16th May 2005 11:27
HSBC Holdings PLC16 May 2005 PART 1 CONFORMED 1.================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2005 or |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the transition period from ______ to ______ Commission file number 1-7436 HSBC USA Inc. (Exact name of registrant as specified in its charter) Maryland (State of Incorporation) 13-2764867 (IRS Employer Identification No.) 452 Fifth Avenue, New York, New York 10018 (Address of principal executive offices) (212) 525-3735 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports requiredto be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes |X| No |_| Indicate by check mark whether the registrant is an accelerated filer (asdefined in Rule 12b-2 of the Exchange Act). Yes |_| No |X| At April 30, 2005, all voting stock (706 shares of Common Stock, $5 par value)is owned by an indirect wholly owned subsidiary of HSBC Holdings plc. ================================================================================ HSBC USA Inc. Form 10-Q TABLE OF CONTENTS Part I FINANCIAL INFORMATION-------------------------------------------------------------------------------- Page ---- Item 1. Consolidated Financial Statements Statement of Income .......................................... 3 Balance Sheet ................................................ 4 Statement of Changes in Shareholders' Equity ................. 5 Statement of Cash Flows ...................................... 6 Notes to Consolidated Financial Statements ................... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Average Balances and Interest Rates .......................... 16 Forward-Looking Statements ................................... 17 Executive Overview ........................................... 17 Basis of Reporting ........................................... 20 Results of Operations ........................................ 20 Business Segments ............................................ 27 Credit Quality ............................................... 31 Derivative Instruments and Hedging Activities ................ 34 Off-Balance Sheet Arrangements ............................... 35 Variable Interest Entities (VIEs) ............................ 36 Capital ...................................................... 36 Risk Management .............................................. 37 Item 3. Quantitative and Qualitative Disclosures About Market Risk ........ 41 Item 4. Controls and Procedures ........................................... 41 Part II OTHER INFORMATION-------------------------------------------------------------------------------- Item 1. Legal Proceedings ................................................. 42 Item 5. Other Information ................................................. 42 Item 6. Exhibits .......................................................... 42 Signature ................................................................. 43 2 Part I FINANCIAL INFORMATIONItem 1. Consolidated Financial Statements-------------------------------------------------------------------------------- HSBC USA Inc.--------------------------------------------------------------------------------CONSOLIDATED STATEMENT OF INCOME Three months ended March 31, 2005 2004--------------------------------------------------------------------------------------------------------- (in millions) Interest income: Loans ....................................................... $ 1,049 $ 613 Securities .................................................. 210 215 Trading assets .............................................. 59 33 Short-term investments ...................................... 49 18 Other ....................................................... 6 4 ------------ ------------Total interest income ........................................... 1,373 883 ------------ ------------Interest expense: Deposits .................................................... 327 160 Short-term borrowings ....................................... 52 18 Long-term debt .............................................. 219 51 ------------ ------------Total interest expense .......................................... 598 229 ------------ ------------Net interest income ............................................. 775 654Provision (credit) for credit losses ............................ 107 (26) ------------ ------------Net interest income after provision for credit losses ........... 668 680 ------------ ------------Other revenues: Trust income ................................................ 23 24 Service charges ............................................. 52 51 Other fees and commissions .................................. 145 108 Securitization revenue ...................................... 44 -- Other income ................................................ 72 47 Residential mortgage banking revenue (expense) .............. 23 (24) Trading revenues ............................................ 96 90 Security gains, net ......................................... 23 38 ------------ ------------Total other revenues ............................................ 478 334 ------------ ------------Operating expenses: Salaries and employee benefits .............................. 266 252 Occupancy expense, net ...................................... 42 40 Support services from HSBC affiliates ....................... 218 86 Other expenses .............................................. 128 110 ------------ ------------Total operating expenses ........................................ 