10-K 1 d25171_10k.txt FORM 10-K ================================================================================ Securities and Exchange Commission Washington, D.C. 20549 Form 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2000 Commission file number 1-7436 HSBC USA Inc. (Exact name of registrant as specified in its charter) 452 Fifth Avenue New York, New York 10018 (Address of principal executive offices) Telephone: (212) 525-6100 IRS Employer Identification No.: State of Incorporation: 13-2764867 Maryland Securities registered on the New York Stock Exchange pursuant to Section 12(b) of the Act: Depositary Shares, each representing a one-fourth interest in a share of Adjustable Rate Cumulative Preferred Stock, Series D $1.8125 Cumulative Preferred Stock $2.8575 Cumulative Preferred Stock 7% Subordinated Notes due 2006 8.375% Debentures due 2007 Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) had filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. [X] All voting stock (704 shares of Common Stock $5 par value) is owned by HSBC North America Inc., an indirect wholly owned subsidiary of HSBC Holdings plc. Documents incorporated by reference: None ================================================================================ 1 This page is intentionally left blank. 2 TABLE OF CONTENTS Page Part I -------------------------------------------------------------------------------- 1. Business 4 2. Properties 6 3. Legal Proceedings 6 4. Submission of Matters to a Vote of Security Holders 6 Part II -------------------------------------------------------------------------------- 5. Market for the Registrant's Common Equity and Related Stockholder Matters 6 6 Selected Financial Data 7 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 7A. Quantitative and Qualitative Disclosures About Market Risk 31 8. Financial Statements and Supplementary Data 37 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 79 Part III -------------------------------------------------------------------------------- 10. Directors and Executive Officers of the Registrant 79 11. Executive Compensation 83 12. Security Ownership of Certain Beneficial Owners and Management 85 13. Certain Relationships and Related Transactions 86 Part IV -------------------------------------------------------------------------------- 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 87 3 PART I Item 1. Business HSBC USA Inc. (the Company) is a New York State based bank holding company registered under the Bank Holding Company Act of 1956, as amended. At December 31, 2000, the Company had assets of $83.0 billion and employed approximately 14,200 full and part time employees. All of the Company's common stock is owned by HSBC North America Inc. (HNAI), an indirect wholly owned subsidiary of HSBC Holdings plc (HSBC). HSBC, the ultimate parent company of HSBC Bank plc, The Hongkong and Shanghai Banking Corporation Limited (HongkongBank), and other financial services companies, is an international banking and financial services organization with major commercial and investment banking franchises operating in the Asia-Pacific region, Europe, the Americas, the Middle East and Africa. The principal executive offices of HSBC are located in London, England. HSBC, with assets of $674 billion at December 31, 2000, is one of the world's largest banking and financial services organizations. The Company's principal subsidiary HSBC Bank USA (the Bank), had assets of $80.1 billion and deposits of $56.9 billion at December 31, 2000. The Company also is a participant in a joint venture, Wells Fargo HSBC Trade Bank. The Bank's domestic operations encompass the State of New York as well as two branches in Pennsylvania, seven branches in Florida and three branches in California. Selected commercial and consumer banking products are offered on a national basis. The Bank is engaged in a general commercial banking business, offering a full range of banking products and services to individuals, including high-net-worth individuals, corporations, institutions and governments. Through its affiliation with HSBC, the Bank offers its customers access to global markets and services. In turn, the Bank plays a role in the delivery and processing of other HSBC products. In addition to its domestic offices, the Bank maintains foreign branch offices, subsidiaries and/or representative offices in the Caribbean, Europe, Panama, Asia and Latin America. On August 1, 2000, the Company purchased the banking operations of Chase Manhattan Bank, Panama (Chase Panama). The transaction was accounted for as a purchase. Accordingly, the results of Chase Panama are included with those of the Company for the period subsequent to the date of acquisition. The branch operations had over $750 million in assets and $720 million in deposit liabilities. On December 31, 1999, HSBC acquired Republic New York Corporation (Republic), which it subsequently merged with the Company, and Safra Republic Holdings S.A., subsequently renamed HSBC Republic Holdings (Luxembourg) S.A. (HRH). As part of the integration of Republic into HSBC, various transactions have either taken place, or are planned to take place in 2001. Certain operations of non-U.S. branches and subsidiaries of the Company have been transferred to foreign operations of HSBC, such as the sale of a branch in Tokyo to the Asia Pacific operations of HSBC. Such plans also involve the reorganization of much of the international private banking business of HSBC outside the Americas (including operations owned by the Company and other HSBC members) to operate through one global private banking organization based in Switzerland and operating in various locations throughout the world. 4 PART I Continued Item 1. Business Continued The Bank had a 49% investment in HRH, a holding company, principally engaged in international private banking and commercial banking with assets of $24.4 billion at December 31, 1999. HSBC held the remaining 51% ownership interest in HRH. In connection with HSBC's internal international private banking operations reorganization in December 2000, the Company distributed its interest in HRH to HNAI, its parent. The distribution, in the form of a return of capital in the amount of $2.8 billion, included its investment in a Bahamian subsidiary in addition to the $2.5 billion investment in HRH. The Bank is supervised and routinely examined by the State of New York Banking Department and the Board of Governors of the Federal Reserve System (the Federal Reserve), and it is subject to banking laws and regulations which place various restrictions on and requirements regarding its operations and administration, including the establishment and maintenance of branch offices, capital and reserve requirements, deposits and borrowings, investment and lending activities, payment of dividends and numerous other matters. The Federal Reserve Act restricts certain transactions between banks and their nonbank affiliates. The deposits of the Bank are insured by the Federal Deposit Insurance Corporation (FDIC) and subject to relevant FDIC regulations. The enactment of the Gramm-Leach-Bliley Act of 1999 (GLB Act), effective March 11, 2000, provides expanded opportunities for banks, other depository institutions, insurance companies and securities firms to enter into combinations that permit a single financial services organization to offer a more complete line of financial products and services. Further competitive pressures are anticipated from industry consolidations in the wake of the passage of the GLB Act. The GLB Act also requires banks, securities firms and insurance companies to adopt written privacy policies, which are designed to safeguard consumers' privacy, and to provide copies of those policies to their customers on or before July 1, 2001. The Company will be devoting significant resources in 2001 to this endeavor. The Company and the Bank are subject to risk-based capital and leverage guidelines issued by the Federal Reserve. The Federal Reserve is required by law to take specific prompt actions with respect to financial institutions that do not meet minimum capital standards. Five capital standards have been identified, the highest of which is well-capitalized. A well-capitalized bank must have a Tier 1 risk-based capital ratio of at least 6%, a total risk-based capital ratio of at least 10% and a leverage ratio of at least 5% and not be subject to a capital directive order. The Company and the Bank's ratios at December 31, 2000 exceeded all ratios required for the well-capitalized category. The Company and its subsidiaries face competition in all the markets they serve, competing with other financial institutions, including commercial banks, investment banks, savings and loan associations, credit unions, consumer finance companies, money market funds and other non-banking institutions such as insurance companies, major retailers, brokerage firms and investment companies. Many of these institutions are not subject to the same laws and regulations imposed on the Company and its subsidiaries. 5 Item 2. Properties The principal executive offices of the Company are located at 452 Fifth Avenue, New York, New York 10018, which is owned by the Bank. The principal executive offices of the Bank are located at One HSBC Center, Buffalo, New York 14203, in a building under a long-term lease. The Bank has more than 420 other banking offices in New York State located in 50 counties, two branches in Pennsylvania, seven branches in Florida and three branches in California. Approximately 38% of these offices are located in buildings owned by the Bank and the remaining are located in leased quarters. In addition, there are branch offices and locations for other activities occupied under various types of ownership and leaseholds in states other than New York, none of which is materially important to the respective activities. The Bank owns properties in: Buenos Aires, Argentina; Santiago, Chile; Panama City, Panama; Montevideo, Uruguay; Mexico City, Mexico and London, England. Item 3. Legal Proceedings The information contained in Note 26 to the Financial Statements on page 68 of this report is incorporated herein by reference. Item 4. Submission of Matters to a Vote of Security Holders Reference is made to Item 5. P A R T II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters Since all common stock of the Company is owned by HSBC North America Inc., shares of the Company's common stock are not listed or traded on a securities exchange. 6 Item 6. Selected Financial Data HSBC acquired Republic New York Corporation (Republic) and merged it with the Company on December 31, 1999. The acquisition was accounted for as a purchase by the Company so that the fair value of the assets and liabilities of Republic are included in balances at year end 1999. Accordingly, the results of operations of Republic are included with those of the Company for the period subsequent to the acquisition.

