interest rate risk, a combination of risk
assessment techniques, including dynamic simulation
modeling, gap analysis, Value at Risk (VaR) and capital at
risk analysis are employed. The combination of these tools
enables management to identify and assess the potential
impact of interest rate movements and take appropriate
action.
Certain limits and benchmarks that serve as guidelines in
determining the appropriate levels of interest rate risk for
the institution have been established. One such limit is
expressed in terms of the Present Value of a Basis Point
(PVBP), which reflects the change in value of the balance
sheet for a one basis point movement in all interest rates.
The institutional PVBP limit as of June 30, 2002 was plus
or minus $4.0 million, which includes distinct limits
associated with trading portfolio activities and financial
instruments. Thus, for a one basis point change in interest
rates, the policy dictates that the value of the balance
sheet shall not change by more than +/- $4.0 million. As of
June 30, 2002, the Company had a position of $2.2 million
PVBP reflecting the impact of a one basis point increase in
interest rates.
The Company also monitors changes in value of the balance
sheet for large movements in interest rates with an overall
limit of +/- 12%, after tax, change from the base case
valuation for a 200 basis point gradual rate movement. As
of June 30, 2002, for a gradual 200 basis point increase in
rates, the value was projected to drop by .4% and for a 200
basis point gradual decrease in rates, value was projected
to drop by 8.6%. The projected drop in value is primarily
related to changes in the value of balance sheet products
with ascribed maturities beyond three years and assumes no
management actions to either manage exposures to the changing
interest rate environment or reinvesting the proceeds from
any maturing assets or liabilities.
25.
In addition to the above mentioned limits, the Company's
Asset and Liability Management Committee particularly
monitors the simulated impact of a number of interest rate
scenarios on net interest income. These scenarios include
both rate shock scenarios which assume immediate market rate
movements of 200 basis points, as well as rate change
scenarios in which rates rise or fall by 200 basis points
over a twelve month period. The individual limit for such
gradual 200 basis point movements is currently +/- 10%,
after tax, of base case earnings over a twelve month period.
Simulations are also performed for other relevant interest
rate scenarios including immediate rate movements and
changes in the shape of the yield curve or in competitive
pricing policies. Net interest income under the various
scenarios is reviewed over a twelve month period, as well as
over a three year period. The simulations capture the
effects of the timing of the repricing of all assets and
liabilities, including derivative instruments such as
interest rate swaps, futures and option contracts.
Additionally, the simulations incorporate any behavioral
aspects such as prepayment sensitivity under various
scenarios.
For purposes of simulation modeling, base case earnings
reflect the existing balance sheet composition, with
balances generally maintained at current levels by the
anticipated reinvestment of expected runoff. These balance
sheet levels will however, factor in specific known or
likely changes including material increases, decreases or
anticipated shifts in balances due to management actions.
Current rates and spreads are then applied to produce base
case earnings estimates on both a twelve month and three
year time horizon. Rate shocks are then modeled and
compared to base earnings (earnings at risk), and include
behavioral assumptions as dictated by specific scenarios
relating to such factors as prepayment sensitivity and the
tendency of balances to shift among various products in
different rate environments. It is assumed that no
management actions are taken to manage exposures to the
changing environment being simulated.
Utilizing these modeling techniques, a gradual 200 basis
point parallel rise or fall in the yield curve on July 1,
2002 would cause projected net interest income for the next
twelve months to decrease by $22 million and increase by $15
million, respectively. This +/- 1% change is well within
the Company's +/- 10% limit. An immediate 100 basis point
parallel rise or fall in the yield curve on July 1, 2002,
would cause projected net interest income for the next
twelve months to decrease by $21 million and $55 million,
respectively. An immediate 200 basis point parallel rise or
fall would decrease projected net interest income for the
next twelve months by $53 million and $171 million,
respectively.
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.
26.
Trading Activities
- --------------------------------------------------------------
The trading portfolios of the Company 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.
The Company relies upon Value at Risk (VaR) analysis as a
basis for quantifying and managing risks associated with the
trading portfolios. Such analysis is based upon the
following two general principles:
(i) VaR applies to all trading positions across all risk
classes including interest rate, equity, commodity,
optionality and global/foreign exchange risks and
(ii) VaR is based on the concept of independent valuations,
with all transactions being repriced by an independent risk
management function using separate models prior to being
stressed against VaR parameters.
VaR attempts to capture the potential loss resulting from
unfavorable market developments within a given time horizon
(typically ten days) and given a certain confidence level
(99%). VaR calculations are performed for all material
trading and investment portfolios and for market risk-
related treasury activities. The VaR is calculated using
the historical simulation method.