654 488 ------------ ------------Income before income tax expense ................................ 492 526Income tax expense .............................................. 176 207 ------------ ------------Net income ...................................................... $ 316 $ 319 ============ ============ The accompanying notes are an integral part of the consolidated financialstatements. 3 HSBC USA Inc.--------------------------------------------------------------------------------CONSOLIDATED BALANCE SHEET March 31, December 31, 2005 2004------------------------------------------------------------------------------------------------------------------- (in millions) AssetsCash and due from banks ..................................................... $ 4,277 $ 2,682Interest bearing deposits with banks ........................................ 3,090 2,776Federal funds sold and securities purchased under resale agreements ......... 2,855 3,126Trading assets .............................................................. 16,964 19,815Securities available for sale ............................................... 15,625 14,655Securities held to maturity (fair value $3,716 and $4,042) .................. 3,583 3,881Loans ....................................................................... 86,247 84,947Less - allowance for credit losses .......................................... 773 788 ----------- ----------- Loans, net ............................................................ 85,474 84,159Properties and equipment, net ............................................... 584 594Intangible assets, net ...................................................... 362 352Goodwill .................................................................... 2,696 2,697Other assets ................................................................ 6,095 6,313 ----------- -----------Total assets ................................................................ $ 141,605 $ 141,050 =========== =========== LiabilitiesDeposits in domestic offices: Noninterest bearing ....................................................... $ 8,455 $ 7,639 Interest bearing .......................................................... 50,770 50,069Deposits in foreign offices: Noninterest bearing ....................................................... 300 248 Interest bearing .......................................................... 23,469 22,025 ----------- ----------- Total deposits ........................................................ 82,994 79,981 ----------- -----------Trading account liabilities ................................................. 11,163 12,120Short-term borrowings ....................................................... 7,152 9,874Interest, taxes and other liabilities ....................................... 5,486 4,370Long-term debt .............................................................. 23,925 23,839 ----------- -----------Total liabilities ........................................................... 130,720 130,184 ----------- -----------Shareholders' equityPreferred stock ............................................................. 500 500Common shareholder's equity: Common stock ($5 par; 150,000,000 shares authorized; 706 shares issued) .................................. --(1) --(1) Capital surplus ........................................................... 8,143 8,418 Retained earnings ......................................................... 2,227 1,917 Accumulated other comprehensive income .................................... 15 31 ----------- ----------- Total common shareholder's equity ..................................... 10,385 10,366 ----------- -----------Total shareholders' equity .................................................. 10,885 10,866 ----------- -----------Total liabilities and shareholders' equity .................................. $ 141,605 $ 141,050 =========== =========== The accompanying notes are an integral part of the consolidated financialstatements. (1) Less than $500 thousand 4 HSBC USA Inc.--------------------------------------------------------------------------------CONSOLIDATED STATEMENT OF CHANGESIN SHAREHOLDERS' EQUITY Three months ended March 31, 2005 2004------------------------------------------------------------------------------------------------------------------------ in millions Preferred stockBalance, January 1 and March 31, .................................................. $ 500 $ 500 ------------ ------------ Common stockBalance, January 1 and March 31, .................................................. --(1) --(1) ------------ ------------ Capital surplusBalance, January 1, ............................................................... 8,418 6,027Capital contribution from parent .................................................. 4 5Employee benefit plans and other .................................................. (279) (1) ------------ ------------Balance, March 31, ................................................................ 8,143 6,031 ------------ ------------ Retained earningsBalance, January 1, ............................................................... 1,917 807Net income ........................................................................ 316 319Cash dividends declared: Preferred stock ............................................................... (6) (7) ------------ ------------Balance, March 31, ................................................................ 