Year Ended December 31, 2000 1999 1998 1997 1996 --------- --------- --------- --------- -------- in millions Net interest income $ 2,119.1 $ 1,225.9 $ 1,165.3 $ 1,173.4 $ 961.8 --------- --------- --------- --------- -------- Securities transactions 28.8 10.1 13.8 17.4 7.9 Interest on Brazilian tax settlement - 13.1 32.7 - - Other operating income 803.6 440.8 413.6 342.0 303.0 --------- --------- --------- --------- -------- Total other operating income 832.4 464.0 460.1 359.4 310.9 --------- --------- --------- --------- -------- Other operating expenses 1,905.9 827.9 780.2 781.4 656.8 Provision for credit losses 137.6 90.0 80.0 87.4 64.7 --------- --------- --------- --------- -------- Income before taxes 908.0 772.0 765.2 664.0 551.2 Applicable income tax expense 340.5 308.3 238.1 193.0 171.0 --------- --------- --------- --------- -------- Net income $ 567.5 $ 463.7 $ 527.1 $ 471.0 $ 380.2 --------- --------- --------- --------- -------- Balances at year end (1) Total assets $ 83,032 $ 87,253 $ 33,944 $ 31,518 $ 23,630 Goodwill and other acquisition intangibles 3,233 3,307 335 370 158 Long-term debt 5,097 5,885 1,748 1,708 1,080 Common shareholder's equity 6,843 6,728 2,228 2,039 1,875 Total shareholders' equity 7,343 7,228 2,228 2,039 1,973 Ratio of shareholders' equity to total assets 8.84% 8.28% 6.56% 6.47% 8.35% --------- --------- --------- --------- -------- Selected financial data (1)(2) Rate of return on Total assets 0.69% 1.35% 1.60% 1.62% 1.83% Total common shareholder's equity 8.19 20.31 24.93 22.93 21.33 Total shareholders' equity to total assets 8.56 6.67 6.44 7.14 8.90 --------- --------- --------- --------- -------- Quarterly Results of Operations

2000 1999 ---------------------------------------- --------------------------------------- 4th Q 3rd Q(3) 2nd Q(3) 1st Q(3) 4th Q 3rd Q 2nd Q 1stQ ------- ------- -------- -------- ------- ------- ------- ------- in millions Net interest income $ 523.9 $ 539.6 $ 527.5 $ 528.1 $ 302.2 $ 305.5 $ 306.9 $ 311.3 ------- ------- -------- ------- ------- ------- ------- ------- Securities transactions 18.4 9.1 3.7 (2.4) 2.9 (0.1) 4.9 2.4 Interest on Brazilian tax settlement - - - - 13.1 - - - Other operating income 194.0 202.5 193.7 213.4 109.4 108.2 104.0 119.2 ------- ------- -------- ------- ------- ------- ------- ------- Total other operating income 212.4 211.6 197.4 211.0 125.4 108.1 108.9 121.6 ------- ------- -------- ------- ------- ------- ------- ------- Other operating expenses 483.8 475.5 473.8 472.8 217.2 200.3 203.8 206.6 Provision for credit losses 31.0 50.6 28.0 28.0 22.5 22.5 22.5 22.5 ------- ------- -------- ------- ------- ------- ------- ------- Income before taxes 221.5 225.1 223.1 238.3 187.9 190.8 189.5 203.8 Applicable income tax expense 83.0 84.4 83.7 89.4 74.0 75.9 76.0 82.4 ------- ------- -------- ------- ------- ------- ------- ------- Net income $ 138.5 $ 140.7 $ 139.4 $ 148.9 $ 113.9 $ 114.9 $ 113.5 $ 121.4 ======= ======= ======== ======= ======= ======= ======= =======

(1) Balances for 1999 were restated to exclude investments to HSBC North America Inc. during 2000. See Note 1 for further discussion. (2) Based on average daily balances. (3) The 2000 quarterly results of operations as reported in the respective Form 10-Q's were restated to exclude investments transferred to HSBC North America Inc. during 2000. See Note 1 for further discussion. 7 CONSOLIDATED AVERAGE BALANCES AND INTEREST RATES - THREE YEARS The following table shows the average balances of the principal components of assets, liabilities and shareholders' equity, together with their respective interest amounts and rates earned or paid on a taxable equivalent basis. Average balances for 1999 were restated to exclude investments transferred to HSBC North America Inc. during 2000. See Note 1 for further discussion.

2000 --------------------------- Balance Interest Rate -------- --------- ---- Assets Interest bearing deposits with banks $ 4,425 $ 308.7 6.98% Federal funds sold and securities purchased under resale agreements 3,260 215.0 6.59 Trading assets 5,504 140.5 2.55 Securities 22,158 1,605.2 7.24 Loans Domestic Commercial 18,105 1,359.4 7.51 Consumer Residential mortgages 14,543 1,086.3 7.47 Other consumer 3,189 366.4 11.49 -------- --------- ---- Total domestic 35,837 2,812.1 7.85 International 3,129 261.7 8.37 -------- --------- ---- Total loans 38,966 3,073.8 7.89 -------- --------- ---- Total earning assets 74,313 $ 5,343.2 7.19% -------- --------- ---- Allowance for loan losses (606) Cash and due from banks 1,794 Other assets 7,288 -------- --------- ---- Total assets $ 82,789 ======== ========= ==== Liabilities and Shareholders' Equity Interest bearing demand deposits $ 676 $ 8.0 1.18% Consumer savings deposits 12,462 313.5 2.52 Other consumer time deposits 9,048 466.9 5.16 Commercial, public savings and other time deposits 7,188 358.3 4.98 Deposits in foreign offices 19,586 1,186.8 6.06 -------- --------- ---- Total interest bearing deposits 48,960 2,333.5 4.77 -------- --------- ---- Federal funds purchased and securities sold under repurchase agreements 2,082 123.8 5.95 Other short-term borrowings 6,575 320.9 4.88 Long-term debt 5,771 420.3 7.28 -------- --------- ---- Total interest bearing liabilities 63,388 $ 3,198.5 5.05% -------- --------- ---- Interest rate spread 2.14% -------- --------- ---- Noninterest bearing deposits 6,063 Other liabilities 6,248 Total shareholders' equity 7,090 -------- --------- ---- Total liabilities and shareholders' equity $ 82,789 ======== ========= ==== Net yield on average earning assets 2.89% -------- --------- ---- Net yield on average total assets 2.59 ======== ========= ==== Total weighted average rate earned on earning assets is interest and fee earnings divided by daily average amounts of total interest earning assets, including the daily average amount on nonperforming loans. Loan fees included were $38 million for 2000, $36 million for 1999 and $28 million for 1998. 8 SCHEDULE CONTINUED