A VaR report broken down by trading business and on a
consolidated basis is distributed daily to management. To
measure the accuracy of the VaR model output, the daily VaR
is compared to the actual result from trading activities.
The following table summarizes trading VaR of the Company.
- -----------------------------------------------------------------------------
2nd Quarter 2002
June 30, --------------------------- December 31,
2002 Minimum Maximum Average 2001
- -----------------------------------------------------------------------------
in millions
Total trading $22.3 $11.5 $38.3 $20.9 $19.2
Commodities 7.7 .1 7.7 1.2 .3
Equities 1.1 .4 8.0 2.4 2.0
Foreign exchange 8.1 3.3 16.1 7.1 4.6
Interest rate 11.9 11.7 37.4 20.0 21.5
- -----------------------------------------------------------------------------
The following summary illustrates the Company's daily
revenue earned from market risk-related activities during
the second quarter of 2002. Market risk-related revenues
include realized and unrealized gains (losses) related to
treasury and trading activities but excludes the related net
interest income. The analysis of the frequency distribution
of daily market risk-
27.
related revenues shows that there were 29 days with negative
revenue during the second quarter of 2002. The most
frequent result was a daily loss of between $2 million and
zero with 24 occurrences. The highest daily revenue was
$7.2 million and the largest daily loss was $3.8 million.
- -----------------------------------------------------------------------------------------------
Ranges of daily revenue
earned from market risk-
related activities
(in millions) $(4) to $(2) $(2) to $0 $0 to $2 $2 to $4 $4 to $6 Over $6
- -----------------------------------------------------------------------------------------------
Number of trading days
market risk-related
revenue was within the
stated range 5 24 23 11 - 1
- -----------------------------------------------------------------------------------------------
Forward-Looking Statements
- --------------------------------------------------------------
This report includes forward-looking statements. Statements
that are not historical facts, including statements about
management's beliefs and expectations, are forward-looking
statements and involve inherent risks and uncertainties. A
number of important factors could cause actual results to
differ materially from those contained in any forward-
looking statements. Such factors include, but are not
limited to: sharp and/or rapid changes in interest rates;
significant changes in the economic conditions which could
materially change anticipated credit quality trends and the
ability to generate loans; technology changes and
challenges; significant changes in accounting, tax or
regulatory requirements; and competition in the geographic
and business areas in which the Company conducts its
operations.
28.
HSBC USA Inc.
- --------------------------------------------------------------------------------
CONSOLIDATED AVERAGE BALANCES AND INTEREST RATES*
Second Quarter 2002 Second Quarter 2001
Balance Interest Rate Balance Interest Rate
- --------------------------------------------------------------------------------
in millions
Assets
Interest bearing deposits
with banks $ 2,365 $ 16.2 2.75%$ 4,648 $ 61.9 5.34%
Federal funds sold and
securities purchased under
resale agreements 5,626 26.0 1.85 3,322 37.8 4.56
Trading assets 10,815 41.3 1.53 8,149 62.2 3.06
Securities 17,960 241.1 5.38 19,486 342.6 7.05
Loans
Domestic
Commercial 16,302 200.3 4.93 16,851 276.6 6.58
Consumer
Residential mortgages 19,107 320.0 6.70 16,900 312.1 7.39
Other consumer 3,000 67.8 9.06 3,143 89.2 11.38
- --------------------------------------------------------------------------------
Total domestic 38,409 588.1 6.14 36,894 677.9 7.37
International 3,275 42.8 5.24 4,297 74.6 6.97
- --------------------------------------------------------------------------------
Total loans 41,684 630.9 6.07 41,191 752.5 7.33
- --------------------------------------------------------------------------------
Other interest ** 6.2 ** ** 7.3 **
- --------------------------------------------------------------------------------
Total earning assets 78,450 $ 961.7 4.92% 76,796 $1,264.3 6.60%
- --------------------------------------------------------------------------------
Allowance for credit losses (528) (553)
Cash and due from banks 1,910 1,966
Other assets 7,461 7,468
- --------------------------------------------------------------------------------
Total assets $ 87,293 $ 85,677
================================================================================
Liabilities and Shareholders' Equity
Interest bearing demand
deposits $ 378 $ 0.5 0.46%$ 401 $ 0.6 0.56%
Consumer savings deposits 15,404 43.0 1.12 12,786 62.6 1.97
Other consumer time deposits 9,249 60.8 2.64 11,453 137.2 4.80
Commercial, public savings
and other time deposits 8,746 35.7 1.64 7,210 62.2 3.46
Deposits in foreign offices 19,022 106.7 2.25 20,737 246.8 4.77
- --------------------------------------------------------------------------------
Total interest bearing deposits 52,799 246.7 1.87 52,587 509.4 3.89
- --------------------------------------------------------------------------------
Short-term borrowings 11,084 65.8 2.37 9,604 88.5 3.70
Long-term debt 4,751 69.0 5.83 4,874 84.6 6.96
- --------------------------------------------------------------------------------
Total interest bearing
liabilities 68,634 $ 381.5 2.23% 67,065 $ 682.5 4.08%
- --------------------------------------------------------------------------------
Interest rate spread 2.69% 2.52%
- --------------------------------------------------------------------------------
Noninterest bearing deposits 5,359 5,640
Other liabilities 6,150 5,665
Total shareholders' equity 7,150 7,307
- --------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 87,293 $ 85,677
================================================================================
Net yield on average earning assets 2.97% 3.04%
Net yield on average total assets 2.67 2.72
================================================================================
* Interest and rates are presented on a taxable equivalent basis.
