HSBC USA Q4 2005 10-K - Pt 4
HSBC Holdings PLC
06 March 2006
PART 4
128
A reconciliation of beginning and ending balances of the projected benefit
obligation of the defined benefit pension plans is shown below. The projected
benefit obligation shown for the year ended December 31, 2005 reflects the
projected benefit obligation of the merged HNAH plan.
--------------------------------------------------------------------------------------------------------------------
Year Ended December 31 2005 2004
--------------------------------------------------------------------------------------------------------------------
(Post-merger) (Pre-merger)
(in millions)
Projected benefit obligation at beginning of year ............. $ 1,173 $ 1,102
Transfer in from the HSBC Finance Corporation Plan ............ 1,020 --
Service cost .................................................. 94 31
Interest cost ................................................. 130 69
Actuarial gains ............................................... 203 9
Benefits paid ................................................. (90) (38)
--------- ---------
Projected benefit obligation at end of year ................... $ 2,530 $ 1,173
========= =========
HUSI's share of the projected benefit obligation at December 31, 2005 is
approximately $1 billion. The accumulated benefit obligation for the post-merger
HNAH defined benefit pension plans was approximately $2 billion at December 31,
2005. HUSI's share of the accumulated benefit obligation at December 31, 2005
was approximately $1 billion. The accumulated benefit obligation for the
pre-merger defined benefit pension plans was approximately $1 billion at
December 31, 2004.
Estimated future benefit payments for the HNAH defined benefit plan and HUSI's
share of those payments are as follows:
--------------------------------------------------------------------------------------------------------------------
HUSI's
HNAH Share
--------------------------------------------------------------------------------------------------------------------
(in millions)
2006 ...................................................................... $ 102 $ 42
2007 ...................................................................... 112 46
2008 ...................................................................... 121 50
2009 ...................................................................... 129 54
2010 ...................................................................... 136 58
2011-2015 ................................................................. 848 366
The assumptions used in determining the projected benefit obligation of the
defined benefit plans at December 31 are as follows:
--------------------------------------------------------------------------------------------------------------------
2005 2004 2003
--------------------------------------------------------------------------------------------------------------------
(Post-merger) (Pre-merger) (Pre-merger)
Discount rate ......................................... 5.70% 6.00% 6.25%
Salary increase assumption ............................ 3.75 3.75 3.75
Postretirement Plans Other Than Pensions
HUSI's employees also participate in several plans which provide medical, dental
and life insurance benefits to retirees and eligible dependents. These plans
cover substantially all employees who meet certain age and vested service
requirements. HUSI has instituted dollar limits on payments under the plans to
control the cost of future medical benefits.
129
The net postretirement benefit cost included the following:
-----------------------------------------------------------------------------------------------------------------
Year Ended December 31 2005 2004 2003
-----------------------------------------------------------------------------------------------------------------
(in millions)
Service cost - benefits earned during the period ............... $ 2 $ 2 $ 3
Interest cost .................................................. 7 7 7
Amortization of transition obligation .......................... 3 3 3
------- -------- --------
Net periodic postretirement benefit cost ....................... $ 12 $ 12 $ 13
======= ======== ========
The assumptions used in determining the net periodic postretirement benefit cost
for HUSI's postretirement benefit plans at December 31 are as follows:
-----------------------------------------------------------------------------------------------------------------
2005 2004 2003
-----------------------------------------------------------------------------------------------------------------
Discount rate .................................................... 6.00% 5.75% 6.25%
Salary increase assumption ....................................... 3.75 3.75 3.75
A reconciliation of the beginning and ending balances of the accumulated
postretirement benefit obligation is as follows:
-----------------------------------------------------------------------------------------------------------------
Year Ended December 31 2005 2004
-----------------------------------------------------------------------------------------------------------------
(in millions)
Accumulated benefit obligation at beginning of year ........................ $ 122 $ 124
Service cost ............................................................... 2 2
Interest cost .............................................................. 7 6
Foreign currency exchange rate changes ..................................... 1 1
Actuarial losses ........................................................... (4) --
Benefits paid .............................................................. (9) (11)
-------- --------
Accumulated benefit obligation at end of year .............................. $ 119 $ 122
======== ========
HUSI's postretirement benefit plans are funded on a pay-as-you-go basis. HUSI
currently estimates that it will pay benefits of approximately $9 million
relating to the postretirement benefit plans in 2006. The components of the
accrued postretirement benefit obligation are as follows:
-----------------------------------------------------------------------------------------------------------------
December 31 2005 2004
-----------------------------------------------------------------------------------------------------------------
(in millions)
Funded status .............................................................. $ (119) $ (122)
Unrecognized net actuarial (loss) gain ..................................... 8 12
Unamortized transition obligation .......................................... 21 24
---------- ----------
Accrued postretirement benefit obligation .................................. $ (90) $ (86)
========== ==========
Estimated future benefit payments for HUSI's plans are as follows:
----------------------------------------------------------------------------------------------------------------
(in millions)
2006 ........................................................................................... $ 9
2007 ........................................................................................... 9
2008 ........................................................................................... 9
2009 ........................................................................................... 9
2010 ........................................................................................... 9
2011-2015 ...................................................................................... 49
130
The assumptions used in determining the benefit obligation of HUSI's
postretirement benefit plans at December 31 are as follows:
----------------------------------------------------------------------------------------------------------------
2005 2004 2003
----------------------------------------------------------------------------------------------------------------
Discount rate ............................................... 5.70% 6.00% 5.75%
Salary increase assumption .................................. 3.75 3.75 3.75
A 10.5 percent annual rate of increase in the gross cost of covered health care
benefits was assumed for 2006. This rate of increase is assumed to decline
gradually to 5 percent in 2014.
Assumed health care cost trend rates have an effect on the amounts reported for
health care plans. A one-percentage point change in assumed health care cost
trend rates would increase (decrease) service and interest costs and the
postretirement benefit obligation as follows:
---------------------------------------------------------------------------------------------------------------
One Percent One Percent
Increase Decrease
---------------------------------------------------------------------------------------------------------------
(in millions)
Effect on total of service and interest cost components ........... $ -- $ --
Effect on postretirement benefit obligation ....................... 1 (2)
Other Plans
HUSI maintains a 401(k) plan covering substantially all employees. Employer
contributions to the plan are based on employee contributions. Total expense
recognized for this plan was approximately $33 million, $18 million and $18
million in 2005, 2004 and 2003 respectively.
Certain employees are participants in various defined contribution and other
non-qualified supplemental retirement plans. Total expense recognized for these
plans was immaterial in 2005, 2004 and 2003.
131
Note 23. Business Segments
--------------------------------------------------------------------------------
HUSI reports and manages its business segments consistently with the line of
business groupings used by HSBC. HUSI has five distinct segments that it
utilizes for management reporting and analysis purposes. Descriptions of HUSI's
business segments are presented in Item 1 on pages 4-5 of this Form 10-K.
Results for each segment are summarized in the following tables. Prior period
disclosures previously reported for 2004 and 2003 have been conformed herein to
the presentation of current segments, including methodology changes related to
the transfer pricing of assets and liabilities.