2,227 1,119 ------------ ------------ Accumulated other comprehensive incomeBalance, January 1, ............................................................... 31 128Net change in unrealized (losses) gains on securities ............................. (120) 48Net change in unrealized gains on derivatives classified as cash flow hedges ...... 87 12Net change in unrealized gains on interest only strip receivables ................. 18 --Foreign currency translation adjustments .......................................... (1) 1 ------------ ------------Other comprehensive (loss) income, net of tax ..................................... (16) 61 ------------ ------------Balance, March 31, ................................................................ 15 189 ------------ ------------Total shareholders' equity, March 31, ............................................. $ 10,885 $ 7,839 ============ ============Comprehensive incomeNet income ........................................................................ $ 316 $ 319Other comprehensive (loss) income ................................................. (16) 61 ------------ ------------Comprehensive income .............................................................. $ 300 $ 380 ============ ============ The accompanying notes are an integral part of the consolidated financialstatements. (1) Less than $500 thousand 5 HSBC USA Inc.--------------------------------------------------------------------------------CONSOLIDATED STATEMENT OF CASH FLOWS Three months ended March 31, 2005 2004----------------------------------------------------------------------------------------------------------------------------- (in millions) Cash flows from operating activities Net income ......................................................................... $ 316 $ 319 Adjustments to reconcile net income to net cash provided (used) by operating activities Depreciation, amortization and deferred taxes ................................. 188 178 Provision (credit) for credit losses .......................................... 107 (25) Net change in other accrual accounts .......................................... 444 (150) Net change in loans originated for sale ....................................... (205) (54) Net change in trading assets and liabilities .................................. 2,094 415 Other, net .................................................................... (235) (287) ------------ ------------ Net cash provided by operating activities ................................ 2,709 396 ------------ ------------Cash flows from investing activities Net change in interest bearing deposits with banks ................................. (430) (54) Net change in short-term investments ............................................... 312 (1,568) Net change in securities available for sale: Purchases of securities available for sale .................................... (2,823) (2,228) Proceeds from sales of securities available for sale .......................... 1,659 1,983 Proceeds from maturities of securities available for sale ..................... 1,030 1,741 Net change in securities held to maturity: Purchases of securities held to maturity ...................................... (189) (465) Proceeds from maturities of securities held to maturity ....................... 487 340 Net change in loans: Net change in credit card receivables ......................................... (162) 38 Net change in other short-term loans .......................................... (184) (236) Net originations and maturities of long-term loans ............................ (1,055) (2,923) Loans purchased from HSBC Finance Corporation ................................. -- (870) Sales of loans/other .......................................................... 29 60 Net change in tax refund anticipation loans program: Net originations of loans ..................................................... (24,300) -- Sales of loans to HSBC Finance Corporation .................................... 24,298 -- Expenditures for properties and equipment .......................................... (11) (3) Net cash provided (used) in acquisitions (disposals), net of cash acquired ......... (24) 30 Other, net ......................................................................... (156) (536) ------------ ------------ Net cash used in investing activities .................................... (1,519) (4,691) ------------ ------------Cash flows from financing activities Net change in deposits ............................................................. 2,990 3,851 Net change in short-term borrowings ................................................ (2,762) (685) Net change in long-term debt: Issuance of long-term debt .................................................... 345 1,186 Repayment of long-term debt ................................................... (166) (138) Capital contribution from parent ................................................... 4 5 Reduction of capital surplus ....................................................... -- (1) Dividends paid ..................................................................... (6) (7) ------------ ------------ Net cash provided by financing activities ................................ 405 4,211 ------------ ------------Net change in cash and due from banks .................................................. 1,595 (84)Cash and due from banks at beginning of period ......................................... 