Final Results-HSBC USA Inc.P3

HSBC Holdings PLC 1 March 2004 PART 3 A summary of the notional amount of the Company's derivative financial instruments follows. December 31, 2003 2002 ------- in millions Interest rate: Futures and forwards $ 107,646 $ 73,640 Swaps 625,670 242,502 Options written 161,824 106,540 Options purchased 197,081 108,710 1,092,221 531,392 Foreign exchange: Swaps, futures and forwards 147,741 80,042 Options written 16,583 4,101 Options purchased 16,769 4,875 Spot 14,320 5,258 195,413 94,276 Other (1): Swaps, futures and forwards 33,897 28,011 Options written 7,048 5,059 Options purchased 7,081 5,042 Credit derivatives 31,302 11,058 79,328 49,170 Total $ 1,366,962 $ 674,838 (1) Other includes commodities, equities and precious metals. The year to year increase in the notional amounts of derivative financial instruments reflects continued growth in the Company's derivative business. However, the notional amount of derivative financial instruments only provides an indicator of the transaction volume in these types of instruments. It does not represent the Company's exposure to market or credit risks under these contracts. The total fair value of derivative receivables on the balance sheet was $7,653 million and $5,419 million at December 31, 2003 and 2002 respectively. These amounts reflect a net receivable balance for all counterparties with an International Swaps and Derivatives Association Master Agreement in place. See Note 2. The net fair value of derivative financial instruments was a negative $566 million and a positive $689 million at December 31, 2003 and 2002 respectively. The table below summarizes the risk profile of the counterparties of the Company's on balance sheet exposure to derivative contracts, net of cash and other highly liquid collateral as of December 31, 2003. Rating equivalent Exposure Net Percent of of Collateral Exposure Net (1) of Collateral ---------- in millions AAA to AA- $ 1,814 35.8 % A+ to A- 1,480 29.2 BBB+ to BBB- 920 18.1 BB+ to B- 405 8.0 CCC+ and below 454 8.9 Total $ 5,073 100.0 % (1) Total fair value of derivative receivables exposure on the balance sheet and collateral held by the Company against this exposure was $7,653 million and $2,580 million respectively. This collateral excludes credit enhancements in the form of letters of credit and surety receivables. 100 Note 22. Concentrations of Credit Risk The Company enters into a variety of transactions in the normal course of business that involve both on- and off-balance sheet credit risk. Principal among these activities is lending to various commercial, institutional, governmental and individual customers. The Company participates in lending activity throughout the United States and on a limited basis internationally. See Note 23 for a geographic distribution of year-end assets. The following is a summary of the regional exposure the Company has at December 31, 2003 for the following loan portfolios. Commercial Residential Construction and Mortgage Mortgage Loans Loans New York State 63.3 % 32.1 % North Central United States 3.1 9.0 North Eastern United States 9.4 9.9 Southern United States 8.1 19.2 Western United States 15.8 26.9 Other .3 2.9 Total 100.0 % 100.0 % In general, the Company controls the varying degrees of credit risk involved in on- and off-balance sheet transactions through specific credit policies. These policies and procedures provide for a strict approval, monitoring and reporting process. It is the Company's policy to require collateral when it is deemed appropriate. Varying degrees and types of collateral are secured depending upon management's credit evaluation. 101 Note 23. International and Domestic Operations In the following table, international loans are distributed geographically primarily on the basis of the location of the head office or residence of the borrowers or, in the case of certain guaranteed loans, the guarantors. Interest bearing deposits with banks are grouped by the location of the head office of the bank. Investments and acceptances are distributed on the basis of the location of the issuers or borrowers. International Assets by Geographic Distribution and Domestic Assets 2003 2002 December 31, ------- in millions International: Asia/Pacific $ 820 $ 970 Europe/Middle East/Africa 3,753 3,515 Other Western Hemisphere 1,291 1,195 Total international 5,864 5,680 Domestic 89,698 83,746 Total international/domestic $ 95,562 $ 89,426 The following table presents income statement information relating to the international and domestic operations of the Company. Geographical information has been classified by the location of the principal operations of the subsidiary, or in the case of the Bank, by the location of the branch office. Due to the nature of the Company's structure, the following analysis includes intra-Company items between geographic regions. Revenues and Earnings - International and Domestic Year Ended December 31, Total Total Income Revenue (1) Expenses (Loss) (2) Before Taxes ------------- in millions 2003 International: Asia/Pacific $ 41.3 $ 21.4 $ 19.9 Europe 44.1 33.2 10.9 Other Western Hemisphere 77.6 42.5 35.1 Total international 163.0 97.1 65.9 Domestic (3) 3,507.4 2,062.2 1,445.2 Total international/domestic $ 3,670.4 $ 2,159.3 $ 1,511.1 2002 International: Asia/Pacific $ 43.0 $ 17.1 $ 25.9 Europe 31.9 22.7 9.2 Other Western Hemisphere 103.7 112.6 (8.9 ) Total international 178.6 152.4 26.2 Domestic (3) 3,262.5 1,923.6 1,338.9 Total international/domestic $ 3,441.1 $ 2,076.0 $ 1,365.1 2001 International: Asia/Pacific $ 62.7 $ 30.4 $ 32.3 Europe 77.3 21.9 55.4 Other Western Hemisphere 108.2 92.4 15.8 Total international 248.2 144.7 103.5 Domestic (3) 3,113.5 2,637.4 476.1 Total international/domestic $ 3,361.7 $ 2,782.1 $ 579.6 (1) Includes net interest income and other operating income. Total revenue includes intra-Company income of $6.5 million, $5.5 million and $.7 million for 2003, 2002 and 2001 respectively. (2) Includes operating expenses and provision for credit losses. Total expenses include intra-Company expenses of $6.5 million, $5.5 million and $.7 million for 2003, 2002 and 2001 respectively. (3) Includes the Caribbean and Canada. 102 Note 24. Fair Value of Financial Instruments The Company is required to disclose the estimated fair value of its financial instruments in accordance with Statement of Financial Accounting Standards No. 107, Disclosures about Fair Value of Financial Instruments (SFAS 107). The disclosures do not attempt to estimate or represent the fair value of the Company as a whole. The disclosures exclude assets and liabilities that are not financial instruments, including intangible assets, such as goodwill. The estimation methods and assumptions used by the Company to value individual classifications of financial instruments are described below. Different assumptions could significantly affect the estimates. Accordingly, the net realizable values upon liquidation of the financial instruments could be materially different from the estimates presented below. Financial instruments with carrying value equal to fair value - The carrying value of certain financial assets and liabilities is considered to be equal to fair value as a result of their short term nature. These include cash and due from banks, interest bearing deposits with banks, federal funds sold and securities purchased under resale agreements, accrued interest receivable, customers' acceptance liability and certain financial liabilities including acceptances outstanding, short-term borrowings and interest, taxes, and other liabilities. Securities and trading assets and liabilities - The fair value of securities and