------------------------------------------------------------------------------------------------------------------------
PFS CF CMB CIBM PB Other Total
------------------------------------------------------------------------------------------------------------------------
(in millions)
2005
Net interest income (1) $ 1,203 $ 583 $ 661 $ 456 $ 172 $ (12) $ 3,063
Other revenues 442 356 183 641 257 32 1,911
--------- --------- --------- --------- --------- --------- ---------
Total revenues 1,645 939 844 1,097 429 20 4,974
Operating expenses (2) 1,033 424 379 650 272 -- 2,758
--------- --------- --------- --------- --------- --------- ---------
Working contribution 612 515 465 447 157 20 2,216
Provision for credit
losses (3) 103 599 22 (47) (3) -- 674
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before
income tax expense $ 509 $ (84) $ 443 $ 494 $ 160 $ 20 $ 1,542
========= ========= ========= ========= ========= ========= =========
Average assets $ 49,084 $ 19,316 $ 15,817 $ 57,597 $ 5,041 $ 321 $ 147,176
Average liabilities/
equity (4) 43,304 684 17,856 75,579 9,751 2 147,176
Goodwill at December 31,
2005 (5) 1,167 -- 468 631 428 -- 2,694
2004
Net interest income (1) $ 1,090 $ 182 $ 584 $ 766 $ 130 $ (11) $ 2,741
Other revenues 381 2 170 534 204 28 1,319
--------- --------- --------- --------- --------- --------- ---------
Total revenues 1,471 184 754 1,300 334 17 4,060
Operating expenses (2) 944 17 352 525 263 -- 2,101
--------- --------- --------- --------- --------- --------- ---------
Working contribution 527 167 402 775 71 17 1,959
Provision for credit
losses (3) 81 22 (26) (95) 1 -- (17)
--------- --------- --------- --------- --------- --------- ---------
Income before income
tax expense $ 446 $ 145 $ 428 $ 870 $ 70 $ 17 $ 1,976
========= ========= ========= ========= ========= ========= =========
Average assets $ 41,202 $ 4,256 $ 13,750 $ 48,689 $ 4,029 $ 300 $ 112,226
Average liabilities/
equity (4) 34,165 (2) 14,670 54,442 8,951 -- 112,226
Goodwill at December 31,
2004 (5) 1,167 -- 471 631 428 -- 2,697
132
------------------------------------------------------------------------------------------------------------------------
PFS CF CMB CIBM PB Other Total
------------------------------------------------------------------------------------------------------------------------
(in millions)
2003
Net interest income (1) .. $ 1,081 $ -- $ 592 $ 731 $ 123 $ (17) $ 2,510
Other revenues ........... 250 -- 158 526 195 25 1,154
-------- -------- -------- -------- -------- -------- --------
Total revenues ........... 1,331 -- 750 1,257 318 8 3,664
Operating expenses (2) ... 930 -- 402 442 265 1 2,040
-------- -------- -------- -------- -------- -------- --------
Working contribution ..... 401 -- 348 815 53 7 1,624
Provision for credit
losses (3) ............. 68 -- 55 (8) (2) -- 113
-------- -------- -------- -------- -------- -------- --------
Income before income
tax expense ............ $ 333 $ -- $ 293 $ 823 $ 55 $ 7 $ 1,511
======== ======== ======== ======== ======== ======== ========
Average assets ........... $ 28,601 $ -- $ 14,236 $ 45,738 $ 2,936 $ 314 $ 91,825
Average liabilities/
equity (4) ............. 31,066 -- 13,281 38,917 8,561 -- 91,825
Goodwill at
December 31, 2003 (5) .... 1,223 -- 495 631 428 -- 2,777
(1) Net interest income of each segment represents the difference between
actual interest earned on assets and interest paid on liabilities of the
segment adjusted for a funding charge or credit. Segments are charged a
cost to fund assets (e.g. customer loans) and receive a funding credit for
funds provided (e.g. customer deposits) based on equivalent market rates.
(2) Expenses for the segments include fully apportioned corporate overhead
expenses.
(3) The provision apportioned to the segments is based on the segments' net
charge offs and the change in allowance for credit losses. Credit loss
reserves are established at a level sufficient to absorb the losses
considered to be inherent in the portfolio.
(4) Common shareholder's equity and earnings on common shareholder's equity
are allocated back to the segments based on the percentage of capital
assigned to the business.
(5) The reduction in goodwill from December 31, 2004 to December 31, 2005
resulted from the sale of certain branches during 2005. The reduction in
goodwill from December 31, 2003 to December 31, 2004 resulted from the
sale or transfer of certain domestic and foreign operations during 2004.
Note 24. Collateral, Commitments and Contingent Liabilities
--------------------------------------------------------------------------------
Pledged Assets
The following table presents pledged assets included in the consolidated balance
sheet.
--------------------------------------------------------------------------------------------------------------------
December 31 2005 2004
--------------------------------------------------------------------------------------------------------------------
(in millions)
Interest bearing deposits with banks .................................... $ 1,170 $ 767
Trading assets .......................................................... 1,452 305
Securities available for sale ........................................... 6,369 6,096
Securities held to maturity ............................................. 447 655
Loans ................................................................... 8,204 5,971
---------- ----------
Total ................................................................... $ 17,642 $ 13,794
========== ==========
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 credit
card receivables pledged against secured long-term borrowings.
In accordance with the Statement of Financial Accounting Standards No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities (SFAS 140), debt securities pledged as collateral that can be
sold or repledged by the secured party continue to be reported on the
consolidated balance sheet. The fair value of securities available for sale that
can be sold or repledged at December 31, 2005 and 2004 was approximately $2,152
million and $1,320 million respectively.
133
The fair value of collateral accepted by HUSI not reported on the consolidated
balance sheet that can be sold or repledged at December 31, 2005 and 2004 was
approximately $5,800 million and $2,834 million respectively. This collateral
was obtained under security resale agreements. Of this collateral, approximately
$1,158 million at December 31, 2005 has been sold or repledged as collateral
under repurchase agreements or to cover short sales compared with $2,081 million
at December 31, 2004.
The 2004 increase in pledged assets resulted from collateral requirements
associated with increased short-term borrowings and with increased derivatives
activity.
Lease Obligations
HUSI and its subsidiaries are obligated under a number of noncancellable leases
for premises and equipment. Certain leases contain renewal options and
escalation clauses. The following table presents actual and expected minimum
lease payments under noncancellable operating leases, net of sublease rentals.
--------------------------------------------------------------------------------------------------------------------
December 31 2005 2004 2003
--------------------------------------------------------------------------------------------------------------------
(in millions)
Actual annual rental expense .................................. $ 89 $ 82 $ 63
======= ===== ======
Minimum expected future payments:
2006 .......................................................... $ 79
2007 .......................................................... 72
2008 .......................................................... 61
2009 .......................................................... 54
2010 .......................................................... 46
Thereafter .................................................... 179
-------
$ 491
=======
Litigation
HUSI is named in and is defending legal actions in various jurisdictions arising
from its normal business. None of these proceedings is regarded as material
litigation. In addition, there are certain proceedings related to the "Princeton
Note Matter" that are described below.
In relation to the Princeton Note Matter, as disclosed in HUSI's 2002 Annual
Report on Form 10-K, two of the noteholders were not included in the settlement
and their civil suits are continuing. The U.S. Government excluded one of them
from the restitution order (Yakult Honsha Co., Ltd.) because a senior officer of
the noteholder was being criminally prosecuted in Japan for his conduct relating
to its Princeton Notes. The senior officer in question was convicted during
September 2002 of various criminal charges related to the sale of the Princeton
Notes. The U.S. Government excluded the other noteholder (Maruzen Company,
Limited) because the sum it is likely to recover from the Princeton Receiver
exceeds its losses attributable to its funds transfers with Republic New York
Securities Corporation as calculated by the U.S. Government. Both of these civil
suits seek compensatory, punitive, and treble damages pursuant to RICO and
assorted fraud and breach of duty claims arising from unpaid Princeton Notes
with face amounts totaling approximately $125 million. No amount of compensatory
damages is specified in either complaint. These two complaints name HUSI, HBUS,
and Republic New York Securities Corporation as defendants. HUSI and HBUS have
moved to dismiss both complaints. The motion is fully briefed and sub judice.
Mutual production of documents took place in 2001, but additional discovery
proceedings have been suspended pending the Court's resolution of the motions to
dismiss.
134
Note 25. 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
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 $1,060 million in trading assets at December 31, 2005. 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 December 31, 2005. HUSI is not the primary beneficiary of these
VIE structures. Information for unconsolidated VIEs is presented in the
following table and commentary.
--------------------------------------------------------------------------------------------------------------------
December 31, 2005 December 31, 2004
------------------------------ ----------------------------
Maximum Maximum
Total Exposure Total Exposure
Assets to Loss Assets to Loss
--------------------------------------------------------------------------------------------------------------------
(in millions)
Asset backed commercial paper conduit ......... $ 10,183 $ 7,423 $ 5,657 $ 5,867
Securitization vehicles ....................... 1,774 565 1,062 552
Investment funds . ............................ 2,513 -- 2,832 36
Capital funding vehicles ...................... 1,093 32 1,093 32
Low income housing tax credits ................ 1,080 165 994 88
---------- --------- --------- --------
Total $ 16,643 $ 8,185 $ 11,638 $ 6,575
========== ========= ========= ========
Asset Backed Commercial Paper Conduits
HSBC affiliates support the financing needs of customers by facilitating their
access to the commercial paper markets. Specifically, pools of customers'
assets, typically trade receivables, are sold to an independently rated,
commercial paper financing entity, which in turn issues short-term, asset backed
commercial paper that is collateralized by such assets. Neither the HSBC
affiliates nor HUSI service the assets or transfer their own receivables into
the financing entities.