1999 1998 ------------------------------ ------------------------------ Balance Interest Rate Balance Interest Rate -------- --------- ---- -------- --------- ---- in millions Assets Interest bearing deposits with banks $ 1,795 $ 97.0 5.40% $ 2,377 $ 136.6 5.75% Federal funds sold and securities purchased under resale agreements 2,238 116.5 5.21 2,299 128.0 5.57 Trading assets 919 50.8 5.52 851 51.0 5.99 Securities 3,654 214.7 5.88 3,930 232.6 5.92 Loans Domestic Commercial 10,496 825.3 7.86 8,569 738.3 8.62 Consumer Residential mortgages 9,382 656.9 7.00 9,531 684.7 7.18 Other consumer 2,432 285.6 11.74 2,652 319.8 12.06 -------- --------- ---- -------- --------- ---- Total domestic 22,310 1,767.8 7.92 20,752 1,742.8 8.40 International 1,075 75.4 7.02 640 44.6 6.96 -------- --------- ---- -------- --------- ---- Total loans 23,385 1,843.2 7.88 21,392 1,787.4 8.36 -------- --------- ---- -------- --------- ---- Total earning assets 31,991 $ 2,322.2 7.26% 30,849 $ 2,335.6 7.57% -------- --------- ---- -------- --------- ---- Allowance for loan losses (379) (404) Cash and due from banks 1,046 1,128 Other assets 1,572 1,274 -------- --------- ---- -------- --------- ---- Total assets $ 34,230 $ 32,847 ======== ========= ==== ======== ========= ==== Liabilities and Shareholders' Equity Interest bearing demand deposits $ 248 $ 2.3 0.91% $ 274 $ 3.0 1.09% Consumer savings deposits 7,620 172.9 2.27 7,321 183.1 2.50 Other consumer time deposits 6,808 308.4 4.53 6,369 336.1 5.28 Commercial, public savings and other time deposits 4,265 153.3 3.59 3,244 134.2 4.13 Deposits in foreign offices 4,584 216.0 4.71 4,074 211.0 5.18 -------- --------- ---- -------- --------- ---- Total interest bearing deposits 23,525 852.9 3.63 21,282 867.4 4.08 -------- --------- ---- -------- --------- ---- Federal funds purchased and securities sold under repurchase agreements 951 45.2 4.75 917 48.1 5.24 Other short-term borrowings 1,618 84.4 5.21 2,717 156.1 5.74 Long-term debt 1,867 111.7 5.98 1,469 96.1 6.54 -------- --------- ---- -------- --------- ---- Total interest bearing liabilities 27,961 $ 1,094.2 3.91% 26,385 $ 1,167.7 4.45% -------- --------- ---- -------- --------- ---- Interest rate spread 3.35% 3.11% -------- --------- ---- -------- --------- ---- Noninterest bearing deposits 3,111 3,665 Other liabilities 873 683 Total shareholders' equity 2,285 2,114 -------- --------- ---- -------- --------- ---- Total liabilities and shareholders' equity $ 34,230 $ 32,847 ======== ========= ==== ======== ========= ==== Net yield on average earning assets 3.84% 3.79% -------- --------- ---- -------- --------- ---- Net yield on average total assets 3.59 3.56 ======== ========= ==== ======== ========= ====

9 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The Company reported pretax income of $908.0 million for 2000 compared with $772.0 million in 1999. Pretax income after adding back goodwill amortization was $1,084.2 million in 2000 compared with $805.3 million in 1999. Return on average common shareholder's equity was 8.19% in 2000 and 20.31% in 1999. The largest factor contributing to the increased net income between 2000 and 1999 was the acquisition of Republic New York Corporation (Republic) on December 31, 1999. The acquisition was accounted for as a purchase by the Company. The fair value of the assets and liabilities of Republic were included in the balance sheet of the Company as of December 31, 1999. Accordingly, the results of operations of Republic are included with those of the Company for the period subsequent to the acquisition. Republic engaged in five principal lines of business: private banking; consumer financial services; lending; treasury; and markets. Republic National Bank of New York (Republic Bank) had 83 branches in the greater New York metropolitan area, where it was the third-largest deposit taking institution, and 7 branches in Florida, as well as 36 branches, representative offices or wholly owned subsidiaries in Latin America, the Caribbean, Europe and Asia. Republic was a world leader in banknotes and bullion trading and provided the fifth-largest factoring service in the United States. In addition, it had significant international private banking operations in New York, Miami, Los Angeles and Asia. At December 31, 1999 Republic had total assets of $46.9 billion, deposits of $29.9 billion and common shareholders' equity of $2.9 billion. Republic's net income for 1999 was $418 million. See page 30 for additional analysis of Republic. In December 2000, as part of an internal international reorganization of the HSBC Group's global private banking operations, the Company distributed its 49% interest in HSBC Republic Holdings (Luxembourg) S.A. (HRH) from the Bank to its parent HSBC North America Inc. (HNAI). The distribution, in the form of a return of capital of $2.8 billion, included its investment in HSBC Investments (Bahamas) Limited in addition to the $2.5 billion investment in HRH. The assets transferred were acquired as a part of the acquisition and merger of Republic New York Corporation (Republic) on December 31, 1999. See Note 2, Acquisitions. The divestitures were accounted for as transfers of assets between companies under common control at historical cost. The entities involved were acquired in conjunction with the Republic merger. The accompanying consolidated financial statements and related notes reflect a restatement of the December 31, 1999 consolidated balance sheets of the Company and the Bank to exclude the transferred assets and liabilities as though they had not been acquired (depooling). Restatement of the 1999 income statement was not required as no income or expenses from Republic were included in the reported results. This report includes forward-looking statements that involve inherent risks and uncertainties. Statements that are not historical facts, including statements about management's beliefs and expectations, are forward-looking statements. A number of important factors could cause actual results to differ materially from those contained in any forward-looking statements. Such factors include, but are not limited to: sharp and/or rapid changes in interest rates; significant changes in the economic conditions which could materially change anticipated credit quality trends and the ability to generate loans; cost savings and revenue enhancements as well as the nature, costs and timing of integration of businesses relating to the acquisition; 10 technology changes; significant changes in accounting, tax or regulatory requirements; and competition in the geographic and business areas in which the Company conducts its operations. A detailed review comparing 2000 operations with 1999 and 1998 follows. It should be read in conjunction with the consolidated financial statements of the Company which begin on page 37. 11 EARNINGS PERFORMANCE REVIEW Net Interest Income Net interest income is the total interest income on earning assets less the interest expense on deposits and borrowed funds. In the discussion that follows, interest income and rates are presented and analyzed on a taxable equivalent basis, in order to permit comparisons of yields on tax-exempt and taxable assets.

Increase(Decrease) Increase(Decrease) --------------------------------- ------------------------------------------ 2000 Amount % 1999 Amount % 1998 -------- -------- ------- -------- ------ ---- -------- in millions Interest income $5,343.2 $3,021.0 130.1 $2,322.2 $(13.4) (.6) $2,335.6 Interest expense 3,198.5 2,104.3 192.3 1,094.2 (73.5) (6.3) 1,167.7 -------- -------- ------- -------- ------ ---- -------- Net interest income - taxable equivalent basis 2,144.7 916.7 74.6 1,228.0 60.1 5.1 1,167.9 Taxable equivalent adjustment 25.6 23.5 1,102.6 2.1 (.5) (17.5) 2.6 -------- -------- ------- -------- ------ ---- -------- Net interest income $2,119.1 $ 893.2 72.9 $1,225.9 $ 60.6 5.2 $1,165.3 -------- -------- ------- -------- ------ ---- -------- Average earning assets $ 74,313 $ 42,322 132.3 $ 31,991 $1,142 3.7 $ 30,849 Average nonearning assets 8,476 6,237 278.6 2,239 241 12.0 1,998 -------- -------- ------- -------- ------ ---- -------- Average total assets $ 82,789 $ 48,559 141.9 $ 34,230 $1,383 4.2 $ 32,847 -------- -------- ------- -------- ------ ---- -------- Net yield on: Average earning assets 2.89% (.95)% (24.7) 3.84% .05% 1.3 3.79% Average total assets 2.59 (1.00) (27.9) 3.59 .03 .8 3.56 ======== ======== ======= ======== ====== ==== ========

