FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Private Issuer
Pursuant to Rule 13a - 16 or 15d - 16 of
the Securities Exchange Act of 1934
For the month of May 2006
HSBC Holdings plc
42nd Floor, 8 Canada
Square, London E14 5HQ, England
(Indicate by check mark whether the registrant files or will file annual
reports under cover of Form 20-F or Form 40-F).
Form 20-F X Form 40-F ......
(Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934).
Yes....... No X
(If "Yes" is marked, indicate below the file number assigned to the registrant
in connection with Rule 12g3-2(b): 82- ..............)
================================================================================
UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|x| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2006
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number 1-7436
HSBC USA Inc.
(Exact name of registrant as specified in its charter)
Maryland 13-2764867
(State of Incorporation) (I.R.S. Employer Identification No.)
452 Fifth Avenue, New York, New York 10018
(Address of principal executive offices) (Zip Code)
(716) 841-2424
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) had filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of "accelerated
filer and a large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act).
Yes |_| No |X|
At April 30, 2006, there were 706 shares of the registrant's Common Stock
outstanding, all of which are owned by HSBC Investments (North America) Inc.
DOCUMENTS INCORPORATED BY REFERENCE
None
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2
HSBC USA Inc.
Form 10-Q
TABLE OF CONTENTS
Part I FINANCIAL INFORMATION
--------------------------------------------------------------------------------
Page
----
Item 1. Consolidated Financial Statements
Statement of Income 4
Balance Sheet 5
Statement of Changes in Shareholders' Equity 6
Statement of Cash Flows 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (MD&A)
Average Balances and Interest Rates 23
Forward-Looking Statements 24
Executive Overview 24
Basis of Reporting 28
Results of Operations 29
Business Segments 39
Credit Quality 44
Derivative Instruments and Hedging Activities 46
Off-Balance Sheet Arrangements 49
Risk Management 50
Item 3. Quantitative and Qualitative Disclosures About Market Risk 54
Item 4. Controls and Procedures 54
Part II OTHER INFORMATION
--------------------------------------------------------------------------------
Item 1A. Risk Factors 55
Item 6. Exhibits 59
Signature 60
3
Part I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
--------------------------------------------------------------------------------
HSBC USA Inc.
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF INCOME
Three months ended March 31,
2006 2005
--------------------------------------------------------------------------------
(in millions)
Interest income:
Loans $1,286 $1,049
Securities 263 210
Trading assets 108 59
Short-term investments 126 49
Other 14 6
------ ------
Total interest income 1,797 1,373
------ ------
Interest expense:
Deposits 649 327
Short-term borrowings 74 52
Long-term debt 339 219
------ ------
Total interest expense 1,062 598
------ ------
Net interest income 735 775
Provision for credit losses 157 107
------ ------
Net interest income after provision for credit losses 578 668
------ ------
Other revenues:
Trust income 22 23
Service charges 51 52
Other fees and commissions 236 145
Securitization revenue 17 44
Other income 26 72
Residential mortgage banking revenue 23 23
Trading revenues 279 96
Security gains, net 4 23
------ ------
Total other revenues 658 478
------ ------
Operating expenses:
Salaries and employee benefits 315 266
Occupancy expense, net 51 42
Support services from HSBC affiliates 265 218
Other expenses 154 128
------ ------
Total operating expenses 785 654
------ ------
Income before income tax expense 451 492
Income tax expense 143 176
------ ------
Net income $ 308 $ 316
====== ======
The accompanying notes are an integral part of the consolidated financial
statements.
4
HSBC USA Inc.
--------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET
March 31, December 31,
2006 2005
------------------------------------------------------------------------------------------------------
(in millions)
Assets
Cash and due from banks $ 3,377 $ 4,441
Interest bearing deposits with banks 6,776 3,001
Federal funds sold and securities purchased under resale agreements 5,781 4,568
Trading assets 26,518 21,220
Securities available for sale 18,387 17,764
Securities held to maturity (fair value $3,230 and $3,262) 3,188 3,171
Loans 88,651 90,342
Less - allowance for credit losses 837 846
--------- ------------
Loans, net 87,814 89,496
Properties and equipment, net 545 538
Intangible assets 508 463
Goodwill 2,694 2,694
Other assets 6,481 6,503
--------- ------------
Total assets $ 162,069 $ 153,859
========= ============
Liabilities
Deposits in domestic offices:
Noninterest bearing $ 8,444 $ 9,695
Interest bearing 62,787 57,911
Deposits in foreign offices:
Noninterest bearing 347 320
Interest bearing 21,726 23,889
--------- ------------
Total deposits 93,304 91,815
--------- ------------
Trading account liabilities 14,183 10,710
Short-term borrowings 8,399 7,049
Interest, taxes and other liabilities 6,388 4,732
Long-term debt 27,996 27,959
--------- ------------
Total liabilities 150,270 142,265
--------- ------------
Shareholders' equity
Preferred stock 1,316 1,316
Common shareholder's equity:
Common stock ($5 par; 150,000,000 shares authorized; 706 shares issued) --(1) --(1)
Capital surplus 8,124 8,118
Retained earnings 2,460 2,172
Accumulated other comprehensive loss (101) (12)
--------- ------------
Total common shareholder's equity 10,483 10,278
--------- ------------
Total shareholders' equity 11,799 11,594
--------- ------------
Total liabilities and shareholders' equity $ 162,069 $ 153,859
========= ============
The accompanying notes are an integral part of the consolidated financial
statements.
(1) Less than $500 thousand
5
HSBC USA Inc.
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS' EQUITY
Three months ended March 31,
2006 2005
-----------------------------------------------------------------------------------------------------
(in millions)
Preferred stock
Balance, January 1 and March 31, $ 1,316 $ 500
--------- ---------
Common stock
Balance, January 1 and March 31, --(1) --(1)
Capital surplus
Balance, January 1, 8,118 8,418
Capital contribution from parent 2 4
Employee benefit plans 4 (279)
--------- ---------
Balance, March 31, 8,124 8,143
--------- ---------
Retained earnings
Balance, January 1, 2,172 1,917
Net income 308 316
Cash dividends declared:
Preferred stock (16) (6)
Cumulative adjustment from adoption of new accounting pronouncement
(see Note 5) (4) --
--------- ---------
Balance, March 31, 2,460 2,227
--------- ---------
Accumulated other comprehensive (loss) income
Balance, January 1, (12) 31
Net change in unrealized losses on securities (107) (120)
Net change in unrealized gains on derivatives classified as cash flow
hedges 21 87
Net change in unrealized (losses) gains on interest only strip receivables (2) 18
Foreign currency translation adjustments (1) (1)
--------- ---------
Other comprehensive loss, net of tax (89) (16)
--------- ---------
Balance, March 31, (101) 15
--------- ---------
Total shareholders' equity, March 31, $ 11,799 $ 10,885
========= =========
Comprehensive income
Net income $ 308 $ 316
Other comprehensive loss (89) (16)
--------- ---------
Comprehensive income $ 219 $ 300
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
(1) Less than $500 thousand
6
HSBC USA Inc.
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CASHFLOWS
Three months ended March 31,
2006 2005
---------------------------------------------------------------------------------------------------------
(in millions)
Cash flows from operating activities
Net income $ 308 $ 316
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation, amortization and deferred taxes 164 188
Provision for credit losses 157 107
Net change in other accrual accounts 1,607 444
Net change in loans held for sale to HSBC Markets (USA) Inc. (HMUS):
Loans acquired from third parties (5,235) --
Sales of loans to HMUS, including premium 3,691 --
Net change in other loans held for sale 12 (205)
Net change in loans attributable to tax refund anticipation loans program:
Originations of loans (27,300) (24,300)
Sales of loans to HSBC Finance Corporation, including premium 27,293 24,298
Net change in trading assets and liabilities (1,667) 2,094
Other, net (236) (235)
--------- ---------
Net cash (used in) provided by operating activities (1,206) 2,707
--------- ---------
Cash flows from investing activities
Net change in interest bearing deposits with banks (3,926) (430)
Net change in short-term investments (1,213) 312
Net change in securities available for sale:
Purchases of securities available for sale (2,064) (2,823)
Proceeds from sales of securities available for sale 1,188 1,659
Proceeds from maturities of securities available for sale 602 1,030
Net change in securities held to maturity:
Purchases of securities held to maturity (380) (189)
Proceeds from maturities of securities held to maturity 365 487
Net change in loans:
Originations, net of collections 7,805 3,319
Loans purchased from HSBC Finance Corporation (4,909) (4,720)
Sales of loans and other -- 29
Net cash used for acquistions of properties and equipment (28) (11)
Net cash used for disposals of branches/subsidiaries -- (24)
Other, net (244) (156)
--------- ---------
Net cash used in investing activities (2,804) (1,517)
--------- ---------
Cash flows from financing activities
Net change in deposits 1,489 2,990
Net change in short-term borrowings 1,350 (2,762)
Net change in long-term debt:
Issuance of long-term debt 615 345
Repayment of long-term debt (499) (166)
Increases in capital surplus 6 4
Dividends paid (15) (6)
--------- ---------
Net cash provided by financing activities 2,946 405
--------- ---------
Net change in cash and due from banks (1,064) 1,595
Cash and due from banks at beginning of period 4,441 2,682
--------- ---------
Cash and due from banks at end of period $ 3,377 $ 4,277
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
7
Notes to Consolidated Financial Statements
Note 1. Organization and Basis of Presentation
--------------------------------------------------------------------------------
HSBC USA Inc. is an indirect wholly owned subsidiary of HSBC North America
Holdings Inc. (HNAH), which is an indirect wholly owned subsidiary of HSBC
Holdings plc (HSBC). The accompanying unaudited interim consolidated financial
statements of HSBC USA Inc. and its subsidiaries (collectively, HUSI), including
its principal subsidiary, HSBC Bank USA, National Association (HBUS), have been
prepared in accordance with accounting principles generally accepted in the
United States of America (U.S. GAAP) for interim financial information, with the
instructions to Form 10-Q and with Article 10 of Regulation S-X, as well as in
accordance with predominant practices within the banking industry. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all normal and recurring adjustments considered necessary for a
fair presentation of financial position, results of operations and cash flows
for the interim periods have been made. These unaudited interim financial
statements should be read in conjunction with HUSI's Annual Report on Form 10-K
for the year ended December 31, 2005 (the 2005 Form 10-K). Certain
reclassifications have been made to prior period amounts to conform to the
current period presentations. The accounting and reporting policies of HUSI are
consistent, in all material respects, with those used to prepare the 2005 Form
10-K, except for the impact of new accounting pronouncements summarized in Note
15 of these unaudited interim consolidated financial statements.
The preparation of financial statements in conformity with U.S. GAAP requires
the use of estimates and assumptions that affect reported amounts and
disclosures. Actual results could differ from those estimates. Interim results
should not be considered indicative of results in future periods.
8
Note 2. Securities
--------------------------------------------------------------------------------
At March 31, 2006 and December 31, 2005, HUSI held no securities of any single
issuer (excluding the U.S. Treasury, U.S. Government agencies and U.S.
Government sponsored enterprises) with a book value that exceeded 10% of
shareholders' equity. The following tables provide a summary of the amortized
cost and fair value of the securities available for sale and securities held to
maturity portfolios.
--------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
March 31, 2006 Cost Gains Losses Value
--------------------------------------------------------------------------------------------------------
(in millions)
Securities available for sale:
U.S. Treasury $ 1,075 $ -- $ (15) $ 1,060
U.S. Government sponsored enterprises (1) 10,315 12 (355) 9,972
U.S. Government agency issued or guaranteed 3,986 5 (106) 3,885
Obligations of U.S. states and political subdivisions 487 -- (6) 481
Asset backed securities 741 1 (6) 736
Other domestic debt securities 1,574 10 (29) 1,555
Foreign debt securities 639 8 (5) 642
Equity securities 50 6 -- 56
--------- ----------- ----------- ---------
Securities available for sale $ 18,867 $ 42 $ (522) $ 18,387
========= =========== =========== =========
Securities held to maturity:
U.S. Treasury $ 129 $ -- $ -- $ 129
U.S. Government sponsored enterprises (1) 1,856 29 (28) 1,857
U.S. Government agency issued or guaranteed 627 25 (2) 650
Obligations of U.S. states and political subdivisions 361 24 (1) 384
Other domestic debt securities 164 -- (5) 159
Foreign debt securities 51 -- -- 51
--------- ----------- ----------- ---------
Securities held to maturity $ 3,188 $ 78 $ (36) $ 3,230
========= =========== =========== =========
--------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 2005 Cost Gains Losses Value
--------------------------------------------------------------------------------------------------------
(in millions)
Securities available for sale:
U.S. Treasury $ 711 $ -- $ (4) $ 707
U.S. Government sponsored enterprises (1) 10,850 25 (251) 10,624
U.S. Government agency issued or guaranteed 2,466 10 (48) 2,428
Obligations of U.S. states and political subdivisions 487 -- (5) 482
Asset backed securities 1,165 2 (4) 1,163
Other domestic debt securities 1,700 6 (15) 1,691
Foreign debt securities 611 8 (5) 614
Equity securities 49 6 -- 55
--------- ----------- ----------- ---------
Securities available for sale $ 18,039 $ 57 $ (332) $ 17,764
========= =========== =========== =========
Securities held to maturity:
U.S. Treasury $ 83 $ -- $ -- $ 83
U.S. Government sponsored enterprises (1) 1,860 57 (21) 1,896
U.S. Government agency issued or guaranteed 644 31 (1) 674
Obligations of U.S. states and political subdivisions 369 25 -- 394
Other domestic debt securities 164 1 (1) 164
Foreign debt securities 51 -- -- 51
--------- ----------- ----------- ---------
Securities held to maturity $ 3,171 $ 114 $ (23) $ 3,262
========= =========== =========== =========
(1) Includes primarily mortgage-backed securities issued by the Federal
National Mortgage Association (FNMA) and the Federal Home Loan Mortgage
Corporation (FHLMC).
In March 2006, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 156, Accounting for Servicing of Financial
Assets (SFAS 156). HUSI adopted this standard effective January 1, 2006 (see
Note 5, of these consolidated financial statements), electing to reclassify
securities used to offset changes in economic value of mortgage servicing rights
(MSRs) from the available for sale portfolio to trading assets at that date. At
December 31, 2005, these securities had a book value of $115 million and a fair
value of $111 million.
9
The following tables provide a summary of gross unrealized losses and related
fair values, classified as to the length of time the losses have existed.
--------------------------------------------------------------------------------------------------------------------
One Year or Less Greater Than One Year
--------------------------------------- ----------------------------------------
Number Gross Aggregate Number Gross Aggregate
of Unrealized Fair Value of Unrealized Fair Value
March 31, 2006 Securities Losses of Investment Securities Losses of Investment
--------------------------------------------------------------------------------------------------------------------
(in millions)
Securities available for sale:
U.S. Treasury 13 $ (15) $ 1,060 -- $ -- $ --
U.S. Government
sponsored enterprises (1) 656 (260) 7,376 66 (95) 1,881
U.S. Government agency
issued or guaranteed 603 (69) 3,382 103 (37) 375
All other securities 148 (40) 2,206 35 (6) 359
---------- ----------- ------------- ---------- ----------- -------------
Securities available for sale 1,420 $ (384) $ 14,024 204 $ (138) $ 2,615
========== =========== ============= ========== =========== =============
Securities held to maturity:
U.S. Government
sponsored enterprises (1) 42 $ (23) $ 645 4 $ (5) $ 44
U.S. Government agency
issued or guaranteed 216 (2) 87 -- -- --
All other securities 11 (5) 175 11 (1) 8
---------- ----------- ------------- ---------- ----------- -------------
Securities held to maturity 269 $ (30) $ 907 15 $ (6) $ 52
========== =========== ============= ========== =========== =============
(1) Includes primarily mortgage-backed securities issued by FNMA and FHLMC.
--------------------------------------------------------------------------------------------------------------------
One Year or Less Greater Than One Year
--------------------------------------- ----------------------------------------
Number Gross Aggregate Number Gross Aggregate
of Unrealized Fair Value of Unrealized Fair Value
December 31, 2005 Securities Losses of Investment Securities Losses of Investment
--------------------------------------------------------------------------------------------------------------------
(in millions)
Securities available for sale:
U.S. Government
sponsored enterprises (1) 560 $ (176) $ 7,313 46 $ (75) $ 1,434
U.S. Government agency
issued or guaranteed 288 (22) 1,346 82 (26) 434
All other securities 113 (32) 2,944 39 (1) 82
---------- ----------- ------------- ---------- ----------- -------------
Securities available for sale 961 $ (230) $ 11,603 167 $ (102) $ 1,950
========== =========== ============= ========== =========== =============
Securities held to maturity:
U.S. Government
sponsored enterprises (1) 28 $ (14) $ 397 3 $ (7) $ 41
U.S. Government agency
issued or guaranteed 181 (1) 34 -- -- --
All other securities 11 -- 167 12 (1) 9
---------- ----------- ------------- ---------- ----------- -------------
Securities held to maturity 220 $ (15) $ 598 15 $ (8) $ 50
========== =========== ============= ========== =========== =============
(1) Includes primarily mortgage-backed securities issued by FNMA and FHLMC.
Gross unrealized losses within the available for sale securities and held to
maturity securities portfolios increased during the three months ended March 31,
2006 due to rising short-term and medium-term interest rates. Since
substantially all of these securities are high credit grade (i.e., AAA or AA),
and HUSI has the ability and intent to hold these securities until maturity or a
market price recovery, they are not considered to be other than temporarily
impaired.
10
Note 3. Loans
--------------------------------------------------------------------------------
The composition of HUSI's loan portfolio is summarized in the following table.
------------------------------------------------------------------------------------------------
March 31, 2006 December 31, 2005
------------------------ ------------------------
Total Held for Sale Total Held for Sale
------------------------------------------------------------------------------------------------
(in millions)
Commercial:
Construction and other real estate $ 9,195 $ -- $ 9,123 $ --
Other commercial 17,609 -- 18,598 --
Consumer:
Residential mortgage 44,328 5,608 43,970 4,175
Credit card receivables 14,461 -- 15,514 --
Other consumer loans 3,058 427 3,137 390
-------- -------- -------- --------
Total loans $ 88,651 $ 6,035 $ 90,342 $ 4,565
======== ======== ======== ========
Loans pledged as collateral are summarized in Note 10 on page 17 of this Form
10-Q.