HUSI and other banks provide one year liquidity facilities, in the form of
either loan or asset purchase commitments, in support of each transaction in the
financing entity. HUSI does not provide any program wide enhancements to the
financing entities. In the preceding table, HUSI's maximum exposure to loss is
the total notional amount of the liquidity facilities.
In the normal course of business, HUSI provides liquidity facilities to asset
backed commercial paper conduits sponsored by unrelated third parties. HUSI does
not transfer their own receivables into the financing entity, has no ownership
interest 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 $1.4 billion at December 31, 2005. These
facilities are excluded from the table summarizing HUSI's involvement in VIEs.
135
Credit risk is managed on these commitments by subjecting them to HUSI's normal
underwriting and risk management processes.
Securitization Vehicles
An HSBC affiliate and third parties organize trusts that are special purpose
entities (SPEs) that issue fixed or floating rate debt backed by the assets of
the trusts. Neither the HSBC affiliate nor HUSI transfer their own assets into
the trusts. HUSI's relationship with the SPEs is primarily as counterparty to
the SPE's derivative transactions (interest rate, credit default and currency
swaps). HUSI's maximum exposure to loss from the unconsolidated trust entities
is comprised of investments in the trust and the market risk on the derivative
transactions.
Investment Funds
HUSI is a derivative counterparty (total return swap) with a hedge fund
established by an unrelated third party. The total return swap creates a
variable interest in the fund for HUSI. HUSI does not hold shares in or have any
other involvement with the fund. As such, HUSI is not the primary beneficiary.
HUSI is also an investor in a hedge fund established by an unrelated third
party. The shares owned by HUSI do not have voting rights but do participate in
profits and losses based on percentage of share ownership. HUSI does not hold
sufficient beneficial interests in the fund to be considered the primary
beneficiary.
HUSI is a sub-investment advisor to mutual funds structured as trusts and
managed by an HSBC affiliate. As sub-investment advisor, HUSI receives a
variable fee based on the value of funds. HUSI has no ownership interest in or
credit exposure resulting from its duties as investment advisor.
Capital Funding Vehicles
Prior to 2005, HUSI established five Capital Trust entities. These trusts issue
preferred securities and common stock. HUSI purchased all of the common equity
issued by the trusts, which equates to approximately 3% of the total assets of
the trusts. HUSI does not own any of the preferred securities issued by the
trusts. It has been determined that the majority of the benefit of profit and/or
risk of loss lies with the preferred security holders. Thus, HUSI is not the
primary beneficiary of the trusts and is not required to consolidate these
entities.
Low Income Housing Tax Credits
HUSI participates as a limited partner in Low Income Housing Tax Credit
Partnerships. These investments are recorded as other assets on the consolidated
balance sheet using the equity method of accounting. HUSI also receives tax
benefits over a period of time specified in the investment contracts. HUSI's
investment is reduced over time for its share of any operating losses incurred
by the partnership as well as for any amortization over the time period in which
tax credits are received. Tax credits may be subject to recapture if the
underlying properties do not remain in compliance with certain conditions. Some
of these partnerships have been determined to be VIEs. HUSI's maximum exposure
to loss shown in the table represents the net assets recorded on the balance
sheet, estimated expected reduction of future tax liabilities, and potential
recapture of tax credits allowed in prior years.
Note 26. Fair Value of Financial Instruments
--------------------------------------------------------------------------------
HUSI 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 HUSI 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 HUSI 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.
136
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 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 HUSI for borrowings with similar characteristics and maturities.
The summarized carrying values and estimated fair values of financial
instruments as of December 31, 2005 and 2004 follows.
------------------------------------------------------------------------------------------------------------------------
2005 2004
---------------------- ----------------------
Carrying Fair Carrying Fair
December 31 Value Value Value Value
------------------------------------------------------------------------------------------------------------------------
(in millions)
Financial assets:
Instruments with carrying value equal to fair value ....... $ 13,385 $ 13,385 $ 9,845 $ 9,845
Trading assets ............................................ 21,220 21,220 19,815 19,815
Securities available for sale ............................. 17,764 17,764 14,655 14,655
Securities held to maturity ............................... 3,171 3,262 3,881 4,042
Loans, net of allowance ................................... 89,496 88,467 84,159 84,216
Derivative instruments included in other assets (1) ....... 305 305 217 217
Financial liabilities:
Instruments with carrying value equal to fair value ....... 7,562 7,562 10,200 10,200
Deposits:
Without fixed maturities ............................... 77,924 77,924 68,234 68,234
Fixed maturities ....................................... 13,891 13,889 11,747 11,749
Trading account liabilities ............................... 10,710 10,710 12,120 12,120
Long-term debt ............................................ 27,959 28,448 23,839 24,589
Derivative instruments included in other liabilities (1) .. 80 80 176 176
(1) At December 31, 2005 and 2004, the amounts reported relate to derivative
contracts that qualify for hedge accounting treatment as defined by SFAS
133.
137
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.
Note 27. Financial Statements of HSBC USA Inc. (parent)
--------------------------------------------------------------------------------
Condensed parent company financial statements follow.
------------------------------------------------------------------------------------------------------------------------
Balance Sheet
December 31 2005 2004
------------------------------------------------------------------------------------------------------------------------
(in millions)
Assets:
Cash and due from banks .................................................................... $ -- $ --
Interest bearing deposits with banks (including $3,216 and $1,286 in banking subsidiary) ... 3,281 1,351
Trading assets ............................................................................. 584 279
Securities purchased under resale agreements ............................................... 6 3
Securities available for sale .............................................................. 157 20
Securities held to maturity (fair value $136 and $162) ..................................... 128 151
Loans (net of allowance for credit losses of $1 and $1) .................................... 131 533
Receivables from subsidiaries .............................................................. 1,616 1,766
Investment in subsidiaries at amount of their net assets:
Banking .............................................................................. 11,888 11,385
Other ................................................................................ 403 350
Goodwill ................................................................................... 604 604
Other assets ............................................................................... 158 179
--------- ---------
Total assets ............................................................................... $ 18,956 $ 16,621
========= =========
Liabilities:
Interest, taxes and other liabilities ...................................................... $ 147 $ 180
Short-term borrowings ...................................................................... 2,620 2,480
Long-term debt (1) ......................................................................... 4,595 3,092
Long-term debt due to subsidiary (1) ....................................................... -- 3
--------- ---------
Total liabilities .......................................................................... 7,362 5,755
Shareholders' equity * ..................................................................... 11,594 10,866
--------- ---------
Total liabilities and shareholders' equity ................................................. $ 18,956 $ 16,621
========= =========
* See Consolidated Statement of Changes in Shareholders' Equity, page 85.
(1) Contractual scheduled maturities for the debt over the next five years are
as follows: $300 million for 2006; 2007, $1,598 million; 2008, $240
million; 2009, $561 million and none in 2010.