** Other interest relates to Federal Reserve Bank and Federal Home Loan
Bank stock included in other assets.
29.
HSBC USA Inc.
- -----------------------------------------------------------------------------
CONSOLIDATED AVERAGE BALANCES AND INTEREST RATES*
Six Months 2002 Six Months 2001
Balance Interest Rate Balance Interest Rate
- -----------------------------------------------------------------------------
in millions
Assets
Interest bearing deposits
with banks $ 2,974 $ 39.2 2.65%$ 4,700 $ 134.2 5.76%
Federal funds sold and
securities purchased under
resale agreements 5,270 48.1 1.84 3,123 80.8 5.22
Trading assets 10,078 74.6 1.48 8,036 123.2 3.07
Securities 18,494 495.0 5.40 20,232 715.9 7.14
Loans
Domestic
Commercial 16,487 407.6 4.99 16,584 572.8 6.97
Consumer
Residential mortgages 18,931 631.9 6.68 16,545 620.6 7.50
Other consumer 3,025 137.7 9.18 3,224 185.6 11.61
- -----------------------------------------------------------------------------
Total domestic 38,443 1,177.2 6.18 36,353 1,379.0 7.65
International 3,450 89.0 5.20 4,446 159.3 7.23
- -----------------------------------------------------------------------------
Total loans 41,893 1,266.2 6.10 40,799 1,538.3 7.60
- -----------------------------------------------------------------------------
Other interest ** 11.6 ** ** 15.2 **
- -----------------------------------------------------------------------------
Total earning assets 78,709 $1,934.7 4.96% 76,890 $ 2,607.6 6.84%
- -----------------------------------------------------------------------------
Allowance for credit losses (522) (545)
Cash and due from banks 1,980 1,830
Other assets 7,584 7,188
- -----------------------------------------------------------------------------
Total assets $ 87,751 $ 85,363
=============================================================================
Liabilities and Shareholders' Equity
Interest bearing demand
deposits $ 379 $ 0.8 0.44%$ 402 $ 1.3 0.66%
Consumer savings deposits 15,170 84.8 1.13 12,616 134.8 2.15
Other consumer time deposits 9,464 133.3 2.84 11,525 285.8 5.00
Commercial, public savings
and other time deposits 8,537 71.1 1.68 6,747 124.4 3.72
Deposits in foreign offices,
primarily banks 19,386 218.2 2.27 21,050 545.9 5.23
- -----------------------------------------------------------------------------
Total interest bearing deposit 52,936 508.2 1.94 52,340 1,092.2 4.21
- -----------------------------------------------------------------------------
Short-term borrowings 11,048 118.8 2.17 9,263 208.9 4.55
Long-term debt 4,805 139.0 5.83 4,950 175.2 7.14
- -----------------------------------------------------------------------------
Total interest bearing
liabilities 68,789 $ 766.0 2.25% 66,553 $1,476.3 4.47%
- -----------------------------------------------------------------------------
Interest rate spread 2.71% 2.37%
- -----------------------------------------------------------------------------
Noninterest bearing deposits 5,497 5,631
Other liabilities 6,314 5,842
Shareholders' equity 7,151 7,337
- -----------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 87,751 $85,363
=============================================================================
Net yield on average earning assets 2.99% 2.97%
Net yield on average total assets 2.69 2.67
=============================================================================
* Interest and rates are presented on a taxable equivalent basis.
** Other interest relates to Federal Reserve Bank and Federal Home Loan Bank
stock included in other assets.
30.