2,682 2,534 ------------ ------------Cash and due from banks at end of period ............................................... $ 4,277 $ 2,450 ============ ============ Cash paid for: Interest ................................................................ $ 505 $ 195 Income taxes ............................................................ 31 7 The accompanying notes are an integral part of the consolidated financialstatements. Pending settlement receivables/payables related to securities and trading assetsand liabilities are treated as non cash items for cash flows reporting. 6 Notes to Consolidated Financial Statements Note 1. Organization and Basis of Presentation-------------------------------------------------------------------------------- HSBC USA Inc. is an indirect wholly owned subsidiary of HSBC North AmericaHoldings Inc. (HNAH), which is a wholly owned subsidiary of HSBC Holdings plc(HSBC). HNAH's other principal indirect subsidiaries include: o HSBC Finance Corporation, a consumer finance company; o HSBC Markets (USA) Inc. (HSBC Markets), a holding company for investment banking and markets subsidiaries; o HSBC Technology & Services (USA) Inc. (HTSU), a provider of information technology services; and o HSBC Bank Canada (HBCA), a Canadian banking subsidiary. The accompanying unaudited consolidated financial statements of HSBC USA Inc.and its subsidiaries (collectively, HUSI), including its principal subsidiary,HSBC Bank USA, National Association (HBUS), have been prepared in accordancewith accounting principles generally accepted in the United States of America(U.S. GAAP) for interim financial information, with the instructions to Form10-Q and with Article 10 of Regulation S-X, as well as in accordance withpredominant practices within the banking industry. Accordingly, they do notinclude all of the information and footnotes required by generally acceptedaccounting principles for complete financial statements. In the opinion ofmanagement, all normal and recurring adjustments, considered necessary for afair presentation of financial position, results of operations and cash flowsfor the interim periods have been made. These unaudited interim financialstatements should be read in conjunction with HUSI's Annual Report on Form 10-Kfor the year ended December 31, 2004 (the 2004 Form 10-K). Certainreclassifications have been made to prior period amounts to conform to thecurrent period presentations. The accounting and reporting policies of HUSI areconsistent, in all material respects, with those used to prepare the 2004 Form10-K, except for the impact of new accounting pronouncements summarized in Note12. The preparation of financial statements in conformity with U.S. GAAP requiresthe use of estimates and assumptions that affect reported amounts anddisclosures. Actual results could differ from those estimates. Interim resultsshould not be considered indicative of results in future periods. Interim financial statement disclosures regarding business segments andoff-balance sheet arrangements are included in the Management's Discussion andAnalysis of Financial Condition and Results of Operations (MD&A) section of thisForm 10-Q. 7 Note 2. Securities-------------------------------------------------------------------------------- At March 31, 2005 and December 31, 2004, HUSI held no securities of any singleissuer (excluding the U.S. Treasury and federal agencies) with a book value thatexceeded 10% of shareholders' equity. The following tables provide a summary of the amortized cost and fair value ofthe securities available for sale and securities held to maturity portfolios. ------------------------------------------------------------------------------------------------------------------------ Gross Gross Amortized Unrealized Unrealized FairMarch 31, 2005 Cost Gains Losses Value------------------------------------------------------------------------------------------------------------------------ (in millions) Securities available for sale: U.S. Treasury ............................................. $ 202 $ -- $ 7 $ 195 U.S. Government sponsored enterprises (1) ................. 9,709 22 203 9,528 U.S. Government agency issued or guaranteed ............... 3,471 22 75 3,418 Asset backed securities ................................... 1,196 4 1 1,199 Other domestic debt securities ............................ 201 4 2 203 Foreign debt securities ................................... 976 5 20 961 Equity securities ......................................... 64 59 2 121 --------- --------- --------- --------- $ 15,819 $ 116 $ 310 $ 15,625 ========= ========= ========= ========= Securities held to maturity: U.S. Treasury ............................................ $ 84 $ -- $ -- $ 84 U.S. Government sponsored enterprises (1) ................ 2,060 72 15 2,117 U.S. Government agency issued or guaranteed .............. 742 41 1 782 Obligations of U.S. states and political subdivisions .... 443 31 -- 474 Other domestic debt securities ........................... 205 6 1 210 Foreign debt securities .................................. 49 -- -- 49 --------- --------- --------- --------- $ 3,583 $ 150 $ 17 $ 3,716 ========= ========= ========= ========= (1) Includes primarily mortgage-backed securities issued by the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC). ------------------------------------------------------------------------------------------------------------------------ Gross Gross Amortized Unrealized Unrealized FairDecember 31, 2004 Cost Gains Losses Value------------------------------------------------------------------------------------------------------------------------ (in millions) Securities available for sale: U.S. Treasury ............................................ $ 203 $ -- $ 3 $ 200 U.S. Government sponsored enterprises (1) ................ 8,136 47 90 8,093 U.S. Government agency issued or guaranteed .............. 3,029 32 29 3,032 Asset backed securities .................................. 1,122 3 1 1,124 Other domestic debt securities ........................... 990 6 2 994 Foreign debt securities .................................. 1,090 15 2 1,103 Equity securities ........................................ 64 49 4 109 --------- --------- --------- --------- $ 14,634 $ 152 $ 131 $ 14,655 ========= ========= ========= ========= Securities held to maturity: U.S. Treasury ........................................... $ 122 $ -- $ -- $ 122 U.S. Government sponsored enterprises (1) ............... 2,202 92 11 2,283 U.S. Government agency issued or guaranteed ............. 716 40 2 754 Obligations of U.S. states and political subdivisions ... 465 37 -- 502 Other domestic debt securities .......................... 231 6 1 236 Foreign debt securities ................................. 145 -- -- 145 --------- --------- --------- --------- $ 3,881 $ 175 $ 14 $ 4,042 ========= ========= ========= ========= (1) Includes primarily mortgage-backed securities issued by the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC). 8 The following tables provide a summary of gross unrealized losses and relatedfair values, classified as to the length of time the losses have existed. ------------------------------------------------------------------------------------------------------------------------ Less Than One Year Greater Than One Year ----------------------------------------- --------------------------------------- Number Gross Aggregate Number Gross Aggregate of Unrealized Fair Value of Unrealized Fair ValueMarch 31, 2005 Securities Losses of Investment Securities Losses of Investment------------------------------------------------------------------------------------------------------------------------ (in millions) Securities available for sale: U.S. Treasury ................. 1 $ 7 $ 195 -- $ -- $ -- U.S. Government sponsored enterprises (1) ............. 259 111 5,461 53 92 2,300 U.S. Government agency issued or guaranteed ........ 220 34 1,548 141 41 1,053 All other securities .......... 44 23 827 1 2 4 ------ ------ ------ ------ ------ ------ 524 $ 175 $8,031 195 $ 135 $3,357 ====== ====== ====== ====== ====== ====== Securities held to maturity: U.S. Government sponsored enterprises (1) .............. 10 $ 2 $ 262 10 $ 13 $ 191 U.S. Government agency issued or guaranteed ......... -- -- -- 3 1 35 All other securities ........... 35 1 14 -- -- -- ------ ------ ------ ------ ------ ------ 45 $ 3 $ 276 13 $ 14 $ 226 ====== ====== ====== ====== ====== ====== (1) Includes primarily mortgage-backed securities issued by FNMA and FHLMC. ------------------------------------------------------------------------------------------------------------------------ Less Than One Year Greater Than One Year ----------------------------------------- ---------------------------------------- Number Gross Aggregate Number Gross Aggregate of Unrealized Fair Value of Unrealized Fair ValueDecember 31, 2004 Securities Losses of Investment Securities Losses of Investment------------------------------------------------------------------------------------------------------------------------ (in millions) Securities available for sale: U.S. Treasury ............... 1 $ 3 $ 200 -- $ -- $ -- U.S. Government sponsored enterprises (1) ........... 78 36 3,118 51 54 1,344 U.S. Government agency issued or guaranteed ...... 62 11 646 115 18 532 All other securities ........ 31 6 487 21 3 103 ------ ------ ------ ------ ------ ------ 172 $ 56 $4,451 187 $ 75 $1,979 ====== ====== ====== ====== ====== ====== Securities held to maturity: U.S. Government sponsored enterprises (1) .......... 8 $ 2 $ 163 12 $ 9 $ 247 U.S. Government agency issued or guaranteed ..... 4 1 27 3 1 34 All other securities ....... 7 1 5 -- -- -- ------ ------ ------ ------ ------ ------ 19 $ 4 $ 195 15 $ 10 $ 281 ====== ====== ====== ====== ====== ====== (1) Includes primarily mortgage-backed securities issued by FNMA and FHLMC. The gross unrealized losses on securities available for sale increased duringthe three months ended March 31, 2005 due to the impact of a general increase ininterest rates on fixed rate securities. Since substantially all of thesesecurities are high credit grade (i.e., AAA or AA), and HUSI has the ability andintent to hold these securities until maturity or a market price recovery, thesesecurities are not considered to be other than temporarily impaired. 9 Note 3. Loans-------------------------------------------------------------------------------- The following table shows the composition of the loan portfolio. ---------------------------------------------------------------------------------------------------------- March 31, December 31, 2005 2004---------------------------------------------------------------------------------------------------------- (in millions) Domestic: Commercial: Construction and mortgage loans ........................... $ 8,563 $ 8,281 Other business and financial .............................. 12,015 11,815 Consumer: Residential mortgages ..................................... 47,610 46,775 Credit card receivables ................................... 12,001 12,078 Other consumer loans ...................................... 3,152 3,122International ...................................................... 