1st Aug 2005 16:30
HSBC Holdings PLC01 August 2005 CONFORMED================================================================================ 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 June 30, 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 July 31, 2005, all voting stock (706 shares of Common Stock, $5 par value) isowned 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 ...................... 17 Forward-Looking Statements ............................... 19 Executive Overview ....................................... 19 Basis of Reporting ....................................... 22 Results of Operations .................................... 22 Business Segments ........................................ 33 Credit Quality ........................................... 39 Derivative Instruments and Hedging Activities ............ 42 Off-Balance Sheet Arrangements ........................... 44 Variable Interest Entities (VIEs) ........................ 44 Capital .................................................. 45 Risk Management .......................................... 45 Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 50 Item 4. Controls and Procedures........................................ 50 Part II OTHER INFORMATION-------------------------------------------------------------------------------- Item 5. Other Information ............................................. 51 Item 6. Exhibits ...................................................... 51 Signature .............................................................. 52 2 Part I FINANCIAL INFORMATIONItem 1. Consolidated Financial Statements-------------------------------------------------------------------------------- HSBC USA Inc.--------------------------------------------------------------------------------CONSOLIDATED STATEMENT OF INCOME Three months ended June 30, Six months ended June 30, 2005 2004 2005 2004------------------------------------------------------------------------------------------------------------------ (in millions) Interest income: Loans .............................................. $ 1,136 $ 669 $ 2,185 $ 1,282 Securities ......................................... 215 215 425 430 Trading assets ..................................... 60 38 119 71 Short-term investments ............................. 70 18 119 36 Other .............................................. 9 4 15 8 ------------ ------------ ----------- -----------Total interest income ................................. 1,490 944 2,863 1,827 ------------ ------------ ----------- -----------Interest expense: Deposits ........................................... 396 158 723 318 Short-term borrowings .............................. 67 34 119 52 Long-term debt ..................................... 242 63 461 114 ------------ ------------ ----------- -----------Total interest expense ................................ 705 255 1,303 484 ------------ ------------ ----------- -----------Net interest income ................................... 785 689 1,560 1,343Provision (credit) for credit losses .................. 170 6 277 (20) ------------ ------------ ----------- -----------Net interest income after provision (credit) for credit losses ...................................... 615 683 1,283 1,363 ------------ ------------ ----------- -----------Other revenues: Trust income ....................................... 22 24 45 48 Service charges .................................... 53 53 105 104 Other fees and commissions ......................... 144 122 289 230 Securitization revenue ............................. 25 -- 69 -- Other income ....................................... 83 35 155 82 Residential mortgage banking revenue (expense) ..... (13) (17) 10 (41) Trading revenues ................................... 35 78 131 168 Security gains, net ................................ 64 3 87 41 ------------ ------------ ----------- -----------Total other revenues .................................. 413 298 891 632 ------------ ------------ ----------- -----------Operating expenses: Salaries and employee benefits ..................... 254 242 520 494 Occupancy expense, net ............................. 43 42 85 82 Support services from HSBC affiliates .............. 218 106 436 192 Other expenses ..................................... 169 130 297 240 ------------ ------------ ----------- -----------Total operating expenses .............................. 684 520 1,338 1,008 ------------ ------------ ----------- -----------Income before income tax expense ...................... 344 461 836 987Income tax expense .................................... 131 130 307 337 ------------ ------------ ----------- -----------Net income ............................................ $ 213 $ 331 $ 529 $ 650 ============ ============ =========== =========== The accompanying notes are an integral part of the consolidated financialstatements. 3 HSBC USA Inc.--------------------------------------------------------------------------------CONSOLIDATED BALANCE SHEET June 30, December 31, 2005 2004---------------------------------------------------------------------------------------------------------- (in millions) AssetsCash and due from banks ................................................. $ 3,098 $ 2,682Interest bearing deposits with banks .................................... 2,853 2,776Federal funds sold and securities purchased under resale agreements ..... 3,886 3,126Trading assets .......................................................... 18,848 19,815Securities available for sale ........................................... 15,705 14,655Securities held to maturity (fair value $3,601 and $4,042) .............. 3,408 3,881Loans ................................................................... 87,847 84,947Less - allowance for credit losses ...................................... 790 788 ------------ ------------- Loans, net ........................................................... 87,057 84,159Properties and equipment, net ........................................... 