138
------------------------------------------------------------------------------------------------------------------------
Statement of Income
Year Ended December 31 2005 2004 2003
------------------------------------------------------------------------------------------------------------------------
(in millions)
Income:
Dividends from banking subsidiaries ........................... $ 675 $ 125 $ 690
Dividends from other subsidiaries ............................. 2 2 34
Interest from banking subsidiaries ............................ 167 104 99
Interest from other subsidiaries .............................. 1 1 1
Other interest income ......................................... 30 19 16
Securities transactions ....................................... 13 4 (2)
Other income .................................................. 35 91 49
---------- ---------- ----------
Total income ........................................................ 923 346 887
---------- ---------- ----------
Expenses:
Interest (including $-, $86 and $64 paid to subsidiaries) ..... 350 240 229
Provision for credit losses ................................... -- 3 36
Other expenses ................................................ 17 20 24
---------- ---------- ----------
Total expenses ...................................................... 367 263 289
---------- ---------- ----------
Income before taxes and equity in undistributed income of subsidiaries 556 83 598
Income tax benefit .................................................. (40) (21) (64)
---------- ---------- ----------
Income before equity in undistributed income of subsidiaries ........ 596 104 662
Equity in undistributed income of subsidiaries ...................... 380 1,154 279
---------- ---------- ----------
Net income .......................................................... $ 976 $ 1,258 $ 941
========== ========== ==========
139
------------------------------------------------------------------------------------------------------------------------
Statement of Cash Flows
Year Ended December 31 2005 2004 2003
------------------------------------------------------------------------------------------------------------------------
(in millions)
Cash flows from operating activities:
Net income ....................................................... $ 976 $ 1,258 $ 941
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, amortization and deferred taxes ................. (3) 13 13
Provision for credit losses ................................... -- 3 36
Net change in other accrued accounts .......................... (77) 137 25
Undistributed income of subsidiaries .......................... (380) (1,154) (279)
Other, net .................................................... (286) (80) (63)
---------- ---------- ----------
Net cash provided by operating activities .................. 230 177 673
---------- ---------- ----------
Cash flows from investing activities:
Net change in interest bearing deposits with banks ............... (1,930) (738) 306
Purchases of securities .......................................... (174) (11) (1)
Sales and maturities of securities ............................... 58 41 31
Net originations and maturities of loans ......................... 414 (435) (32)
Net change in investments in and advances to subsidiaries ........ (490) (1,510) (539)
Other, net ....................................................... 172 (65) 56
---------- ---------- ----------
Net cash used in investing activities ...................... (1,950) (2,718) (179)
---------- ---------- ----------
Cash flows from financing activities:
Net change in short-term borrowings .............................. 140 733 261
Issuance of long-term debt, net of issuance costs ................ 1,497 -- --
Repayment of long-term debt ...................................... (3) (424) --
Dividends paid ................................................... (711) (148) (712)
Reductions of capital surplus .................................... (22) (20) (44)
Preferred stock issuance, net of redemptions ..................... 816 -- --
Capital contribution from HNAI ................................... 3 2,400 --
---------- ---------- ----------
Net cash provided by (used in) financing activities .................... 1,720 2,541 (495)
---------- ---------- ----------
Net change in cash and due from banks .................................. -- -- (1)
Cash and due from banks at beginning of year ........................... -- -- 1
---------- ---------- ----------
Cash and due from banks at end of year ................................. $ -- $ -- $ --
========== ========== ==========
Cash paid for:
Interest ......................................................... $ 349 $ 237 $ 228
========== ========== ==========
HBUS is subject to legal restrictions on certain transactions with its nonbank
affiliates in addition to the restrictions on the payment of dividends to HUSI.
See Note 18 on page 119 for further discussion.
140
Quarterly Results of Operations (Unaudited)
--------------------------------------------------------------------------------
The following table presents a quarterly summary of selected financial
information.
------------------------------------------------------------------------------------------------------------------------
Quarter Ended December 31 September 30 June 30 March 31
------------------------------------------------------------------------------------------------------------------------
(in millions)
2005
Net interest income .................................... $ 742 $ 761 $ 785 $ 775
------- ------- ------- -------
Trading revenues ....................................... 127 137 35 96
Residential mortgage banking revenue (expense) ......... 23 31 (13) 23
Securities gains, net .................................. 2 17 64 23
Other income ........................................... 362 320 327 337
------- ------- ------- -------
Total other revenues ................................... 514 505 413 479
------- ------- ------- -------
Operating expenses ..................................... 746 673 684 655
Provision for credit losses ............................ 198 199 170 107
------- ------- ------- -------
Income before income tax expense ....................... 312 394 344 492
Income tax expense ..................................... 116 142 131 177
------- ------- ------- -------
Net income ............................................. $ 196 $ 252 $ 213 $ 315
======= ======= ======= =======
2004
Net interest income .................................... $ 700 $ 698 $ 689 $ 654
------- ------- ------- -------
Trading revenues ....................................... 99 21 78 90
Residential mortgage banking revenue (expense) ......... (14) (65) (17) (24)
Securities gains, net .................................. 26 18 3 38
Other income ........................................... 214 388 234 230
------- ------- ------- -------
Total other revenues ................................... 325 362 298 334
------- ------- ------- -------
Operating expenses ..................................... 613 480 520 488
Provision (credit) for credit losses ................... (24) 27 6 (26)
------- ------- ------- -------
Income before income tax expense ....................... 436 553 461 526
Income tax expense ..................................... 167 214 130 207
------- ------- ------- -------
Net income ............................................. $ 269 $ 339 $ 331 $ 319
======= ======= ======= =======
141
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
--------------------------------------------------------------------------------
There were no disagreements on accounting and financial disclosure matters
between HUSI and its independent accountants during 2005.
Item 9A. 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 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 controls 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.
142
PART III
Item 10. Directors and Executive Officers of the Registrant
--------------------------------------------------------------------------------
Directors
Set forth below is certain biographical information relating to the members of
HUSI's Board of Directors. The members of the HUSI Board of Directors also
comprise the HBUS Board of Directors. Each director is elected annually. There
are no family relationships among the directors.
Salvatore H. Alfiero, age 68, Chairman and Chief Executive Officer, Protective
Industries, LLC. since May 2001. He is also a director of Phoenix Companies,
Inc., Southwire Company, Fresh Del Monte Produce Company and National Health
Care Affiliates. He has been a director of HBUS since 1996, a director of HUSI
since 2000 and a director of HNAH since 2005.
Donald K. Boswell, age 54, President and Chief Executive Officer, Western New
York Public Broadcasting Association since 1998. Mr. Boswell has been in public
broadcasting since 1977. He has been a director of HBUS and HUSI since 2002.
James H. Cleave, age 63, formerly President and Chief Executive Officer of HUSI
and HBUS from 1993 through 1997. Prior to that Mr. Cleave was President and
Chief Executive Officer of HSBC Bank Canada and he is currently a director and
Vice Chairman of HSBC Bank Canada. He has been a director of HBUS and HUSI since
1991.
Frances D. Fergusson, age 61, President, Vassar College since 1986. Dr.
Fergusson was formerly Provost and Vice President for Academic Affairs, Bucknell
University. Dr. Fergusson is also director of Wyeth Pharmaceuticals and a member
of the Board of Overseers of Harvard University. She has been a director of HBUS
since 1990 and a director of HUSI since 2000.
Martin J. G. Glynn, age 54, President and Chief Executive Officer of HUSI and
HBUS since 2003. Mr. Glynn also has been a Group General Manager for HSBC since
2001 and Chairman of HSBC Bank Canada since 2004. He has been a director of HSBC
Bank Canada since 1999 and was formerly President and Chief Executive Officer of
HSBC Bank Canada from 1999 to 2003. He is also a director of AEA Investors LLC
and Husky Energy Inc. He has been a director of HUSI and HBUS since 2000.
Stephen K. Green, age 57, Chairman of HUSI and HBUS since April 2005. Mr. Green
is HSBC Group Chairman (designate) and has been Group Chief Executive, HSBC
since 2003 and an Executive Director of HSBC since 1998. Mr. Green joined HSBC
in 1982 and more recently served as Executive Director, Corporate, Investment
Banking and Markets from 1998 to 2003 and as Group Treasurer from 1992 to 1998.
Mr. Green is also Chairman of HSBC Bank plc, HSBC Bank Middle East Limited, HSBC
Group Investment Businesses Limited and HSBC Private Banking Holdings (Suisse)
S.A. He is a director of The Bank of Bermuda Limited, HSBC France S.A. (formerly
CCF S.A.), The Hongkong and Shanghai Banking Corporation Limited, Grupo
Financiero HSBC, S.A. de C.V., HSBC North America Holdings Inc. and HSBC
Trinkaus & Burkhardt KGaA. He was previously a director of HBUS and HUSI from
2000 to 2004 and re-elected in 2005.
Richard A. Jalkut, age 61, Lead Director of HUSI and HBUS since January 2005.