Net interest income was $2,144.7 million in 2000 compared with $1,228.0 million in 1999. The Republic acquisition was the principal factor contributing to the increase in net interest income and average assets. The decrease in net yield in 2000 from 1999 was primarily due to a higher concentration of lower yielding treasury assets and higher costing foreign deposits as a result of the Republic acquisition. The following table presents net interest income components on a taxable equivalent basis, using marginal tax rates of 35%, and quantifies the changes in the components according to "volume and rate". 12 Net Interest Income Components Including Volume/Rate Analysis

2000 Compared to 1999 1999 Compared to 1998 Increase(Decrease) Increase(Decrease) ------------------------------- --------------------------------------- 2000 Volume Rate 1999 Volume Rate 1998 -------- -------- ------- -------- ------ ------- -------- in millions Interest income: Interest bearing deposits with banks $ 308.7 $ 176.6 $ 35.1 $ 97.0 $(31.8) $ (7.8) $ 136.6 Federal funds sold and securities purchased under resale agreements 215.0 62.1 36.4 116.5 (3.3) (8.2) 128.0 Trading assets 140.5 130.3 (40.6) 50.8 3.9 (4.1) 51.0 Securities 1,605.2 1,329.4 61.1 214.7 (16.2) (1.7) 232.6 Loans: Domestic: Commercial 1,359.4 572.9 (38.8) 825.3 155.6 (68.6) 738.3 Consumer Residential mortgages 1,086.3 382.8 46.6 656.9 (10.6) (17.2) 684.7 Credit card receivables 180.1 (1.3) (5.5) 186.9 (21.0) (4.2) 212.1 Other consumer 186.3 72.3 15.3 98.7 (6.7) (2.3) 107.7 International 261.7 169.3 17.0 75.4 30.5 .3 44.6 -------- -------- ------- -------- ------ ------- -------- Total interest income 5,343.2 2,894.4 126.6 2,322.2 100.4 (113.8) 2,335.6 -------- -------- ------- -------- ------ ------- -------- Interest expense: Interest bearing demand deposits 8.0 4.9 .8 2.3 (.2) (.5) 3.0 Consumer savings and other time deposits 780.4 253.8 45.3 481.3 27.0 (64.9) 519.2 Commercial and public savings and other time deposits 358.3 131.1 73.9 153.3 38.3 (19.2) 134.2 Deposits in foreign offices 1,186.8 892.8 78.0 216.0 25.0 (20.0) 211.0 Short-term borrowings 444.7 312.6 2.5 129.6 (55.2) (19.4) 204.2 Long-term debt 420.3 279.5 29.1 111.7 24.3 (8.7) 96.1 -------- -------- ------- -------- ------ ------- -------- Total interest expense 3,198.5 1,874.7 229.6 1,094.2 59.2 (132.7) 1,167.7 -------- -------- ------- -------- ------ ------- -------- Net interest income - taxable equivalent basis $2,144.7 $1,019.7 $(103.0) $1,228.0 $ 41.2 $ 18.9 $1,167.9 ======== ======== ======= ======== ====== ======= ========

The changes in interest income and interest expense due to both rate and volume have been allocated in proportion to the absolute amounts of the change in each. Average Balances and Interest Rates Average balances and interest rates earned or paid for the past three years are reported on pages 8 and 9. The Republic acquisition was the principal factor contributing to the increase in net interest income, average assets and liabilities and shareholders' equity for 2000. The favorable volume variance for residential mortgages also reflects loan growth achieved for 2000. The overall rate environment for 2000 was higher than 1999, with an approximate 1.2% increase in average prime rate and a 1.1% increase in average LIBOR rate year-to-year. The unfavorable rate variances for trading assets, domestic commercial loans and credit card receivables for 2000 compared to 1999 reflect the impact of lower yielding Republic assets. The rate variance for short-term borrowings for 2000 compared to 1999 similarly reflects the impact of lower rate Republic liabilities. 13 Other Operating Income Other operating income was $832.4 million in 2000 compared with $464.0 million in 1999 and $460.1 million in 1998.

Increase(Decrease) Increase(Decrease) ----------------------------- --------------------------------------- 2000 Amount % 1999 Amount % 1998 ------ ------ ------- ------ ------ ----- ------ in millions Trust income $ 84.9 $ 32.7 62.6 $ 52.2 $ 4.9 10.4 $ 47.3 Service charges 172.3 43.7 33.9 128.6 13.2 11.5 115.4 Mortgage banking revenue 32.5 2.0 6.7 30.5 (12.6) (29.4) 43.1 Letter of credit fees 53.5 21.0 64.6 32.5 6.6 25.5 25.9 Credit card fees 56.0 9.4 20.4 46.6 2.3 5.1 44.3 Other fee-based income 131.8 75.7 134.9 56.1 7.5 15.5 48.6 Investment product fees 59.0 26.6 82.1 32.4 5.7 21.3 26.7 Interest on Brazilian tax settlement - (13.1) - 13.1 (19.6) (59.8) 32.7 Other income 73.4 21.5 41.5 51.9 (6.7) (11.4) 58.6 ------ ------ ------- ------ ------ ----- ------ Nontrading income 663.4 219.5 49.5 443.9 1.3 .3 442.6 ------ ------ ------- ------ ------ ----- ------ Trading revenues 140.2 130.2 1,300.0 10.0 6.3 170.6 3.7 Securities transactions 28.8 18.7 185.6 10.1 (3.7) (27.1) 13.8 ------ ------ ------- ------ ------ ----- ------ Total other operating income $832.4 $368.4 79.4 $464.0 $ 3.9 .8 $460.1 ====== ====== ======= ====== ====== ===== ======

Nontrading Income Nontrading income was $663.4 million in 2000 compared with $443.9 million in 1999. The Republic acquisition was the principal factor contributing to the increase. In addition, increases in trust income, investment product fees and insurance income reflect growth achieved in our domestic wealth management business. Mortgage banking revenue for 2000 increased only slightly as a result of lower gains on sale of mortgages due to the higher interest rate environment and competitive pricing pressures. The Company received interest of $13.1 million and $32.7 million in 1999 and 1998, respectively, as a result of the settlement of previously disallowed income tax credits on Brazilian debt. Other income in 1999 included a gain on the sale of a student loan business of $15.0 million. 14 Total Trading Revenues Trading revenues are generated by the Company's participation in the foreign exchange and precious metal markets, from trading derivative contracts, including interest rate swaps, and trading securities. The following table presents the components of total trading revenues. The product diversification data in the table below includes net interest income earned/(paid) on trading instruments, as well as an allocation by management to reflect the funding benefit or cost associated with the trading positions. The Republic acquisition was the principal factor contributing to the increase for 2000. Overall market conditions for 2000 were stable. During the second half of 2000, the flatter yield curve reduced opportunities in some markets. 2000 1999 1998 ------ ----- ----- in millions Trading revenues $140.2 $10.0 $ 3.7 Net interest income 52.1 4.6 8.0 ------ ----- ----- Total trading related revenues $192.3 $14.6 $11.7 ====== ===== ===== Product diversification: Foreign exchange $ 94.9 $ 6.2 $ 5.5 Precious metals 51.7 - - Trading account profits and commissions 45.7 8.4 6.2 ------ ----- ----- Total trading related revenues $192.3 $14.6 $11.7 ====== ===== ===== Securities Transactions Securities transactions during 2000 resulted in net gains of $28.8 million compared with net gains of $10.1 million in 1999. These gains resulted from the sale of investments classified as available for sale and from the redemption of certain held to maturity securities. Securities were sold as a result of the rationalization of portfolios in light of the Republic acquisition. Other Operating Expenses