539 594Intangible assets, net .................................................. 334 352Goodwill ................................................................ 2,694 2,697Other assets ............................................................ 5,972 6,313 ------------ -------------Total assets ............................................................ $ 144,394 $ 141,050 ============ =============LiabilitiesDeposits in domestic offices: Noninterest bearing .................................................... $ 8,960 $ 7,639 Interest bearing ....................................................... 53,113 50,069Deposits in foreign offices: Noninterest bearing .................................................... 423 248 Interest bearing ....................................................... 22,583 22,025 ------------ ------------- Total deposits ....................................................... 85,079 79,981 ------------ -------------Trading account liabilities ............................................. 11,020 12,120Short-term borrowings ................................................... 8,220 9,874Interest, taxes and other liabilities ................................... 4,548 4,370Long-term debt .......................................................... 23,885 23,839 ------------ -------------Total liabilities ....................................................... 132,752 130,184 ------------ -------------Shareholders' equityPreferred stock ......................................................... 1,017 500Common shareholder's equity: Common stock ($5 par; 150,000,000 shares authorized; 706 shares issued) ............................... -- -- Capital surplus ........................................................ 8,133 8,418 Retained earnings ...................................................... 2,429 1,917 Accumulated other comprehensive income ................................. 63 31 ------------ ------------- Total common shareholder's equity .................................... 10,625 10,366 ------------ -------------Total shareholders' equity .............................................. 11,642 10,866 ------------ -------------Total liabilities and shareholders' equity .............................. $ 144,394 $ 141,050 ============ ============= The accompanying notes are an integral part of the consolidated financialstatements. 4 HSBC USA Inc.--------------------------------------------------------------------------------CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY Six months ended June 30, 2005 2004---------------------------------------------------------------------------------------------------------- (in millions) Preferred stockBalance, January 1 ...................................................... $ 500 $ 500Preferred stock issuance ................................................ 517 -- ------------ -------------Balance, June 30, ....................................................... 1,017 500 ------------ ------------- Common stockBalance, January 1 and June 30, ......................................... -- -- ------------ ------------- Capital surplusBalance, January 1, ..................................................... 8,418 6,027Capital contribution from parent ........................................ 7 8Preferred stock issuance costs .......................................... (13) --Employee benefit plans and other ........................................ (279) (9) ------------ -------------Balance, June 30, ....................................................... 8,133 6,026 ------------ ------------- Retained earningsBalance, January 1, ..................................................... 1,917 807Net income .............................................................. 529 650Cash dividends declared: Preferred stock ....................................................... (17) (12) ------------ -------------Balance, June 30, ....................................................... 2,429 1,445 ------------ ------------- Accumulated other comprehensive income (loss)Balance, January 1, ..................................................... 31 128Net change in unrealized gains (losses) on securities ................... 6 (222)Net change in unrealized gains (losses) on derivatives classified as cash flow hedges ...................................................... 24 (58)Net change in unrealized gains on interest only strip receivables ....... 5 --Foreign currency translation adjustments ................................ (3) (4) ------------ -------------Other comprehensive income (loss), net of tax ........................... 32 (284) ------------ -------------Balance, June 30, ....................................................... 63 (156) ------------ -------------Total shareholders' equity, June 30, .................................... $ 11,642 $ 7,815 ============ ============= Comprehensive incomeNet income .............................................................. $ 529 $ 650Other comprehensive income (loss) 32 (284) ------------ -------------Comprehensive income .................................................... $ 561 $ 366 ============ ============= The accompanying notes are an integral part of the consolidated financialstatements. 5 HSBC USA Inc.--------------------------------------------------------------------------------CONSOLIDATED STATEMENT OF CASH FLOWS Six months ended June 30, 2005 2004---------------------------------------------------------------------------------------------------------- (in millions) Cash flows from operating activities Net income .......................................................... $ 529 $ 650 Adjustments to reconcile net income to net cash provided by (used in ) operating activities Depreciation, amortization and deferred taxes .................... 380 52 Provision (credit) for credit losses ............................. 277 (20) Net change in other accrual accounts ............................. 