Mr. Jalkut is President and Chief Executive Officer, Telepacific Communications
and Chairman of Birch Telecom, Inc. Formerly President and Chief Executive of
Pathnet and previously President and Group Executive, NYNEX Telecommunications.
Mr. Jalkut is also a director of IKON Office Solutions and Covad Communications.
He has been a director of HBUS since 1992 and a director of HUSI since 2000.
Peter Kimmelman, age 61, private investor and managing member of Peter Kimmelman
Asset Management LLC, an investment advisory firm registered with the Securities
and Exchange Commission. Mr. Kimmelman was formerly a director of Republic New
York Corporation and Republic National Bank of New York from 1976 until 1999. He
has been a director of HBUS and HUSI since 2000.
143
Charles G. Meyer, Jr., age 68, Director and former President of Cord Meyer
Development Company. Mr. Meyer was formerly a director of Republic National Bank
of New York from 1987 until 1999. He has been a director of HBUS and HUSI since
2000.
James L. Morice, age 68, President and Chief Executive Officer since January 1,
2006 of Morice Consulting, LLC, successor to the JLM Group LLC, a management
consulting firm. Mr. Morice was previously Executive Vice President and Director
of NationsBuilders Insurance Services, Inc. He was formerly a director of
Republic New York Corporation and Republic National Bank of New York from 1987
until 1999 and a member of the Human Resources Committee of the University of
New Haven from 2003 through 2005. He has been a director of HBUS and HUSI since
2000.
Executive Officers
--------------------------------------------------------------------------------
Information regarding the executive officers of HUSI as of March 6, 2006 is
presented in the following table.
-------------------------------------------------------------------------------------------------------------------
Year
Name Age Appointed Present Position with HUSI
-------------------------------------------------------------------------------------------------------------------
Martin J. G. Glynn 54 2003 President and Chief Executive Officer
Brendan McDonagh 47 2002 Chief Operating Officer
Gerard Aquilina 54 2002 Senior Executive Vice President, Private Banking and Wealth
Management
Janet L. Burak 50 2004 Senior Executive Vice President, General Counsel and Secretary
Robert M. Butcher 62 1988 Senior Executive Vice President and Chief Risk Officer
David Dew 50 2006 Senior Executive Vice President and Group Audit Executive, USA
John J. McKenna 46 2005 Senior Executive Vice President and Chief Financial Officer
Joseph M. Petri 53 2001 Senior Executive Vice President, Treasurer and Co-Head, CIBM
Americas
George T. Wendler 61 2000 Senior Executive Vice President and Chief Credit Officer
Anthony J. Murphy 46 2005 Co-Head, CIBM Americas
Paulette M. Crooke 52 2004 Executive Vice President, Operations
Jeanne G. Ebersole 44 2004 Executive Vice President, Human Resources
Seamus McMahon 46 2004 Executive Vice President and Regional President, Atlantic Region
Teresa A. Pesce 46 2005 Executive Vice President, AML Compliance
Carolyn M. Wind 52 2005 Executive Vice President, Compliance
Michael P. Ebbs 46 2005 Managing Director, Chief Information Officer
Joseph R. Simpson 44 2003 Chief Accounting Officer
Clive R. Bucknall 42 2006 Chief Accounting Officer (Designate)
-------------------------------------------------------------------------------------------------------------------
Martin J. G. Glynn was appointed President and Chief Executive Officer of HUSI
and HBUS in October 2003. Prior to joining HUSI, he was President and Chief
Executive Officer of HSBC Bank Canada from 1999 to 2003. Mr. Glynn was appointed
a Group General Manager in 2001 and has been with the HSBC Group since 1982.
Brendan McDonagh was appointed Chief Operating Officer, HBUS in October 2004.
Mr. McDonagh is an HSBC International Manager who has been with the HSBC Group
for over twenty five years and was appointed a Group General Manager effective
August 1, 2005. He is Chairman of HSBC Investments (USA) Inc., a wholly owned
subsidiary of HBUS. Mr. McDonagh has extensive commercial and retail management
experience and prior to joining HUSI in 2002 as Senior Executive Vice President,
Retail and Commercial Banking, he served as Senior Executive, Strategy
Implementation, at HSBC Group headquarters.
Gerard Aquilina assumed responsibilities for Private Banking and Wealth
Management Services for HSBC in North America in 2003. Mr. Aquilina joined HSBC
in June 2002 as Chief Executive Officer, International Private Banking,
Americas. He previously held various management positions with Merrill Lynch
from 1984 to 2002, including Global Head of Marketing and Wealth Management for
their International Private Client Group.
Janet L. Burak was appointed General Counsel and Secretary for HUSI and HBUS in
April 2004. Ms. Burak had served as an attorney with HSBC Finance Corporation
for twelve years and most recently as their Group General Counsel. Prior to
joining HSBC Finance Corporation, she was an associate with Shearman & Sterling
and an attorney with Citigroup.
144
Robert M. Butcher was appointed Chief Risk Officer for HUSI and HBUS in May
2003. Mr. Butcher was Chief Financial Officer of HUSI and HBUS from 1990 to
2003. Prior to joining HBUS's predecessor, Marine Midland Bank in 1988, Mr.
Butcher was with Citicorp for 15 years where he held various senior officer
positions in the corporate finance department.
David Dew was appointed Senior Executive Vice President, Audit, HSBC North
America Inc. (HNAI) effective January 1, 2006. Prior to this appointment Mr. Dew
served as Chief Auditor, Group Audit, HSBC Finance Corporation from November
2004 to December 2005. He was Executive Director & Chief Operating Officer, The
Saudi British Bank, Riyadh, Saudi Arabia from March 2001 to November 2004;
Deputy Chief Executive Officer, The Hongkong and Shanghai Banking Corporation
Limited, Singapore from September 1997 to March 2001; and Chief Executive
Officer, HSBC Bank plc, Milan, Italy from November 1994 to September 1997. Mr.
Dew has been an HSBC employee since 1977.
John J. McKenna was appointed Senior Executive Vice President and Chief
Financial Officer of HUSI effective October 3, 2005. Prior to this appointment,
Mr. McKenna served as Chief Financial Officer, HSBC Mexico, S.A. from November
2002 through September 2005. From July 2000 to October 2002, he held the
position of Senior Vice President and Director of Financial Management for HUSI.
Since joining HSBC in 1986, Mr. McKenna has held a variety of financial
management positions focusing on strategic planning, business controllership and
management information.
Joseph M. Petri was appointed Co-Head of Corporate, Investment Banking and
Markets (CIBM) Americas in November 2004. Mr. Petri had been Head of Global
Markets, Americas. He joined HUSI 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.
George T. Wendler was appointed Chief Credit Officer of HUSI in 2000. Mr.
Wendler was Chief Credit Officer and a member of the Senior Management Committee
of Republic New York Corporation when it was acquired by HSBC in December 1999.
He was also a director and Vice Chairman of Republic New York Corporation from
1997 to 1999.
Anthony J. Murphy, Chief Executive Officer, HSBC Securities (USA) Inc., was
appointed Co-Head, CIBM Americas in November 2004. Mr. Murphy has been with the
HSBC Group since 1990. Prior to his appointment as Chief Executive Officer, HSBC
Securities (USA) Inc. in April 2003, Mr. Murphy served as Chief Strategic
Officer, CIBM Americas from 2000. Prior to that assignment, he was Head of
Market Risk Management for HSBC Bank plc and HSBC Investment Bank in London from
1996.
Paulette M. Crooke was appointed Executive Vice President, Operations for HUSI
and HBUS in July 2004. Ms. Crooke has previously held various management
positions within the HBUS Human Resources Division, as well as various retail
banking positions, most recently directing PFS activities in Manhattan. She has
been with HBUS for over thirty years.
Jeanne G. Ebersole joined HUSI from HSBC Finance Corporation in May 2004 as
Executive Vice President, Human Resources. Prior to this appointment, Ms.
Ebersole had overall human resources responsibility for HSBC Finance
Corporation's retail services, insurance services and refund lending businesses
since August 2002. She held a variety of human resources positions since joining
HSBC Finance Corporation in 1980.
Seamus McMahon was appointed Executive Vice President in charge of strategic
planning, corporate development and acquisitions, and ongoing integration
initiatives in May 2004. In October 2004, Mr. McMahon was appointed HBUS
Regional President, Atlantic Region. Mr. McMahon has more than twenty years of
experience in the financial services industry. Prior to joining HUSI, Mr.