Part II - OTHER INFORMATION
- --------------------------------------------------------------
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibit
3 Registrant's By-Laws, as Amended to Date
12.01 Computation of Ratio of Earnings to Fixed Charges
12.02 Computation of Ratio of Earnings to Combined Fixed
Charges and Preferred Dividends.
(b) Reports on Form 8-K
A current report on Form 8-K was filed July 2, 2002
announcing that HSBC USA Inc. had signed a memorandum of
understanding with certain partners of Arthur Andersen LLP's
(AA LLP) U.S. Private Client Service Practice and with AA
LLP. The report relates to the proposed transaction with
certain partners of AA LLP to join a new HSBC Private Client
Services Group as well as a memorandum of understanding with
AA LLP relating to the release of such partners and providing
for the acquisition of certain assets.
31.
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: August 5, 2002 /s/ Gerald A. Ronning
Gerald A.Ronning
Executive Vice President & Controller
(On behalf of Registrant and
as Chief Accounting Officer)
32.
Exhibit 12.01
HSBC USA Inc.
Computation of Ratio of Earnings to Fixed Charges
(in millions, except ratios)
- -----------------------------------------------------------------
Six months ended June 30,
2002 2001
- -----------------------------------------------------------------
Excluding interest on deposits
Income before cumulative effect
of accounting change $ 408 $ 369
Applicable income tax expense 237 236
Less undistributed equity earnings 13 3
Fixed charges:
Interest on:
Borrowed funds 119 209
Long-term debt 139 175
One third of rents, net of income
from subleases 8 9
- -----------------------------------------------------------------
Total fixed charges 266 393
Earnings before taxes and cumulative
effect of accounting change based on
income and fixed charges (as above) $ 898 $ 995
- -----------------------------------------------------------------
Ratio of earnings to fixed charges 3.38 2.53
- -----------------------------------------------------------------
Including interest on deposits
Total fixed charges (as above) $ 266 $ 393
Add: Interest on deposits 508 1,092
- -----------------------------------------------------------------
Total fixed charges and interest on
deposits $ 774 $1,485
- -----------------------------------------------------------------
Earnings before taxes and cumulative
effect of accounting change based on
income and fixed charges (as above) $ 898 $ 995
Add: Interest on deposits 508 1,092
- -----------------------------------------------------------------
Total $1,406 $2,087
- -----------------------------------------------------------------
Ratio of earnings to fixed charges 1.82 1.41
- -----------------------------------------------------------------
33.
Exhibit 12.02
HSBC USA Inc.
Computation of Ratio of Earnings to Combined Fixed Charges
and Preferred Dividends
(in millions, except ratios)
- ----------------------------------------------------------------
Six months ended June 30,
2002 2001
- ----------------------------------------------------------------
Excluding interest on deposits
Income before cumulative effect
of accounting change $ 408 $ 369
Applicable income tax expense 237 236
Less undistributed equity earnings 13 3
Fixed charges:
Interest on:
Borrowed funds 119 209
Long-term debt 139 175
One third of rents, net of income
from subleases 8 9
- ----------------------------------------------------------------
Total fixed charges 266 393
Earnings before taxes and cumulative
effect of accounting change based on
income and fixed charges $ 898 $ 995
- ----------------------------------------------------------------
Total fixed charges $ 266 $ 393
Preferred dividends 12 13
Ratio of pretax income to income
before cumulative effect of
accounting change 1.58 1.64
- ----------------------------------------------------------------
Total preferred stock dividend factor 18 21
Fixed charges, including preferred
stock dividend factor $ 284 $ 414
- ----------------------------------------------------------------
Ratio of earnings to combined fixed
charges and preferred dividends 3.16 2.40
- ----------------------------------------------------------------
Including interest on deposits
Total fixed charges, including preferred
stock dividend factor (as above) $ 284 $ 414
Add: Interest on deposits 508 1,092
- ----------------------------------------------------------------
Fixed charges, including preferred stock
dividend factor and interest on deposits $ 792 $1,506
- ----------------------------------------------------------------
Earnings before taxes and cumulative effect
of accounting change based on income and
fixed charges (as above) $ 898 $ 995
Add: Interest on deposits 508 1,092
- ----------------------------------------------------------------
Total $1,406 $2,087
- ----------------------------------------------------------------
Ratio of earnings to combined fixed
charges and preferred dividends 1.78 1.39
- ----------------------------------------------------------------
34.
HSBC USA INC.
BY-LAWS
(As Amended and Restated effective April 20, 2000)
(As Further Amended effective April 11, 2002)
35.
-1-
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
36.
-2-
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
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
37.
-3-
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.
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
38.
-4-
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