264 (41) Net change in loans originated for sale .......................... (804) (297) Net change in trading assets and liabilities ..................... (5) 204 Other, net ....................................................... (446) (261) ------------ ------------- Net cash provided by operating activities ..................... 195 287 ------------ -------------Cash flows from investing activities Net change in interest bearing deposits with banks .................. (52) (1,174) Net change in short-term investments ................................ (759) (1,510) Net change in securities available for sale: Purchases of securities available for sale ....................... (4,992) (5,919) Proceeds from sales of securities available for sale ............. 2,360 2,916 Proceeds from maturities of securities available for sale ........ 2,056 3,445 Net change in securities held to maturity: Purchases of securities held to maturity ......................... (370) (727) Proceeds from maturities of securities held to maturity .......... 845 1,099 Net change in loans: Net change in credit card receivables ............................ 7,665 (17) Net change in other short-term loans ............................. (153) (351) Net originations and maturities of long-term loans ............... (1,253) (12,266) Loans purchased from HSBC Finance Corporation .................... (8,917) (870) Sales of loans/other ............................................. 29 92 Net change in tax refund anticipation loans program: Originations of loans ............................................ (24,300) -- Sales of loans to HSBC Finance Corporation, including premium .... 24,318 -- Expenditures for properties and equipment ........................... 37 (7) Net cash provided by (used in) acquisitions (disposals), net of cash acquired ............................................... (90) 91 Other, net .......................................................... (397) (484) ------------ ------------- Net cash used in investing activities ......................... (3,973) (15,682) ------------ -------------Cash flows from financing activities Net change in deposits .............................................. 5,106 10,634 Net change in short-term borrowings ................................. (1,655) 2,976 Net change in long-term debt: Issuance of long-term debt ....................................... 651 2,687 Repayment of long-term debt ...................................... (412) (329) Preferred stock issuance ............................................ 517 -- Capital contribution from parent .................................... 7 8 Reduction of capital surplus ........................................ (13) (9) Dividends paid ...................................................... (7) (11) ------------ ------------- Net cash provided by financing activities ..................... 4,194 15,956 ------------ -------------Net change in cash and due from banks ................................... 416 561Cash and due from banks at beginning of period .......................... 2,682 2,534 ------------ -------------Cash and due from banks at end of period ................................ $ 3,098 $ 3,095 ============ ============= The accompanying notes are an integral part of the consolidated financialstatements. 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 an indirect wholly owned subsidiary of HSBCHoldings 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 for HSBC affiliates; 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. 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 June 30, 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 FairJune 30, 2005 Cost Gains Losses Value------------------------------------------------------------------------------------------------------------------- (in millions) Securities available for sale: U.S. Treasury .......................................... $ 396 $ 9 $ -- $ 405 U.S. Government sponsored enterprises (1) .............. 9,159 44 (54) 9,149 U.S. Government agency issued or guaranteed ............ 3,563 34 (24) 3,573 Obligations of U.S. states and political subdivisions .. 85 -- (3) 82 Asset backed securities ................................ 1,196 4 (1) 1,199 Other domestic debt securities ......................... 220 6 -- 226 Foreign debt securities ................................ 999 19 (1) 1,017 Equity securities ...................................... 49 5 -- 54 ---------- ---------- ---------- ---------- $ 15,667 $ 121 $ (83) $ 15,705 ========== ========== ========== ========== Securities held to maturity: U.S. Treasury .......................................... $ 83 $ -- $ -- $ 83 U.S. Government sponsored enterprises (1) .............. 2,302 128 (3) 2,427 U.S. Government agency issued or guaranteed ............ 380 30 -- 410 Obligations of U.S. states and political subdivisions .. 410 31 -- 441 Other domestic debt securities ......................... 184 7 -- 191 Foreign debt securities ................................ 49 -- -- 49 ---------- ---------- ---------- ---------- $ 3,408 $ 196 $ (3) $ 3,601 ========== ========== ========== ========== ------------------------------------------------------------------------------------------------------------------- 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 ValueJune 30, 2005 Securities Losses of Investment Securities Losses of Investment------------------------------------------------------------------------------------------------------------------------ (in millions) Securities available for sale: U.S. Government sponsored enterprises (1) ............. 89 $ (29) $ 3,141 34 $ (25) $ 905 U.S. Government agency issued or guaranteed ........ 74 (6) 858 104 (18) 638 All other securities .......... 26 (5) 451 -- -- -- ---------- ---------- ------------- ---------- ---------- ------------- 189 $ (40) $ 4,450 138 $ (43) $ 1,543 ========== ========== ============= ========== ========== ============= Securities held to maturity: U.S. Government sponsored enterprises (1) ............. 