derivative contracts is based on current market quotations, where available. If quoted market prices are not available, fair value is estimated based on the quoted price of similar instruments or internal valuation models that approximate market pricing. Loans - The fair value of the performing loan portfolio is determined primarily by calculating the present value of expected cash flows using a discount rate as noted below. The loans are grouped, to the extent possible, into homogeneous pools, segregated by maturity, weighted average maturity, and average coupon rate. Depending upon the type of loan involved, maturity assumptions are based on either the contractual or expected maturity date. For commercial loans, the allowance for credit losses is allocated to the expected cash flows to provide for credit risk. A published interest rate that equates closely to a "risk free" or "low-risk" loan rate is used as the discount rate. The interest rate is adjusted for a liquidity factor, as appropriate. The discount rate used to calculate the fair value of consumer loans is computed using the estimated rate of return an investor would demand for the product without regard to credit risk. The discount rate is formulated by reference to current market rates. The discount rate used to calculate the fair value of residential mortgages is determined by reference to quoted market prices for loans with similar characteristics and maturities. Deposits - The fair value of demand, savings, and money market deposits with variable maturities is equal to the carrying value. For deposits with fixed maturities, fair value is estimated using market interest rates currently offered on deposits with similar characteristics and maturities. Long-term debt - Fair value is estimated using interest rates currently available to the Company for borrowings with similar characteristics and maturities. 103 The summarized carrying values and estimated fair values of financial instruments as of December 31, 2003 and 2002 follows. 2003 2002 December 31, Carrying Fair Carrying Fair Value Value Value Value ------- in millions Financial assets: Instruments with carrying value equal to fair value $ 6,185 $ 6,185 $ 6,300 $ 6,300 Trading assets 14,646 14,646 13,408 13,408 Securities available for sale 14,143 14,143 14,694 14,694 Securities held to maturity 4,512 4,648 4,628 4,905 Loans, net of allowance 48,075 48,871 43,143 43,940 Derivative instruments included in other assets (1) 194 194 267 267 Financial liabilities: Instruments with carrying value equal to fair value 6,960 6,960 7,632 7,632 Deposits: Without fixed maturities 54,304 54,304 51,262 51,262 Fixed maturities 9,651 9,675 8,568 8,638 Trading account liabilities 10,460 10,460 7,710 7,710 Long-term debt 3,814 4,500 3,675 4,419 Derivative instruments included in other liabilities (1) 53 53 100 100 (1) At December 31, 2003 and 2002, the amounts reported relate to derivative contracts that qualify for hedge accounting treatment as defined by SFAS 133. The fair value of commitments to extend credit, standby letters of credit and financial guarantees, is not included in the previous table. These instruments generate fees, which approximate those currently charged to originate similar commitments. 104 Note 25. Financial Statements of HSBC USA Inc. (parent) Condensed parent company financial statements follow. Balance Sheet 2003 2002 December 31, ------- in thousands Assets: Cash and due from subsidiary bank $ - $ 882 Interest bearing deposits with banks (including $547,654 and $853,261 in banking subsidiary) 612,654 918,261 Trading assets 179,057 177,448 Securities available for sale 44,152 49,045 Securities held to maturity (fair value $180,290 and $192,889) 167,424 185,784 Loans (net of allowance for credit losses of $698 and $1,329) 104,175 107,452 Receivable from subsidiaries 1,682,402 1,660,589 Investment in subsidiaries at amount of their net assets: Banking 7,921,346 7,288,607 Other 1,253,591 1,265,839 Goodwill 604,501 604,501 Other assets 334,620 334,495 Total assets $ 12,903,922 $ 12,592,903 Liabilities: Interest, taxes and other liabilities $ 163,436 $ 142,918 Short-term borrowings 1,746,188 1,484,417 Long-term debt (1) (2) 3,529,599 2,483,620 Long-term debt due to subsidiary (1) (2) 3,163 1,085,355 Total liabilities 5,442,386 5,196,310 Shareholders' equity * 7,461,536 7,396,593 Total liabilities and shareholders' equity $ 12,903,922 $ 12,592,903 * See Consolidated Statement of Changes in Shareholders' Equity, page 65. (1) Contractual scheduled maturities for the debt over the next five years are as follows: 2004, $300 million; none for 2005; 2006, $300 million; 2007, $100 million and 2008, $250 million. (2) As a result of the adoption of FIN 46 effective December 31, 2003, the Company deconsolidated all trusts that were previously considered consolidated subsidiaries of the Company. Junior subordinated debt issued by the Company to the trusts, totaling $1,082.5 million (face value) at December 31, 2003 is reported above as long-term debt instead of long-term debt due to subsidiary, where it was reported previously. For further information on this accounting change, see Note 11, Long-Term Debt. 105 Statement of Income 2003 2002 2001 Year Ended December 31, ------------- in thousands Income: Dividends from banking subsidiaries $ 690,000 $ 670,000 $ 950,000 Dividends from other subsidiaries 34,126 2,954 3,801 Interest from banking subsidiaries 98,996 105,973 138,254 Interest from other subsidiaries 942 392 1,938 Other interest income 15,775 17,264 34,910 Securities transactions (2,218 ) (894 ) 5,868 Other income 48,636 23,087 9,612 Total income 886,257 818,776 1,144,383 Expenses: Interest (including $64,081, $65,263 and $61,172 paid to subsidiaries) 228,682 241,043 312,902 Goodwill amortization - - 39,381 Princeton Note Matter - - 575,000 Provision for credit losses 35,729 (23,500 ) - Other expenses 23,862 22,638 25,799 Total expenses 288,273 240,181 953,082 Income before taxes, equity in undistributed income of subsidiaries and cumulative effect of accounting change 597,984 578,595 191,301 Income tax benefit (63,481 ) (54,081 ) (311,757 ) Income before equity in undistributed income of subsidiaries and cumulative effect of accounting change 661,465 632,676 503,058 Equity in undistributed income (loss) of subsidiaries 279,280 222,768 (143,721 ) Income before cumulative effect of accounting change 940,745 855,444 359,337 Cumulative effect of accounting change- implementation of SFAS 133, net of tax - - (6,199 ) Net income $ 940,745 $ 855,444 $ 353,138 106 Statement of Cash Flows 2003 2002 2001 Year Ended December 31, ------------- in thousands Cash flows from operating activities: Net income $ 940,745 $ 855,444 $ 353,138 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, amortization and deferred taxes 13,272 131,685 (42,277 ) Provision for credit losses 35,729 (23,500 ) - Net change in other accrued accounts 24,828 (539,887 ) 96,003 Undistributed (income) loss of subsidiaries (279,280 ) (222,768 ) 143,721 Other, net (62,445 ) (136,182 ) 97,207 Net cash provided by operating activities 672,849 64,792 647,792 Cash flows from investing activities: Net change in interest bearing deposits with banks 305,607 740,990 (818,752 ) Purchases of securities (1,162 ) (5,106 ) (89,798 ) Sales and maturities of securities 31,331 46,787 293,632 Net originations and maturities of loans (32,452 ) (70,022 ) 263,044 Net change in investments in and advances to subsidiaries (538,850 ) (18,633 ) (10,816 ) Other, net 56,450 95,515 (40,071 ) Net cash provided (used) by investing activities (179,076 ) 789,531 (402,761 ) Cash flows from financing activities: Net change in short-term borrowings 261,771 (150,142 ) 741,973 Issuance of long-term debt - 609,279 - Repayment of long-term debt - (624,320 ) (350,000 ) Dividends paid (712,521 ) (693,067 ) (550,856 ) Return of capital (43,905 ) - (84,939 ) Net cash used by financing activities (494,655 ) (858,250 ) (243,822 ) Net change in cash and due from banks (882 ) (3,927 ) 1,209 Cash and due from banks at beginning of year 882 4,809 3,600 Cash and due from banks at end of year $ - $ 882 $ 4,809 Cash paid for: Interest $ 228,155 $ 250,098 $ 322,014 The Bank is subject to legal restrictions on certain transactions with its nonbank affiliates in addition to the restrictions on the payment of dividends to the Company. See Note 13 for further discussion. 