2,906 2,876 --------- ---------Total loans ........................................................ $ 86,247 $ 84,947 ========= ========= Note 4. Allowance for Credit Losses-------------------------------------------------------------------------------- The following provides a summary of changes in the allowance for credit losses. ----------------------------------------------------------------------------------------------------------Quarter ended March 31 2005 2004---------------------------------------------------------------------------------------------------------- (in millions) Balance at beginning of quarter .................................... $ 788 $ 399Allowance related to acquisitions and (dispositions), net .......... -- (9)Charge offs ........................................................ 199 29Recoveries ......................................................... 77 22 --------- --------- Net charge offs .............................................. 122 7 --------- ---------Provision charged (credited) to income ............................. 107 (26) --------- ---------Balance at end of quarter .......................................... $ 773 $ 357 ========= ========= Further analysis of credit quality and the allowance for credit losses arepresented on pages 31-33 of this Form 10-Q. 10 Note 5. Intangible Assets, Net-------------------------------------------------------------------------------- The following table summarizes the composition of intangible assets. ------------------------------------------------------------------------------------------------------------------------ March 31, December 31, 2005 2004------------------------------------------------------------------------------------------------------------------------ (in millions) Mortgage servicing rights, net of accumulated amortization and valuation allowance .... $ 320 $ 309Favorable lease arrangements, net of accumulated depreciation ......................... 42 43 --------- ---------Intangible assets, net ................................................................ $ 362 $ 352 ========= ========= Mortgage Servicing Rights (MSRs) The following table summarizes activity for MSRs and the related valuationallowance. ------------------------------------------------------------------------------------------------------------------------Three months ended March 31 2005 2004------------------------------------------------------------------------------------------------------------------------ (in millions) MSRs, net of accumulated amortization: Beginning balance ..................................................................... $ 416 $ 526 Additions related to loan sales ....................................................... 13 16 Net MSRs sales ........................................................................ -- (56) Permanent impairment charges .......................................................... (9) (1) Amortization .......................................................................... (19) (26) --------- --------- Ending balance ........................................................................ 401 459 --------- --------- Valuation allowance for MSRs: Beginning balance ..................................................................... (107) (23) Temporary impairment (provision) recovery ............................................. 17 (62) Permanent impairment charges .......................................................... 9 1 Release of allowance related to MSRs sold ............................................. -- 3 --------- --------- Ending balance ........................................................................ (81) (81) --------- --------- MSRs, net of accumulated amortization and valuation allowance ............................... $ 320 $ 378 ========= ========= Normal amortization for the current MSRs portfolios is expected to beapproximately $78 million for the year ending December 31, 2005, declininggradually to approximately $34 million for the year ending December 31, 2009.Actual levels of amortization could increase or decrease depending upon changesin interest rates and loan prepayment activity. Actual levels of amortizationare also dependent upon future levels of MSRs recorded. Favorable Lease Arrangements Favorable lease arrangements resulted from various business acquisitions.Scheduled amortization of favorable lease arrangements will approximate $5million per year for 2005 through 2009. Note 6. Goodwill-------------------------------------------------------------------------------- During the second quarter of 2004, HUSI completed its annual impairment test ofgoodwill and determined that the fair value of each of the reporting unitsexceeded its carrying value. As a result, no impairment loss was required to berecognized. During the first quarter of 2005, there were no events ortransactions which warrant consideration for their impact on recorded bookvalues assigned to goodwill. 11 Note 7. Income Taxes-------------------------------------------------------------------------------- The following table presents HUSI's effective tax rates. --------------------------------------------------------------------------------Three months ended March 31 2005 2004--------------------------------------------------------------------------------Effective tax rate ............................... 