6 $ (1) $ 149 3 $ (2) $ 72 ---------- ---------- ------------- ---------- ---------- ------------- 6 $ (1) $ 149 3 $ (2) $ 72 ========== ========== ============= ========== ========== ============= ------------------------------------------------------------------------------------------------------------------------ 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 decreased duringthe six months ended June 30, 2005 due to a decrease in long-term interestrates, which was partially offset by the impact of increased short-term andmedium-term rates. Since substantially all of these securities are high creditgrade (i.e., AAA or AA), and HUSI has the ability and intent to hold thesesecurities until maturity or a market price recovery, these securities are notconsidered to be other than temporarily impaired. 9 Note 3. Loans-------------------------------------------------------------------------------- The following table shows the composition of the loan portfolio. ------------------------------------------------------------------------------- June 30, December 31, 2005 2004------------------------------------------------------------------------------- (in millions)Commercial: Construction and other real estate ............ $ 8,861 $ 8,281 Other commercial .............................. 15,314 14,691Consumer: Residential mortgages ......................... 47,634 46,775 Credit card receivables ....................... 12,876 12,078 Other consumer loans .......................... 3,162 3,122 ----------- -----------Total loans ....................................... $ 87,847 $ 84,947 =========== =========== Note 4. Allowance for Credit Losses-------------------------------------------------------------------------------- The following provides a summary of changes in the allowance for credit losses. ------------------------------------------------------------------------------------------------- Three Months Six Months Ended June 30 Ended June 30 ----------------- ----------------- 2005 2004 2005 2004------------------------------------------------------------------------------------------------- (in millions) Beginning balance ....................................... $ 773 $ 357 $ 788 $ 399Allowance related to acquisitions and (dispositions), net -- -- -- (9)Charge offs ............................................. 206 35 405 64Recoveries .............................................. 53 19 130 41 ------- ------- ------- ------- Net charge offs ................................... 153 16 275 23 ------- ------- ------- -------Provision charged (credited) to income .................. 170 6 277 (20) ------- ------- ------- -------Ending balance .......................................... $ 790 $ 347 $ 790 $ 347 ======= ======= ======= ======= Further analysis of the allowance for credit losses and credit quality begins onpage 39 of this Form 10-Q. 10 Note 5. Intangible Assets, Net-------------------------------------------------------------------------------- The following table summarizes the composition of intangible assets. ----------------------------------------------------------------------------------------------------- June 30, December 31, 2005 2004----------------------------------------------------------------------------------------------------- (in millions) Mortgage servicing rights, net of accumulated amortization and valuation allowance ............................................................. $ 285 $ 309Other ................................................................... 49 43 ----------- -----------Intangible assets, net .................................................. $ 334 $ 352 =========== =========== Mortgage Servicing Rights (MSRs) The following table summarizes activity for MSRs and the related valuationallowance. ---------------------------------------------------------------------------------------------- Three Months Six Months Ended June 30 Ended June 30 ------------------ ------------------ 2005 2004 2005 2004---------------------------------------------------------------------------------------------- (in millions) MSRs, net of accumulated amortization: Beginning balance .............................. $ 401 $ 459 $ 416 $ 526 Additions related to loan sales ................ 18 19 31 36 Net MSRs acquisitions (sales) .................. -- 3 -- (54) Permanent impairment charges ................... (7) (6) (16) (7) Amortization ................................... (18) (38) (37) (64) ------- ------- ------- ------- Ending balance ................................. 394 437 394 437 ------- ------- ------- ------- Valuation allowance for MSRs: Beginning balance .............................. (81) (81) (107) (23) Temporary impairment (provision) recovery ...... (35) 75 (18) 13 Permanent impairment charges ................... 7 6 16 7 Release of allowance related to MSRs sold ...... -- -- -- 3 ------- ------- ------- ------- Ending balance ................................. (109) -- (109) -- ------- ------- ------- ------- MSRs, net of accumulated amortization and valuation allowance ....................................... $ 285 $ 437 $ 285 $ 437 ======= ======= ======= ======= 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. Note 6. Goodwill-------------------------------------------------------------------------------- During the second quarter of 2005, 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 six months of 2005, there were no significantevents or transactions which warranted specific consideration for their impacton recorded book values assigned to goodwill. Note 7. Income Taxes-------------------------------------------------------------------------------- The following table presents the effective tax rate for the three months and sixmonths ended June 30, 2005 and 2004. ---------------------------------------------------------------------------------------------- Three Months Six Months Ended June 30 Ended June 30 ------------------ ------------------ 2005 2004 2005 2004---------------------------------------------------------------------------------------------- Effective tax rate ................................ 