Loans Held for Sale
Loans held for sale are recorded at the lower of aggregate cost or market value.
Aggregate cost exceeded market value at March 31, 2006 and December 31, 2005,
resulting in recorded valuation allowance of $70 million and $26 million
respectively.
In June 2005, HUSI began acquiring residential mortgage loans from unaffiliated
third parties, with the intent of selling the loans to an HSBC affiliate, HSBC
Markets (USA) Inc. (HMUS). The increase in held for sale loans during 2006
directly resulted from this activity. Further information regarding loans held
for sale to HMUS is provided on page 25 of this Form 10-Q.
Concentrations of Credit Risk
Certain residential mortgage loans have high loan-to-value (LTV) ratios and no
mortgage insurance, which could result in failure to recover the entire
investment in loans involving foreclosed or damaged properties.
HUSI also offers interest-only residential mortgage loans. These interest-only
loans allow customers to pay only the accruing interest for a period of time,
which results in lower payments during the initial loan period. Depending on a
customer's financial situation, the subsequent increase in the required payment
attributable to loan principal could affect a customer's ability to repay the
loan at some future date when the interest rate resets and/or principal payments
are required.
As with any non-conforming and non-prime loan products, HUSI utilizes high
underwriting standards and prices these loans in a manner that is appropriate to
compensate for higher risk.
Outstanding balances of high LTV and interest-only loans are summarized in the
following table.
-----------------------------------------------------------------------------------------------
March 31, December 31,
2006 2005
-----------------------------------------------------------------------------------------------
(in millions)
Residential mortgage loans with high LTV and no mortgage insurance $ 3,338 $ 3,510
Interest-only residential mortgage loans 8,396 8,713
-------- --------
Total loans $ 11,734 $ 12,223
======== ========
11
Credit Quality Statistics
An analysis of credit quality is provided beginning on page 44 of this Form
10-Q.
The following table provides a summary of credit quality statistics.
---------------------------------------------------------------------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
2006 2005 2005 2005 2005
---------------------------------------------------------------------------------------------------------------------
(in millions)
Nonaccruing loans
Balance at end of period:
Commercial:
Construction and other real
estate $ 21 $ 15 $ 32 $ 29 $ 28
Other commercial 64 70 77 81 99
------------ ------------ ------------ ------------ ------------
Total commercial 85 85 109 110 127
------------ ------------ ------------ ------------ ------------
Consumer:
Residential mortgages 160 156 126 115 116
Credit card receivables -- -- -- -- --
Other consumer loans -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Total consumer loans 160 156 126 115 116
------------ ------------ ------------ ------------ ------------
Total nonaccruing loans $ 245 $ 241 $ 235 $ 225 $ 243
============ ============ ============ ============ ============
As a percent of loans:
Commercial:
Construction and other real
estate .23% .16% .36% .33% .33%
Other commercial .36 .38 .48 .53 .66
------------ ------------ ------------ ------------ ------------
Total commercial .32 .31 .43 .46 .54
------------ ------------ ------------ ------------ ------------
Consumer:
Residential mortgages .36 .35 .27 .24 .24
Credit card receivables -- -- -- -- --
Other consumer loans -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Total consumer loans .26 .25 .20 .18 .18
------------ ------------ ------------ ------------ ------------
Total .28% .27% .26% .26% .28%
============ ============ ============ ============ ============
Interest income on nonaccruing loans
(quarterly total):
Amount which would have been
recorded had the associated loans
been current in accordance with
their original terms $ 5 $ 8 $ 5 $ 7 $ 5
Amount actually recorded 1 5 3 1 3
Accruing loans contractually past due
90 days or more as to principal or
interest:
Total commercial $ 6 $ 19 $ 4 $ 7 $ 13
------------ ------------ ------------ ------------ ------------
Residential mortgages -- 27 1 -- 1
Credit card receivables 244 248 237 206 210
Other consumer loans 17 17 15 14 15
------------ ------------ ------------ ------------ ------------
Total consumer loans 261 292 253 220 226
------------ ------------ ------------ ------------ ------------
Total accruing loans contractually
past due 90 days or more $ 267 $ 311 $ 257 $ 227 $ 239
============ ============ ============ ============ ============
Criticized assets (balance at end of
period):
Special mention $ 648 $ 706 $ 735 $ 706 $ 728
Substandard 858 721 736 761 535
Doubtful 20 25 29 28 34
------------ ------------ ------------ ------------ ------------
Total $ 1,526 $ 1,452 $ 1,500 $ 1,495 $ 1,297
============ ============ ============ ============ ============
Impaired loans:
Balance at end of period $ 85 $ 90 $ 115 $ 102 $ 119
Amount with impairment reserve 23 27 51 79 96
Impairment reserve 7 10 8 19 21
Other real estate and owned assets:
Balance at end of period $ 40 $ 35 $ 31 $ 25 $ 20
Ratio of total nonaccruing loans,
other real estate and owned assets
to total assets .18% .18% .18% .17% .19%
12
Note 4. Allowance for Credit Losses
--------------------------------------------------------------------------------
Changes in the allowance for credit losses are summarized in the following
table.
----------------------------------------------------------------------------------------------------------
Quarter ended March 31 2006 2005
----------------------------------------------------------------------------------------------------------
(in millions)
Balance at beginning of quarter $ 846 $ 788
Allowance related to disposition of certain private label credit card relationships (6) --
Charge offs 230 199
Recoveries 70 77
-------- --------
Net charge offs 160 122
-------- --------
Provision charged to income 157 107
-------- --------
Balance at end of quarter $ 837 $ 773
======== ========
Further analysis of credit quality and the allowance for credit losses is
presented on pages 44-46 of this Form 10-Q. Credit quality statistics are
provided in Note 3, beginning on page 11.
Note 5. Intangible Assets
--------------------------------------------------------------------------------
The composition of intangible assets is summarized in the following table.
--------------------------------------------------------------------------------
March 31, December 31,
2006 2005
--------------------------------------------------------------------------------
(in millions)
Mortgage servicing rights $ 465 $ 418
Other 43 45
-------- --------
Intangible assets $ 508 $ 463
======== ========
Mortgage Servicing Rights (MSRs)
HUSI recognizes the right to service mortgage loans as a separate and distinct
asset at the time the loans are sold. HUSI receives a fee for servicing the
related residential mortgage loans. HUSI has one class of MSRs arising from
sales of mortgage loans.
In March 2006, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 156, Accounting for Servicing of Financial
Assets (SFAS 156). HUSI adopted this standard effective January 1, 2006,
electing to measure its one class of MSRs at fair value. Upon adoption, HUSI
recorded a cumulative effect adjustment to beginning retained earnings of less
than $1 million, representing the difference between the fair value and the
carrying amount of MSRs as of the date of adoption.
MSRs are subject to interest rate risk, in that their value will fluctuate as a
result of changes in the interest rate environment. Interest rate risk is
mitigated through an active hedging program that uses securities and derivatives
to offset changes in the economic value of MSRs. Since the hedging program
involves trading activity, risk is quantified and managed using a number of risk
assessment techniques, which are addressed in more detail beginning on page 53
of this Form 10-Q.
With the adoption of SFAS 156, HUSI also made an irrevocable election to
reclassify securities used to offset changes in economic value of MSRs from
available for sale to trading assets, effective January 1, 2006. At December 31,
2005, these securities had a book value of $115 million and a fair value of $111
million. The accumulated unrealized loss recorded in accumulated other
comprehensive income of $4 million was reversed effective January 1, 2006, with
the offsetting amount recorded as a cumulative effect adjustment to beginning
retained earnings.
MSRs are initially measured at fair value at the time that the related loans are
sold, and periodically remeasured using the fair value measurement method. This
method requires that MSRs be measured at fair value at each reporting date with
changes in fair value of the asset reflected in earnings in the period that the
changes occur. Fair value is determined based upon the application of valuation
models and other inputs. The valuation models
13
incorporate assumptions market participants would use in estimating future cash
flows. These assumptions include expected prepayments, default rates and
market-based option adjusted spreads. The reasonableness of these pricing models
is periodically validated by reference to external independent broker valuations
and industry surveys.
Fair value of MSRs is calculated using the following critical assumptions.
--------------------------------------------------------------------------------
March 31, December 31,
2006 2005
--------------------------------------------------------------------------------
Annualized constant prepayment rate (CPR) 17.20% 16.30%
Constant discount rate 12.21% 12.07%
Weighted average life 5.6 years 5.5 years
The following table summarizes MSRs activity for the three months ended March
31, 2006, the first reporting period since adoption of SFAS 156.
-------------------------------------------------------------------------------------------------
Three months ended March 31 2006
-------------------------------------------------------------------------------------------------
(in millions)
Fair value of MSRs:
Beginning balance $ 418
Additions related to loan sales 23
Changes in fair value due to:
Change in valuation inputs or assumptions used in the valuation models 45
Realization of cash flows (21)
-----
Ending balance $ 465
=====
The following table summarizes activity for MSRs and the related valuation
allowance for the three months ended March 31, 2005, which was prior to adoption
of SFAS 156.
-------------------------------------------------------------------------------------------------
Three months ended March 31 2005
-------------------------------------------------------------------------------------------------
(in millions)
MSRs, net of accumulated amortization:
Beginning balance $ 416
Additions related to loan sales 13
Permanent impairment charges (9)
Amortization (19)
-----
Ending balance 401
-----
Valuation allowance for MSRs:
Beginning balance (107)
Temporary impairment recovery 17
Permanent impairment charges 9
-----
Ending balance (81)
-----
MSRs, net of accumulated amortization and valuation allowance $ 320
=====
Note 6. Goodwill
--------------------------------------------------------------------------------
During the second quarter of 2005, HUSI completed its annual impairment test of
goodwill and determined that the fair value of each of the reporting units
exceeded its carrying value. As a result, no impairment loss was required to be
recognized. During the first quarter of 2006, there were no events or
transactions which warrant consideration for their impact on recorded book
values assigned to goodwill.
Note 7. Income Taxes
--------------------------------------------------------------------------------
The following table presents HUSI's effective tax rates.
--------------------------------------------------------------------------------
Three months ended March 31 2006 2005
--------------------------------------------------------------------------------
Effective tax rate 31.7% 35.8%
14
In the first quarter of 2006, approximately $17 million of income tax liability,
related mainly to the completion of ongoing tax audits, was released against tax
expense, thereby reducing the effective tax rate by 3.8% for the first three
months of 2006. The effective tax rate was further reduced due to an increase in
available low income housing tax credits and a decrease in state and local
income tax liabilities.
In the first quarter of 2005, HUSI finalized certain prior year state and local
tax returns and recorded a $20 million reduction of income tax expense, reducing
the effective tax rate by 4.1% for the first three months of 2005. This
reduction represented the difference between its previous estimate of tax
liability and the liability per the tax returns.
Note 8. Long-Term Debt
--------------------------------------------------------------------------------
Long-term debt is summarized in the following table.
--------------------------------------------------------------------------------
March 31, December 31,
2006 2005
--------------------------------------------------------------------------------
(in millions)
Senior debt $ 22,377 $ 22,218
Subordinated debt 5,601 5,722
All other 18 19
------------ ------------
Total long-term debt $ 27,996 $ 27,959
============ ============
Information regarding the material components of long-term debt is provided in
Note 14 of the consolidated financial statements, beginning on page 112 of the
2005 Form 10-K.
Note 9. Related Party Transactions
--------------------------------------------------------------------------------
In the normal course of business, HUSI conducts transactions with HSBC and its
subsidiaries (HSBC affiliates). These transactions occur at prevailing market
rates and terms. All extensions of credit by HUSI to other HSBC affiliates are
legally required to be secured by eligible collateral. The following table
presents related party balances and the income and expense generated by related
party transactions.
----------------------------------------------------------------------------------------------------
March 31, December 31,
2006 2005
----------------------------------------------------------------------------------------------------
(in millions)
Assets:
Cash and due from banks $ 138 $ 121
Interest bearing deposits with banks 548 67
Federal funds sold and securities purchased under resale agreements 122 111
Trading assets 5,787 5,386
Loans 1,154 1,901
Other 129 78
------------ ------------
Total assets $ 7,878 $ 7,664
============ ============
Liabilities:
Deposits $ 8,349 $ 10,131
Trading account liabilities 4,806 4,545
Short-term borrowings 1,727 698
Other 91 106
------------ ------------
Total liabilities $ 14,973 $ 15,480
============ ============
----------------------------------------------------------------------------------------------------
Three months ended March 31 2006 2005
----------------------------------------------------------------------------------------------------
(in millions)
Interest income $ 11 $ 9
Interest expense 100 64
Trading losses (363) (321)
Other revenues 55 40
Support services from HSBC affiliates:
Fees paid to HSBC Finance Corporation 116 106
Treasury and traded markets services and other fees 92 64
Fees paid to HSBC Technology & Services (USA) Inc. (HTSU) for
technology services 57 48
15
The following business transactions conducted with HSBC Finance Corporation
impacted operations during the first quarter of 2006.
Credit Card Receivables and Other Loan Transactions
o In December 2004, HUSI acquired a private label receivable portfolio from
HSBC Finance Corporation, which primarily included credit card receivables
and retained interests associated with securitized credit card
receivables. HSBC Finance Corporation retained and continues to service
the customer relationships, for which they charged HUSI servicing fees of
$98 million and $92 million for the three months ended March 31, 2006 and
2005 respectively. In July 2004, HUSI sold certain MasterCard(1)/Visa2
credit card relationships to HSBC Finance Corporation, but retained the
receivable balances associated with these relationships. By agreement,
HUSI is purchasing receivables generated by these private label and
MasterCard/Visa customer relationships at fair value on a daily basis.
Premiums paid are being amortized to interest income over the estimated
life of the receivables purchased. Since the original private label
receivables acquisition and MasterCard/Visa relationship sale, the
underlying customer balances included within these portfolios have
revolved, and new private label relationships have been added. Activity
related to these portfolios is summarized in the following table.
----------------------------------------------------------------------------------------------------------
Private Label MasterCard/Visa
--------------------- ---------------------
Quarter ended March 31 2006 2005 2006 2005
----------------------------------------------------------------------------------------------------------
(in millions)
Receivable balances at beginning of period $ 14,355 $ 10,936 $ 1,159 $ 1,142
========= ========= ========= =========
Receivable balances at end of period 13,332 10,892 1,129 1,109
========= ========= ========= =========
Premium paid to HSBC Finance Corporation during the period 77 103 8 8
========= ========= ========= =========
o During the quarter ended March 31, 2006, HUSI purchased approximately $186
million of consumer loans at fair value from originating lenders pursuant
to HSBC Finance Corporation correspondent loan programs.
Other Transactions
o Support services from HSBC affiliates includes charges by HSBC Finance
Corporation under various service level agreements for loan origination
and servicing as well as other operational and administrative support.
o HBUS is the originating lender for a federal income tax refund
anticipation loan program for clients of various third party tax
preparers, which is managed by HSBC Finance Corporation. By agreement,
HBUS processes applications, funds and subsequently sells these loans to
HSBC Finance Corporation. During the quarter ended March 31, 2006,
approximately $27 billion of loans were originated by HBUS and sold to
HSBC Finance Corporation, resulting in gains of approximately $19 million
and fees paid to HSBC Finance Corporation of $3 million. For the same 2005
quarter, $24 billion of loans were sold to HSBC Finance Corporation,
resulting in gains of $17 million and fees paid of $3 million.
o At March 31, 2006, HUSI had a $2 billion unused line of credit with HSBC
Finance Corporation. The interest rate is comparable to third party rates
for a line of credit with similar terms.
o Trading losses primarily represent the mark to market of the intercompany
components of interest rate and foreign currency derivative swap
transactions entered into with HSBC Finance Corporation. Specifically,
HSBC Finance Corporation enters into these swap contracts with HUSI in
order to hedge its interest rate positions. HUSI, within its Corporate,
Investment Banking and Markets business, accounts for these transactions
on a mark to market basis, with the change in value on the intercompany
component substantially offset by the mark to market of related contracts
entered into with HSBC affiliates and third parties.
---------------
(1) MasterCard is a registered trademark of MasterCard International,
Incorporated.
(2) Visa is a registered trademark of Visa USA, Inc.
16
The following business transactions were conducted with HMUS during the first
quarter of 2006.
o HUSI utilizes HMUS for broker dealer, debt underwriting, customer
referrals and for other treasury and traded markets related services,
pursuant to service level agreements. Debt underwriting fees charged by
HMUS are deferred as a reduction of long-term debt and amortized to
interest expense over the life of the related debt. Customer referral fees
paid to HMUS are netted against customer fee income, which is included in
other fees and commissions. All other fees charged by HMUS are included in
support services from HSBC affiliates.
o In June 2005, HUSI began acquiring residential mortgage loans, excluding
servicing, from unaffiliated third parties and subsequently selling these
acquired loans to HMUS. HUSI maintains no ownership interest in the
residential mortgage loans after sale. During the first quarter of 2006,
HUSI sold $4 billion of loans to HMUS for total gains on sale of $17
million, which are included in other revenues.
At March 31, 2006, HUSI had an unused line of credit with HSBC of $2 billion.
The interest rate is comparable to third party rates for a line of credit with
similar terms.
HUSI has extended loans and lines of credit to various other HSBC affiliates
totaling $1.4 billion, of which $180 million was outstanding at March 31, 2006.
Interest rates are comparable to third party rates for a line of credit with
similar terms.
At March 31, 2006 and December 31, 2005, the aggregate notional amounts of all
derivative contracts with other HSBC affiliates were approximately $644 billion
and $570 billion respectively. The net credit risk exposure related to these
contracts was approximately $5 billion at both March 31, 2006 and December 31,
2005.
Domestic employees of HUSI participate in a defined benefit pension plan
sponsored by HNAH. Additional information regarding pensions is provided in Note
11 of these consolidated financial statements.