35.8% 39.4% In the first quarter of 2005, HUSI finalized certain prior year state and localtax returns and recorded a $20 million reduction of income tax expense, whichrepresents the difference between its previous estimate of tax liability and theliability per the tax returns. During the first quarter of 2005, the prepaid pension asset previously carriedon the balance sheet of HUSI was transferred to HNAH. The related deferred taxliability of approximately $203 million was also transferred to HNAH resultingin a significantly lower deferred tax liability as of March 31, 2005. Note 8. Long-Term Debt-------------------------------------------------------------------------------- The following table presents a summary of long-term debt. -------------------------------------------------------------------------------- March 31, December 31, 2005 2004-------------------------------------------------------------------------------- (in millions)Senior debt ...................................... $ 18,929 $ 18,831Subordinated debt ................................ 4,976 4,988All other ........................................ 20 20 --------- ---------Total long-term debt ............................. $ 23,925 $ 23,839 ========= =========Note 9. Related Party Transactions-------------------------------------------------------------------------------- In the normal course of business, HUSI conducts transactions with HSBC and itssubsidiaries (HSBC affiliates). These transactions occur at prevailing marketrates and terms. All extensions of credit by HUSI to other HSBC affiliates arelegally required to be secured by eligible collateral. The following tablepresents related party balances and the income and expense generated by relatedparty transactions. -------------------------------------------------------------------------------- March 31, December 31, 2005 2004-------------------------------------------------------------------------------- (in millions)Assets: Interest bearing deposits with banks ....... $ 97 $ 436 Loans ...................................... 1,537 828 Trading assets ............................. 3,096 3,167 Other ...................................... 159 752 --------- --------- Total assets ............................... $ 4,889 $ 5,183 ========= ========= Liabilities: Deposits ................................... $ 11,113 $ 9,759 Trading account liabilities ................ 4,865 5,704 Short-term borrowings ...................... 1,139 1,089 Other ...................................... 180 77 --------- --------- Total liabilities .......................... $ 17,297 $ 16,629 ========= ========= 12 -------------------------------------------------------------------------------------------------------------------Three months ended March 31 2005 2004------------------------------------------------------------------------------------------------------------------- (in millions) Interest income ............................................................. $ 1 $ 3Interest expense ............................................................ 63 21Trading losses .............................................................. (321) (127)Other revenues .............................................................. 36 10Support services from HSBC affiliates: Fees paid to HTSU for technology services ............................. 48 39 Fees paid to HSBC Finance Corporation ................................. 106 4 Other fees, primarily treasury and traded markets services ............ 64 43 The following business transactions conducted with HSBC Finance Corporationimpacted operations during the first quarter of 2005. o Trading losses primarily represent the mark to market of the intercompany components of interest rate and foreign currency derivative swap transactions entered into with HSBC Finance Corporation. Specifically, HSBC Finance Corporation enters into these swap contracts with HUSI in order to hedge its interest rate positions. HUSI, within its Corporate, Investment Banking and Markets business, accounts for these transactions on a mark to market basis, with the change in value on the intercompany component substantially offset by the mark to market of related contracts entered into with HSBC affiliates and third parties. o In December of 2004, approximately $12 billion of loans, primarily private label credit card receivables, were purchased from HSBC Finance Corporation. Residual interests in securitized private label credit card receivable pools of approximately $3 billion were also acquired. HSBC Finance Corporation retained the customer relationships and continues to service the loans. By agreement, HUSI is purchasing additional receivables generated under current and future private label accounts at fair value on a daily basis. During the first quarter of 2005, approximately $4 billion of additional receivables were acquired from HSBC Finance Corporation at a premium of $103 million, which is being amortized to interest income over the estimated life of the receivables purchased. o During the quarter ended March 31, 2005, HUSI purchased approximately $781 million of consumer loans, primarily domestic residential mortgage loans, at fair value from originating lenders pursuant to HSBC Finance Corporation correspondent loan programs. o In July of 2004, in order to centralize the servicing of credit card receivables within a common HSBC affiliate in the United States, certain consumer credit card customer relationships of HUSI were sold to HSBC Finance Corporation. Receivable balances associated with these relationships were not sold as part of the transaction. New receivableRelated Shares:
HSBC Holdings