107 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There were no disagreements on accounting and financial disclosure matters between the Company and its independent accountants during 2003. Item 9A. Controls and Procedures Under the direction of the Company's Chief Executive Officer (CEO) and Chief Financial Officer (CFO), the Company has reviewed its "disclosure controls and procedures". That term means controls and other procedures designed to ensure that information required to be disclosed in the Company's reports filed with the SEC is recorded, processed, summarized and reported by the due dates specified by the SEC's rules. Also, this process is the support for the certifications of the CEO and CFO included as Exhibit 31 to this report. Since 1993, the CEO and CFO have reported on the Bank's internal controls over financial reporting pursuant to FDICIA regulations. The Company's independent auditors have annually attested, without qualification, to the reports. Thus, management is well acquainted with the process underlying the attestation to financial reporting controls. The current review process is built on the annual review at the Bank for FDICIA purposes as well as various other internal control processes and procedures, which management has established and monitors. The review is conducted quarterly and includes all subsidiaries of the Company. To monitor the Company's compliance with the disclosure controls and procedures, the Company has formed a Disclosure Committee chaired by its CFO. The Disclosure Committee is composed of key members of senior management, who have knowledge of significant portions of the Company's internal control system as well as the business and competitive environment in which the Company operates. The Disclosure Committee covers all of the Company's significant business and administrative functions. One of the key responsibilities of each Disclosure Committee member is to review the document to be filed with the SEC as it progresses through the preparation process. Open lines of communication to financial reporting management exist for Disclosure Committee members to convey comments and suggestions. The Disclosure Committee has designated a preparation-working group that is responsible for providing and/or reviewing the detail supporting financial disclosures. The Disclosure Committee also has designated a business issues working group that is responsible for the development of forward-looking disclosures. The Company's CEO and CFO have concluded that, based on the deliberations of the Disclosure Committee and input received from senior business and financial managers, the Company's disclosure controls and procedures were effective as of December 31, 2003 and that those controls and procedures support the disclosures in this document. During the quarter ended December 31, 2003 there were no material changes in the Company's internal controls over financial reporting. 108 PART III Item 10. Directors and Executive Officers of the Registrant Directors Set forth below is certain biographical information relating to the members of the Company's Board of Directors. Each director is elected annually. There are no family relationships among the directors. William F. Aldinger III, age 56, Chairman of the Company and the Bank since January, 2004. Mr. Aldinger has been Chairman and Chief Executive Officer of Household International, Inc. since 1996 and has been an Executive Director of HSBC since 2003. He is also a director of AT&T, Illinois Tool Works, Inc. and MasterCard International. A director of the Bank and the Company since October, 2003. Under agreement with management and the Board of Directors of HSBC, Mr. Aldinger manages the North American operations of HSBC. As such, it was agreed that he would act as Chairman and Director of the principal North American operating subsidiaries of HSBC. Sal H. Alfiero, age 66, Chairman and Chief Executive Officer, Protective Industries, LLC. Mr. Alfiero has been a director of the Bank since 1996. He is also a director of Phoenix Companies, Inc., Southwire Company, Fresh Del Monte Produce Company and National Health Care Affiliates. Elected January, 2000. Donald K. Boswell, age 52, President and Chief Executive Officer, Western New York Public Broadcasting Association since 1998. He has been in public broadcasting since 1977. A director of the Bank and the Company since April, 2002. James H. Cleave, age 61, formerly President and Chief Executive Officer of the Company and the Bank from 1993 through 1997 and formerly Executive Director from June 1992 through December 1992. Previously Director, President and Chief Executive Officer of HSBC Bank Canada since 1987. Mr. Cleave is also a director and Vice Chairman of HSBC Bank Canada. Elected in 1991. Frances D. Fergusson, age 59, President, Vassar College since 1986. Formerly Provost and Vice President for Academic Affairs, Bucknell University. Dr. Fergusson is a member of the Board of Overseers of Harvard University. She was a director of the Company from 1990 through 1995 and has been a director of the Bank since 1990. Reelected January, 2000. Douglas J. Flint, age 48, Group Finance Director, HSBC Holdings plc and an Executive Director of HSBC since 1995. A director of HSBC Bank Malaysia Berhad and a director of the Bank since 1998. Mr. Flint is a member of the UK Accounting Standards Board and a former partner in KPMG LLP. Elected January, 2000. Martin J. G. Glynn, age 52, Director, President and Chief Executive Officer of the Company and the Bank since October, 2003 and a Group General Manager since 2001. Formerly President and Chief Executive Officer, HSBC Bank Canada. He is also a director of HSBC Bank Canada and Husky Energy Inc. Elected January, 2000. 109 Stephen K. Green, age 55, Vice Chairman of the Company and the Bank and Group Chief Executive, HSBC Holdings plc. He joined HSBC in 1982 and has been an Executive Director of HSBC since 1998. Mr. Green is Deputy Chairman of HSBC Bank plc. He is also a director of HSBC Private Banking Holdings (Suisse) S.A., HSBC Bank Canada, HSBC Bank Middle East, The Hongkong and Shanghai Banking Corporation Limited, Grupo Financiero HSBC, S.A. de C.V., CCF S.A. and HSBC Trinkaus & Burkhardt KGaA. Elected January, 2000. Richard A. Jalkut, age 59, President and Chief Executive Officer, Telepacific Communications and Chairman of Birch Telecom, Inc. Formerly President and Chief Executive of Pathnet. Previously President and Group Executive, NYNEX Telecommunications. He was a director of the Company from 1992 through 1995 and has been a director of the Bank since 1992. He is also a director of IKON Office Solutions and Covad Communications. Reelected January, 2000. Peter Kimmelman, age 59, Private Investor. Formerly a director of Republic and Republic Bank since 1976. A director of the Bank and the Company since January, 2000. Charles G. Meyer, Jr. , age 66, Director and former President of Cord Meyer Development Company. Formerly a director of Republic Bank. A director of the Bank and the Company since January, 2000. James L. Morice, age 66, President and Chief Executive Officer of The JLM Group, LLC, a management consulting firm. Formerly a director of Republic and Republic Bank since 1987. A director of the Bank and the Company since January, 2000. Carole S. Taylor, age 58, Chair of the Canadian Broadcasting Corporation and a governor of the Vancouver Board of Trade. Also a director of HSBC Holdings plc, Fairmont Hotels & Resorts and Canfor. Formerly a director of HSBC Bank Canada. A director of the Bank and the Company since April, 2002. 