Employees of HUSI participate in one or more stock compensation plans sponsored
by HSBC. HUSI's share of the expense of these plans on a pre-tax basis for the
first three months of 2006 and 2005 was approximately $11 million and $9 million
respectively. As of March 31, 2006, HUSI had approximately $79 million of
compensation cost related to nonvested stock compensation plans, which is
expected to be recognized over a weighted-average period of 1.9 years. A
description of these stock compensation plans begins on page 125 of HUSI's 2005
Form 10-K.
Note 10. Pledged Assets
--------------------------------------------------------------------------------
The following table presents pledged assets included in the consolidated balance
sheet.
--------------------------------------------------------------------------------
March 31, December 31,
2006 2005
--------------------------------------------------------------------------------
(in millions)
Interest bearing deposits with banks $ 1,751 $ 1,170
Trading assets 2,745 1,452
Securities available for sale 5,595 6,369
Securities held to maturity 467 447
Loans 8,387 8,204
------- -----------
Total $18,945 $ 17,642
======= ===========
Securities available for sale are primarily pledged against various short-term
borrowings. Loans are primarily residential mortgage loans pledged against
long-term borrowings from the Federal Home Loan Bank and private label
receivables pledged against long-term secured borrowings.
17
Note 11. Pensions and Other Postretirement Benefits
--------------------------------------------------------------------------------
In November 2004, sponsorship of the U.S. defined benefit pension plans and the
health and life insurance plan of HUSI and HSBC Finance Corporation were
transferred to HNAH. Effective January 1, 2005, the separate U.S. defined
benefit pension plans were merged into a single defined benefit pension plan,
which facilitated the development of a unified employee benefit policy and
unified employee benefit plan administration for HSBC affiliates operating in
the U.S. As a result, HUSI's prepaid pension asset of $482 million, and a
related deferred tax liability of $203 million, were transferred to HNAH. The
net transfer amount of $279 million is reflected as a reduction of capital
surplus for 2005 on the consolidated statement of changes in shareholders'
equity.
The following table presents the components of net periodic benefit cost as
allocated to HUSI from HNAH.
------------------------------------------------------------------------------------------------
Other
Postretirement
Pension Benefits Benefits
----------------- ----------------
Three months ended March 31 2006 2005 2006 2005
------------------------------------------------------------------------------------------------
(in millions)
Net periodic benefit cost:
Service cost - benefits earned during the period $ 8 $ 11 $ -- $ 1
Interest cost on projected benefit obligation 17 17 2 2
Expected return on plan assets (22) (25) -- --
Recognized losses 3 1 -- --
Transition amount amortization -- -- 1 1
----- ----- ----- -----
Net periodic benefit cost $ 6 $ 4 $ 3 $ 4
===== ===== ===== =====
During 2006 HUSI expects to make no contribution for pension benefits and to pay
postretirement benefits of approximately $9 million.
18
Note 12. Business Segments
--------------------------------------------------------------------------------
HUSI has five distinct business segments that it utilizes for management
reporting and analysis purposes. The business segments are based upon customer
groupings, as well as products and services offered. The business segments are
described in the following paragraphs.
The Personal Financial Services (PFS) Segment
This segment provides a broad range of financial products and services including
installment and revolving term loans, deposits, branch services, mutual funds,
investments and insurance. These products are marketed to individuals primarily
through the branch banking network and increasingly through e-banking channels.
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 origination offices. Servicing is
performed for the individual mortgage holder or on a contractual basis for
mortgages owned by third parties.
The PFS segment continues to include MasterCard/Visa credit card receivables
acquired on a daily basis, related to account relationships which HUSI sold to
HSBC Finance Corporation in 2004.
The Consumer Finance (CF) Segment
Effective for the first quarter of 2005, HUSI formed a new business segment,
Consumer Finance (CF), which was reported as a component of PFS in prior
periods. The CF segment includes point of sale and other lending activities
primarily to meet the financial needs of individuals. Specifically, operating
activity within the CF segment relates to various consumer loans, private label
credit card receivables, and retained interests in securitized receivable trusts
purchased from HSBC Finance Corporation, as well as consumer loans purchased
from originating lenders pursuant to HSBC Finance Corporation correspondent loan
programs.
The Commercial Banking (CMB) Segment
This segment provides loan and deposit products to small businesses and
middle-market corporations including specialized products such as real estate
financing. Various credit and trade related products such as standby facilities,
performance guarantees and acceptances are also offered. These products and
services are offered through multiple delivery systems, including the branch
banking network.
Effective January 1, 2006, the CMB segment also includes activity related to an
equity investment in Wells Fargo HSBC Trade Bank N.A., which was previously
reported in the Other segment. For comparability purposes, 2005 segment results
have been revised to reflect this change.
The Corporate, Investment Banking and Markets (CIBM) Segment
This segment is comprised of Corporate/Institutional Banking (CIB) and
Investment Banking and Markets (IBM). CIB provides deposit and lending products
to large and multi-national corporations and banks. U.S. dollar clearing
services are offered for domestic and international wire transfer transactions.
Credit and trade related products such as standby facilities, performance
guarantees and acceptances are also provided by CIB to large corporate entities.
The IBM 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 structured transactions as well as the trading and sale of foreign
exchange, banknotes, derivatives, precious metals, securities and emerging
markets instruments, both domestically and internationally.
The Private Banking (PB) Segment
This segment offers a full range of services for high net worth domestic and
foreign individuals including deposit, lending, trading, trust, branch services,
mutual funds, insurance and investment management.
19
Other Segment
This segment includes an equity investment in HSBC Republic Bank (Suisse) S.A.
and certain corporate expenses not allocated to other business segments.
The following table summarizes the results for each segment. The net interest
income component in the table reflects actual interest earned, net of cost of
funds as determined by corporate transfer pricing methodology.
Analysis of operating results for each segment begins on page 39 of this Form
10-Q.
-------------------------------------------------------------------------------------------------------------------
PFS CF CMB CIBM PB Other Total
-------------------------------------------------------------------------------------------------------------------
(in millions)
Three months ended March 31:
2006
Net interest income (1) $ 309 $ 153 $ 178 $ 53 $ 48 $ (6) $ 735
Other revenues 135 119 49 273 76 6 658
-------- -------- -------- -------- -------- -------- --------
Total revenues 444 272 227 326 124 -- 1,393
Operating expenses (2) 291 110 110 183 75 16 785
-------- -------- -------- -------- -------- -------- --------
Working contribution 153 162 117 143 49 (16) 608
Provision for credit losses (3) 16 135 4 2 -- -- 157
-------- -------- -------- -------- -------- -------- --------
Income (loss) before income
tax expense $ 137 $ 27 $ 113 $ 141 $ 49 $ (16) $ 451
======== ======== ======== ======== ======== ======== ========
Average assets $ 44,070 $ 20,544 $ 16,734 $ 71,321 $ 5,473 $ 336 $158,478
Average liabilities/equity (4) 47,094 1,684 19,928 79,252 10,520 -- 158,478
Goodwill at March 31 1,169 -- 467 630 428 -- 2,694
2005
Net interest income (1) $ 300 $ 130 $ 154 $ 154 $ 40 $ (3) $ 775
Other revenues 128 80 38 167 58 7 478
-------- -------- -------- -------- -------- -------- --------
Total revenues 428 210 192 321 98 4 1,253
Operating expenses (2) 251 107 98 134 64 -- 654
-------- -------- -------- -------- -------- -------- --------
Working contribution 177 103 94 187 34 4 599
Provision for credit losses (3) 22 109 (5) (18) (1) -- 107
-------- -------- -------- -------- -------- -------- --------
Income before income tax
expense $ 155 $ (6) $ 99 $ 205 $ 35 $ 4 $ 492
======== ======== ======== ======== ======== ======== ========
Average assets $ 50,752 $ 18,282 $ 14,920 $ 53,101 $ 4,720 $ 309 $142,084
Average liabilities/equity (4) 43,733 533 16,176 72,243 9,399 -- 142,084
Goodwill at March 31 1,169 -- 468 631 428 -- 2,696
(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 apportioned corporate overhead expenses.
For the first quarter of 2006, expenses included within the Other business
segment include certain corporate charges.
(3) The provision apportioned to the segments is based on the segments' net
charge offs and the change in allowance for credit losses.
(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.
20
Note 13. Regulatory Capital
--------------------------------------------------------------------------------
The following table presents the capital ratios of HUSI and HBUS calculated in
accordance with banking regulations. To be categorized as "well-capitalized"
under the Federal Reserve Board, Federal Deposit Insurance Corporation and the
Office of the Comptroller of the Currency guidelines, a banking institution must
have the minimum ratios reflected in the table, and must not be subject to a
directive, order, or written agreement to meet and maintain specific capital
levels.
------------------------------------------------------------------------------------------------------
Well-Capitalized March 31, December 31,
Minimum Ratio 2006 2005
------------------------------------------------------------------------------------------------------
Total capital (to risk weighted assets)
HUSI 10.00% 12.10% 12.53%
HBUS 10.00 11.98 12.32
Tier 1 capital (to risk weighted assets)
HUSI 6.00 8.10 8.25
HBUS 6.00 8.15 8.29
Tier 1 capital (to average assets)
HUSI 3.00 6.44 6.51
HBUS 5.00 6.56 6.61
Tangible common equity (to risk weighted assets)
HUSI 6.34 6.40
HBUS 8.19 8.33
Note 14. Variable Interest Entities (VIEs)
--------------------------------------------------------------------------------
HUSI, in the ordinary course of business, makes use of VIE structures in a
variety of business activities, primarily to facilitate client needs. VIE
structures are utilized after careful consideration of the most appropriate
structure needed to achieve HUSI's control and risk management objectives and to
help ensure an efficient structure from a taxation and regulatory perspective.
Consolidated VIEs
During the first quarter of 2006, HUSI entered into a series of transactions
with VIEs organized by HSBC affiliates and unrelated third parties. These VIEs
were structured as trusts or corporations that issue fixed or floating rate
instruments backed by the assets of the issuing entities. HUSI sold trading
assets to the VIEs and subsequently entered into total return swaps with the
VIEs whereby HUSI receives the total return on the transferred assets and, in
return, pays a market rate of return to its counterparties. HUSI has determined
that it is the primary beneficiary of these VIEs under the applicable accounting
literature and, accordingly, consolidated $2,383 million in trading assets at
March 31, 2006. These assets are pledged as collateral for obligations of the
VIEs. The holders of the instruments issued by the VIEs have no recourse to the
general credit of HUSI beyond the assets sold to the VIEs and pledged as
collateral.
Unconsolidated VIEs
HUSI also holds variable interests in various other VIEs which are not
consolidated at March 31, 2006. HUSI is not the primary beneficiary of these VIE
structures. Information for unconsolidated VIEs is presented in the following
table and commentary. Descriptions of these VIE relationships are included in
pages 136-137 of HUSI's 2005 Form 10-K.
-----------------------------------------------------------------------------------------
March 31, 2006 December 31, 2005
--------------------- ---------------------
Maximum Maximum
Total Exposure Total Exposure
Assets to Loss Assets to Loss
-----------------------------------------------------------------------------------------
(in millions)
Asset backed commercial paper conduits $ 9,823 $ 8,237 $ 10,183 $ 7,423
Securitization vehicles 1,750 558 1,774 565
Investment funds 2,735 -- 2,513 --
Capital funding vehicles 1,114 32 1,093 32
Low income housing tax credits 1,286 229 1,080 165
--------- --------- --------- ---------
Total $ 16,708 $ 9,056 $ 16,643 $ 8,185
========= ========= ========= =========
21
Asset Backed Commercial Paper Conduits
HUSI provides a liquidity facility to an asset backed commercial paper conduit
sponsored by an unrelated third party. HUSI does not transfer its own
receivables into the financing entity, has no ownership interest in, no
administrative duties, and does not service any assets of these conduits. The
only interest HUSI has in these entities are liquidity facilities in the amount
of approximately $1.7 billion at March 31, 2006. These facilities are excluded
from the table summarizing HUSI's involvement in VIEs.
Note 15. New Accounting Pronouncements
--------------------------------------------------------------------------------
Effective January 1, 2006, HUSI adopted Statement of Financial Accounting
Standards No. 123 (Revised), Share-Based Payment, (SFAS 123R). The adoption of
SFAS 123R did not have a material impact on HUSI's financial position or results
of operations. Substantially all of the disclosure requirements of SFAS 123R
that are applicable to HUSI were included in HUSI's 2005 Form 10-K. Certain
disclosure requirements of SFAS 123R that were not included in the 2005 Form
10-K are included in Note 9 of these consolidated financial statements,
beginning on page 15 of this Form 10-Q.
Effective January 1, 2006, HUSI adopted Statement of Financial Accounting
Standards No. 154, Accounting Changes and Error Corrections: a replacement of
APB Opinion No. 20 and FASB Statement No. 3 (SFAS 154). The adoption of SFAS 154
did not have any impact on HUSI's financial position or results of operations.
Effective January 1, 2006, HUSI adopted FASB Staff Position Nos. FAS 115-1 and
FAS 124-1, The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments, (FSP 115-1 and FSP 124-1), in response to Emerging Issues
Task Force 03-1, The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments. The adoption of the impairment guidance
contained in FSP 115-1 and FSP 124-1 did not have a material impact on HUSI's
financial position or results of operations.
In February 2006, the FASB issued Statement of Financial Accounting Standards
No. 155, Accounting for Certain Hybrid Financial Instruments (SFAS 155). SFAS
155 permits companies to elect to measure at fair value entire financial
instruments containing embedded derivatives that would otherwise have to be
bifurcated and accounted for separately. SFAS 155 also requires companies to
identify interests in securitized financial assets that are free standing
derivatives or contain embedded derivatives that would have to be accounted for
separately, clarifies which interest-only and principal-only strip receivables
are subject to Statement of Financial Accounting Standards No. 133, Accounting
for Derivative Instruments and Hedging Activities (SFAS 133), and amends
Statement of Financial Accounting Standards No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities (SFAS 140)
to revise the conditions of a qualifying special purpose entity. SFAS 155 is
effective for all financial instruments acquired or issued after the beginning
of a company's first fiscal year that begins after September 15, 2006. Early
adoption is permitted as of the beginning of a company's fiscal year, provided
the company has not yet issued financial statements for that fiscal year. HUSI
elected to early adopt SFAS 155 effective January 1, 2006. The adoption of SFAS
155 did not have a material impact on HUSI's financial position or results of
operations.
In March 2006, the FASB issued Statement of Financial Accounting Standards No.
156, Accounting for Servicing of Financial Assets (SFAS 156). SFAS 156 amends
previously issued guidance with respect to accounting for separately recognized
loan servicing rights. HUSI early adopted this standard as of January 1, 2006
and elected to account for residential mortgage servicing rights at fair value
prospectively. Refer to Note 5 of the consolidated financial statements,
beginning on page 13 of this Form 10-Q, for information relating to the adoption
of SFAS 156.
22
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (MD&A)
--------------------------------------------------------------------------------
HSBC USA Inc.
--------------------------------------------------------------------------------
CONSOLIDATED AVERAGE BALANCES AND INTEREST RATES
The following table shows the quarterly average balances of the principal
components of assets, liabilities and shareholders' equity, together with their
respective interest amounts and rates earned or paid, presented on a taxable
equivalent basis.
Three Months Ended March 31,
------------------------------------------------------------------------
2006 2005
----------------------------------- -----------------------------------
Balance Interest Rate* Balance Interest Rate*
------------------------------------------------------------------------
(in millions)
Assets
Interest bearing deposits with banks $ 4,710 $ 52 4.50% $ 3,850 $ 25 2.61%
Federal funds sold and securities
purchased under resale agreements 6,683 74 4.47 3,639 24 2.66
Trading assets 10,096 108 4.33 6,623 59 3.61
Securities 21,313 270 5.14 18,318 214 4.73
Loans
Commercial 26,351 385 5.92 22,503 250 4.51
Consumer:
Residential mortgages 43,870 569 5.19 47,463 579 4.88
Credit cards 15,160 267 7.16 12,169 158 5.26
Other consumer 3,241 65 8.16 3,645 62 6.93
--------- --------- ------ --------- --------- ------
Total consumer 62,271 901 5.87 63,277 799 5.12
--------- --------- ------ --------- --------- ------
Total loans 88,622 1,286 5.89 85,780 1,049 4.96
--------- --------- ------ --------- --------- ------
Other 652 14 8.41 583 6 4.40
--------- --------- ------ --------- --------- ------
Total earning assets 132,076 $ 1,804 5.54% 118,793 $ 1,377 4.70%
--------- --------- ------ --------- --------- ------
Allowance for credit losses (935) (894)
Cash and due from banks 4,148 4,013
Other assets 23,189 20,172
--------- ---------
Total assets $ 158,478 $ 142,084
========= =========
Liabilities and Shareholders' Equity
Deposits in domestic offices
Savings deposits $ 32,819 $ 153 1.90% $ 27,565 $ 51 0.75%
Other time deposits 27,754 281 4.11 23,003 148 2.61
Deposits in foreign offices
Foreign banks deposits 7,186 77 4.33 8,048 45 2.24
Other time and savings 14,813 138 3.78 15,397 83 2.20
--------- --------- ------ --------- --------- ------
Total interest bearing deposits 82,572 649 3.19 74,013 327 1.79
--------- --------- ------ --------- --------- ------
Short-term borrowings 10,757 74 2.78 8,896 52 2.40
Long-term debt 28,195 339 4.87 23,870 219 3.72
--------- --------- ------ --------- --------- ------
Total interest bearing liabilities 121,524 1,062 3.54 106,779 598 2.27
--------- --------- ------ --------- --------- ------
Net interest income / Interest rate spread $ 742 2.00% $ 779 2.43%
--------- ------ --------- ------
Noninterest bearing deposits 10,165 9,766
Other liabilities 15,077 14,596
Total shareholders' equity 11,712 10,943
--------- ---------
Total liabilities and shareholders' equity $ 158,478 $ 142,084
========= =========
Net interest margin on average earning
assets 2.28% 2.66%
------ ------
Net interest margin on average total assets 1.90% 2.22%
====== ======
* Rates are calculated on unrounded numbers.
Total weighted average rate earned on earning assets is interest and fee
earnings divided by daily average amounts of total interest earning assets,
including the daily average amount on nonperforming loans. Loan interest for the
first three months of 2006 and 2005 included fees of $12 million and $8 million
respectively.