McMahon served as President and Chief Executive Officer of TD Bank, USA, a
wholly owned subsidiary of Toronto Dominion Bank. He also led the retail
financial services practices at First Manhattan Consulting Group and Booz Allen
& Hamilton, and worked for Chase Manhattan in New York and Accenture (then
Andersen Consulting) in Europe.
145
Teresa A. Pesce joined HUSI in September 2003 as Executive Vice President and
Anti-Money Laundering (AML) Director. In 2004 she was appointed the AML Director
for all HSBC businesses in North America. Ms. Pesce joined HUSI from the United
States Attorney's Office, Southern District of New York where she was Senior
Trial Counsel, White Plains Division and previously Chief of the Major Crimes
Unit and Deputy Chief of the Criminal Division. From 1992 to 1999 she served as
a Line Assistant in the Major Crimes, Narcotics, and General Crimes Units.
Carolyn M. Wind, Executive Vice President, Compliance, was the Chief Compliance
Officer for Republic New York Corporation when it was acquired by HSBC in
December 1999. Prior to joining Republic New York Corporation, she was a senior
national bank examiner with the Office of the Comptroller of the Currency (OCC).
Michael P. Ebbs was appointed Managing Director and Chief Information Officer -
HBUS Banking Systems in January 2005. Mr. Ebbs was Head of Information
Technology at The Bank of Bermuda Limited when it was acquired by HSBC in
February 2004. Prior to his thirteen years at The Bank of Bermuda Limited, Mr.
Ebbs held senior technology positions at The Putnam Companies and the Bank of
New England.
Joseph R. Simpson was appointed Controller and Chief Accounting Officer for HUSI
and HBUS in 2003. Prior to that appointment, he held the position of Manager of
External Financial Reporting and previous to that, Manager of Accounting Policy.
Mr. Simpson has been with HUSI for over fifteen years.
Clive R. Bucknall was appointed Controller and Chief Accounting Officer, HUSI
effective March 7, 2006. Prior to this appointment Mr. Bucknall served as Senior
Financial Officer, HSBC Singapore from March 2002 through December 2005. He was
Senior Financial Officer, HSBC Thailand from September 1998 to March 2002 and
Senior Area Accounting Manager, HSBC Hong Kong from September 1994 to September
1998. In 1991, Mr. Bucknall joined Midland Bank in London, which was acquired by
HSBC in 1992, as Financial Accounting Manager.
Audit Committee
--------------------------------------------------------------------------------
The Audit Committee of HUSI's Board of Directors is comprised of Messrs.:
Alfiero (Chairman), Cleave, Jalkut and Kimmelman. Messrs. Alfiero and Cleave
have been determined by HUSI'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
--------------------------------------------------------------------------------
HUSI has adopted a code of ethics applicable to its chief executive officer, its
chief financial officer, and its chief accounting officer and is included herein
as Exhibit 14.
146
Item 11. Executive Compensation
--------------------------------------------------------------------------------
The following table presents the compensation earned for the three years ending
December 31, 2005 by the President and Chief Executive Officer of HUSI and HBUS
and by the four most highly compensated Executive Officers of HUSI and HBUS, who
were serving as such on December 31, 2005 (the named executive officers).
Principal position indicates capacity served in 2005.
Summary Compensation Table
------------------------------------------------------------------------------------------------------------------------
Long Term
Annual Compensation Compensation
---------------------------------------- -------------
Restricted All Other
Name and Principal Position Year Salary Bonus Other Stock Awards(6) Compensation
------------------------------------------------------------------------------------------------------------------------
Martin J. G. Glynn (1) 2005 $ 707,692 $1,650,000 $ 295,235(2) $1,200,000 $ 10,500(5)
President and 2004 600,000 1,500,000 299,312(2) 526,693 7,738
Chief Executive Officer 2003 103,846 1,000,000 70,449(2) 278,758 1,846
Joseph M. Petri 2005 325,000 3,960,000 -- 2,790,000 10,500(5)
Senior Executive Vice
President, 2004 325,000 3,210,000 69,355(3) 3,879,045 7,175
Treasurer and Co-Head,
Corporate, 2003 325,000 3,750,000 246,553(3) 2,794,674 7,000
Investment Banking and Markets,
Americas
Gerard Aquilina 2005 500,000 1,050,000 -- 775,000 10,500(5)
Senior Executive Vice
President, 2004 490,173 875,000 -- 700,000 6,384
Private Banking and Wealth 2003 465,000 750,000 -- 412,000 781
Management
Brendan McDonagh 2005 636,960 789,000 477,756(4) 376,000 156,265(5)
Senior Executive Vice
President 2004 529,796 475,500 401,871(4) 228,000 164,041
and Chief Operating Officer 2003 470,333 219,598 464,264(4) 150,000 93,174
George T. Wendler 2005 566,500 747,780 -- 150,000 12,600(5)
Senior Executive Vice
President 2004 566,500 700,194 -- -- --
and Chief Credit Officer 2003 566,500 475,000 -- 56,000 --
(1) Mr. Glynn was appointed President and Chief Executive Officer of HUSI and
HBUS effective October 22, 2003. His 2003 salary figure represents the
salary earned and paid by HUSI from October 22, 2003 to December 31, 2003.
Prior to joining HUSI, Mr. Glynn was President and Chief Executive Officer
of HSBC Bank Canada.
(2) Mr. Glynn's Other Annual Compensation represents perquisites and other
personal benefits. The amount reported for 2005, 2004 and 2003 includes
reimbursements and tax gross-ups related to rental expenses of $259,285,
$272,115 and $69,222 respectively.
(3) Mr. Petri's Other Annual Compensation for 2004 and 2003 principally
represents imputed interest income from the investment of deferred bonus
amounts from previous years.
(4) Mr. McDonagh's Other Annual Compensation includes perquisites and other
personal benefits of $452,232, $366,984 and $424,964 for 2005, 2004 and
2003 respectively. Total perquisites and personal benefits for 2005
include reimbursements and tax gross-ups related to rental expenses of
$172,645 and children's educational expenses of $130,858. Perquisites and
personal benefits for 2004 include reimbursements and tax gross-ups
related to rental expenses of $135,501 and children's educational expenses
of $103,205. Perquisites and personal benefits for 2003 include
reimbursements and tax gross-ups related to rental expenses of $169,283
and children's educational expenses of $124,149.
(5) All Other Compensation in 2005 for each of the named executive officers,
except Mr. McDonagh, represents HUSI's matching 401(k) plan contribution.
Mr. McDonagh's 2005 All Other Compensation represents pension
contributions made by HSBC on his behalf.
(6) Restricted stock awards granted in the past three fiscal years include
performance and non-performance based awards.
147
The restricted stock awards included in the Summary Compensation Table represent
the monetary value on the date of grant of awards received during the years
indicated. Dividends are paid on all restricted shares and are reinvested in
additional restricted shares.
The following table presents the number and value of the aggregate restricted
stock holdings at December 31, 2005 for each named executive officer.
-----------------------------------------------------------------------------------------------------------------------
Number of
December 31, 2005 Shares Value
-----------------------------------------------------------------------------------------------------------------------
Martin J. G. Glynn .................................................................... 177,208 $ 2,845,664
Joseph M. Petri (1) ................................................................... 475,924 7,642,537
Gerard Aquilina ....................................................................... 139,696 2,243,280
Brendan McDonagh ...................................................................... 81,987 1,316,567
George T. Wendler ..................................................................... 34,372 551,953
(1) Mr. Petri's restricted share holdings at December 31, 2005 include 96,332
shares representing the balance of shares originally granted in March
2003, two thirds of which vested equally in 2004 and 2005 and the balance
of which will vest in 2006 on the date HSBC publishes its 2005 annual
results. Restricted share holdings at December 31, 2005 also include
170,109 shares representing the balance of shares originally granted in
March 2004, one third of which vested in 2005 and two thirds of which will
vest equally in 2006 and 2007 on the date HSBC publishes its annual
results. Also included in Mr. Petri's total restricted share holdings are
174,548 shares representing the accumulated balance of shares originally
granted in February 2005. These shares will vest in equal increments on
the date HSBC publishes its annual results in 2006, 2007 and 2008.