110 Executive Officers The table below shows the names and ages of all executive officers of the Company and the positions held by them as of March 1, 2004 and the dates when elected an executive officer of the Company. Name Age Year Present Position with the Company Elected Martin J. G. Glynn 52 2003 Director, President and Chief Executive Officer Gerard Aquilina 52 2002 Senior Executive Vice President Susie Babani 43 2003 Executive Vice President Robert M. Butcher 60 1988 Senior Executive Vice President and Chief Risk Officer Paul L. Lee 57 2000 Senior Executive Vice President and General Counsel Vincent J. Mancuso 57 1996 Senior Executive Vice President and Group Audit Executive, USA Brendan McDonagh 45 2002 Senior Executive Vice President Roger K. McGregor 55 2003 Executive Vice President and Chief Financial Officer Joseph M. Petri 51 2001 Senior Executive Vice President Brian Robertson 49 2002 Senior Executive Vice President Joseph R. Simpson 42 2003 Senior Vice President and Controller Philip S. Toohey 60 1990 Senior Executive Vice President and Secretary Yvonne M. Walters 51 2003 Executive Vice President George T. Wendler 59 2000 Senior Executive Vice President and Chief Credit Officer Martin J. G. Glynn was appointed President and Chief Executive Officer of the Company and the Bank in October, 2003. Prior to joining the Company, he was President and Chief Executive Officer of HSBC Bank Canada. Mr. Glynn was appointed a Group General Manager in 2001 and has been with the HSBC Group since 1982. Gerard Aquilina held various management positions with Merrill Lynch from 1984 to 2002. Prior to leaving Merrill Lynch, he was Global Head of Marketing and Wealth Management for their International Private Client Group. Most recently, Mr. Aquilina assumed responsibilities for Private Banking and Wealth Management Services for HSBC in North America. Susie Babani has managed the Human Resources Division of the Bank since 2000. From 1998 to 2000 she was Global Head of Human Resources, HSBC Asset Management. She has been with the HSBC Group since 1989. Brendan McDonagh is an HSBC International Manager who has been with the HSBC Group for over 20 years. He has extensive commercial and retail management experience and most recently served as Senior Executive, Strategy Implementation, at HSBC Group Headquarters. Roger K. McGregor was previously Chief Financial Officer, HSBC Bank Canada from 2000 to 2003. From 1995 to 2000, he was Head of International Financial Control, HSBC Bank plc. He has been with the HSBC Group since 1977. Joseph M. Petri joined the Company in April 2000 as Executive Managing Director and head of sales for HSBC's Investment Banking and Markets, Americas division. From 1995 to 1998, he was President and Senior Partner of Summit Capital Advisors LLC, a New Jersey based hedge fund. Prior to that, Mr. Petri held a variety of management positions with Merrill Lynch. 111 Brian Robertson was appointed Group General Manager and Head of Corporate Investment Banking and Markets, effective March 2003. From 1991 to 1994 he served the Company as Senior Executive Vice President and Chief Credit Officer and as Executive Vice President and Manager, Special Credits. Mr. Robertson has been with the HSBC Group since 1975. Messrs. Lee and Wendler each served Republic New York Corporation in executive capacities for more than five years. Messrs. Butcher, Mancuso, Simpson, Toohey and Ms. Walters have each served the Company or the Bank for more than five years. There are no family relationships among the above officers. Section 16(a) Beneficial Ownership Reporting Compliance Based solely on a review of copies of reports filed by reporting persons of the Company pursuant to Section 16 (a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Company believes that during fiscal year 2003 all filings required to be made by reporting persons of the Company were timely made in accordance with the requirements of the Exchange Act, with the exception of one late Form 4 filed by Mr. Alfiero on March 14, 2003 with respect to shares of the Company's $1.8125 Cumulative Preferred Stock purchased on December 15, 2002. Audit and Examining Committee The Audit and Examining Committee of the Company's Board of Directors is comprised of Messrs.: Alfiero (Chairman), Cleave, Jalkut and Kimmelman. Messrs. Alfiero and Cleave have been determined by the Company's Board of Directors to be audit committee financial experts, each having the attributes prescribed by the SEC, and are independent as that term is used in Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act. Code of Ethics The Company has adopted a code of ethics applicable to its chief executive and chief financial officer, as well as its controller (principal accounting officer) and is included herein as Exhibit 14. 112 Item 11. Executive Compensation The following table sets forth information as to the compensation earned through December 31, 2003 by both the current and former President and Chief Executive Officer of the Company and the Bank, the four most highly compensated Executive Officers of the Company and the Bank, who were serving as such on December 31, 2003, and by a former Executive Officer, who would have been among the four most highly compensated Executive Officers had he not been appointed to another position within the HSBC Group prior to December 31, 2003. Unless otherwise noted, all compensation amounts in the following table have been paid, or will be paid, by the Company or the Bank. Principal position indicates capacity served in 2003. Summary Compensation Table Annual Compensation Long Term Compensation Name and Principal Position Year Salary Bonus Other Restricted LTIP All Stock Payouts Other Awards Compensation ---------------- Martin J. G. Glynn (1) 2003 $ 103,846 $ 1,000,000 $ 1,227 $ 526,693 $ - $ - President and Chief Executive Officer Youssef A. Nasr (2) 2003 830,769 2,250,000 247,071 1,044,459 - 8,000 Former President and 2002 800,000 2,250,000 271,134 700,425 - 7,346 Chief Executive Officer 2001 784,614 1,500,000 324,920 578,000 - 6,800 Joseph M. Petri 2003 325,000 3,750,000 246,553 3,750,000 - 7,000 Senior Executive Vice 2002 325,000 1,800,000 1,080 2,700,000 - 5,250 President and Treasurer 2001 284,615 2,185,000 540 2,015,000 - 5,547 Gerard Aquilina (3) 2003 465,000 750,000 2,776 700,000 - - Senior Executive Vice 2002 304,038 513,000 1,924 412,000 - - President, Private Banking and Wealth Management Paul L. Lee 2003 400,000 500,000 3,870 150,000 93,069 - Senior Executive Vice 2002 400,000 700,000 3,870 150,000 179,714 - President and General Counsel 2001 400,000 700,000 1,806 150,000 283,151 - Brian Robertson (4) 2003 492,486 200,000 517,303 398,153 - 85,113 Senior Executive Vice President and CEO, Corporate, Investment Banking and Markets Robert H. Muth (5) 2003 555,144 1,000,000 74,788 286,000 - 18,365 Former Senior Executive 2002 575,000 830,000 97,250 220,000 - 18,346 Vice President, 2001 567,308 700,000 2,070 200,000 - 16,800 Administration (1) Mr. Glynn's salary represents the