Increase(Decrease) Increase(Decrease) ------------------------------- --------------------------------------- 2000 Amount % 1999 Amount % 1998 -------- -------- ----- ------ ------ ---- ------ in millions Salaries and employee benefits $ 979.6 $ 558.3 132.5 $421.3 $11.0 2.7 $410.3 Net occupancy 169.0 80.0 89.9 89.0 (.4) (.5) 89.4 Equipment and software 121.1 67.4 125.6 53.7 2.3 4.4 51.4 Goodwill amortization 176.2 142.9 428.6 33.3 (4.4) (11.7) 37.7 Marketing 34.3 9.9 40.9 24.4 3.0 13.7 21.4 Outside services 105.4 56.3 114.9 49.1 (1.7) (3.5) 50.8 Professional fees 38.4 16.3 73.7 22.1 2.4 12.5 19.7 Other real estate and owned asset expense (.5) 13.4 96.1 (13.9) 3.2 19.1 (17.1) Other 282.4 133.5 89.7 148.9 32.3 27.7 116.6 -------- -------- ----- ------ ----- ---- ------ Total other operating expenses $1,905.9 $1,078.0 130.2 $827.9 $47.7 6.1 $780.2 -------- -------- ----- ------ ----- ---- ------ Personnel - average number 14,415 5,509 61.9 8,906 (32) (.4) 8,938 ======== ======== ===== ====== ===== ==== ======

Other operating expenses were $1,905.9 million in 2000 compared with $827.9 million in 1999. The increase over 1999 was due primarily to the Republic acquisition. Included in total other operating expenses for 2000 were $85.0 million of restructuring costs related to the Republic acquisition compared with $26.7 million in 1999. See Note 2, Acquisitions, on pages 47 through 49 for further discussion. Additional expenses were also incurred in 2000 to 15 support growth in our domestic wealth management business, as well as information technology related initiatives including a comprehensive internet banking product for personal banking customers. Average staffing levels (full time equivalents) were 14,415 in 2000 compared with 8,906 in 1999. Other real estate and owned asset expense in 2000 and 1999 benefited from gains on disposals of properties. Provision for Credit Losses Provision for credit losses was $137.6 million in 2000 compared with $90.0 million in 1999. Net charge offs in the credit card portfolio were $60.2 million and $74.9 million in 2000 and 1999, respectively. Commercial loan net charge offs were $166.3 million in 2000 compared with $8.7 million in 1999. Although the overall quality of the portfolio remains sound, there was some deterioration in the quality of leveraged credits in 2000. These constitute a small portion of total loans. An analysis of the allowance for credit losses and the provision for credit losses begins on page 26. Income Taxes The Company recognized income tax expense of $340.5 million and $308.3 million in 2000 and 1999, respectively. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss carryforwards. The Company has a valuation allowance for the portion of the Company's net deductible temporary differences which are not expected to be realized. At December 31, 2000, the Company had a net deferred tax asset of $92.4 million, as compared with a net deferred tax asset of $120.7 million at December 31, 1999. Business Segments As a result of the Republic acquisition, the Company altered its business segments that it uses to manage operations as of January 1, 2000. Prior year disclosures have been conformed to the presentation of current segments. The Company has four distinct segments that it uses for management reporting: commercial banking, corporate and institutional banking, personal banking and investment banking and markets. A description of each segment and the methodologies used to measure financial performance are included in Note 24, Business Segments, to the financial statements. The following summarizes the results for each segment.

Average Liabilities/ Average Assets Equity Pretax Income ----------------------------- ---------------------------- ---------------------- 2000 1999 1998 2000 1999 1998 2000 1999 1998 ------- ------- ------- ------- ------- ------- ----- ---- ---- Segments: in millions Commercial banking $14,219 $ 7,411 $ 6,782 $ 9,715 $ 6,065 $ 5,495 $ 249 $215 $216 Corporate/institutional banking 5,703 3,799 1,940 4,814 2,258 1,440 113 132 78 Personal banking 20,527 12,452 12,835 27,931 16,169 15,852 503 374 392 Investment banking/ markets 38,990 8,401 9,323 30,922 6,816 7,160 310 25 26 Other 3,350 2,167 1,967 9,407 2,922 2,900 (267) 26 53 ------- ------- ------- ------- ------- ------- ----- ---- ---- Total $82,789 $34,230 $32,847 $82,789 $34,230 $32,847 $ 908 $772 $765 ======= ======= ======= ======= ======= ======= ===== ==== ====

16 The principal factor contributing to the increase in total average assets, liabilities and equity and pretax income for 2000 was the Republic acquisition. The decrease in pretax income for corporate/institutional banking segment compared with 1999 reflects a higher provision for credit losses. The increase in pretax income for personal banking segment compared with 1999 reflects growth achieved in our domestic wealth management business. The pretax loss for 2000 in the other segment includes $85.0 million of restructuring costs and $146.1 million of goodwill amortization related to the Republic acquisition. The acquisition of commercial loans from the HongkongBank late in 1998 contributed to the increase in 1999 pretax income for the corporate/ institutional banking segment compared with 1998. Pretax income for 1999 in the personal banking segment included a gain of $15.0 million on the sale of a student loan business while 1998 included gains of $28.1 million from the sale of certain credit card portfolios. Pretax income for 1999 in the other segment included a $13.1 million Brazilian tax settlement compared with a $32.7 million settlement for 1998. 17 BALANCE SHEET REVIEW Risk Management The Company's organizational structure includes a Risk Management Committee comprised of senior officers to oversee the risk management process. This committee is charged with the review of the internal control framework which identifies, measures, monitors and controls the risks undertaken by the various business and support units and the Company as a whole. It is responsible for the review of all risks associated with significant new products and activities and their primary internal controls prior to implementation. The spectrum of risks includes, but is not limited to, liquidity, market, credit, operational, legal and reputational risk. The Asset and Liability Policy Committee manages the details of liquidity and interest rate risk. The management of credit risk is further discussed on page 22. Asset/Liability Management The principal objectives of asset/liability management are to ensure adequate liquidity and to manage exposure to interest rate, currency and other market risks. In managing these risks, the Company seeks to protect both its income stream and the value of its assets. Liquidity management requires maintaining funds to meet customers' borrowing and deposit withdrawal requirements as well as funding anticipated growth. Interest rate exposure management seeks to control both the near term and longer term effects of interest rate movements on net interest income and other correlated income. The Company has a variety of available techniques for implementing asset/ liability management decisions. Overall balance sheet strategy is centralized under the Asset and Liability Policy Committee, comprised of senior officers. Authority and responsibility for implementation of the Committee's broad strategy is controlled under a framework of defined balance sheet position limits. The Company employs a combination of market rate risk assessment techniques, principally dynamic simulation modeling, capital at risk analysis, gap analysis and Value at Risk (VaR) to assess the sensitivity of its earnings and capital positions to changes in interest rates. In addition, VaR, stress testing and other analyses are used for trading activities. These techniques take into consideration all on-balance sheet and off-balance sheet items. In dynamic simulation modeling, the primary technique currently used, reactions to a range of possible future positive and negative interest rate movements are projected with consideration given to known activities and to the behavioral patterns of specific pools of assets and liabilities in the corresponding rate environments. The optionality of some instruments such as mortgage backed securities and the mortgage loan portfolio is taken into consideration. VaR attempts to capture the potential loss resulting from unfavorable market developments within a given time horizon (typically 10 days) and given a certain confidence level (99%). Management of market risk is further discussed on page 31. 18 The Company maintains a strong liquidity position. The size and stability of the deposit base are complemented by the maintenance of a surplus borrowing capacity in the money markets, including the ability to issue additional commercial paper and access unused lines of credit of $500 million at December 31, 2000. Wholesale liabilities increased to $18,498 million at December 31, 2000 from $17,237 million a year ago. The Company also has strong liquidity as a result of a high level of assets available for immediate sale or pledge including securities available for sale, trading assets, mortgages and other assets. Diversification is also a principle employed in asset/liability management. The Company is an active participant in international banking markets. Managing this activity requires diversification of the risks among many countries and counterparties throughout the world. Liabilities, which are primarily interest bearing deposits and other purchased funds, are obtained from both domestic and international sources. These sources of funds represent a wide range of depositors, mostly individuals, and product types. The stability of the funding base is enhanced by the diversification of the funding sources. On January 1, 2001 the Company adopted Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (FAS 133) as amended by FAS 137 and FAS 138. FAS 133 requires that all derivative financial instruments be recognized at fair value on the balance sheet. To the extent these derivatives qualify for special hedge accounting under FAS 133, changes in their value may be offset by the corresponding mark to market of hedged assets, liabilities or firm commitments or for forecasted transactions, deferred as component of shareholder's equity until the transaction occurs. The ineffective portion of the change in value of a derivative in a qualifying hedge relationship and derivative contracts that do not qualify for hedge accounting under FAS 133 are recognized currently in earnings. Increased earnings volatility will result from the on-going mark to market of certain economically viable derivative contracts that did not satisfy the requirements of FAS 133, as well as from the hedge ineffectiveness associated with the qualifying contracts. The Company expects however that it will be able to continue to pursue its overall asset and liability risk management objectives using a combination of derivatives and cash instruments. Interest Rate Sensitivity The Company is subject to interest rate risk associated with the repricing characteristics of its balance sheet assets and liabilities. Specifically, as interest rates change, interest earning assets reprice at intervals that do not correspond to the maturities or repricing patterns of interest bearing liabilities. This mismatch between assets and liabilities in repricing sensitivity results in shifts in net interest income as interest rates move. To help manage the risks associated with changes in interest rates, and to optimize net interest income within ranges of interest rate risk that management considers acceptable, the Company uses off-balance sheet derivative instruments such as interest rate swaps, options, futures and forwards as hedges to modify the repricing characteristics of specific on-balance sheet assets and liabilities. The following table shows the repricing structure of assets and liabilities as of December 31, 2000. For assets and liabilities whose cash flows are subject to change due to movements in interest rates, such as the sensitivity of 19 mortgage loans to prepayments, data is reported based on the earlier of expected repricing or maturity. The resulting "gaps" are reviewed to assess the potential sensitivity to earnings with respect to the direction, magnitude and timing of changes in market interest rates. Data shown is as of one day, and one day figures can be distorted by temporary swings in assets or liabilities.