38.1% 28.2% 36.7% 34.1% 11 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. Excluding the impact of this adjustment, theeffective tax rate for the six months ended June 30, 2005 would have been 39.2%. In June 2004, approximately $51 million of income tax liability related to theanticipated completion of an outstanding audit was released, reducing theeffective tax rate by 10.9% for the second quarter and 5.2% for the first sixmonths of 2004. Note 8. Long-Term Debt-------------------------------------------------------------------------------- The following table presents a summary of long-term debt. ------------------------------------------------------------------------------- June 30, December 31, 2005 2004------------------------------------------------------------------------------- (in millions)Senior debt........................................ $ 18,870 $ 18,831Subordinated debt.................................. 4,995 4,988All other.......................................... 20 20 ----------- -----------Total long-term debt............................... $ 23,885 $ 23,839 =========== =========== For a discussion of the components of long-term debt refer to the narrativeaccompanying Note 14 Long-Term Debt on pages 93 and 94 of the 2004 Form 10-K. Note 9. Preferred Stock-------------------------------------------------------------------------------- In April 2005, HUSI issued 20,700,000 shares of floating rate non-cumulativepreferred stock with a stated value of $25 per share. Dividends are payablequarterly, beginning July 1, 2005 at .75% above three-month LIBOR, but not lessthan 3.50% per annum. The shares may be redeemed at the option of HUSI on orafter April 7, 2010 at $25 per share, plus accrued dividends. Related issuancecosts of $13 million have been recorded as a reduction of capital surplus. Note 10. 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. ----------------------------------------------------------------------------------- June 30, December 31, 2005 2004----------------------------------------------------------------------------------- (in millions) Assets: Interest bearing deposits with banks ........... $ 225 $ 436 Loans .......................................... 1,142 828 Trading assets ................................. 4,688 3,167 Other .......................................... 122 752 ----------- ------------ Total assets ................................... $ 6,177 $ 5,183 =========== ============ Liabilities: Deposits ....................................... $ 9,426 $ 9,759 Trading account liabilities .................... 4,979 5,704 Short-term borrowings .......................... 1,153 1,089 Other .......................................... 162 77 ----------- ------------ Total liabilities .............................. $ 15,720 $ 16,629 =========== ============ 12 ----------------------------------------------------------------------------------------------------------------- Three Months Six Months Ended June 30 Ended June 30 ----------------------- ----------------------- 2005 2004 2005 2004----------------------------------------------------------------------------------------------------------------- (in millions) Interest income........................................... $ 3 $ 1 $ 4 $ 4Interest expense ......................................... 69 18 132 39Trading losses ........................................... (1,430) (137) (1,751) (70)Other revenues ........................................... 27 14 67 24Support services from HSBC affiliates: Fees paid to HTSU for technology services ............. 51 44 100 82 Fees paid to HSBC Finance Corporation ................. 100 8 205 13 Other fees, primarily treasury and traded markets services ............................................. 67 55 132 99 The following business transactions conducted with HSBC Finance Corporationimpacted operations during 2005. o In December of 2004, approximately $12 billion of private label receivables and other loans were purchased from HSBC Finance Corporation. Retained 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 six months of 2005, approximately $9 billion of additional receivables were acquired from HSBC Finance Corporation at a premium of $192 million, which is being amortized to interest income over the estimated life of the receivables purchased. o During the first six months of 2005, HUSI purchased approximately $1.4 billion of residential mortgage and other consumer loans from originating lenders pursuant to HSBC Finance Corporation correspondent loan programs. Total premium paid was $17 million, which is being amortized to interest income over the estimated life of the loans purchased. 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 receivable balances generated by these relationships are purchased at fair value from HSBC Finance Corporation on a daily basis. During the first six months of 2005, approximately $947 million of receivables associated with these relationships were purchased from HSBC Finance Corporation at a premium of approximately $17 million, which is being amortized to interest income over the estimated life of the receivables purchased. Servicing for the majority of these relationships was also transferred to HSBC Finance Corporation. o Support services from HSBC affiliates includes charges by HSBC Finance Corporation under various service level agreements for loan origination and servicing as well as other operational and administrative support. o Effective October 1, 2004, HBUS is the originating lender for loans initiated for HSBC Finance Corporation's Taxpayer Financial Services business for clients of various third party tax preparers. By agreement, HBUS processes applications, funds and subsequently sells these loans to HSBC Finance Corporation. During the first six months of 2005, approximately $24 billion of loans were originated by HUSI and immediately sold to HSBC Finance Corporation, resulting in gains of approximately $19 million and fees paid to HSBC Finance Corporation of $4 million.Related Shares:
HSBC Holdings