Certain reclassifications have been made to prior period amounts to conform to
the current period presentations.
23
FORWARD-LOOKING STATEMENTS
--------------------------------------------------------------------------------
The MD&A should be read in conjunction with the consolidated financial
statements, notes and tables included elsewhere in this Form 10-Q and with
HUSI's 2005 Form 10-K. The MD&A may contain certain statements that may be
forward-looking in nature within the meaning of the Private Securities
Litigation Reform Act of 1995. HUSI's results may differ materially from those
noted in the forward-looking statements. Words such as "believe", "expects",
"estimates", "targeted", "anticipates", "goal" and similar expressions are
intended to identify forward-looking statements but should not be considered as
the only means through which these statements may be made. Statements that are
not historical facts, including statements about management's beliefs and
expectations, are forward-looking statements that involve inherent risks and
uncertainties and are based on current views and assumptions. A number of
factors could cause actual results to differ materially from those contained in
any forward-looking statements. For a list of important risk factors that may
affect HUSI's actual results, see Cautionary Statement on Forward-Looking
Statements and Risk Factors in Part I of HUSI's 2005 Form 10-K and Risk Factors
in Part II of this Form 10-Q.
EXECUTIVE OVERVIEW
--------------------------------------------------------------------------------
Income before income tax expense decreased $41 million (8%) in the first quarter
of 2006, as compared with the same 2005 period, primarily due to the following
factors:
o decreased net interest income resulting from continued increases in
short-term interest rates and flattening of the yield curve, particularly
affecting balance sheet management income within the CIBM business
segment; and
o increased operating expenses within the PFS, CMB and PB business segments
associated with expansion of the core banking network and rollout of the
online savings product, and within the CIBM business segment due to the
impact of the buildout of the business platform.
The items noted above were partially offset by improved results in the following
areas:
o increased income before income tax expense for the private label credit
card receivable portfolio, included within the CF business segment,
primarily due to decreased amortization of premiums paid for credit card
receivables acquired from HSBC Finance Corporation;
o increased other revenues within the CIBM business segment attributable to
improved trading results and to the recognition of income relating to
certain derivative contracts that was deferred at December 31, 2005;
o increased income before income tax expense in the CMB business segment
resulting from product and business expansion initiatives in 2005 and
2006; and
o increased income before income tax expense within the PB business segment,
due to increased revenues from advisory services offered to clients, and
to higher earnings on a foreign equity investment.
Income tax expense decreased $33 million (19%) in the first quarter of 2006, as
compared with the same 2005 period, due partially to decreased income before
income tax expense, and partially to a release of $17 million of income tax
liability related to completion of ongoing audits. Refer to Note 7 of the
consolidated financial statements on page 14 of this Form 10-Q for additional
information.
Private Label Loan Portfolio
In December of 2004, HUSI acquired approximately $12 billion of loans, primarily
private label credit card receivables, from HSBC Finance Corporation at fair
value, without recourse. During 2005, interest income was significantly reduced
by amortization of the initial premium paid for the portfolio, which was heavily
front-loaded into 2005 in relation to expected runoff of the receivable
balances. During the first quarter of 2006, total premium amortization
associated with the portfolio decreased $47 million in comparison to the same
2005 period, primarily due to reduced amortization of the initial premium paid.
24
By agreement, HUSI is purchasing additional private label credit card
receivables from HSBC Finance Corporation at fair value on a daily basis. Since
the original acquisition, the underlying private label customer balances have
revolved, and new relationships have been added, resulting in increased
receivable balances. Refer to Note 9 of the consolidated financial statements,
beginning on page 15 of this Form 10-Q for further discussion of receivables
acquired from HSBC Finance Corporation.
Residual interests in securitized credit card receivable pools were also
acquired from HSBC Finance Corporation. Securitization revenue from these
securitized trusts decreased $27 million in the first quarter of 2006, as
compared with the same 2005 period, due to significantly reduced receivable
balances maintained in the trusts. As the balance requirements of these trusts
decrease, receivables maintained on the balance sheet increase, resulting in
increased net interest income. Refer to the Other Revenues commentary beginning
on page 33 of this Form 10-Q for further discussion of securitization revenue.
Residential Mortgage Loans Held for Sale to an HSBC Affiliate
In June 2005, HUSI began acquiring residential mortgage loans from unaffiliated
third parties with the intent of selling these loans to an HSBC affiliate, HSBC
Markets (USA) Inc. (HMUS). HMUS in turn is selling these loans to securitization
vehicles. These loans are recorded by HUSI at the lower of their aggregate cost
or market value, with adjustments to market value being recorded in a valuation
reserve. The loans are generally held on HUSI's balance sheet for 30-90 days,
resulting in activity that affects various balance sheet and income statement
line items. HUSI maintains a portfolio of derivatives and securities which are
used as economic hedges to offset changes in market values of the loans held for
sale to HMUS. Gains on sales of loans result from incremental value realized on
pools of loans actually sold to HMUS for securitization. During the first
quarter of 2006, the following activity was recorded as a result of acquiring,
holding and selling these loans.
---------------------------------------------------------------------------------------------------------------
Three months ended March 31 2006
---------------------------------------------------------------------------------------------------------------
(in millions)
Residential mortgage loans held for sale to HMUS:
Balance at beginning of period $ 2,879
Loans acquired from third parties 5,235
Loans sold to HMUS (3,675)
---------
Balance at end of period $ 4,439
=========
Valuation reserve for adjustments to market value:
Balance at beginning of period $ (11)
Additional valuation reserves for reductions in market value (79)
Releases of valuation reserves for loans sold to HMUS 40
---------
Balance at end of period $ (50)
=========
Increases (decreases) to income before income taxes:
Increased net interest income associated with loans held for sale to HMUS $ 20
Gains on sale of residential mortgage loans sold to HMUS, recorded in other revenues 17
Cumulative valuation reserve adjustments for reductions in market value of loans held for sale
to HMUS, recorded in other revenues (79)
Trading revenues recognized from economic hedges held to offset changes in market values of
loans held for sale to HMUS 64
Underwriting and other program costs included in other expenses (6)
---------
Net impact on income before income taxes $ 16
=========
25
Balance Sheet Review
HUSI utilizes borrowings from various sources to fund balance sheet growth, to
meet cash and capital needs, and to fund investments in subsidiaries. Balance
sheet growth and funding sources are summarized in the following table.
-------------------------------------------------------------------------------
Increase (Decrease)
During the Period
--------------------
Three months ended March 31, 2006 Amount %
-------------------------------------------------------------------------------
(in millions)
Balance sheet growth:
Loans (1) $(1,691) (2)
Short-term investments (2) 3,924 33
Trading assets 5,298 25
Securities and other assets 679 2
------- -------
$ 8,210 5
======= =======
Funding sources:
Total deposits $ 1,489 2
Trading account liabilities 3,473 32
All other liabilities 3,006 26
Long-term debt 37 --
Shareholders' equity 205 2
------- -------
$ 8,210 5
======= =======
(1) The decrease in loans was principally in residential mortgage loans due to
balance sheet management strategy. See Note 3, beginning on page 11 of
this Form 10-Q for a summary of specific loan categories.
(2) Includes cash and due from banks, interest bearing deposits with banks and
Federal funds sold and securities purchased under resale agreements.
Trading Assets and Liabilities
Trading assets and liabilities are summarized in the following table.
--------------------------------------------------------------------------------
March 31, December 31,
2006 2005
--------------------------------------------------------------------------------
(in millions)
Trading assets:
Securities (1) $ 11,760 $ 10,779
Precious metals 3,186 2,286
Fair value of derivatives 11,572 8,155
------------ ------------
$ 26,518 $ 21,220
============ ============
Trading liabilities:
Securities sold, not yet purchased $ 1,764 $ 1,808
Payables for precious metals 874 1,161
Fair value of derivatives 11,545 7,741
------------ ------------
$ 14,183 $ 10,710
============ ============
(1) Includes U.S. Treasury, U.S. Government agency, U.S. Government sponsored
enterprises, asset backed, corporate bonds and other securities.
Increased trading assets and liabilities were generally due to increased volume
of activity resulting from business growth initiatives within the CIBM business
segment. Improved market prices and conditions also contributed to increased
precious metals and securities trading assets balances.
Deposit Strategy and Growth
Beginning in 2004, HUSI implemented a strategy for its core banking network,
which includes building deposits over a three to five year period, across
multiple markets and segments, and utilizing multiple delivery systems. During
2005, and through the first three months of 2006, the strategy included various
initiatives, including:
o full deployment of new personal and business checking and savings
products, particularly relationship based products;
o emphasis on more competitive pricing with the introduction of high
yielding products, including online savings accounts, which have grown
significantly beginning in late 2005;
26
o retail branch expansion into new geographic markets;
o improving delivery systems, including use of internet capabilities;
o refined targeting of the affluent consumer population;
o maintaining strong customer relationships; and
o increasing deposits from, and improving retention of, existing customers.
HUSI's rollout of its deposit strategy continues to be successful. Deposit
growth of $12 billion during calendar year 2005 has been followed by growth of
$1.5 billion in the first quarter of 2006. Included in overall deposit growth
are new internet savings deposits of $1 billion for calendar year 2005 and $2.8
billion for the first quarter of 2006.
Selected Financial Data
The following tables present a summary of selected financial information.
-------------------------------------------------------------------------------------------------------------
Increase (Decrease)
---------------------
Three months ended March 31: 2006 2005 Amount %
-------------------------------------------------------------------------------------------------------------
(in millions)
Net interest income $ 735 $ 775 $ (40) (5)
--------- --------- -------- --------
Trading revenues 279 96 183 191
Residential mortgage banking revenue 23 23 -- --
Securities gains, net 4 23 (19) (83)
Other income 352 336 16 5
--------- --------- -------- --------
Total other revenues 658 478 180 38
--------- --------- -------- --------
Operating expenses 785 654 131 20
Provision for credit losses 157 107 50 47
--------- --------- -------- --------
Income before income tax expense 451 492 (41) (8)
Income tax expense 143 176 (33) (19)
--------- --------- -------- --------
Net income $ 308 $ 316 $ (8) (3)
========= ========= ======== ========
Balances at period end:
Loans:
Commercial loans $ 26,804 $ 23,484 $ 3,320 14
Residential mortgages 44,328 47,610 (3,282) (7)
Credit card receivables 14,461 12,001 2,460 20
Other consumer loans 3,058 3,152 (94) (3)
--------- --------- -------- --------
Total loans 88,651 86,247 2,404 3
Allowance for credit losses (837) (773) (64) (8)
--------- --------- -------- --------
Loans, net of allowance 87,814 85,474 2,340 3
Total assets 162,069 141,605 20,464 14
Total tangible assets 159,331 138,866 20,465 15
Total deposits 93,304 82,994 10,310 12
Short-term borrowings 8,399 7,152 1,247 17
Long-term debt 27,996 23,925 4,071 17
Common shareholder's equity 10,483 10,385 98 1
Tangible common shareholder's equity 7,856 7,646 210 3
Total shareholders' equity 11,799 10,885 914 8
Selected financial ratios:
Total shareholders' equity to total assets, at period end 7.28% 7.69%
Tangible common shareholder's equity to total tangible
assets, at period end 4.93 5.51
Rate of return on average (1):
Total assets .79 .90
Total common shareholder's equity 11.34 12.05
Net interest margin to average (1):
Earning assets 2.28 2.66
Total assets 1.90 2.22
Average total shareholders' equity to average total
assets (1) 7.39 7.70
Cost: income ratio (1) 56.38 52.17
(1) Selected financial ratios are defined in the Glossary of Terms beginning
on page 78 of the 2005 Form 10-K.
27
BASIS OF REPORTING
--------------------------------------------------------------------------------
HUSI's consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States (U.S. GAAP).
International Financial Reporting Standards (IFRSs)
Because HSBC reports results in accordance with IFRSs and IFRS results are used
by HSBC in measuring and rewarding performance of employees, HUSI management
also separately monitors net income under IFRSs (a non-U.S. GAAP financial
measure). The following table reconciles HUSI's net income on a U.S. GAAP basis
to net income on an IFRS basis.
--------------------------------------------------------------------------------
Three months ended March 31 2006
--------------------------------------------------------------------------------
(in millions)
Net income - U.S. GAAP basis $ 308
Adjustments, net of tax:
Fair value option (24)
Other 3
--------
Net income - IFRS basis $ 287
========
Differences between U.S. GAAP and IFRSs are as follows:
Fair Value Option
IFRSs
o Under IAS 39, a financial instrument, other than one held for trading, is
classified in this category if it meets the criteria set out below, and is
so designated by management. An entity may designate financial instruments
at fair value where the designation;
- eliminates or significantly reduces a measurement or recognition
inconsistency that would otherwise arise from measuring financial
assets or financial liabilities or recognizing the gains and losses
on them on different bases; or
- applies to a group of financial assets, financial liabilities or
both that is managed and its performance evaluated on a fair value
basis, in accordance with a documented risk management or investment
strategy, and where information about that group of financial
instruments is provided internally on that basis to management; or
- relates to financial instruments containing one or more embedded
derivatives that significantly modify the cash flows resulting from
those financial instruments.
o Financial assets and financial liabilities so designated are recognized
initially at fair value, with transaction costs taken directly to the
income statement, and are subsequently remeasured at fair value. This
designation, once made, is irrevocable in respect of the financial
instruments to which it is made. Financial assets and financial
liabilities are recognized using trade date accounting.
o Gains and losses from changes in the fair value of such assets and
liabilities are recognized in the income statement as they arise, together
with related interest income and expense and dividends.
U.S. GAAP
o There are no provisions to make such an election in U.S. GAAP similar to
that in IAS 39.
o Generally, for financial assets to be measured at fair value with gains
and losses recognized immediately in the income statement under U.S. GAAP,
they must meet the definition of trading securities in SFAS 115
"Accounting for Certain Investments in Debt and Equity Securities".
Financial liabilities are generally reported at amortized cost under U.S.
GAAP.
28
Impact
o HUSI has used the fair value designation for certain fixed rate long-term
debt issues whose interest rate characteristic has been changed to
floating through interest rate swaps as part of a documented interest rate
management strategy. Approximately $2 billion of HUSI's debt issues have
been accounted for using the option. The movement in fair value of these
debt issues includes the effect of changes in the credit spread and any
ineffectiveness in the economic relationship between the related swaps and
this debt. Such ineffectiveness arises from the different credit
characteristics of the swap and the debt coupled with the sensitivity of
the floating leg of the swap to changes in short-term interest rates. In
addition, the economic relationship between the swap and the debt can be
affected by relative movements in market factors, such as bond and swap
rates, and the relative bond and swap rates at inception. The size and
direction of the accounting consequences of changes in credit spread and
ineffectiveness can be volatile from period to period, but do not alter
the cash flows anticipated as part of the documented interest rate
management strategy.
o Under U.S. GAAP, debt issues are reported at amortized cost. An offsetting
derivative providing an economic hedge for an asset or liability results
in asymmetrical accounting, which in U.S. GAAP is reflected in net income
except where the relationship is elected as a fair value hedge under SFAS
133.
Other
Other includes the net impact of differences relating to various adjustments
none of which were individually material at March 31, 2006, and which are
described on pages 18-22 of HUSI's 2005 Form 10-K.
RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
Net Interest Income
A summary of net interest income is presented in the following table.
--------------------------------------------------------------------------------
Increase (Decrease)
-------------------
Three months ended March 31 2006 2005 Amount %
--------------------------------------------------------------------------------
(in millions)
Interest income:
Loans $1,286 $1,049 $ 237 23
Securities 263 210 53 25
Trading assets 108 59 49 83
Short-term investments 126 49 77 157
Other 14 6 8 133
------ ------ ------ ------
Total interest income 1,797 1,373 424 31
------ ------ ------ ------
Interest expense:
Deposits 649 327 322 98
Short-term borrowings 74 52 22 42
Long-term debt 339 219 120 55
------ ------ ------ ------
Total interest expense 1,062 598 464 78
------ ------ ------ ------
Net interest income $ 735 $ 775 $ (40) (5)
====== ====== ====== ======
29
Fluctuations in the components of net interest income, summarized according to
the impacts of "volume" changes and "rate" changes associated with various
interest earning assets and interest bearing liabilities, are presented in the
following table.
-------------------------------------------------------------------------------------------------------
Increase/(Decrease)
Three months ended March 31 2006 Volume Rate 2005
-------------------------------------------------------------------------------------------------------
(in millions)
Interest income:
Interest bearing deposits with banks $ 52 $ 6 $ 21 $ 25
Federal funds sold and securities purchased under resale
agreements 74 28 22 24
Trading assets 108 36 13 59
Securities 270 37 19 214
Loans:
Commercial 385 48 87 250
Consumer:
Residential mortgages 569 (45) 35 579
Credit cards 267 44 65 158
Other consumer 65 (7) 10 62
-------- -------- -------- --------
Total consumer 901 (8) 110 799
Other interest (1) 14 1 7 6
-------- -------- -------- --------
Total interest income 1,804 148 279 1,377
-------- -------- -------- --------
Interest expense:
Deposits in domestic offices:
Savings deposits 153 11 91 51
Other time deposits 281 35 98 148
Deposits in foreign offices:
Foreign banks deposits 77 (5) 37 45
Other time and savings 138 (3) 58 83
Short-term borrowings 74 13 9 52
Long-term debt 339 44 76 219
-------- -------- -------- --------
Total interest expense 1,062 95 369 598
-------- -------- -------- --------
Net interest income -taxable equivalent basis 742 $ 53 $ (90) 779
======== ======== --------
Tax equivalent adjustment (7) (4)
-------- --------
Net interest income -non taxable equivalent basis $ 735 $ 775
======== ========
(1) Other interest relates to interest earned on Federal Reserve Bank and
Federal Home Loan Bank stock.
Overview
Net interest income is the total interest income on earning assets less the
total interest expense on deposits and borrowed funds. In the discussion that
follows, interest income and rates are presented and analyzed on a taxable
equivalent basis to permit comparisons of yields on tax-exempt and taxable
assets. An analysis of consolidated average balances and interest rates on a
taxable equivalent basis is presented on page 23 of this Form 10-Q.