Interest Bearing Funds Noninterest ------------------------------------------ Bearing 0-90 91-180 181-365 Over 1 December 31, 2000 Funds Days Days Days Year Total ----------- ------- ------ ------- ------- ------- in millions Assets $ 8,221 $37,697 $3,252 $ 4,422 $29,440 $83,032 Liabilities and shareholders' equity 15,970 43,431 4,173 5,159 14,299 83,032 ------- ------- ------ ------- ------- ------- Effect of derivative contracts - 1,329 4,137 (3,336) (2,130) - ------- ------- ------ ------- ------- ------- Gap position $(7,749) $(4,405) $3,216 $(4,073) $13,011 - ======= ======= ====== ======= ======= =======

Liabilities and shareholders' equity at year-end 2000 include time deposits of $100,000 or more with maturity dates as follows: $2,880 million, 0-90 days; $799 million, 91-180 days; $613 million, 181-365 days, and $228 million over 1 year. The Company does not use the static "gap" measurement of interest rate risk reflected in the table above as a primary management tool. See pages 31 through 33 for further description of earnings at risk measurements and dynamic simulation modeling employed by the Company to manage interest rate risk. Commercial Loan Maturities and Sensitivity to Changes in Interest Rates

One Over One Over Year Through Five December 31, 2000 or Less Five Years Years ------- ---------- ------ in millions Domestic: Construction and mortgage loans $ 965 $2,584 $2,097 Other business and financial 7,972 4,309 270 International 2,945 318 251 ------- ------ ------ Total $11,882 $7,211 $2,618 ======= ====== ====== Loans with fixed interest rates $ 6,156 $2,603 $2,576 Loans having variable interest rates 5,726 4,608 42 ------- ------ ------ Total $11,882 $7,211 $2,618 ======= ====== ======

The table presents the contractual maturity and interest sensitivity of domestic commercial and international loans at year-end 2000. Securities Portfolios Debt securities that the Company has the ability and intent to hold to maturity are reported at amortized cost. Securities acquired principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings. All other securities are classified as available for sale and carried at fair value, with unrealized gains and losses included in accumulated other comprehensive income and reported as a separate component of shareholders' equity. 20 The following table is an analysis of the carrying values of the securities portfolios at the end of each of the last three years. The Company did not hold any securities in the held to maturity category at December 31, 1998.

Held to Available for Sale Maturity -------------------------------- -------------------- December 31, 2000 1999 1998 2000 1999 ------- ------- ------ ------ ------ in millions U.S. Treasury $ 323 $ 1,522 $1,580 $ - $ - U.S. Government agency obligations 9,119 16,383 1,913 3,530 4,092 Obligations of U.S. states and political subdivisions - - - 718 666 Other domestic debt securities 4,653 4,435 569 12 12 Foreign debt securities 2,555 1,805 - - - Equity securities 687 472 176 - - ------- ------- ------ ------ ------ Total $17,337 $24,617 $4,238 $4,260 $4,770 ======= ======= ====== ====== ======

Equity securities in the table above include Federal Reserve Bank and Federal Home Loan Bank stock totaling $463 million at December 31, 2000, $238 million at December 31, 1999 and $156 million at December 31, 1998. The following table reflects the distribution of maturities of debt securities held at year-end 2000 together with the approximate taxable equivalent yield of the portfolio. The yields shown are calculated by dividing annual interest income, including the accretion of discounts and the amortization of premiums, by the fair value of securities outstanding at December 31, 2000. Yields on tax-exempt obligations have been computed on a taxable equivalent basis using applicable statutory tax rates. Securities - Contractual Final Maturities and Yield

Within After One After Five After One but Within but Within Ten Taxable Year Five Years Ten Years Years equivalent --------------- --------------- --------------- --------------- basis Amount Yield Amount Yield Amount Yield Amount Yield -------------------------- ------ ----- ------ ----- ------ ----- ------ ----- in millions Available for sale: U.S. Treasury $ 11 6.11% $ 150 5.16% $ 161 4.34% $ 1 6.65% U.S. Government agency 85 6.66 1,507 6.08 305 6.92 7,222 6.93 Foreign debt securities 381 3.50 778 6.99 963 8.98 433 7.61 Other debt securities 419 5.25 1,332 6.69 885 6.91 2,017 7.25 ---- ---- ------ ---- ------ ---- ------ ---- Total fair value $896 4.65% $3,767 6.45% $2,314 7.59% $9,673 7.03% ---- ---- ------ ---- ------ ---- ------ ---- Total amortized cost $896 $3,768 $2,291 $9,523 ==== ==== ====== ==== ====== ==== ====== ==== Held to maturity: U.S. Government agency $ 11 7.86% $ 54 7.97% $ 566 7.32% $3,027 7.64% Obligations of U.S. states and political subdivisions 22 3.48 46 5.07 118 5.21 561 5.56 Other debt securities - - - - 1 7.50 11 6.57 ---- ---- ------ ---- ------ ---- ------ ---- Total fair value $ 33 4.94% $ 100 6.62% $ 685 6.96% $3,599 7.31% ---- ---- ------ ---- ------ ---- ------ ---- Total amortized cost $ 33 $ 99 $ 662 $3,466 ==== ==== ====== ==== ====== ==== ====== ====

The maturity distribution of U.S. Government agency obligations and other securities which include asset-backed securities, primarily mortgages, are based on the contractual due date of the final payment. These securities have an anticipated cash flow that includes contractual principal payments and estimated prepayments generally resulting in shorter average lives than those based on contractual maturities. 21 Credit Risk Management The credit approval and policy function is centralized under the control of the Chief Credit Officer. The structure is designed to emphasize credit decision accountability, optimize credit quality, facilitate control of credit policies and procedures and encourage consistency in the approach to, and management of, the credit process throughout the Company. The Risk Management Committee is responsible for oversight of the credit risk profile of the loan portfolio. The Chief Credit Officer is responsible for the design and management of the credit function including monitoring and making changes, where appropriate, to written credit policies. In addition to active supervision and evaluation by lending officers, periodic reviews of the loan portfolio are made by internal auditors, independent auditors, the Board of Directors and regulatory agency examiners. These reviews cover selected borrowers' current financial position, past and prospective earnings and cash flow, and realizable value of collateral and guarantees. These reviews also serve as an early identification of problem credits. Loans Outstanding The following table provides a breakdown of major loan categories as of year end for the past five years.