amount earned since his appointment as President and Chief Executive Officer of the Company and Bank effective October 22, 2003. Mr. Glynn's bonus is based on performance in his prior position as President and Chief Executive Officer of HSBC Bank Canada. The bonus will be paid by HSBC Bank Canada. (2) Mr. Nasr's salary for 2003 represents the amount earned as President and Chief Executive Officer of the Company and Bank from January 1, 2003 to October 22, 2003, the date he was appointed President of HSBC Bank Brazil. Mr. Nasr's restricted stock award will be paid by HSBC Bank Brazil. (3) Mr. Aquilina joined the Company during 2002. (4) Mr. Robertson, an HSBC International Manager, was compensated prior to 2003 by an HSBC entity other than the Company. (5) Mr. Muth, a former Executive Officer of the Company and the Bank, was appointed Head of Global Resourcing, HSBC effective December 1, 2003. Other Annual Compensation for Mr. Nasr includes reimbursement of rental expenses and related tax gross-ups amounting to $237,026 in 2003, $260,535 in 2002 and $322,108 in 2001. Mr. Petri's Other Annual Compensation in 2003 includes $243,637 of imputed interest income on the investment of deferred bonus amounts from previous years. For 2002 and 2001, Mr. Petri's Other Annual Compensation represents imputed insurance benefits. Other Annual Compensation for Mr. Robertson includes reimbursements and tax gross-ups on rental expenses amounting to $145,878 and reimbursements and tax gross-ups on a housing allowance amounting to $228,019. Mr. Muth's Other Annual Compensation in 2003 includes an automobile allowance of $24,394 and imputed income and tax gross-ups amounting to $31,247 related to an executive relocation package. Other Annual Compensation for Mr. Muth in 2002 included 113 an automobile allowance of $26,287 and executive relocation package imputed income of $43,296. In 2001, Mr. Muth's Other Annual Compensation included imputed insurance benefits. Other Annual Compensation for Mr. Glynn, Mr. Aquilina and Mr. Lee represents imputed insurance benefits for each of the years presented. The Restricted Stock Awards represent the monetary value at grant date of awards made under the HSBC Restricted Share Plan for performance in the year indicated. The number of shares of HSBC Holdings plc common stock corresponding to the 2003 awards will not be known until HSBC actually purchases the shares, which is expected to occur in the first quarter of 2004. Dividends are paid on all restricted shares and are reinvested in additional restricted shares. The aggregate number and value at December 31, 2003 of restricted share holdings for each of the named executives was: Mr. Glynn: 88,014 ($1,387,452); Mr. Nasr: 213,995 ($3,373,417); Mr. Petri: 378,512 ($5,966,858); Mr. Aquilina: 128,973 ($2,033,129); Mr. Lee: 41,247 ($650,215); Mr. Robertson: 68,270 ($1,076,209); and Mr. Muth: 85,655 ($1,350,269). Of Mr. Petri's restricted share holdings at December 31, 2003, 93,012 shares represent the accumulated balance of shares originally granted in March 2002 which will vest in 2004. Mr. Petri's restricted share holdings also include 261,956 shares accumulated from a March 2003 grant which will vest 33% in 2004, 33% in 2005 and 34% in 2006. The restricted share holdings of Mr. Nasr at December 31, 2003 include 56,383 shares accumulated for performance while employed by HSBC entities other than the Company. All of Mr. Glynn's and Mr. Robertson's restricted share holdings at December 31, 2003 are for performance with HSBC entities other than the Company. No stock options on HSBC Holdings plc common stock were granted under the HSBC Holdings Group Share Option Plan to any of the named executives for the performance years indicated. The Long-Term Incentive Plan payouts to Mr. Lee represent payments made under Republic's Long-Term Incentive Plan. All Other Compensation in 2003 for Mr. Nasr and Mr. Petri represents the Company's matching 401(k) plan contribution. Mr. Robertson's All Other Compensation represents pension contributions made by HSBC on his behalf. Mr. Muth's All Other Compensation in 2003 represents the Company's matching 401(k) plan contribution and a four percent credit on salary deferred under the Company's deferred salary plan. Since deferred salary is not eligible for the Company matching contributions under the 401(k) plan, salary deferrals are increased by four percent, the maximum matching contribution available under the 401(k) plan. Aggregated Stock Options Exercised in 2003 and Option Values as of Year End 2003 Number of Securities Value of Unexercised Underlying Unexercised In-the-Money Options Options as of December 31, 2003 (2) as of December 31, 2003 Name Shares Value Exercisable Unexercisable Exercisable Unexercisable Acquired Realized (1) on ($) Exercise (#) ----- Martin J. G. 82,500 $ 538,443 - - $ - $ - Glynn Youssef A. Nasr 25,500 182,009 82,500 - 453,132 - Joseph M. Petri - - - - - - Gerard Aquilina - - - - - - Paul L. Lee - - - - - - Brian Robertson - - 37,500 - 208,118 - Robert H. Muth - - 39,000 - 218,198 - (1) Although the performance conditions have been met on the above unexercised options, HSBC Staff Dealing Rules prohibit the exercise of these options until the 2003 financial results of HSBC Holdings plc have been publicly announced. (2) The value of unexercised in-the-money options is based on the December 31, 2003 closing price per share of 8.78 GBP for HSBC Holdings plc common stock and a U.S. dollar exchange rate of 1.7854 per GBP. 114 The unexercised stock options included above on HSBC Holdings plc common stock were granted under the HSBC Holdings Executive Share Option Scheme for performance years 1997 and prior. The option awards for Messrs. Nasr and Robertson are for performance while employed by other HSBC entities. The following table shows the estimated annual retirement benefit payable upon normal retirement on a straight life annuity basis to participating employees, including officers, in the compensation and years of service classifications indicated under the HSBC Bank USA Pension Plan (the Pension Plan) and non-qualified supplemental benefit plans, which cover most officers and employees on a noncontributory basis. The amounts shown are before application of social security reductions. Years of service credited for benefit purposes is limited to 30 years in the aggregate. Representative Years of Credited Service Five Year 15 20 25 30 35 Average Compensation $ 300,000 $ 87,750 $ 117,750 $ 147,750 $ 177,750 $ 178,500 400,000 117,000 157,000 197,000 237,000 238,000 500,000 146,250 196,250 246,250 296,250 297,500 600,000 175,500 235,500 295,500 355,500 357,000 700,000 204,750 274,750 344,750 414,750 416,500 800,000 234,000 314,000 394,000 474,000 476,000 900,000 263,250 353,250 443,250 533,250 535,500 1,000,000 292,500 392,500 492,500 592,500 595,000 The Pension Plan is a noncontributory defined benefit pension plan under which the Bank and other participating subsidiaries of the Company make contributions in actuarially determined amounts. Compensation covered by the Pension Plan includes regular basic earnings (including salary reduction contributions to the 401(k) plan), but not incentive awards, bonuses, special payments or deferred salary. The Company maintains supplemental benefit plans which provide for the difference between the benefits actually payable under the Pension Plan and those that would have been payable if certain other awards, special payments and deferred salaries were taken into account and if compensation in excess of the limitations set by the Internal Revenue Code could be counted. Payments under these plans are unfunded and will be made