Net interest income decreased $40 million (5%) in the first quarter of 2006, as
compared with the same 2005 period. Interest rate spread (see page 23 of this
Form 10-Q) declined to 2.00% in the first quarter of 2006 from 2.43% in the same
2005 quarter. The following factors contributed to the overall decrease in
interest rate spread in the first quarter of 2006, as compared with the same
2005 period:
o reduced balance sheet management income within the CIBM business segment,
due largely to increasing short-term interest rates and to a flat yield
curve; and
o reduced net interest income associated with trading assets within the CIBM
business segment, which was more than offset by a significant increase in
trading revenues (refer to page 36 of this Form 10-Q).
Analysis of various components of net interest income follows. All increases and
decreases noted for the first quarter of 2006 represent comparisons with the
same 2005 period.
30
Commercial Loans
Interest income from commercial loans increased $135 million (54%) in the first
quarter of 2006. Average commercial loan balances increased by 17% during the
quarter. The average yield earned on commercial loans increased 141 basis points
(31%) due to increases in HBUS's prime lending rate during 2006 and 2005.
Significant resources have been dedicated to expansion of various commercial
lending businesses and regional offices. Targeted growth in small business,
middle market and real estate lending portfolios, which began in 2004, continued
to increase loan balances in 2005 and 2006.
Residential Mortgage Loans
Interest income earned from residential mortgage loans decreased $10 million
(2%) in the first quarter of 2006. Average residential mortgage loans decreased
8% in the first quarter of 2006, due to the following balance sheet management
initiatives and other factors:
o in 2005, HUSI decided to decrease the volumes generated through HSBC
Finance Corporation's network of residential mortgage loan correspondents.
Purchases from correspondents were therefore discontinued effective
September 1, 2005;
o HUSI sold a higher proportion of adjustable rate residential mortgage
loans in 2005 and 2006 compared with prior years, which previously would
have been held on the balance sheet. Residential mortgage loans originated
with the intention to sell increased 28% in the first quarter of 2006; and
o originations of residential mortgage loans decreased in the first quarter
of 2006, due to the national originations market decreasing in size.
The average yield earned on residential mortgage loans increased 31 basis points
(6%) due to a generally increasing residential mortgage interest rate
environment.
Credit Card Receivables
Interest earned from credit card receivables increased $109 million (69%) in the
first quarter of 2006. Average credit card receivable balances were 25% higher
for the quarter. The average rate earned increased 190 basis points (36%) for
the quarter.
In December 2004, HUSI acquired $12 billion of private label receivables and
other loans from HSBC Finance Corporation. Total premiums paid for these
receivables, which are being amortized against interest income over the
estimated life of the related receivables, totaled $639 million. Amortization of
the initial premium was heavily front-loaded into 2005, resulting in a
significant reduction of interest income and the average yield during the year.
Amortization of the initial premium decreased $121 million (73%) to $45 million
for the first quarter of 2006.
By agreement, new receivables generated from these private label credit card
relationships are being acquired from HSBC Finance Corporation on a daily basis,
at fair value. Total amortization of premiums paid for these ongoing receivable
purchases increased $83 million to $113 million for the first quarter of 2006,
due to a higher level of premiums associated with new receivables acquired.
During 2004, HUSI sold certain MasterCard/Visa credit card relationships to HSBC
Finance Corporation. HUSI purchases receivables associated with these
MasterCard/Visa relationships from HSBC Finance Corporation on a daily basis, at
fair value. Total amortization of premiums paid for these receivables increased
$1 million to $8 million for the first quarter of 2006.
31
The total impact of premium amortization on interest income and average yields
for credit card receivables and total loans are summarized in the following
table.
---------------------------------------------------------------------------------------------------------
Three Months Ended Three Months Ended
March 31, 2006 March 31, 2005
----------------------- -----------------------
Amount Rate Amount Rate
---------------------------------------------------------------------------------------------------------
(in millions)
Credit card receivables:
Interest income, before premium amortization $ 433 11.85% $ 361 12.67%
Premium amortization (166) (4.69) (203) (7.41)
--------- --------- --------- ---------
Interest income, adjusted for premium amortization $ 267 7.16% $ 158 5.26%
========= ========= ========= =========
Total loans:
Interest income, before premium amortization $ 1,452 6.67% $ 1,252 5.96%
Premium amortization (166) (.78) (203) (1.00)
--------- --------- --------- ---------
Interest income, adjusted for premium amortization $ 1,286 5.89% $ 1,049 4.96%
========= ========= ========= =========
Interest Income - Trading Assets
Interest income from trading assets increased $49 million (83%), primarily as a
result of increased trading assets balances. Average trading assets increased
52% in the quarter. Average rates earned on trading assets increased 72 basis
points (20%) due to a rising interest rate environment.
Interest Income - Short-Term Investments
Short-term investments include interest bearing deposits with banks and Federal
funds sold and securities purchased under resale agreements. Fluctuations in
short-term investments directly result from the relationship between HUSI's
excess liquidity position and its funding needs at any given point in time.
Interest income from short-term investments increased $77 million (157%) in the
first quarter of 2006. Average short-term investment balances grew by 52% in the
quarter, while average rates earned also increased significantly, primarily due
to increases in the federal funds rate throughout 2005 and 2006.
Interest Expense - Deposits
Total interest expense on interest bearing deposits increased $322 million (98%)
in the first quarter of 2006. Interest expense increased for both domestic and
foreign deposits. Average interest bearing deposits increased by 12% in the
quarter. Deposits have been a major source of funding for balance sheet growth
since 2004. Specific strategic initiatives targeted deposit growth in various
business units.
Average interest rates paid to deposit customers increased 140 basis points
(78%), due to increases in short-term interest rates and the introduction of
more competitively priced consumer and commercial products during 2005,
particularly internet savings accounts. Deposits outstanding associated with
these new products have grown steadily since their introduction.
An overview of deposit growth initiatives is provided on pages 26-27 of this
Form 10-Q.
Interest Expense - Short-Term Borrowings
Interest expense on short-term borrowings increased $22 million (42%) in the
first quarter of 2006. Average short-term borrowings balances increased by 21%
in the quarter. The average interest rate paid increased 38 basis points (16%),
due primarily to increases in the federal funds rate throughout 2005 and 2006,
which were partially offset by a shift in the funding mix toward lower interest
rate borrowings.
32
Interest Expense - Long-Term Debt
Interest expense on long-term debt increased $120 million (55%) in the first
quarter of 2006. Average long-debt balances increased by 18% in the quarter, due
to new debt issued during the last nine months of 2005 to fund balance sheet
growth. The average rate paid increased 115 basis points (31%) in the quarter,
due to increases in the underlying reference interest rates in 2005 and 2006.
Other Revenues
The following table presents the components of other revenues.
---------------------------------------------------------------------------------------
Increase (Decrease)
-------------------
Three months ended March 31 2006 2005 Amount %
---------------------------------------------------------------------------------------
(in millions)
Trust income $ 22 $ 23 $ (1) (4)
Service charges:
HSBC affiliate income 4 4 -- --
Other service charges 47 48 (1) (2)
------ ------ ------ ------
Total service charges 51 52 (1) (2)
------ ------ ------ ------
Other fees and commissions:
Letter of credit fees 18 17 1 6
Credit card fees 122 57 65 114
Wealth and tax advisory services 26 13 13 100
HSBC affiliate income 12 16 (4) (25)
Other fee-based income, net of referral fees 58 42 16 38
------ ------ ------ ------
Total other fees and commissions 236 145 91 63
------ ------ ------ ------
Securitization revenue 17 44 (27) (61)
Other income:
Insurance 13 16 (3) (19)
HSBC affiliate income 39 20 19 95
Gains on property and other financial assets 6 14 (8) (57)
Other (32) 22 (54) (245)
------ ------ ------ ------
Total other income 26 72 (46) (64)
------ ------ ------ ------
Residential mortgage banking revenue 23 23 -- --
Trading revenues 279 96 183 191
Securities gains, net 4 23 (19) (83)
------ ------ ------ ------
Total other revenues $ 658 $ 478 $ 180 38
====== ====== ====== ======
Other Fees and Commissions
The increase in credit card fees in the first quarter of 2006 resulted from
activity generated by the private label credit card receivable portfolio. Total
number of accounts and average total receivable balances have increased for the
portfolio, resulting in increased fees. In addition, there were lower payments
to merchant partners in the first quarter of 2006 due to terminations and
revisions to certain merchant agreements.
The increase in wealth and tax advisory services is attributable to specific
growth initiatives intended to expand services to high net worth individuals
within the PB business segment.
The increase in other fee-based income is due to:
o new service fees recorded within the CIBM business segment generated by a
subsidiary transferred to HUSI from HSBC in March 2005, which provides
accounting and valuation services for hedge fund clients; and
o various growth initiatives undertaken in 2005 and 2006, which resulted in
general increases in fee income recorded within the PFS, CMB and CIBM
business segments.
33
Securitization Revenue
Securitization revenue is comprised of servicing revenue and excess servicing
spread from residual interests in securitized private label credit card
receivables. Existing securitized trusts require replenishments of receivables
to support previously issued securities. Receivables will continue to be sold to
these trusts until their revolving periods end, the last of which is expected to
occur in 2007. All collateralized funding transactions have been structured as
secured financings since the third quarter of 2004. Therefore, there were no new
securitization transactions during 2005 or during the first quarter of 2006.
The decrease in securitization revenue is primarily attributable to decreased
levels of receivables maintained within existing securitized trusts. As the
balance requirements of these trusts decrease, receivables maintained on the
balance sheet increase, resulting in increased net interest income.
Other Income
Increased HSBC affiliate income resulted from gains realized on sales of
residential mortgage loans to HMUS. Additional information regarding these loan
sales is provided in the Executive Overview beginning on page 24 of this Form
10-Q.
The decrease in other resulted primarily from the net impact of the following:
o losses of $79 million due to market valuation adjustments required on
residential mortgage loans held for sale to HMUS; and
o increased earnings of $14 million from various equity investments.
34
Residential Mortgage Banking Revenue
The following table presents the components of residential mortgage banking
revenue. Net interest income includes interest earned/paid on assets and
liabilities of the residential mortgage banking business as well as an
allocation of the funding cost or benefit associated with these balances. The
net interest income component in the table is included in net interest income in
the consolidated statement of income and reflects actual interest earned, net of
cost of funds, and adjusted for corporate transfer pricing.
-------------------------------------------------------------------------------------------
Increase (Decrease)
-------------------
Three months ended March 31 2006 2005 Amount %
-------------------------------------------------------------------------------------------
(in millions)
Net interest income $ 95 $ 129 $ (34) (26)
------- ------- ------- -------
Servicing related income:
Servicing fee income 23 19 4 21
Changes in fair value of MSRs due to (1):
Changes in valuation inputs or assumptions
used in valuation model 45 -- 45 --
Realization of cash flows (21) -- (21) --
MSRs amortization (2) -- (19) 19 100
MSRs temporary impairment recovery (2) -- 17 (17) (100)
Trading - Derivative instruments used to
offset changes in value of MSRs (34) (6) (28) (467)
------- ------- ------- -------
Total net servicing related income 13 11 2 18
------- ------- ------- -------
Originations and sales related income:
Gains on sales of mortgages 3 3 -- --
Trading and fair value hedge activity (3) 1 5 (4) (80)
------- ------- ------- -------
Total net originations and sales related
income 4 8 (4) (50)
------- ------- ------- -------
Other mortgage income 6 4 2 50
------- ------- ------- -------
Total residential mortgage banking revenue
included in other revenues 23 23 -- --
------- ------- ------- -------
Total residential mortgage banking related
revenue $ 118 $ 152 $ (34) (22)
======= ======= ======= =======
(1) Based upon adoption of SFAS 156 effective January 1, 2006. Refer to Note 5
of the consolidated financial statements, beginning on page 13 of this
Form 10-Q for further discussion.
(2) Based upon methodology existing prior to adoption of SFAS 156.
(3) Includes SFAS 133 qualifying fair value adjustments related to residential
mortgage banking warehouse fair value hedging activity, which was
discontinued in 2005, and other immaterial activity.
All increases and decreases referenced below for the first quarter of 2006
represent comparisons with the same 2005 period.
Net Interest Income
Decreased net interest income for the first quarter of 2006 resulted from a
decrease in average residential mortgage loan outstandings as well as a slight
narrowing of interest rate spreads. In 2005, HUSI commenced a strategic balance
sheet initiative to sell the majority of new loan production to government
sponsored enterprises and private investors, which continued into the first
quarter of 2006. The held loan portfolio is expected to continue to decline for
the remainder of 2006 as a result of this initiative.
Overall yields earned on residential mortgage loans increased 31 basis points
(6%) in the first quarter of 2006 due to a generally increasing residential
mortgage interest rate environment.
Additional commentary regarding residential mortgage interest income is provided
on page 31 of this Form 10-Q.
35
Servicing Related Income
Increased net servicing related income for the first three months of 2006 was
primarily attributable to increased volume of loans included within the average
serviced loans portfolio, which increased 24% in the quarter. The average
serviced loans portfolio increase was attributable to the following factors:
o HUSI sold a higher proportion of adjustable rate loans in 2005 and 2006,
which previously would have been held on the balance sheet;
o in the fourth quarter of 2005, HUSI commenced servicing a portfolio of
loans previously serviced by a third party; and
o also in the fourth quarter of 2005, HUSI completed a securitization sale
of loans previously held in portfolio.
The increased serviced loans portfolio, and its positive impact on servicing fee
income, was partially offset by a slight decrease in the hedged MSRs portfolio
for the first quarter of 2006, compared with the same 2005 period.
Additional commentary regarding risk management associated with the MSRs hedging
program is provided on pages 53-54 of this Form 10-Q.
Trading Revenues
Trading revenues are generated by HUSI's participation in foreign exchange,
credit derivative and precious metals markets; from trading derivative
contracts, including interest rate swaps and options; and from trading
securities. During 2005, HUSI's CIBM business segment expanded operations and
products offered to clients, which resulted in increased trading activity and
improved trading results in 2005 and 2006. Decreased net interest income for the
first quarter of 2006, when compared with the same 2005 period, was primarily
due to steadily rising short-term interest rates during 2005 and 2006, which had
an adverse impact on interest rate spreads.
Trading related revenues generated by the CIBM business segment, summarized by
type of business, are provided in the following table. The data in the table
includes interest income earned on trading instruments, net of allocated funding
cost associated with the trading positions. The net interest income component is
included in net interest income on the consolidated statement of income. Trading
revenues related to the residential mortgage banking business are included in
residential mortgage banking revenue.
--------------------------------------------------------------------------------------------
Increase (Decrease)
-----------------------
Three months ended March 31 2006 2005 Amount %
--------------------------------------------------------------------------------------------
(in millions)
Trading revenues $ 279 $ 96 $ 183 191
Net interest income (13) 17 (30) (176)
--------- --------- --------- ---------
Trading related revenues $ 266 $ 113 $ 153 135
========= ========= ========= =========
Business:
Derivatives instruments $ 90 $ 41 $ 49 120
Economic hedges of loans held for sale
to HMUS 84 -- 84 --
Treasury (primarily securities) 5 14 (9) (64)
Foreign exchange and banknotes 44 37 7 19
Precious metals 35 17 18 106
Other trading 8 4 4 100
--------- --------- --------- ---------
Trading related revenues $ 266 $ 113 $ 153 135
========= ========= ========= =========
36
Derivative Instruments
Net interest income related to derivatives businesses decreased $24 million in
the first quarter of 2006, as compared with the same 2005 quarter, due to the
rising short-term interest rate environment.
HUSI recognizes gain or loss at the inception of derivative transactions only
when the fair value of the transaction can be verified to market transactions or
if all significant pricing model assumptions can be verified to observable
market data. Gain or loss not recognized at inception is recorded in trading
liabilities and recognized over the term of the derivative contract in
correlation with outstanding risk and valuation characteristics. As a result of
observability being established during the first quarter, $28 million of
previously deferred revenue was recognized.
In addition, derivatives trading revenues increased as a result of the following
activity:
o increased revenue from the credit derivatives trading and structured
transactions businesses, which were significantly expanded during 2005;
and
o improved trading results from the interest rate derivatives desk.
Economic Hedges of Loans Held for Sale to HMUS
Effective in the third quarter of 2005, HUSI maintains a portfolio of derivative
instruments that are utilized as economic hedges to offset changes in market
values of loans held for sale to HMUS. During the first quarter of 2006, HUSI
realized $64 million of trading revenues and $20 million of net interest income
related to this portfolio. Further analysis and commentary regarding these loans
and the associated hedges is provided on page 25 of this Form 10-Q.
Precious Metals
Precious metals trading income increased due to increased client and proprietary
trading activity from both domestic and foreign trading desks, which resulted
from higher precious metals prices. Partially offsetting increased trading
revenues was decreased net interest income resulting from rising short-term
interest rates.
Securities Gains, Net
The following table provides a summary of realized securities gains and losses.
---------------------------------------------------------------------------------------------
2006 2005
------------------------------ ------------------------------
Gross Gross Net Gross Gross Net
Realized Realized Realized Realized Realized Realized
Three months ended March 31 Gains (Losses) Gains Gains (Losses) Gains
---------------------------------------------------------------------------------------------
(in millions)
Securities gains, net $ 4 $ -- $ 4 $ 23 $ -- $ 23
======== ======== ======== ======== ======== ========
HUSI maintains various securities portfolios as part of its strategies for
overall liquidity, balance sheet diversification and risk management. The
following table summarizes net securities gains resulting from various
strategies.
--------------------------------------------------------------------------------
Three months ended March 31 2006 2005
--------------------------------------------------------------------------------
(in millions)
Balance sheet diversity and reduction of risk $ 4 $ 12
Reduction of Latin American exposure -- 10
Other -- 1
------ ------
Total securities gains, net $ 4 $ 23
====== ======
37
Operating Expenses
The following table presents the components of operating expenses.