2000 1999 1998 1997 1996 ------- ------- ------- ------- ------- in millions Domestic: Commercial: Construction and mortgage loans $ 5,646 $ 5,648 $ 3,096 $ 2,235 $ 2,085 Other business and financial 12,551 12,002 7,803 5,811 5,094 Consumer: Residential mortgages 15,836 13,241 9,467 10,008 3,632 Credit card receivables 1,232 1,290 1,291 1,780 1,939 Other consumer loans 1,640 1,231 1,319 1,179 1,433 ------- ------- ------- ------- ------- 36,905 33,412 22,976 21,013 14,183 ------- ------- ------- ------- ------- International: Government and official institutions 302 444 331 345 359 Banks and other financial institutions 852 727 622 65 95 Commercial and industrial 2,359 3,747 120 199 55 ------- ------- ------- ------- ------- 3,513 4,918 1,073 609 509 ------- ------- ------- ------- ------- Total loans $40,418 $38,330 $24,049 $21,622 $14,692 ======= ======= ======= ======= =======

In the fourth quarter of 2000, HSBC acquired Credit Commercial de France. As part of the consolidation of HSBC's commercial banking activities in the U.S., the Company acquired a commercial loan portfolio of approximately $500 million of the New York office of Credit Commercial de France. Additionally, $2.4 billion of commitments to lend were assumed as part of the acquisition. In the third quarter of 2000, the Company purchased the banking operations of Chase Manhattan Bank, Panama. Approximately $390 million of consumer and $220 million of commercial loans were acquired from Chase Panama. As a result of the Republic acquisition, loans increased approximately $14 billion at December 31, 1999 comprised of $6 billion commercial loans, $4 billion residential mortgages and $4 billion international loans. In 1998 the Company acquired $1.7 billion of commercial loans from the U.S. corporate 22 banking unit of the HongkongBank completing the consolidation of HSBC's commercial banking activities in the U.S. Credit card portfolios of approximately $370 million were sold in 1998. Acquisitions in 1997 included a commercial mortgage portfolio of approximately $400 million and a residential mortgage portfolio of $5.1 billion. During 2000, certain operations of non-U.S. branches and subsidiaries of the Company were transferred to foreign operations of HSBC. Over $1 billion of international loans were transferred or sold to other HSBC entities. International loans to banks and other financial institutions included $297 million and $107 million at year ends 2000 and 1999, respectively, to the HSBC Group. With respect to other business and financial commercial loans, no single industry group's aggregate borrowings from the Company exceeded 10% of the total loan portfolio at December 31, 2000. Problem Loan Management Borrowers who experience difficulties in meeting the contractual payment terms of their loans receive special attention. Depending on circumstances, decisions may be made to cease accruing interest on such loans. The Company complies with regulatory requirements which mandate that interest not be accrued on commercial loans with principal or interest past due for a period of ninety days unless the loan is both adequately secured and in process of collection. In addition, commercial loans are designated as nonaccruing when, in the opinion of management, reasonable doubt exists with respect to collectibility of all interest and principal based on certain factors, including adequacy of collateral. Interest that has been recorded but unpaid on loans placed on nonaccruing status generally is reversed and reduces current income at the time loans are so categorized. Interest income on these loans may be recognized to the extent of cash payments received. In those instances where there is doubt as to collectibility of principal, any cash interest payments received are applied as principal reductions. Loans are not reclassified as accruing until interest and principal payments are brought current and future payments are reasonably assured. 23 Risk Elements in the Loan Portfolio at Year End

2000 1999 1998 1997 1996 ------ ---- ----- ----- ----- in millions Nonaccruing loans: Domestic: Construction and other commercial real estate $ 35 $ 83 $ 104 $ 129 $ 176 Other domestic loans 372 255 233 181 181 ------ ---- ----- ----- ----- Subtotal 407 338 337 310 357 International 16 6 - 1 - ------ ---- ----- ----- ----- Total nonaccruing loans 423 344 337 311 357 Other real estate and owned assets 21 14 9 12 14 ------ ---- ----- ----- ----- Total nonaccruing loans, other real estate and owned assets $ 444 $358 $ 346 $ 323 $ 371 ====== ==== ===== ===== ===== Ratios: Nonaccruing loans to total loans 1.05% .90% 1.40% 1.44% 2.43% Nonaccruing loans, other real estate and owned assets to total assets .53 .41 1.02 1.02 1.57 ------ ---- ----- ----- ----- Accruing loans contractually past due 90 days or more as to principal or interest (all domestic): Residential real estate mortgages $ - $ 13 $ 2 $ 1 $ 12 Credit card receivables 1 1 5 33 35 Other consumer loans 12 3 10 10 12 All other 29 23 13 13 16 ------ ---- ----- ----- ----- Total accruing loans contractually past due 90 days or more $ 42 $ 40 $ 30 $ 57 $ 75 ====== ==== ===== ===== =====

In certain situations where the borrower is experiencing temporary cash flow problems, and after careful examination by management, the interest rate and payment terms may be adjusted from the original contractual agreement. When this occurs and the revised terms at the time of renegotiation are less than the Company would be willing to accept for a new loan with comparable risk, the loan is separately identified as restructured. Nonaccruing loans at December 31, 2000 totaled $423 million compared with $344 million a year ago. Of the nonaccruing loans at December 31, 2000 over 34% are less than 30 days past due as to cash payment of principal and interest. Nonaccruing loans that have been restructured but remain in nonaccruing status amounted to $8 million, $32 million and $21 million at December 31, 2000, 1999 and 1998, respectively. Cash payments received on loans on nonaccruing status during 2000, or since loans were placed on nonaccruing status, whichever was later, totaled $47 million, $24 million of which was recorded as interest income and $23 million as reduction of loan principal. Residential mortgages are generally designated as nonaccruing when delinquent for more than ninety days. Loans to credit card customers that are past due more than ninety days are designated as nonaccruing if the customer has agreed to credit counseling. Other consumer loans are generally not designated as nonaccruing and are charged off against the allowance for credit losses according to an established delinquency schedule. The Company identified impaired loans totaling $224 million at December 31, 2000 of which $109 million had an allocation from the allowance of $46 million. At December 31, 1999, identified impaired loans were $216 million, of which $110 million had an allocation from the allowance of $64 million. 24 Cross-Border Net Outstandings The following table presents total cross-border net outstandings in accordance with Federal Financial Institutions Examination Council (FFIEC) guidelines. Cross-border net outstandings are amounts payable to the Company by residents of foreign countries regardless of the currency of claim and local country claims in excess of local country obligations. Excluded from cross-border net outstandings are, among other things, the following: local country claims funded by non-local country obligations (U.S. dollar or other non-local currencies), principally certificates of deposits issued by a foreign branch, where the providers of funds agree that, in the event of the occurrence of a sovereign default or the imposition of currency exchange restrictions in a given country, they will not be paid until such default is cured or currency restrictions lifted or, in certain circumstances, they may accept payment in local currency or assets denominated in local currency (hereinafter referred to as constraint certificates of deposits); and cross-border claims that are guaranteed by cash or other external liquid collateral. The Company's cross-border net outstandings excluded $682 million and $545 million of Brazilian assets funded by constraint certificates of deposit, at December 31, 2000 and 1999, respectively. Cross-border net outstandings include deposits in other banks, loans, acceptances, securities available for sale, trading securities, revaluation gains on foreign exchange and derivative contracts and accrued interest receivable. Cross-Border Net Outstandings Which Exceed .75% of Total Assets at Year End

Banks and Other Government and Commercial Financial Official and Institutions Institutions Industrial(1) Total --------------- -------------- ------------ ----- in millions December 31, 2000: France $500 $15 $135 $650 Germany 889 6 77 972 United Kingdom 443 8 208 659 December 31, 1999: Germany 853 15 60 928 United Kingdom 523 1 265 789 December 31, 1998: France 345 - - 345 United Kingdom 52 - 641 693 ==== === ==== ====

(1) Includes excess of local country claims over local country obligations. 25 Allowance for Credit Losses and Charge Offs At year-end 2000, the allowance was $525 million, or 1.30% of total loans, compared with $638 million, or 1.66% of total loans, a year ago. The ratio of the allowance to nonaccruing loans was 124.06% at December 31, 2000 compared with 185.72% a year earlier.