out of the general funds of the Bank or other participating subsidiaries. The calculation of retirement benefits is based on the highest five-consecutive year compensation. Members of the Senior Management Committee of the Bank, who participate in the Pension Plan, receive two times their normal credited service for each year and fraction thereof served as a committee member in determining pension and severance benefits to a maximum of 30 years of credited service in total. This additional service accrual is unfunded and payments will be made from the general funds of the Bank or other subsidiaries. As of December 31, 2003, the individuals listed in the Summary Compensation Table, have total years of credited service in determining benefits payable under the plans as follows: Mr. Nasr, 19.25; Mr. Lee, 13.75; and Mr. Muth, 21.33. Mr. Glynn's pension benefits will be provided through the HSBC Bank Canada plan. Mr. Petri and Mr. Aquilina participate in the HSBC Bank USA Retirement Plan, a defined contribution retirement plan covering employees hired after 1996. Since Mr. Robertson is an HSBC International Manager, he does not participate in the Company's retirement plans. In addition to the pension benefits payable under the Company plan, Messrs. Nasr and Muth are also entitled to receive pension benefits under the plan of HSBC Bank Canada. Under terms of employment with the Company, they may receive additional pension benefits which take into account their combined total years of service with HSBC. Payments under these arrangements are unfunded and any additional amounts due would be paid out of the general funds of the Bank. 115 Directors' Compensation For their services as directors of both the Company and the Bank, all nonemployee directors receive an annual retainer of $35,000, plus a fee of $1,000 for each Board meeting attended. Directors who are employees of HSBC or other Group affiliates do not receive annual retainers or fees. In addition, nonemployee directors who are members of any committee of the Board of Directors other than the Audit and Examining Committee also receive a fee of $1,000 for attendance at committee meetings except, when a meeting is held on the same day as a Board meeting or if participation is by conference telephone, the fee is $500. Additionally, committee chairmen receive annual fees of $2,500 for acting in that capacity. Members of the Audit and Examining Committee receive an annual fee which is $9,000 for the chairman and $6,000 for the other members and $500 per meeting for special meetings. Directors are reimbursed for their expenses incurred in attending meetings. The Company and the Bank have standard arrangements pursuant to which directors may defer all or part of their fees. The Directors' Retirement Plan covers nonemployee directors elected prior to 1998 and excludes those serving as directors at the request of HSBC. Eligible directors with at least five years of service will receive quarterly retirement benefit payments commencing at the later of age 65 or retirement from the Board, and continuing for ten years. The annual amount of the retirement benefit is a percent of the annual retainer in effect at the time of the last Board meeting the director attended. The percentage is 50 percent after five years of service and increases by five percent for each additional year of service to 100 percent upon completion of 15 years of service. If a director who has at least five years of service dies before the retirement benefit has commenced, the director's beneficiary will receive a death benefit calculated as if the director had retired on the date of death. If a retired director dies before receiving retirement benefit payments for the ten year period, the balance of the payments will be continued to the director's beneficiary. The plan is unfunded and payment will be made out of the general funds of the Company or the Bank. Employment Contracts Mr. Joseph M. Petri has an agreement with the Company whereby he will give six months notice before leaving and sign a non-compete agreement in order to receive all restricted stock granted to him at that time. There are no other employment contracts between the Company and any of its other named executive officers. Compensation Committee Interlocks and Insider Participation The current members of the Human Resources Committee of the Company's Board of Directors are: nonemployee director Ms. Frances D. Fergusson, Chair; Mr. Martin J. G. Glynn, President and Chief Executive Officer of the Company; Mr. Stephen K. Green, Group Chief Executive, HSBC; nonemployee director Mr. James L. Morice and nonemployee director Ms. Carole S. Taylor. Other Committee members during 2003 were former Board members: Mr. John R. H. Bond, Group Chairman, HSBC; Mr. Keith R. Whitson, former Group Chief Executive, HSBC and Mr. Youssef A. Nasr, former Company President and Chief Executive Officer. There are no interlocking relationships. 116 Item 12. Security Ownership of Certain Beneficial Owners and Management Security Ownership of Certain Beneficial Owners The Company's common stock is 100% owned by HSBC North America Inc. HSBC North America Inc. is an indirect wholly owned subsidiary of HSBC. Security Ownership of Management The following table shows the beneficial ownership of HSBC $0.50 ordinary shares as of December 31, 2003 by each of the Company's directors, the executive officers named in the Summary Compensation Table on page 113 and by all of the Company's directors and executive officers as a group. Each of the individuals listed below and all directors and executive officers as a group own less than 1% of the outstanding shares of stock. Directors Shares Shares That Total Beneficially May Beneficially Owned(1) Be Acquired Owned Shares Within 60 Days By Exercise of Options (2) ------------------ William F. Aldinger III (3)(8) 14,783,685 (9) 10,025,900 (10) 24,809,585 Salvatore H. Alfiero 174,000 - 174,000 Donald K. Boswell - - - James H. Cleave 215,057 - 215,057 Frances D. Fergusson - - - Douglas J. Flint (3) 384,096 27,000 411,096 Martin J. G. Glynn (5) 97,005 - 97,005 Stephen K. Green (3) 578,855 - 578,855 Richard A. Jalkut - - - Peter Kimmelman 3,169 - 3,169 Charles G. Meyer, Jr 100 - 100 James L. Morice 440 - 440 Carole S. Taylor (4) 10,000 - 10,000 Named executive officers ------------- Youssef A. Nasr (6) 259,495 82,500 341,995 Joseph M. Petri 378,512 - 378,512 Gerard Aquilina 128,973 - 128,973 Paul L. Lee 41,247 - 41,247 Brian Robertson 144,046 37,500 181,546 Robert H. Muth (7) 97,186 39,000 136,186 All directors and executive officers as a group 17,583,997 10,370,228 27,954,225 (1) Beneficially owned shares include restricted stock awards which do not carry voting rights. (2) HSBC Staff Dealing Rules prohibit the exercise of these options until the 2003 financial results of HSBC have been publicly announced. (3) Executive directors of HSBC. (4) Non-executive director of HSBC. (5) As the current President and Chief Executive Officer of the Company, Mr. Glynn is also one of the named executive officers. (6) Former President and Chief Executive Officer of the Company. (7) Former Executive Officer of the Company. (8) The majority of Mr. Aldinger's beneficially owned shares and options resulted from the conversion of beneficially owned Household International Inc. common stock and options into HSBC ordinary shares and options following HSBC's March 2003 acquisition of Household. The conversion was in the same ratio as the offer for Household, 2.675 HSBC Holdings ordinary shares for each Household common share. Exercise prices per share were adjusted accordingly. (9) Includes 12,444,049 shares beneficially owned through the HSBC (Household) Employee Benefit Trust 2003. Also includes: 1,363,849 shares held either personally, through partnerships and trusts, or as a result of exercising restricted stock rights for former Household shares; 960,662 shares resulting from a 2003 HSBC Restricted Stock Plan award; and 15,125 shares held in a charitable foundation that Mr. Aldinger disclaims beneficial ownership of. (10) Represents exercisable options for HSBC ordinary shares. Total options held at December 31, 2003 amounted to 11,630,900. 