--------------------------------------------------------------------------------------------
Increase (Decrease)
----------------------
Three months ended March 31 2006 2005 Amount %
--------------------------------------------------------------------------------------------
(in millions)
Salaries and employee benefits $ 315 $ 266 $ 49 18
Occupancy expense, net 51 42 9 21
Support services from HSBC affiliates:
Fees paid to HSBC Finance Corporation
for loan servicing and other
administrative support 116 106 10 9
Treasury and traded markets services and
other fees 92 64 28 44
Fees paid to HTSU for technology
services 57 48 9 19
--------- --------- --------- ---------
265 218 47 22
--------- --------- --------- ---------
Other expenses:
Equipment and software 20 24 (4) (17)
Marketing 21 14 7 50
Outside services 28 26 2 8
Professional fees 17 14 3 21
Telecommunications 5 5 -- --
Postage, printing and office supplies 7 6 1 17
Insurance business 5 6 (1) (17)
Other 51 33 18 55
--------- --------- --------- ---------
Total other expenses 154 128 26 20
--------- --------- --------- ---------
Total operating expenses $ 785 $ 654 $ 131 20
========= ========= ========= =========
Personnel - average number 12,135 10,830 1,305 12
All increases and decreases referred to below for the first quarter of 2006
represent comparisons with the same 2005 period.
Overview
Increased expenses during the first quarter of 2006 were driven largely by the
rollout of various business growth initiatives affecting all business segments,
and by increased fees charged by HSBC affiliates for various services.
Salaries and Employee Benefits
Salary expense increased $36 million (20%) for the first quarter of 2006,
primarily due to the increased number of personnel employed to support various
business growth initiatives within the PFS, CMB, CIBM and PB business segments.
Employee benefits expenses increased $13 million (16%) for the first quarter of
2006 as a direct result of the increased salary expense and staff counts.
Support Services from HSBC Affiliates
Fees are charged by various HSBC affiliates for technology services, for
underwriting and broker-dealer services, for treasury and traded markets
services, for loan origination and servicing, and for other operational and
administrative support functions. The overall increases in HSBC affiliate
charges are due primarily to the following activity:
o fees charged by HSBC Finance Corporation for loan origination and
servicing have increased as a result of increased number of accounts and
increased balances associated with various loan portfolios and other loan
balances serviced by HSBC Finance Corporation on behalf of HUSI. Fees
charged by HSBC Finance Corporation for various administrative services
have also increased as a result of continued initiatives to centralize
administrative functions;
o fees charged by HMUS and other HSBC affiliates for treasury and traded
markets services have increased in 2006 due primarily to business
expansion initiatives within the CIBM segment; and
o fees charged by HTSU for technology services increased, as HUSI continues
to upgrade its automated technology environment. Equipment and software
costs included in other expenses have decreased in 2006, as much of these
costs are now included in the charges by HTSU.
38
Other Expenses
Increased marketing and promotional expenses resulted from expanded use of
customer mailings and various media channels to enhance perception of the HSBC
brand and to market products and services, including the online savings account
product.
Other includes a provision for off-balance sheet credit exposures, which
increased $12 million for the first quarter of 2006, related to increased credit
risk associated with increased commercial loan commitments outstanding. Further
analysis of off-balance sheet arrangements is provided beginning on page 46 of
this Form 10-Q.
BUSINESS SEGMENTS
--------------------------------------------------------------------------------
HUSI has five distinct business segments that are utilized for management
reporting and analysis purposes. The segments are based upon customer groupings,
as well as products and services offered. The business segments are described in
Note 12 of the consolidated financial statements, beginning on page 19 of this
Form 10-Q.
Personal Financial Services (PFS)
Overview
Results of this segment have been impacted by expansion of core banking
operations, which has increased expenses by a greater amount than revenues
during the build-out phase. Additional resources and priority have been focused
on core retail banking businesses during 2005 and 2006. Investment in the retail
branch network continues to be expanded and reallocated to ensure coverage of
high potential growth geographic areas. Loan and deposit products offered to
individuals have also been expanded in conjunction with increased marketing
efforts.
Operating Results
The following table summarizes results for the PFS business segment.
----------------------------------------------------------------------------------
2006 Compared to 2005
Increase/(Decrease)
-----------------------
Three months ended March 31 2006 2005 Amount %
----------------------------------------------------------------------------------
(in millions)
Net interest income $ 309 $ 300 $ 9 3
Other revenues 135 128 7 5
--------- --------- --------- ---------
Total revenues 444 428 16 4
Operating expenses 291 251 40 16
--------- --------- --------- ---------
Working contribution 153 177 (24) (14)
Provision for credit losses 16 22 (6) (27)
--------- --------- --------- ---------
Income before income tax expense $ 137 $ 155 $ (18) (12)
========= ========= ========= =========
Average assets $ 44,070 $ 50,752
Average liabilities/equity 47,094 43,733
Goodwill at March 31 1,169 1,169
Increased net interest income for the first quarter of 2006 was primarily due to
higher interest rate spreads on a growing personal deposit base, which was
partially offset by lower net interest income from residential mortgage banking
activities. Additional commentary regarding residential mortgage banking revenue
begins on page 35 of this Form 10-Q.
Operating expenses increased for the first quarter of 2006 due to:
o increased personnel, marketing and other direct expenses associated with
expansion of the core banking network and other consumer lending
operations;
o increased fees paid to HTSU, as HUSI has continued to upgrade its
technology environment; and
o increased fees paid to HSBC Finance Corporation, as HUSI continued to
leverage its relationship to centralize various loan servicing and
administrative support functions.
39
Consumer Finance (CF)
Overview
Results of this segment have been positively impacted by growth of the private
label credit card receivable portfolio and by decreased amortization of premiums
paid to HSBC Finance Corporation for those receivables.
Operating Results
The following table summarizes results for the CF business segment.
----------------------------------------------------------------------------------------
2006 Compared to 2005
Increase/(Decrease)
---------------------
Three months ended March 31 2006 2005 Amount %
----------------------------------------------------------------------------------------
(in millions)
Net interest income $ 153 $ 130 $ 23 18
Other revenues 119 80 39 49
--------- --------- --------- ---------
Total revenues 272 210 62 30
Operating expenses 110 107 3 3
--------- --------- --------- ---------
Working contribution 162 103 59 57
Provision for credit losses 135 109 26 24
--------- --------- --------- ---------
Income (loss) before income tax expense $ 27 $ (6) $ 33 550
========= ========= ========= =========
Average assets $ 20,544 $ 18,282
Average liabilities/equity 1,684 533
Goodwill at March 31 -- --
This segment includes private label credit card receivables (PLCC), and other
consumer loans acquired from HSBC Finance Corporation and its correspondents.
The following table summarizes the impact of the PLCC on earnings for the CF
segment in comparison with the other portfolios.
----------------------------------------------------------------------------------
Three months ended March 31 PLCC Other Total
----------------------------------------------------------------------------------
(in millions)
2006
Net interest income $ 110 $ 43 $ 153
Other revenues 119 -- 119
--------- --------- ---------
Total revenues 229 43 272
Operating expenses 105 5 110
--------- --------- ---------
Working contribution 124 38 162
Provision for credit losses 128 7 135
--------- --------- ---------
(Loss) income before income tax expense $ (4) $ 31 $ 27
========= ========= =========
2005
Net interest income $ 71 $ 59 $ 130
Other revenues 80 -- 80
--------- --------- ---------
Total revenues 151 59 210
Operating expenses 102 5 107
--------- --------- ---------
Working contribution 49 54 103
Provision for credit losses 109 -- 109
--------- --------- ---------
(Loss) income before income tax expense $ (60) $ 54 $ (6)
========= ========= =========
Increased net interest income for the PLCC is due to increased average credit
card receivable balances for the quarter, and to decreased amortization of
premiums paid for purchases of receivables from HSBC Finance Corporation.
Further discussion of interest income from credit card receivables is provided
on pages 31-32 of this Form 10-Q.
Increased other revenues for the PLCC are directly related to increased credit
card fees, which were partially offset by decreased securitization revenue.
Further discussion regarding these revenues is included within Other Revenues
commentary, beginning on page 33 of this Form 10-Q.
40
Increased provision for credit losses for the PLCC portfolio resulted directly
from increased average credit card receivable balances.
New domestic private label credit card receivables are acquired from HSBC
Finance Corporation on a daily basis. In accordance with Federal Financial
Institutions Examination Council (FFIEC) guidance, HUSI adopted a plan to phase
in changes to the required minimum monthly payment amount for domestic private
label credit card accounts. The implementation of these new requirements began
in the fourth quarter of 2005 and was completed in the first quarter of 2006,
resulting in an immaterial impact on first quarter results. Estimates of the
potential impact to the business are based on numerous assumptions and take into
account a number of factors which are difficult to predict such as changes in
customer behavior, which will not be fully known or understood until the changes
have been in place for a period of time. The impact of these changes, if any, is
not expected to be material to HUSI's consolidated results.
Commercial Banking (CMB)
Overview
Improved results for the first quarter of 2006 resulted from the continued
rollout of planned expansion initiatives. Office locations and staffing levels
were expanded in 2005 and 2006, as were loan and deposit products offered to
small businesses and middle-market commercial customers, in conjunction with
increased marketing efforts. HUSI continues to leverage its status as one of the
top ranked small business lenders in New York State.
Operating Results
The following table summarizes results for the CMB business segment.
---------------------------------------------------------------------------------
2006 Compared to 2005
Increase/(Decrease)
---------------------
Three months ended March 31 2006 2005 Amount %
---------------------------------------------------------------------------------
(in millions)
Net interest income $ 178 $ 154 $ 24 16
Other revenues 49 38 11 29
--------- --------- --------- ---------
Total revenues 227 192 35 18
Operating expenses 110 98 12 12
--------- --------- --------- ---------
Working contribution 117 94 23 24
Provision for credit losses 4 (5) 9 180
--------- --------- --------- ---------
Income before income tax expense $ 113 $ 99 $ 14 14
========= ========= ========= =========
Average assets $ 16,734 $ 14,920
Average liabilities/equity 19,928 16,176
Goodwill at March 31 467 468
Increased net interest income, other revenues and operating expenses for the
first quarter of 2006 resulted from the successful rollout of planned expansion
of various small business, middle-market and real estate commercial lending
programs, which resulted in increased actual and average commercial loan
balances. The CMB segment also benefited from more favorable interest rate
spreads on a growing deposit base during the first quarter of 2006.
Increased provision for credit losses for the first quarter of 2006 primarily
resulted from net charge offs of commercial loan balances. Unusually low charge
offs and unusually high recoveries were recorded during the first quarter of
2005. Credit quality was generally strong and continued to be well managed
during the quarter. Further commentary regarding credit quality begins on page
44 of this Form 10-Q.
41
Corporate, Investment Banking and Markets (CIBM)
Overview
The CIBM business segment continues to be negatively impacted by steadily rising
short-term interest rates, which limited opportunities to profit from placing
funds generated from operations. While increased short-term rates have a
positive impact on interest rate spreads for deposit generating businesses, such
as the PFS and CMB business segments, they have an adverse impact on CIBM which
does not generate significant low cost deposit funding.
Various treasury and traded markets activities were expanded in 2005. Increased
products offered to customers, increased marketing efforts for those products,
and an expanded infrastructure to support growth initiatives have resulted in
increased non-funds revenues and operating expenses.
Operating Results
The following table summarizes results for the CIBM business segment.
----------------------------------------------------------------------------------
2006 Compared to 2005
Increase/(Decrease)
----------------------
Three months ended March 31 2006 2005 Amount %
----------------------------------------------------------------------------------
(in millions)
Net interest income $ 53 $ 154 $ (101) (66)
Other revenues 273 167 106 63
--------- --------- --------- ---------
Total revenues 326 321 5 2
Operating expenses 183 134 49 37
--------- --------- --------- ---------
Working contribution 143 187 (44) (24)
Provision for credit losses 2 (18) 20 111
--------- --------- --------- ---------
Income before income tax expense $ 141 $ 205 $ (64) (31)
========= ========= ========= =========
Average assets $ 71,321 $ 53,101
Average liabilities/equity 79,252 72,243
Goodwill at March 31 630 631
Decreased net interest income was primarily due to steadily rising short-term
interest rates during 2005 and 2006, which had an adverse impact on CIBM
interest rate spreads. Net interest income from balance sheet management
activity decreased approximately $105 million in the first quarter of 2006,
compared to the same 2005 period.
Increased other revenues was mainly due to:
o increased trading revenues;
o new service fees generated by a subsidiary transferred to HUSI from HSBC
in March 2005, which provides accounting and valuation services for hedge
fund clients; and
o increased fee-based income, resulting from business expansion initiatives.
Partially offsetting these increases were decreased realized gains on sales of
securities. Commentary regarding trading revenues and securities gains begins on
page 36 of this Form 10-Q. Additional analysis of growth in trading assets and
liabilities is provided on page 26 of this Form 10-Q.
Increased operating expenses resulted from:
o increased direct expenses associated with foreign exchange, risk
management products, and transaction banking businesses;
o increased expenses associated with development of an infrastructure to
support the growing complexity of the CIBM business; and
o increased fees paid to HTSU and other HSBC affiliates for technology
services, as CIBM required additional information technology resources to
support system conversions and business expansion.
42
The provision for credit losses increased during the first quarter of 2006. The
net provision credit for 2005 resulted from continuation of relatively low
charge offs and recoveries of amounts previously charged off.
Private Banking (PB)
Overview
During 2005 and 2006, additional resources have been allocated to expand
products and services provided to high net worth customers served by this
business segment, resulting in increased revenues and operating expenses.
Operating Results
The following table summarizes results for the PB business segment.
----------------------------------------------------------------------------------
2006 Compared to 2005
Increase/(Decrease)
----------------------
Three months ended March 31 2006 2005 Amount %
----------------------------------------------------------------------------------
(in millions)
Net interest income $ 48 $ 40 $ 8 20
Other revenues 76 58 18 31
--------- --------- --------- ---------
Total revenues 124 98 26 27
Operating expenses 75 64 11 17
--------- --------- --------- ---------
Working contribution 49 34 15 44
Provision for credit losses -- (1) 1 100
--------- --------- --------- ---------
Income before income tax expense $ 49 $ 35 $ 14 40
========= ========= ========= =========
Average assets $ 5,473 $ 4,720
Average liabilities/equity 10,520 9,399
Goodwill at March 31 428 428
Increased net interest income for the first quarter of 2006 resulted from
increased average interest earning assets, primarily loans.
Increased other revenues for the first quarter of 2006 resulted from:
o increased fee income from wealth and tax advisory services provided to
high net worth individuals; and
o increased equity earnings from a foreign equity investment.
Increased operating expenses for the first quarter of 2006 resulted from
additional resources being allocated to this segment to expand the services
provided.
43
CREDIT QUALITY
--------------------------------------------------------------------------------
Policies and critical estimates associated with its allowance for credit losses
are summarized on pages 23-24 and 57-60 of HUSI's 2005 Form 10-K. There have
been no material revisions to policies or methodologies in the first quarter of
2006.
Credit quality statistics are summarized in Note 3, beginning on page 11 of the
consolidated financial statements.
The following table provides an analysis of changes in the allowance for credit
losses and related ratios.
---------------------------------------------------------------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
Quarter ended 2006 2005 2005 2005 2005
---------------------------------------------------------------------------------------------------------------
(in millions)
Balance at beginning of
quarter $ 846 $ 852 $ 790 $ 773 $ 788
Allowance related to
disposition of certain credit
card relationships (6) -- -- -- --
Charge offs:
Commercial 20 36 16 17 6
Consumer:
Residential mortgages 11 8 6 6 4
Credit card receivables 170 186 154 160 159
Other consumer loans 29 34 26 23 30
------------ ------------ ------------ ------------ ------------
Total consumer loans 210 228 186 189 193
------------ ------------ ------------ ------------ ------------
Total charge offs 230 264 202 206 199
------------ ------------ ------------ ------------ ------------
Recoveries on loans
charged off:
Commercial 15 15 26 7 23
Consumer:
Residential mortgages -- -- 1 -- --
Credit card receivables 46 35 30 37 44
Other consumer loans 9 10 8 9 10
------------ ------------ ------------ ------------ ------------
Total consumer loans 55 45 39 46 54
------------ ------------ ------------ ------------ ------------
Total recoveries 70 60 65 53 77
------------ ------------ ------------ ------------ ------------
Total net charge offs 160 204 137 153 122
------------ ------------ ------------ ------------ ------------
Provision charged to
income 157 198 199 170 107
------------ ------------ ------------ ------------ ------------
Balance at end of quarter $ 837 $ 846 $ 852 $ 790 $ 773
============ ============ ============ ============ ============
Allowance ratios:
Annualized net charge
offs to average loans .73% .90% .61% .71% .58%
Quarter-end allowance
to:
Quarter-end total loans .94% .94% .95% .90% .90%
Quarter-end total
nonaccruing loans 341.63% 351.04% 362.55% 351.11% 318.11%
44
Overview
An analysis of changes in the allowance for credit losses for the quarter ended
March 31, 2006, by general loan categories, is provided in the following table.
-------------------------------------------------------------------------------------------------------------
Quarter ended Residential Credit Other
March 31, 2006 Commercial Mortgage Card Consumer Unallocated Total
-------------------------------------------------------------------------------------------------------------
(in millions)
Balance at beginning of
period $ 162 $ 34 $ 600 $ 36 $ 14 $ 846
----------- ----------- ----------- ----------- ----------- -----------
Allowance related to
dispositions -- -- (6) -- -- (6)
Charge offs 20 11 170 29 -- 230
Recoveries 15 -- 46 9 -- 70
----------- ----------- ----------- ----------- ----------- -----------
Net charge offs 5 11 124 20 -- 160
----------- ----------- ----------- ----------- ----------- -----------
Provision charged to
income 14 7 119 16 1 157
----------- ----------- ----------- ----------- ----------- -----------
Balance at end of period $ 171 $ 30 $ 589 $ 32 $ 15 $ 837
=========== =========== =========== =========== =========== ===========
The allowance for credit losses decreased $9 million during the first quarter of
2006. Total net charge offs of $160 million were mostly offset by the provision
for credit losses of $157 million and a $6 million reduction of allowance during
the quarter related to the sale of private label credit card relationships.
The allowance for credit losses increased $64 million from March 31, 2005 to
March 31, 2006, primarily due to the additional reserve requirements associated
with increased balances within the private label credit card receivable
portfolio.
Commercial Loan Credit Quality
Components of the commercial allowance for credit losses are summarized in the
following table.