No stock options on HSBC Holdings plc common stock were granted during 2005 to
any of the named executive officers and none of the named executive officers
exercised any previously awarded stock options during 2005.
The only named executive officer with any unexercised stock options on HSBC
Holdings plc common stock is Mr. McDonagh. His options were granted under the
HSBC Holdings Executive Share Option Scheme for performance years 1996 through
1998 while employed by other HSBC entities. The number of Mr. McDonagh's options
and their value at December 31, 2005 are presented in the following table.
--------------------------------------------------------------------------------------------------------------------
Aggregated Stock Options Exercised in 2005 and Option Values as of Year End 2005
Number of Securities Value of Unexercised
Underlying Unexercised Options In-the-Money Options
Shares as of December 31, 2005 as of December 31, 2005 (2)
Acquired on Value ------------------------------- ----------------------------
Name Exercise (#) Realized ($) Exercisable(1) Unexercisable Exercisable Unexercisable
--------------------------------------------------------------------------------------------------------------------
Martin J. G. Glynn -- $ -- -- -- $ -- $ --
Joseph M. Petri -- -- -- -- -- --
Gerard Aquilina -- -- -- -- -- --
Brendan McDonagh -- -- 33,900 -- 187,959 --
George T. Wendler -- -- -- -- -- --
(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 2005 financial results of HSBC have been publicly announced.
(2) The value of unexercised in-the-money options is based on the December 31,
2005 closing price per share of 9.330 GBP for HSBC Holdings plc common
stock and a U.S. dollar exchange rate of 1.72115 per GBP.
148
Pension Benefits for the Named Executive Officers
--------------------------------------------------------------------------------
Mr. Glynn's pension benefits will be provided pursuant to the terms of the
qualified and non-qualified supplemental pension plan of HSBC Bank Canada.
HSBC Bank Canada's qualified pension plan is a defined benefit plan under which
benefits are determined primarily by final average earnings, years of service
and a plan formula. Benefits payable under this plan are limited to the maximum
allowed by Canada Revenue Agency (CRA). For example, in year 2005 the limit was
$2,000 and in year 2006, the limit is $2,111.11 per year of pensionable service.
The following table, which is presented in Canadian currency, indicates the
maximum pension benefits allowed by law for plan participants in the specified
compensation and years of service classifications for year 2006. The table
assumes payments in the form of a life annuity, guaranteed for ten years.
--------------------------------------------------------------------------------------------------------------------
Compensation 15 20 25 30
--------------------------------------------------------------------------------------------------------------------
$ 500,000 $ 31,666 $ 42,222 $ 52,777 $ 63,333
600,000 31,666 42,222 52,777 63,333
700,000 31,666 42,222 52,777 63,333
800,000 31,666 42,222 52,777 63,333
900,000 31,666 42,222 52,777 63,333
1,000,000 31,666 42,222 52,777 63,333
--------------------------------------------------------------------------------------------------------------------
The pension benefit for plan participants in the compensation levels presented
above is capped for all participants having the number of years of credited
service indicated. The compensation covered by the plan is limited to straight
salary. At the plan's normal retirement date of age 60, Mr. Glynn will have
28.75 years of credited service.
In addition to the pension benefit available from the HSBC Bank Canada qualified
plan, Mr. Glynn is entitled to receive an annual pension benefit during his
lifetime pursuant to a non-qualified supplemental retirement agreement with HSBC
Bank Canada. Under the terms of this agreement, the supplemental allowance is
forfeited if Mr. Glynn ceases employment with HSBC before age 55 and goes to
work for a competitor within two years. The supplemental allowance is calculated
based on Mr. Glynn's highest three years average base salary, excluding all
bonuses. The supplemental pension agreement formula is 2.5% of final average
earnings, times years of pensionable service. Mr. Glynn's earnings under this
formula are converted into Canadian currency by multiplying his current earnings
in U.S. currency by 1.3333.
Based on an annual salary of $933,310 in Canadian currency, the estimated annual
total pension benefit at the normal retirement age of 60 for Mr. Glynn is
$670,815. Of this amount, $60,694 is payable from the HSBC Bank Canada qualified
plan and $610,121 from the non-qualified supplemental retirement agreement. In
U.S. currency, these pension benefits amount to $45,522 from the qualified plan
and $457,602 from the non-qualified plan.
The pension benefits for Joseph M. Petri, Gerard Aquilina and George T. Wendler
will be provided pursuant to the terms of the HSBC - North America (USA)
Retirement Income Plan, a non-contributory defined benefit pension plan under
which HBUS and other participating subsidiaries of HNAH make contributions in
actuarially determined amounts.
The pension benefits under the Retirement Income Plan for employees hired before
January 1, 2000 are determined primarily by compensation and years of service.
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 Retirement Income Plan and non-qualified supplemental
benefit plans. The amounts shown are before application of social security
reductions. Years of service for benefit purposes is limited to 30 years in the
aggregate.
149
--------------------------------------------------------------------------------------------------------------------
Five Year
Average
Compensation 15 20 25 30 35
--------------------------------------------------------------------------------------------------------------------
$ 300,000 $ 87,750 $ 117,450 $ 147,450 $ 177,450 $ 178,200
400,000 117,000 156,600 196,600 236,600 237,600
500,000 146,250 195,750 245,750 295,750 297,000
600,000 175,500 234,900 294,900 354,900 356,400
700,000 204,750 274,050 344,050 414,050 415,800
800,000 234,000 313,200 393,200 473,200 475,200
900,000 263,250 352,350 442,350 532,350 534,600
1,000,000 292,500 391,500 491,500 591,500 594,000
--------------------------------------------------------------------------------------------------------------------
Compensation covered by the Retirement Income Plan in the above table includes
regular basic earnings (including salary reduction contributions to the 401(k)
plan), but not incentive awards, bonuses, special payments or deferred salary.
HNAH maintains supplemental benefit plans which provide for the difference
between the benefits actually payable under the Retirement Income 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 HBUS or
other participating subsidiaries. The calculation of retirement benefits is
based on the highest five-consecutive year compensation.
Mr. Wendler is the only named executive officer participating in the Retirement
Income Plan who was hired before January 1, 2000. He is also a member of the
Senior Management Committee of HBUS. Individuals who were members of the Senior
Management Committee prior to July 1, 2004, and who participate in the
Retirement Income 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 HBUS or other subsidiaries. As of December 31, 2005, Mr.
Wendler had 23.76 total years of credited service in determining benefits
payable under the Retirement Income Plan and other non-qualified supplemental
benefit plans.
The pension benefits for Joseph M. Petri and Gerard Aquilina under the HSBC -
North America (USA) Retirement Income Plan are based on the formula applicable
to employees hired on or after January 1, 2000.
Under this formula, benefits are calculated at 2% of pensionable pay for each
year of service, credited with interest at the end of the year at a rate equal
to the lesser of the average of the 10-year treasury rates or the average of the
30-year treasury rates for the September of the preceding year. Under certain
circumstances, this benefit may be reduced due to federal regulations.
Pensionable pay is defined as base pay plus overtime, bonuses and commissions
paid in that calendar year. Employee pre-tax contributions to any benefit plan
maintained by HNAH are also included in pensionable pay. Deferred compensation
is not included.
The estimated pension benefit available for Mr. Petri at age 65, the normal
retirement age, is a one time only, lump sum benefit of $67,652.83. The
estimated age 65 benefit available for Mr. Aquilina is a one time only, lump sum
benefit of $59,585.58.
Since Brendan McDonagh is an HSBC International Manager, he participates in the
HSBC International Staff Retirement Benefits Scheme (ISRBS), a defined benefit
plan. Based on a benefit formula that approximates 85% of his Sterling Basic
Salary of 161,310.60 GBP and a normal retirement date of July 31, 2011, at age
53 and over 30 years of service, Mr. McDonagh's pension benefit is 136,357.87
GBP per annum. At a U.S. dollar exchange rate of 1.72115 per GBP at December 31,
2005, this benefit equates to $234,692.35 in U.S. currency. Mr. McDonagh makes
ISRBS contributions at the current rate of 6.67% of Sterling Basic Salary and
HSBC makes contributions on his behalf at the current rate of 57.5% of Sterling
Basic Salary.