117 At December 31, 2003 Salvatore H. Alfiero beneficially owned 145,600 shares, or 4.85% of the outstanding shares, of the Company's $1.8125 Cumulative Preferred Stock. No other director or executive officer of the Company owned any of the Company's outstanding preferred stock at December 31, 2003. Item 13. Certain Relationships and Related Transactions Directors and officers of the Company, members of their immediate families and HSBC and its affiliates were customers of, and had transactions with, the Company, the Bank and other subsidiaries of the Company in the ordinary course of business during 2003. Similar transactions in the ordinary course of business may be expected to take place in the future. Of particular note are certain business transactions between the Company and Household, of which Mr. Aldinger is Chairman and Chief Executive Officer. On December 31, 2003, the Company purchased approximately $2.8 billion of residential mortgage loan assets from Household. The Company anticipates that an additional $1.0 billion of similar receivables will be purchased from Household during the first quarter of 2004. In addition, during the remainder of 2004, the Company anticipates approximately $3.0 billion of additional residential mortgage loans underwritten by Household will be recorded by the Company. Subject to regulatory and other approvals, the Company anticipates the purchase of approximately $14 billion of credit card receivables from Household during 2004. As part of the same purchase transaction, residual interests in approximately $14 billion of securitized credit card receivable pools would also be transferred from Household. Subsequent to the initial transfer, additional credit card receivables will be purchased from Household on a daily basis. During the fourth quarter of 2003, agreement was reached with Household whereby risk associated with credit life and disability reinsurance policies is now transferred to a Household insurance subsidiary. All loans to executive officers and directors and members of their immediate families and to HSBC and its affiliates were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and did not involve more than normal risk of collectibility or present other unfavorable features. 118 Item 14. Principal Accounting Fees and Services Fees billed to the Company by its auditing firm, KPMG LLP, were as follows. Year Ended December 31, 2003 2002 ------------- in thousands Audit fees Audit of the Company's consolidated financial statements included in the Company's filing on Form 10-K and review of the quarterly financial statements included in the Company's filings on Form 10-Q $ 2,400 $ 2,400 Audit related fees Audit of the consolidated balance sheet of HSBC Bank USA; attestation to management's assessment of the effectiveness of the Bank's internal control over financial reporting (FDICIA reporting); audits of the financial statements of: other subsidiaries; trust and employee benefit plans; and compliance procedures required by various contractual arrangements or regulations 1,601 1,644 Tax fees Compliance - preparation of tax returns for trusts administered by the Bank's trust department 1,197 1,522 Other - 54 Advice 168 300 Total tax fees 1,365 1,876 All other fees Assistance in acquisition due diligence reviews - 250 Accounting research assistance 190 136 Litigation support, principally forensic accounting in the Princeton Note 282 1,187 Matter Other 58 89 Total all other fees 530 1,662 Total KPMG LLP fees $ 5,896 $ 7,582 Audit and Examining Committee Pre-approval Policies and Procedures It has been and is the practice of the Audit and Examining Committee of the Company's Board of Directors to approve the annual audit fees, including those covering audit services beyond the Company's financial statements, before any audit procedures are undertaken. Prior to 2003, management had the implicit pre-approval of the Audit and Examining Committee to engage KPMG LLP, or any other professional service firm, to perform tax and other services. Any such services provided by KPMG LLP were reported to the Audit and Examining Committee after the fact. Beginning in 2003, the Audit and Examining Committee assumed responsibility for pre-approving all auditing services and permitted non-auditing services, including the related fees and terms thereof. 119 PART IV Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) (1) Financial Statements HSBC USA Inc.: Consolidated Balance Sheet Consolidated Statement of Income Consolidated Statement of Changes in Shareholders' Equity Consolidated Statement of Cash Flows HSBC Bank USA: Consolidated Balance Sheet Summary of Significant Accounting Policies Notes to Financial Statements (2) Financial Statement Schedules All required schedules are omitted since they are either not applicable or the information is presented elsewhere in this document. (3) Exhibits 3 (i) Registrant's Restated Certificate of Incorporation and Amendments thereto, Exhibit 3(a) to the Company's 1999 Annual Report on Form 10-K incorporated herein by reference. (ii) Registrant's By-Laws, as Amended to Date, Exhibit 3 to the Company's Form 10-Q for the quarter ended June 30, 2002 incorporated herein by reference. 4 Instruments Defining the Rights of Security Holders, Including Indentures, incorporated by reference to previously filed periodic reports. 12.01 Computation of Ratio of Earnings to Fixed Charges (filed herewith) 12.02 Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Dividends (filed herewith) 14 Code of Ethics for Senior Financial Officers 21 Subsidiaries of the Registrant The Company's only significant subsidiary, as defined, is HSBC Bank USA, a state bank organized under the laws of New York State. 23 Consent of Independent Accountants 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 (b) Reports on Form 8-K A current report on Form 8-K was filed with the Securities and Exchange Commission October 22, 2003 announcing that Martin J. G. Glynn was appointed Group General Manager, President and Chief Executive Officer of HSBC USA Inc. and HSBC Bank USA. Also announced was the appointment of Joseph R. Simpson as Senior Vice President and Controller of HSBC USA Inc. A current report on Form 8-K was filed with the Securities and Exchange Commission on December 31, 2003 announcing that HSBC USA Inc. had sold its domestic factoring business to CIT Group Inc. 120 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 ------------------- /s/ Philip S. Toohey ------------------- Philip S. Toohey Senior Executive Vice President and Secretary Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on March 1, 2004 by the following persons on behalf of the registrant and in the capacities indicated: /s/ Roger K. McGregor William F. Aldinger III ------------------- Chairman of the Board Roger K. McGregor Sal H. Alfiero* Director Executive Vice President and Donald K. Boswell* Director Chief Financial Officer James H. Cleave* Director (Principal Financial Officer) Frances D. Fergusson* Director Douglas J. Flint* Director Martin J. G. Glynn* Director, President /s/ Joseph R. Simpson and Chief Executive Officer ------------------- Stephen K. Green* Joseph R. Simpson Vice Chairman of the Board Senior Vice President Richard A. Jalkut* Director and Controller Peter Kimmelman* Director (Principal Accounting Officer) Charles G. Meyer, Jr.