--------------------------------------------------------------------------------
March 31, December 31, March 31,
2006 2005 2005
--------------------------------------------------------------------------------
(in millions)
On-balance sheet allowance:
Specific $ 7 $ 9 $ 21
Collective 160 149 144
Transfer risk 4 4 8
------------ ------------ ------------
171 162 173
Unallocated 15 14 14
------------ ------------ ------------
Total on-balance sheet allowance 186 176 187
Off-balance sheet allowance 86 88 77
------------ ------------ ------------
Total commercial allowances $ 272 $ 264 $ 264
============ ============ ============
The allowance for credit losses associated with commercial loan portfolios
increased $9 million during the first quarter of 2006. Net charge offs of $5
million during the quarter were more than offset by a $14 million provision
expense associated with commercial loans.
Net charge offs of commercial loans continued to run at levels consistent with
those experienced for several recent quarters dating back to 2004, which is well
below historical experience for years prior to 2004. Commercial loan credit
quality continues to be stable and well managed, reflecting HUSI's generally
strong credit underwriting standards and improving economic conditions. At March
31, 2006 HUSI had acceptable on-balance sheet exposure from industries
considered to be of higher risk. Overall exposures to these industries were
reduced in 2005 and were not materially changed at March 31, 2006.
45
Criticized assets classified as "substandard" increased $137 million during the
first quarter of 2006, due to:
o downgrading of various commercial loans based on recent credit assessments
($70 million);
o the downgrading of certain non-investment grade securities ($48 million);
and
o additional consumer loans being designated as substandard ($19 million).
Although overall commercial credit quality is expected to remain stable and well
controlled for the remainder of 2006, any sudden and/or unexpected adverse
economic events or trends could significantly affect credit quality and increase
provisions for credit losses.
Credit Card Receivable Credit Quality
The allowance for credit losses associated with credit card receivables
decreased $11 million during the first quarter of 2006. Net charge offs of $124
million and a $6 million reduction of allowance related to the sale of certain
private label credit card relationships during the quarter were substantially
offset by provision expense of $119 million. The net charge off and provision
activity during the first quarter of 2006, which primarily relates to the
private label credit card portfolio, is consistent with trends and activity for
calendar year 2005.
Receivables included in the private label credit card portfolio are generally
maintained in accruing status until being charged off six months after
delinquency. The following table provides credit quality data for credit card
receivables.
-------------------------------------------------------------------------------------------------------
March 31, December 31, March 31,
2006 2005 2005
-------------------------------------------------------------------------------------------------------
(in millions)
Accruing balances contractually past due 90 days or more:
Balance at end of quarter $ 244 $ 248 $ 210
As a percent of total credit card receivables 1.69% 1.60% 1.75%
Allowance for credit losses associated with credit card
receivables:
Balance at end of quarter $ 589 $ 600 $ 546
As a percent of total credit card receivables 4.07% 3.87% 4.55%
Net charge offs of credit card receivables:
Total for the quarter ended $ 124 $ 151 $ 115
Annualized net charge offs as a percent of average credit
card receivables 3.32% 4.02% 3.83%
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
--------------------------------------------------------------------------------
HUSI is party to various derivative financial instruments as an end user, as an
international dealer in derivative instruments, and for purely trading purposes
in order to realize profits from short-term movements in interest rates,
commodity prices, foreign exchange rates and credit spreads. Additional
information regarding the use of various derivative instruments is included on
page 26 and pages 95-97 of HUSI's 2005 Form 10-K.
Credit and Market Risk Associated with Derivative Contracts
Credit (or repayment) risk in derivative instruments is minimized by entering
into transactions with high quality counterparties, including other HSBC group
entities. Counterparties include financial institutions, government agencies,
both foreign and domestic, corporations, funds (mutual funds, hedge funds,
etc.), insurance companies and private clients. These counterparties are subject
to regular credit review by the credit risk management department. Most
derivative contracts are governed by an International Swaps and Derivatives
Association Master Agreement. Depending on the type of counterparty and the
level of expected activity, bilateral collateral arrangements may be required as
well.
46
The total risk in a derivative contract is a function of a number of variables,
such as:
o whether counterparties exchange notional principal;
o volatility of interest rates, currencies, equity or corporate reference
entity used as the basis for determining contract payments;
o maturity and liquidity of contracts;
o credit worthiness of the counterparties in the transaction; and
o existence and value of collateral received from counterparties to secure
exposures.
The following table presents credit risk exposure associated with derivative
contracts. In the table, current credit risk exposure is the recorded fair value
of derivative receivables, which represents revaluation gains from the marking
to market of derivative contracts held for trading purposes, for all
counterparties with an International Swaps and Derivatives Association Master
Agreement in place.
Future credit risk exposure in the following table is measured using rules
contained in the risk-based capital guidelines published by U.S. banking
regulatory agencies. The risk exposure calculated in accordance with the risk
based capital guidelines potentially overstates actual credit exposure, because:
o the risk-based capital guidelines ignore collateral that may have been
received from counterparties to secure exposures; and
o the risk-based capital guidelines compute exposures over the life of
derivative contracts. However, many contracts contain provisions that
allow a bank to close out the transaction if the counterparty fails to
post required collateral. As a result, these contracts have potential
future exposures that are often much smaller than the future exposures
derived from the risk-based capital guidelines.
The net credit risk exposure amount in the following table does not reflect the
impact of bilateral netting (i.e., netting with a single counterparty when a
bilateral netting agreement is in place). However, the risk-based capital
guidelines recognize that bilateral netting agreements reduce credit risk and
therefore allow for reductions of exposures when netting requirements have been
met. In addition, risk-based capital rules require that netted exposures of
various counterparties be assigned risk-weightings, which result in
risk-weighted amounts for regulatory capital purposes that are a fraction of the
original netted exposures.
--------------------------------------------------------------------------------
March 31, December 31,
2006 2005
--------------------------------------------------------------------------------
(in millions)
Risk associated with derivative contracts:
Current credit risk exposure $ 11,572 $ 8,155
Future credit risk exposure 74,075 61,548
------------ ------------
Total risk exposure 85,647 69,703
Less: collateral held against exposure (2,347) (1,850)
------------ ------------
Net credit risk exposure $ 83,300 $ 67,853
============ ============
47
Notional Values of Derivative Contracts
The following table summarizes the notional values of derivative contracts.
--------------------------------------------------------------------------------
March 31, December 31,
2006 2005
--------------------------------------------------------------------------------
(in millions)
Interest rate:
Futures and forwards $ 112,129 $ 106,826
Swaps 1,759,952 1,674,091
Options written 275,068 199,676
Options purchased 304,679 217,095
------------ ------------
2,451,828 2,197,688
------------ ------------
Foreign exchange:
Swaps, futures and forwards 339,695 308,264
Options written 36,551 40,213
Options purchased 37,248 40,959
Spot 45,591 21,099
------------ ------------
459,085 410,535
------------ ------------
Commodities, equities and precious metals:
Swaps, futures and forwards 60,573 48,702
Options written 14,080 14,378
Options purchased 16,525 16,127
------------ ------------
91,178 79,207
------------ ------------
Credit derivatives 494,139 391,814
------------ ------------
Total $ 3,496,230 $ 3,079,244
============ ============
48
OFF-BALANCE SHEET ARRANGEMENTS
--------------------------------------------------------------------------------
The following table provides maturity information related to off-balance sheet
arrangements and lending and sales commitments. Descriptions of these
arrangements are found on pages 60-62 of HUSI's 2005 Form 10-K.
------------------------------------------------------------------------------------------------------------------
Balance at March 31, 2006
---------------------------------------------------------
One Over One Over Balance at
Year Through Five December 31,
or Less Five Years Years Total 2005
-----------------------------------------------------------------------------------------------------------------
(in millions)
Standby letters of credit, net of
participations $ 4,531 $ 2,123 $ 81 $ 6,735(1) $ 6,114(1)
Commercial letters of credit 784 65 1 850 806
Loan sales with recourse -- 1 11 12(2) 9(2)
Credit derivative contracts 4,484 171,760 95,558 271,802(3) 222,419(3)
Commitments to extend credit:
Commercial 22,556 29,474 3,853 55,883 51,284
Consumer 8,544 -- -- 8,544 8,305
Securities lending indemnifications -- -- -- -- 4,135
------------ ------------ ------------ ------------ ------------
Total $ 40,899 $ 203,423 $ 99,504 $ 343,826 $ 293,072
============ ============ ============ ============ ============
(1) Includes $558 million and $523 million issued for the benefit of related
parties at March 31, 2006 and December 31, 2005 respectively.
(2) $11 million and $7 million is indemnified by third parties at March 31,
2006 and December 31, 2005 respectively.
(3) Includes $58,239 million and $51,202 million issued for the benefit of
related parties at March 31, 2006 and December 31, 2005 respectively.
Letters of Credit
Fees are charged for issuing letters of credit commensurate with the customer's
credit evaluation and the nature of any collateral. Included in other
liabilities are deferred fees on standby letters of credit, representing the
fair value of the "stand ready obligation to perform" under these guarantees,
amounting to $21 million and $19 million at March 31, 2006 and December 31, 2005
respectively. Also included in other liabilities is an allowance for credit
losses on unfunded standby letters of credit of $18 million and $20 million at
March 31, 2006 and December 31, 2005 respectively.
Credit Derivatives
HUSI enters into credit derivative contracts primarily to satisfy the needs of
its customers and, in certain cases, for its own benefit. Credit derivatives are
arrangements that provide for one party (the "beneficiary") to transfer the
credit risk of a "reference asset" to another party (the "guarantor"). Under
this arrangement the guarantor assumes the credit risk associated with the
reference asset without directly purchasing it. The beneficiary agrees to pay to
the guarantor a specified fee. In return, the guarantor agrees to pay the
beneficiary an agreed upon amount if there is a default during the term of the
contract.
In accordance with its policy, HUSI offsets most of the market risk it assumes
in selling credit guarantees through a credit derivative contract with another
counterparty. Credit derivatives, although having characteristics of a
guarantee, are accounted for as derivative instruments and are carried at fair
value. The commitment amount included in the table is the maximum amount that
HUSI could be required to pay, without consideration of the approximately equal
amount receivable from third parties and any associated collateral.
Securities Lending Indemnifications
Through December 31, 2005, HUSI occasionally lent securities of customers, on a
fully collateralized basis, as an agent to third party borrowers. Customers were
indemnified against the risk of loss, and collateral was obtained from the
borrower with a market value exceeding the value of the loaned securities.
Securities lending activities were terminated during the first quarter of 2006.
49
RISK MANAGEMENT
--------------------------------------------------------------------------------
Overview
Some degree of risk is inherent in virtually all of HUSI's activities. For the
principal activities undertaken by HUSI, the most important types of risks are
considered to be credit, interest rate, market, liquidity, operational,
fiduciary and reputational. Market risk broadly refers to price risk inherent in
mark to market positions taken on trading and non-trading instruments.
Operational risk technically includes legal and compliance risk. However, since
compliance risk, including anti-money laundering (AML) risk, has such broad
scope within HUSI's businesses, it is addressed as a separate functional
discipline. During the first three months of 2006, there have been no
significant changes in policies or approach for managing various types of risk.
Liquidity Management
HUSI's approach to address liquidity risk is summarized on pages 67-68 of HUSI's
2005 Form 10-K. There have been no changes in HUSI's approach toward liquidity
risk management during 2006.
HUSI's ability to regularly attract wholesale funds at a competitive cost is
enhanced by strong ratings from the major credit rating agencies. At March 31,
2006, HUSI and HBUS maintained the following debt and preferred stock ratings,
which are unchanged from December 31, 2005.
--------------------------------------------------------------------------------
At March 31, 2006 Moody's S&P Fitch
--------------------------------------------------------------------------------
HUSI:
Short-term borrowings P-1 A-1 F1+
Long-term debt Aa3 A+ AA
Preferred stock A2 A- AA-
HBUS:
Short-term borrowings P-1 A-1+ F1+
Long-term debt Aa2 AA- AA
HUSI periodically issues capital instruments to fund balance sheet growth, to
meet cash and capital needs, or to fund investments in subsidiaries. In December
2005, the United States Securities and Exchange Commission (SEC) amended its
rules regarding registration, communications and offerings under the Securities
Act of 1933. The amended rules facilitate access to capital markets by
well-established public companies, provide more flexibility regarding
restrictions on corporate communications during a securities offering and
further integrate disclosures under the Securities Act of 1933 and the
Securities Exchange Act of 1934. The amended rules provide the most flexibility
to "well-known seasoned issuers", including the option of automatic
effectiveness upon filing of shelf registration statements and relief under the
liberalized communications rules. HUSI currently satisfies the eligibility
requirements for designation as a "well-known seasoned issuer", and has an
effective shelf registration statement with the SEC under which it may issue
debt securities, preferred stock, either separately or represented by depositary
shares, warrants, purchase contracts and units.
Interest Rate Risk Management
Various techniques are utilized to quantify and monitor risks associated with
the repricing characteristics of HUSI's assets, liabilities, and derivative
contracts. The approach toward managing interest rate risk is summarized on
pages 69-71 of HUSI's 2005 Form 10-K. During the first quarter of 2006, there
were no significant changes in policies or approach for managing interest rate
risk.
50
Present Value of a Basis Point (PVBP) Analysis
PVBP is the change in value of the balance sheet for a one basis point upward
movement in all interest rates. The following table reflects the PVBP position
at March 31, 2006.
-------------------------------------------------------------------------------
March 31, 2006 Values
-------------------------------------------------------------------------------
(in millions)
Institutional PVBP movement limit $ 7.5
PVBP position at period end 3.4
Economic Value of Equity
Economic value of equity is the change in value of the assets and liabilities
(excluding capital and goodwill) for either a 200 basis point immediate rate
increase or decrease. The following table reflects the economic value of equity
position at March 31, 2006.
----------------------------------------------------------------------------------------------
March 31, 2006 Values
----------------------------------------------------------------------------------------------
Institutional economic value of equity limit +/- 20%
Projected change in value (reflects projected rate movements on April 1, 2006):
Change resulting from a gradual 200 basis point increase in interest rates (9)
Change resulting from a gradual 200 basis point decrease in interest rates 1
The projected decrease in value for a 200 basis point increase in rates is
primarily related to the anticipated slowing of prepayments for the held
mortgage and mortgage backed securities portfolios in this higher rate
environment. This assumes that no management actions are taken to manage
exposures to the changing interest rate environment.
Dynamic Simulation Modeling
Various modeling techniques are utilized to monitor a number of interest rate
scenarios for their impact on net interest income. These techniques include both
rate shock scenarios which assume immediate market rate movements of 200 basis
points, as well as scenarios in which rates rise or fall by as much as 200 basis
points over a twelve month period. The following table reflects the impact on
net interest income of the scenarios utilized by these modeling techniques.
------------------------------------------------------------------------------------------------------------
March 31, 2006 Values
----------------------
Amount %
------------------------------------------------------------------------------------------------------------
(in millions)
Projected change in net interest income (reflects projected rate movements on
April 1, 2006):
Institutional base earnings movement limit (10)
Change resulting from a gradual 200 basis point increase in the yield curve $(179) (6)
Change resulting from a gradual 200 basis point decrease in the yield curve 247 8
Change resulting from a gradual 100 basis point increase in the yield curve (88)
Change resulting from a gradual 100 basis point decrease in the yield curve 123
Other significant scenarios monitored (reflects projected rate movements on April 1,
2006):
Change resulting from an immediate 100 basis point increase in the yield curve (146)
Change resulting from an immediate 100 basis point decrease in the yield curve 158
Change resulting from an immediate 200 basis point increase in the yield curve (299)
Change resulting from an immediate 200 basis point decrease in the yield curve 224
Change resulting from an immediate 100 basis point increase in short-term rates (267)
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.
51
Capital Risk/Sensitivity of Other Comprehensive Income
Large movements of interest rates could directly affect some reported capital
and capital ratios. The mark to market valuation of available for sale
securities is credited on a tax effective basis through other comprehensive
income in the consolidated statement of changes in shareholders' equity.
Although this valuation mark is excluded from Tier 1 and Tier 2 capital ratios,
it is included in two important accounting based capital ratios: the tangible
common equity to tangible assets and the tangible common equity to risk weighted
assets. As of March 31, 2006, HUSI had an available for sale securities
portfolio of approximately $18 billion with a net negative mark to market of
$480 million included in tangible common equity of $8 billion. An increase of 25
basis points in interest rates of all maturities would lower the mark to market
by approximately $172 million to a net loss of $652 million with the following
results on the tangible capital ratios.
--------------------------------------------------------------------------------
Proforma - Reflecting
25 Basis Points
March 31, 2006 Actual Increase in Rates
--------------------------------------------------------------------------------
Tangible common equity to tangible assets 4.93% 4.87%
Tangible common equity to risk weighted assets 6.34 6.26
Value at Risk (VAR)
VAR analysis is also used to measure interest rate risk and to calculate the
economic capital required to cover potential losses due to interest rate risk.
The approach toward using VAR to measure interest rate risk is summarized on
pages 71-73 of HUSI's 2005 Form 10-K.
Trading Activities
Trading portfolios reside primarily in the CIBM and residential mortgage banking
areas and include foreign exchange, derivatives, precious metals (gold, silver,
platinum), commodities, equities and money market instruments. The trading
portfolios have defined limits pertaining to items such as permissible
investments, risk exposures, loss review, balance sheet size and product
concentrations. Loss review refers to the maximum amount of loss that may be
incurred before senior management intervention is required.
Trading Activities - Treasury
Value at Risk
The following table summarizes trading VAR, assuming a 99% confidence level for
a two year observation period and a 10 day holding period.
-----------------------------------------------------------------------------------------
Three Months Ended March 31, 2006
March 31, --------------------------------------- December 31,
2006 Minimum Maximum Average 2005
-----------------------------------------------------------------------------------------
(in millions)
Total trading $ 121 $ 47 $ 121 $ 76 $ 53
Commodities 2 -- 10 3 5
Credit derivatives 15 15 26 18 18
Equities -- -- 1 -- 1
Foreign exchange 11 2 21 9 4
Interest rate 143 65 143 94 69
52
Trading Volatility
The following tables summarize the frequency distribution of daily market
risk-related revenues for Treasury trading activities during the first quarter
of 2006. Market risk-related Treasury trading revenues include realized and
unrealized gains (losses) related to Treasury trading activities, but exclude
the related net interest income. Analysis of gain (loss) data for the first
three months of 2006 shows that the largest daily gain was $32 million and the
largest daily loss was $13 million.