150
Directors' Compensation
--------------------------------------------------------------------------------
Directors who are employees of HSBC or other Group Affiliates, including HUSI
and HBUS, do not receive annual retainers or fees. For their services as
directors of both HUSI and HBUS, all nonemployee directors, including the
Chairman of the Board but excluding the Lead Director, receive an annual
retainer of $50,000. The Lead Director receives an annual retainer of $75,000.
Committee chairmen receive an additional annual fee of $2,500 for acting in that
capacity. Members of the Audit Committee receive an annual fee which is $10,000
for the chairman and $6,000 for the other members. Directors are reimbursed for
their expenses incurred in attending meetings. HUSI and HBUS have standard
arrangements pursuant to which directors elected prior to June 1999 may defer
all or part of their fees.
Employment Contracts
--------------------------------------------------------------------------------
Mr. Joseph M. Petri has an agreement with HUSI 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 HUSI and any of its other named executive officers.
Compensation Committee Interlocks and Insider Participation
--------------------------------------------------------------------------------
The current members of the Human Resources and Compensation Committee of HUSI's
Board of Directors are: nonemployee director Dr. Frances D. Fergusson, Chair;
Mr. Martin J. G. Glynn, President and Chief Executive Officer of HUSI and HBUS;
nonemployee director Mr. James L. Morice and nonemployee director Mr. Donald K.
Boswell. There are no interlocking relationships.
151
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Matters
--------------------------------------------------------------------------------
Security Ownership of Certain Beneficial Owners
HUSI's common stock is 100% owned by HSBC North America Inc. (HNAI). HNAI is an
indirect wholly owned subsidiary of HSBC.
Security Ownership by Management
The following table shows the beneficial ownership of HSBC $0.50 ordinary shares
as of December 31, 2005 by each of HUSI's directors, the named executive
officers in the Summary Compensation Table on page 147 and by all of HUSI'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.
--------------------------------------------------------------------------------------------------------------------
Shares That
Shares May be Acquired Total
Beneficially Within 60 Days by Beneficially
Directors Owned (1) Exercise of Options (2) Owned Shares
--------------------------------------------------------------------------------------------------------------------
Salvatore H. Alfiero 259,000 -- 259,000
Donald K. Boswell 220 -- 220
James H. Cleave 218,578 -- 218,578
Frances D. Fergusson 100 -- 100
Martin J. G. Glynn (3) 219,968 -- 219,968
Stephen K. Green 1,094,648 -- 1,094,648
Richard A. Jalkut 250 -- 250
Peter Kimmelman 17,035 -- 17,035
Charles G. Meyer, Jr. 500 -- 500
James L. Morice 613 -- 613
--------------------------------------------------------------------------------------------------------------------
Named executive officers
--------------------------------------------------------------------------------------------------------------------
Joseph M. Petri 477,281 -- 477,281
Gerard Aquilina 139,696 -- 139,696
Brendan McDonagh 109,937 33,900 143,837
George T. Wendler 34,372 -- 34,372
--------------------------------------------------------------------------------------------------------------------
All directors and executive officers
as a group 3,129,096 247,031 3,376,127
--------------------------------------------------------------------------------------------------------------------
(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
2005 financial results of HSBC have been publicly announced.
(3) As the President and Chief Executive Officer of HUSI and HBUS, Mr. Glynn
is also one of the named executive officers.
No director or executive officer of HUSI owned any of HUSI's outstanding
preferred stock at December 31, 2005.
152
Item 13. Certain Relationships and Related Transactions
--------------------------------------------------------------------------------
None.
Item 14. Principal Accounting Fees and Services
--------------------------------------------------------------------------------
Fees billed to HUSI by its auditing firm, KPMG LLP, were as follows.
------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 2005 2004
------------------------------------------------------------------------------------------------------------------------
(in thousands)
Audit fees:
Auditing of financial statements, quarterly reviews, statutory audits, preparation of comfort
letters, consents and review of registration statements .............................. $ 5,137 $ 4,310
Audit related fees:
Employee benefit plan audits, due diligence assistance, internal control review assistance,
and audit or attestation services not required by statute or regulation .............. 870 1,478
Tax fees:
Tax related research, general tax services in connection with transactions and legislation,
and review of federal and state tax accounts for possible over-assessment of interest
and/or penalties ..................................................................... 51 1,762
All other fees ............................................................................... -- 46
-------- --------
Total KPMG LLP fees .......................................................................... $ 6,058 $ 7,596
======== ========
Audit Committee Pre-approval Policies and Procedures
It is the practice of the Audit Committee of HUSI's Board of Directors to
approve the annual audit fees, including those covering audit services beyond
HUSI's financial statements, before any audit procedures are undertaken. Prior
to 2003, management had the implicit pre-approval of the Audit 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 Committee after the fact. Beginning in 2003, the Audit Committee assumed
responsibility for pre-approving all auditing services and permitted
non-auditing services, including the related fees and terms thereof.
153
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, National Association:
Consolidated Balance Sheet
Notes to Financial Statements
(2) Not applicable
(3) Exhibits
3(i) Articles of Incorporation and amendments and supplements
thereto (incorporated by reference to Exhibit 3(a) to HUSI's
Annual Report on Form 10-K for the year ended December 31,
1999, filed with the Securities and Exchange Commission on
March 30, 2000, Exhibit 3 to HUSI's Quarterly Report on Form
10-Q for the quarter ended September 30, 2000, filed with
the Securities and Exchange Commission on November 9, 2000,
Exhibits 3.2 and 3.3 to HUSI's Current Report on Form 8-K
dated March 30, 2005, filed with the Securities and Exchange
Commission on April 4, 2005, and Exhibit 3.2 to HUSI's
Current Report on Form 8-K dated October 11, 2005 and filed
with the Securities and Exchange Commission on October 14,
2005).
3(ii) By-Laws dated April 21, 2005.
4(i) Senior Indenture, dated as of October 24, 1996, by and
between HUSI and Bankers Trust Company, as trustee, as
amended and supplemented (incorporated by reference to
Exhibits 4.1 and 4.2 to Post-Effective Amendment No. 1 to
HUSI's registration statement on Form S-3, Registration No.
333-42421, filed with the Securities and Exchange Commission
on April 3, 2002, and Exhibit 4.1 to HUSI's Current Report
on Form 8-K dated November 21, 2005 and filed with the
Securities and Exchange Commission on November 28, 2005).
4(ii) Subordinated Indenture, dated as of October 24, 1996, by and
HUSI and Bankers Trust Company, as trustee, as amended and
supplemented (incorporated by reference to Exhibits 4.3,
4.4, 4.5 and 4.6 to Post-Effective Amendment No. 1 to HUSI's
registration statement on Form S-3, Registration No.
333-42421, filed with the Securities and Exchange Commission
on April 3, 2002.
12.01 Computation of Ratio of Earnings to Fixed Charges
12.02 Computation of Ratio of Earnings to Combined Fixed Charges
and Preferred Dividends
14 Code of Ethics for Senior Financial Officers
21 Subsidiaries of HSBC USA Inc.
23 Consent of Independent Registered Public Accounting Firm
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 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
154
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/ Janet L. Burak
---------------------------------------
Janet L. Burak
Senior Executive Vice President, General Counsel
and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed on March 6, 2006 by the following persons on behalf of the
registrant and in the capacities indicated:
/s/ John J. McKenna Stephen K. Green*
-------------------------------------- Chairman of the Board
John J. McKenna Salvatore H. Alfiero* Director
Senior Executive Vice President and Donald K. Boswell* Director
Chief Financial Officer James H. Cleave* Director
(Principal Financial Officer) Frances D. Fergusson* Director
Martin J. G. Glynn*
Director, President and Chief Executive Officer
Richard A. Jalkut* Director
Peter Kimmelman* Director
/s/ Joseph R. Simpson Charles G. Meyer, Jr.* Director
-------------------------------------- James L. Morice* Director
Joseph R. Simpson
Chief Accounting Officer
(Principal Accounting Officer)
* /s/ Janet L. Burak
------------------------------------------------
Janet L. Burak
Attorney-in-fact
155
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