* Director James L. Morice* Director Carole S. Taylor* Director * /s/ Philip S. Toohey ------------------- Philip S. Toohey Attorney-in-fact 121 Exhibit 12.01 HSBC USA Inc. Computation of Ratio of Earnings to Fixed Charges (in millions, except ratios) Year Ended December 31, 2003 2002 2001 2000 1999 ------------- Excluding interest on deposits Income before cumulative effect of accounting change $ 941 $ 855 $ 354 $ 569 $ 464 Applicable income tax expense 570 510 226 339 308 Less undistributed equity earnings 6 7 9 8 4 Fixed charges: Interest on: Borrowed funds 91 232 337 445 130 Long-term debt 205 225 281 420 112 One third of rents, net of income from subleases 18 17 18 22 15 Total fixed charges 314 474 636 887 257 Earnings before taxes and cumulative effect of accounting change based on income and fixed charges $ 1,819 $ 1,832 $ 1,207 $ 1,787 $ 1,025 Ratio of earnings to fixed charges 5.79 3.86 1.90 2.01 3.99 Including interest on deposits Total fixed charges (as above) $ 314 $ 474 $ 636 $ 887 $ 257 Add: Interest on deposits 666 974 1,904 2,334 853 Total fixed charges and interest on deposits $ 980 $ 1,448 $ 2,540 $ 3,221 $ 1,110 Earnings before taxes and cumulative effect of accounting change based on income and fixed charges (as above) $ 1,819 $ 1,832 $ 1,207 $ 1,787 $ 1,025 Add: Interest on deposits 666 974 1,904 2,334 853 Total $ 2,485 $ 2,806 $ 3,111 $ 4,121 $ 1,878 Ratio of earnings to fixed charges 2.54 1.94 1.22 1.28 1.69 122 Exhibit 12.02 HSBC USA Inc. Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Dividends (in millions, except ratios) Year Ended December 31, 2003 2002 2001 2000 1999 ------------- Excluding interest on deposits Income before cumulative effect of accounting change $ 941 $ 855 $ 354 $ 569 $ 464 Applicable income tax expense 570 510 226 339 308 Less undistributed equity earnings 6 7 9 8 4 Fixed charges: Interest on: Borrowed funds 91 232 337 445 130 Long-term debt 205 225 281 420 112 One third of rents, net of income from subleases 18 17 18 22 15 Total fixed charges 314 474 636 887 257 Earnings before taxes and cumulative effect of accounting change based on income and fixed charges $ 1,819 $ 1,832 $ 1,207 $ 1,787 $ 1,025 Total fixed charges (as above) $ 314 $ 474 $ 636 $ 887 $ 257 Preferred dividends 22 23 25 28 - Ratio of pretax income to income before cumulative effect of accounting change 1.61 1.60 1.64 1.60 1.66 Total preferred stock dividend factor 36 37 41 44 - Fixed charges, including preferred stock dividend factor $ 350 $ 511 $ 677 $ 931 $ 257 Ratio of earnings to combined fixed charges and preferred dividends 5.20 3.59 1.78 1.92 3.99 Including interest on deposits Fixed charges, including preferred stock dividend factor (as above) $ 350 $ 511 $ 677 $ 931 $ 257 Add: Interest on deposits 666 974 1,904 2,334 853 Total fixed charges, including preferred stock dividend factor and interest on deposits $ 1,016 $ 1,485 $ 2,581 $ 3,265 $ 1,110 Earnings before taxes and cumulative effect of accounting change based on income and fixed charges (as above) $ 1,819 $ 1,832 $ 1,207 $ 1,787 $ 1,025 Add: Interest on deposits 666 974 1,904 2,334 853 Total $ 2,485 $ 2,806 $ 3,111 $ 4,121 $ 1,878 Ratio of earnings to combined fixed charges and preferred dividends 2.45 1.89 1.21 1.26 1.69 123 Exhibit 14 Code of Ethics for Senior Financial Officers (As required by Section 406 of the Sarbanes-Oxley Act) As (Chief Executive Officer) (Chief Financial Officer) (Controller) of HSBC USA Inc. (the "Company"), I certify that I will adhere to the following principles and responsibilities, as well as the Company's Statement of Policy and Code of Ethics: - Act with honesty and integrity, and comply with the Company's policies and procedures relating to any actual or apparent conflict of interest involving personal and professional relationships; - Provide other officials and constituents of the Company information that is full, fair, accurate, complete, objective, timely and understandable; - Comply with rules and regulations of all U.S. and non-U.S. governmental entities, as well as other private and public regulatory agencies to which the Company is subject; - Act at all times in good faith, responsibly, with due care, competence and diligence, and without any misrepresentation of material facts; - Act objectively, without allowing my independent judgement to be subordinated; - Respect the confidentiality of Company information, except when authorized or otherwise required to make any disclosure, and avoid the use of any Company information for personal advantage; - Share my knowledge and skills with others to improve the Company's communications to its constituents; - Promote ethical behavior among employees under my supervision at the Company; - Promote responsible use of and control over all assets and resources of the Company entrusted to me; and - Promptly report any violations of the Code of Ethics to the Company's General Counsel or Secretary. Failure to comply with the Code of Ethics may lead to termination of employment. Date:__________________ ______________________________________ Signature 124 Exhibit 23 Consent of Independent Accountants The Board of Directors HSBC USA Inc.: We consent to incorporation by reference in Registration Statements (No. 333-42421, 333-42421-01, 333-42421-02) on Form S-3 of HSBC USA Inc. of our report dated February 2, 2004, relating to the consolidated balance sheets of HSBC USA Inc. and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2003, and the consolidated balance sheets of HSBC Bank USA and subsidiaries as of December 31, 2003 and 2002, which report appears in the 2003 HSBC USA Inc. Annual Report on Form 10-K. Our report included an explanatory paragraph describing the adoption prospectively of the provisions of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, in 2002. /s/ KPMG LLP March 1, 2004 New York, New York 125 Exhibit 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Martin J. G. Glynn, certify that: 1. I have reviewed this annual report on Form 10-K of HSBC USA Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and 126 b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: March 1, 2004 /s/ Martin J. G. Glynn ------------------- Martin J. G. Glynn President and Chief Executive Officer 127 Exhibit 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Roger K. McGregor, certify that: 1. I have reviewed this annual report on Form 10-K of HSBC USA Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and 128 b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: March 1, 2004 /s/ Roger K. McGregor ------------------- Roger K. McGregor Executive Vice President and Chief Financial Officer 129 Exhibit 32 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), each of the undersigned officers of HSBC USA Inc., a Maryland corporation (the Company), does hereby certify, to such officer's knowledge, that: The Annual Report on Form 10-K for the fiscal year ended December 31, 2003 (the Form 10-K) of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and the information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: March 1, 2004 /s/ Martin J. G. Glynn ------------------- Martin J. G. Glynn President and Chief Executive Officer Dated: March 1, 2004 /s/ Roger K. McGregor ------------------- Roger K. McGregor Executive Vice President and Chief Financial Officer 130 This information is provided by RNS The company news service from the London Stock Exchange

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