----------------------------------------------------------------------------------------------------------------
Ranges of daily Treasury trading revenue earned from market risk- Below $(10) $0 to $10 to Over
related activities (in millions) $(10) to $0 $10 $20 $20
----------------------------------------------------------------------------------------------------------------
Number of trading days market risk-related revenue was
within the stated range 2 19 24 12 5
Trading Activities - HSBC Mortgage Corporation (USA)
HSBC Mortgage Corporation (USA) is HUSI's mortgage banking subsidiary. Trading
occurs in mortgage banking operations as a result of an economic hedging program
intended to offset changes in value of mortgage servicing rights and the salable
loan pipeline. Economic hedging may include, for example, forward contracts to
sell residential mortgages and derivative contracts used to protect the value of
MSRs which, while economically viable, may not satisfy the hedge requirements of
SFAS 133.
MSRs are assets that represent the present value of net servicing income
(servicing fees, ancillary income, escrow and deposit float servicing costs).
MSRs are recognized upon the sale of the underlying loans or at the time that
servicing rights are purchased. MSRs are subject to interest rate risk, in that
their value will fluctuate as a result of a changing interest rate environment.
Interest rate risk is mitigated through an active hedging program that uses
trading securities and derivative instruments to offset changes in value of
MSRs. Since the hedging program involves trading activity, risk is quantified
and managed using a number of risk assessment techniques.
Rate Shock Analysis
Modeling techniques are used to monitor certain interest rate scenarios for
their impact on the economic value of net hedged MSRs, as reflected in the
following table.
------------------------------------------------------------------------------------------------------
March 31, 2006 Values
------------------------------------------------------------------------------------------------------
(in millions)
Projected change in net market value of hedged MSRs portfolio (reflects projected rate
movements on April 1, 2006):
Value of hedged MSRs portfolio $ 465
Change resulting from an immediate 50 basis point decrease in the yield curve:
Change limit (no worse than) (16)
Calculated change in net market value (4)
Change resulting from an immediate 50 basis point increase in the yield curve:
Change limit (no worse than) (8)
Calculated change in net market value 6
Change resulting from an immediate 100 basis point increase in the yield curve:
Change limit (no worse than) (12)
Calculated change in net market value 14
Economic Value of MSRs
The economic value of the net, hedged MSRs portfolio is monitored on a daily
basis for interest rate sensitivity. If the economic value declines by more than
established limits for one day or one month, various levels of management
review, intervention and/or corrective actions are required.
53
Hedge Volatility
The following table summarizes the frequency distribution of the weekly economic
value of the MSR asset during the first quarter of 2006. This includes the
change in the market value of the MSR asset net of changes in the market value
of the underlying hedging positions used to hedge the asset. The changes in
economic value are adjusted for changes in MSR valuation assumptions that were
made during the course of the quarter, if applicable.
-------------------------------------------------------------------------------------------------------------------
Ranges of mortgage economic value from market risk-related Below $(2) $0 to $2 to Over
activities (in millions) $(2) to $0 $2 $4 $4
-------------------------------------------------------------------------------------------------------------------
Number of trading weeks market risk-related revenue was
within the stated range 3 4 4 1 1
Item 3. Quantitative and Qualitative Disclosures About Market Risk
--------------------------------------------------------------------------------
Refer to Item 2, Management's Discussion and Analysis of Financial Condition and
Results of Operations, under the captions "Interest Rate Risk Management" and
"Trading Activities", beginning on page 50 of this Form 10-Q.
Item 4. Controls and Procedures
--------------------------------------------------------------------------------
HUSI maintains a system of internal and disclosure controls and procedures
designed to ensure that information required to be disclosed in reports filed or
submitted under the Securities Exchange Act of 1934, as amended, (the Exchange
Act), is recorded, processed, summarized and reported on a timely basis. HUSI's
Board of Directors, operating through its Audit Committee, which is composed
entirely of independent outside directors, provides oversight to the financial
reporting process.
An evaluation was conducted, with the participation of the Chief Executive
Officer and Chief Financial Officer, of the effectiveness of HUSI's disclosure
controls and procedures as of the end of the period covered by this report.
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that HUSI's disclosure controls and procedures were effective
as of the end of the period covered by this report so as to alert them in a
timely fashion to material information required to be disclosed in reports filed
under the Exchange Act.
There have been no significant changes in HUSI's internal and disclosure
controls or in other factors that could significantly affect internal and
disclosure controls subsequent to the date that the evaluation was carried out.
HUSI continues the process to complete a thorough review of its internal
controls as part of its preparation for compliance with the requirements of
Section 404 of the Sarbanes-Oxley Act of 2002 (Section 404). Section 404
requires management to report on, and external auditors to attest to, the
effectiveness of HUSI's internal control structure and procedures for financial
reporting. As a non-accelerated filer under Rule 12b-2 of the Exchange Act,
HUSI's first report under Section 404 will be contained in its Form 10-K for the
period ended December 31, 2007.
54
Part II - OTHER INFORMATION
--------------------------------------------------------------------------------
Item 1A. Risk Factors
--------------------------------------------------------------------------------
Risk factors were provided in HUSI's Form 10-K for the year ended December 31,
2005. However, the following discussion provides a more detailed description of
some of the important risk factors that could affect HUSI's actual results and
could cause results to vary materially from those expressed in public statements
or documents. Other factors besides those discussed below or elsewhere in
reports filed or furnished with the SEC could affect HUSI's business or results.
The reader should not consider any description of such factors to be a complete
set of all potential risks that may face HUSI. Additional commentary regarding
risks that may affect HUSI and HUSI's approach toward risk management is
provided on pages 63-77 of HUSI's 2005 Annual Report on Form 10-K, and on pages
50-54 of this Form 10-Q.
General Business, Economic, Political and Market Conditions
HUSI's business and earnings are affected by general business, economic, market
and political conditions in the United States and abroad. Given its
concentration of business activities in the United States, HUSI is particularly
exposed to downturns in the United States economy. For example, in a poor
economic environment there is greater likelihood that more of HUSI's customers
or counterparties could become delinquent or default on their loans or other
obligations. This could result in higher levels of charge offs and provisions
for credit losses, which would adversely affect HUSI's earnings. General
business, economic and market conditions that could affect HUSI include, but are
not limited to:
o short-term and long-term interest rates;
o inflation;
o recession;
o monetary supply;
o fluctuations in both debt and equity capital markets in which HUSI funds
its operations;
o market value of consumer owned and commercial real estate throughout the
United States;
o consumer perception as to the availability of credit; and
o the ease of filing for bankruptcy.
Certain changes to these conditions could diminish demand for HUSI's products
and services, or increase the cost to provide such products or services. Recent
trends in world-wide financial markets related to, among other things, the
growth of derivatives and hedge funds, could add instability and could change
the way those markets work. Political conditions also may impact HUSI's
earnings. The economic health of geographic areas where HUSI has greater
concentrations of business may decline relative to other geographic regions,
with related impacts on HUSI's earnings. Acts or threats of war or terrorism, as
well as actions taken by the United States or other governments in response to
such acts or threats, could affect business and economic conditions in the
United States.
Competition
HUSI operates in a highly competitive environment. Competitive conditions are
expected to continue to intensify as continued merger activity in the financial
services industry produces larger, better-capitalized and more geographically
diverse companies. New products, customers and channels of distribution are
constantly emerging. In addition, the traditional segregation of the financial
services industry into prime and non-prime segments has eroded and in the future
is expected to continue to do so, further increasing competition in the
financial services industry. Such competition may impact the terms, rates, costs
and/or profits historically included in the loan products HUSI offers or
purchases. The traditional segregation of commercial and investment banks has
all but eroded. There is no assurance that the significant and increasing
competition within the financial services industry will not materially and
adversely affect HUSI's future results of operations.
55
Federal and State Regulation
HUSI operates in a highly regulated environment. Changes in federal, state and
local laws and regulations affecting banking, consumer credit, bankruptcy,
privacy, consumer protection or other matters could materially impact HUSI's
performance. For example, anti-money laundering requirements under the Patriot
Act are frequently revisited by the U.S. Congress and Executive Agencies. Broad
or targeted legislative or regulatory initiatives may be aimed at lenders
operating in consumer lending markets. These initiatives could affect HUSI in
substantial and unpredictable ways, including limiting the types of consumer
loan products it can offer. In addition, there may be amendments to, and new
interpretations of, risk-based capital guidelines and reporting instructions.
HUSI cannot determine whether such legislative or regulatory initiatives will be
instituted or predict the impact that such initiatives would have on results.
Changes in Accounting Standards
HUSI's accounting policies and methods are fundamental to how HUSI records and
reports its financial condition and the results of its operations. From time to
time the Financial Accounting Standards Board (FASB), the SEC and bank
regulators, including the Office of Comptroller of the Currency and the Board of
Governors of the Federal Reserve System, change the financial accounting and
reporting standards that govern the preparation of external financial
statements. These changes are beyond HUSI's control, can be hard to predict and
could materially impact how HUSI reports its financial condition and the results
of its operations. HUSI could be required to apply new or revised standards
retroactively, resulting in a restatement of prior period financial statements
in material amounts.
Management Financial Projections and Judgments
Pursuant to U.S. GAAP, HUSI's management is required to use certain estimates in
preparing financial statements, including accounting estimates to determine loan
loss reserves, reserves related to future litigation, and the fair market value
of certain assets and liabilities, among other items. In particular, loan loss
reserve estimates are judgmental and are influenced by factors outside of HUSI's
control. As a result, estimates could change as economic conditions change. If
values determined by HUSI's management for such items turn out to be
substantially inaccurate, unexpected and material losses could result.
Lawsuits and Regulatory Investigations and Proceedings
HUSI or one of its subsidiaries may be named as a defendant in various legal
actions, including class actions and other litigation or disputes with third
parties, as well as investigations or proceedings brought by regulatory
agencies. These actions may result in judgments, settlements, fines, penalties
or other results, including additional compliance requirements, adverse to HUSI
which could have a material adverse effect on HUSI's business, financial
condition or results of operations, or cause serious reputational harm.
Operational Risks
HUSI's businesses are dependent upon its ability to process a large number of
increasingly complex transactions. If any of HUSI's financial, accounting, or
other data processing systems fail or have other significant shortcomings, HUSI
could be materially and adversely affected. HUSI is similarly dependent on its
employees. HUSI could be materially and adversely affected if an employee causes
a significant operational break-down or failure, either as a result of human
error or where an individual intentionally sabotages or fraudulently manipulates
HUSI's operations or systems. Third parties with which HUSI does business could
also be sources of operational risk, including risks associated with break-downs
or failures of such parties' own systems or employees. Any of these occurrences
could result in diminished ability of HUSI to operate one or more of its
businesses, potential liability to clients, reputational damage and regulatory
intervention, all of which could have a material adverse effect on HUSI.
56
HUSI may also be subject to disruptions of its operating systems and businesses
arising from events that are wholly or partially beyond its control. These may
include:
o computer viruses or electrical or telecommunications outages;
o natural disasters, such as hurricanes and earthquakes;
o events arising from local or regional politics, including terrorist acts;
o unforeseen problems encountered while implementing major new computer
systems; or
o global pandemics, which could have a significant effect on HUSI's business
operations as well as on HSBC affiliates world-wide.
Such disruptions may give rise to losses in service to customers, an inability
to collect receivables in affected areas and other loss or liability to HUSI.
In a company as large and complex as HUSI, lapses or deficiencies in internal
controls over financial reporting may occur from time to time, and there is no
assurance that such deficiencies or material weaknesses may not occur in the
future.
In addition there is the risk that HUSI's controls and procedures, business
continuity planning, and data security systems could prove to be inadequate. Any
such failure could affect HUSI's operations and could have a material adverse
effect on HUSI's results of operations by requiring HUSI to expend significant
resources to correct the defect, as well as by exposing HUSI to litigation or
losses not covered by insurance.
Changes to operational practices from time to time could materially impact
HUSI's performance and results. Such changes may include:
o raising the minimum payment on credit card accounts;
o determinations to acquire or sell private label credit card receivables,
residential mortgage loans and other loans;
o changes to customer account management, risk management and collection
policies and practices;
o increasing investment in technology, business infrastructure and
specialized personnel; or
o outsourcing of various operations.
Liquidity
Adequate liquidity is critical to HUSI's ability to operate its businesses, grow
and be profitable. A compromise to liquidity could therefore have a negative
effect on HUSI. Potential conditions that could negatively affect HUSI's
liquidity include:
o diminished access to capital markets;
o unforeseen cash or capital requirements;
o an inability to sell assets; and
o an inability to obtain expected funding from HSBC affiliates and clients.
HUSI's credit ratings are an important part of maintaining liquidity. Any
downgrade in credit ratings could potentially increase borrowing costs, limit
access to capital markets, require cash payments or collateral posting, and
permit termination of certain contracts material to HUSI.
57
Acquisition Integration
HUSI has in the past, and may again in the future, seek to grow its business by
acquiring other businesses or loan portfolios. There can be no assurance that
acquisitions will have the anticipated positive results, including results
relating to:
o the total cost of integration;
o the time required to complete the integration;
o the amount of longer-term cost savings; or
o the overall performance of the combined entity.
Integration of an acquired business can be complex and costly, and may sometimes
include combining relevant accounting and data processing systems and management
controls, as well as managing relevant relationships with clients, suppliers and
other business partners, as well as with employees.
There is no assurance that any businesses or portfolios acquired in the future,
will be successfully integrated and will result in all of the positive benefits
anticipated. If HUSI is not able to successfully integrate past and future
acquisitions, there is the risk that its results of operations could be
materially and adversely affected.
Risk Management
HUSI seeks to monitor and manage its risk exposure through a variety of separate
but complementary financial, credit, operational, compliance and legal reporting
systems, including models and programs that predict loan delinquency and loss.
While HUSI employs a broad and diversified set of risk monitoring and risk
mitigation techniques, those techniques and the judgments that accompany their
application cannot anticipate every unfavorable event or the specifics and
timing of every outcome. Accordingly, HUSI's ability to successfully identify
and balance risks and rewards, and to manage all significant risks, is an
important factor that can significantly impact results of operations.
Employee Retention
HUSI's employees are its most important resource and, in many areas of the
financial services industry, competition for qualified personnel is intense. If
HUSI were unable to continue to retain and attract qualified employees to
support the various functions of its business, HUSI's performance, including its
competitive position, could be materially and adversely affected.
Reputational Risk
HUSI's ability to attract and retain customers and conduct business transactions
with its counterparties could be adversely affected to the extent that its
reputation is damaged. Failure to address, or appearing to fail to address,
various issues that could give rise to reputational risk could cause harm to
HUSI and its business prospects. Reputational issues include, but are not
limited to:
o appropriately addressing potential conflicts of interest, legal and
regulatory requirements;
o ethical issues;
o adequacy of anti-money laundering processes;
o privacy issues;
o record-keeping;
o sales and trading practices;
o proper identification of the legal, reputational, credit, liquidity and
market risks inherent in HUSI's products; and
o general company performance.
The failure to address these issues appropriately could make customers unwilling
to do business with HUSI, which could adversely affect its results of
operations.
58
Item 6. Exhibits
--------------------------------------------------------------------------------
4.1 Senior Indenture, dated as of March 31, 2006, by and between HUSI and
Deutsche Bank Trust Company Americas (incorporated by reference to Exhibit
4.1 to HUSI's registration statement on Form S-3, Registration No.
333-133007, as filed with the Commission on April 5, 2006).
4.2 Senior Indenture, dated as of October 24, 1996, by and between HUSI and
Bankers Trust Company, as trustee (incorporated by reference to Exhibit
4.1 to post-effective amendment No. 1 to HUSI's registration statement on
Form S-3, Registration No. 333-42421, as filed with the Commission on
April 3, 2002).
4.3 First Supplemental Indenture to Senior Indenture, dated as of February 25,
2000 (incorporated by reference to Exhibit 4.2 to post-effective amendment
No. 1 to HUSI's registration statement on Form S-3, Registration No.
333-42421, as filed with the Commission on April 3, 2002).
4.4 Second Supplemental Indenture to Senior Indenture, dated November 28,
2005, among HUSI, Deutsche Bank Trust Company Americas, as original
trustee, and Wells Fargo Bank, N.A., as series trustee (incorporated by
reference to Exhibit 4.1 to HUSI's Current Report on Form 8-K, dated
November 21, 2005, as filed with the Commission on November 28, 2005).
4.5 Subordinated Indenture, dated as of October 24, 1996, by and between HUSI
and Bankers Trust Company, as trustee (incorporated by reference to
Exhibit 4.3 to post-effective amendment No. 1 to HUSI's registration
statement on Form S-3, Registration No. 333-42421, as filed with the
Commission on April 3, 2002).
4.6 First Supplemental Indenture to Subordinated Indenture, dated as of
December 12, 1996 (incorporated by reference to Exhibit 4.4 to
post-effective amendment No. 1 to HUSI's registration statement on Form
S-3, Registration No. 333-42421, as filed with the Commission on April 3,
2002).
4.7 Second Supplemental Indenture to Subordinated Indenture, dated as of March
1, 1999 (incorporated by reference to Exhibit 4.5 to post-effective
amendment No. 1 to HUSI's registration statement on Form S-3, Registration
No. 333-42421, as filed with the Commission on April 3, 2002).
4.8 Third Supplemental Indenture to Subordinated Indenture, dated as of
February 25, 2000 (incorporated by reference to Exhibit 4.6 to
post-effective amendment No. 1 to HUSI's registration statement on Form
S-3, Registration No. 333-42421, as filed with the Commission on April 3,
2002).
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.0 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
59
SIGNATURE
--------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HSBC USA Inc.
-----------------------
(Registrant)
Date: May 12, 2006 /s/ Clive R. Bucknall
--------------------------------
Clive R. Bucknall
Controller
(On behalf of Registrant)
60
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 Holdings plc
By:
Name: P A Stafford
Title: Assistant Group Secretary
Date: May 15, 2006