2000 1999 1998 1997 1996 ------- ------- ------- ------- ------- in millions Total loans at year end $40,418 $38,330 $24,049 $21,622 $14,692 Average total loans 38,966 23,385 21,392 20,049 13,905 Allowance for credit losses: Balance at beginning of year $ 638.0 $ 379.7 $ 409.4 $ 418.2 $ 477.5 Allowance related to acquired (sold) businesses (11.3) 268.6 - 40.3 3.4 Charge offs: Commercial: Construction and mortgage loans 11.2 - - - - Other business and financial 173.0 27.0 27.9 28.3 69.8 Consumer: Residential mortgages 5.2 12.1 10.2 7.7 2.6 Credit card receivables 70.9 86.5 105.0 137.2 97.9 Other consumer loans 10.9 9.5 9.5 13.5 11.2 International 1.8 - - - - ------- ------- ------- ------- ------- Total charge offs 273.0 135.1 152.6 186.7 181.5 ------- ------- ------- ------- ------- Recoveries on loans charged off: Commercial: Construction and mortgage loans 3.3 - - - 1.1 Other business and financial 14.6 18.3 22.9 31.3 38.3 Consumer: Residential mortgages 1.0 1.0 .8 1.0 .5 Credit card receivables 10.7 11.6 14.9 14.1 10.2 Other consumer loans 4.5 3.9 4.3 3.8 4.0 International .2 - - - - ------- ------- ------- ------- ------- Total recoveries 34.3 34.8 42.9 50.2 54.1 ------- ------- ------- ------- ------- Total net charge offs 238.7 100.3 109.7 136.5 127.4 ------- ------- ------- ------- ------- Translation adjustment .6 - - - - ------- ------- ------- ------- ------- Provision charged to income 137.6 90.0 80.0 87.4 64.7 ------- ------- ------- ------- ------- Balance at end of year $ 525.0 $ 638.0 $ 379.7 $ 409.4 $ 418.2 ------- ------- ------- ------- ------- Allowance ratios: Total net charge offs to average loans .61% .43% .51% .68% .92% Year-end allowance to: Year-end total loans 1.30 1.66 1.58 1.89 2.85 Year-end total nonaccruing loans 124.06 185.72 112.74 131.62 116.98 ======= ======= ======= ======= =======

Charge offs of individual commercial loans and residential mortgages reflect management's judgment with respect to the ultimate collectibility of all or part of the specific loan. Charge offs of consumer loans, excluding residential mortgages, occur according to an established delinquency schedule. The allowance for credit losses is evaluated based on an assessment of the losses inherent in the loan portfolio. This assessment results in an allowance consisting of allocated and unallocated components. The allocated component of the allowance includes specific reserves resulting from the analysis of individual loans and formula-based reserves assigned to pools of similar loans based on historical loss experience for each loan category. The specific reserves are based on a regular analysis of all 26 significant commercial credits where the internal credit rating is at or below a predetermined classification. All other commercial loans are grouped into pools by credit facility grade. Formula reserves are established based on historical one year default rates for each pool using data from the last eight quarters, adjusted for known changes in the economic environment and management judgment. The allocated portion of the allowance also includes management's determination of the amounts necessary for loan concentrations. Residential mortgage loans which are more than 90 days past due are individually analyzed and appropriate specific reserves are assigned. Other residential mortgages are grouped into pools based on delinquency status and formula reserves are established to cover, at a minimum, twelve months of historical net charge offs using data from the past twelve months' pool loss rates. Other consumer loans, including credit card receivables, are grouped into pools based on product and delinquency status. Formula reserves are established to cover, at a minimum, twelve months of historical charge offs. The unallocated portion of the allowance is determined based on management's assessment of general economic conditions as well as specific economic factors in the individual markets in which the Company operates. This determination inherently involves a higher degree of uncertainty and considers current risk factors that may not have yet manifested themselves in the Company's historical loss factors used to determine the allocated component of the allowance, and it recognizes that knowledge of the portfolio may be incomplete. An allocation of the allowance by major loan categories follows. Allocation of Allowance for Credit Losses

2000 1999 1998 1997 1996 ------------- -------------- --------------- -------------- --------------- % of % of % of % of % of Loans Loans Loans Loans Loans to to to to to Total Total Total Total Total Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- in millions Domestic: Commercial: Construction and mortgage loans $ 28 14.0 $ 45 14.8 $ 23 12.8 $ 31 10.4 $ 21 14.2 Other business 163 31.0 163 31.3 62 32.4 53 26.9 75 34.7 Consumer: Residential mortgages 10 39.2 43 34.5 12 39.4 30 46.3 7 24.7 Credit card receivables 62 3.0 40 3.4 45 5.4 60 8.2 55 13.2 Other consumer 31 4.1 17 3.2 12 5.5 17 5.4 9 9.8 International 117 8.7 116 12.8 31 4.5 26 2.8 26 3.4 Unallocated 114 - 214 - 195 - 192 - 225 - ---- ----- ---- ----- ---- ----- ---- ----- ---- ----- Total $525 100.0 $638 100.0 $380 100.0 $409 100.0 $418 100.0 ==== ===== ==== ===== ==== ===== ==== ===== ==== =====

27 The allocations in the table are based on management's current allocation methodologies. The use of other methods to allocate the allowance would change the assigned allocation. Management concludes that the allowance for credit losses, including the unallocated component, is appropriately stated at December 31, 2000. The U.S. banking industry continues to carefully assess credit risk considering, among other things, (1) credit issues still remaining in U.S. consumer banking businesses, (2) the effect that increasing energy prices will have on bank customers, and (3) the likelihood of continued economic expansion and the effect on loan portfolios. Capital Resources Total common shareholder's equity at year end 2000 was $6,843 million, compared with $6,728 million at year end 1999. The equity base increased by $568 million from net income and reduced by $600 million for common shareholder dividends paid to HSBC and $28 million for dividends to preferred stock shareholders. The equity base also increased from the change in unrealized gains on securities available for sale of $175 million and decreased by $7 million for foreign currency translation adjustments. The other capital contribution from the parent of $8 million relates to an HSBC stock option plan in which almost all of the Company's employees are eligible to participate. The ratio of common shareholder's equity to total year-end assets was 8.24% at December 31, 2000 compared with 7.71% at December 31, 1999. Although the acquisition of Republic was effective December 31, 1999, payment to Republic shareholders of $7,091 million was delayed, as agreed by the parties to the transaction in advance, until January 7, 2000 in order to avoid settlement crossing Year 2000. Had the payment been made at December 31, 1999, the ratio of common shareholder's equity to total year-end assets would have been 8.39%. Capital Adequacy The Federal Reserve Board (FRB) has Risk-Based Capital Guidelines for assessing the capital adequacy of U.S. banking organizations. The guidelines place balance sheet assets into four categories of risk weights, primarily based on the relative credit risk of the counterparty. Some off-balance sheet items such as letters of credit and loan commitments are taken into account by applying different categories of "credit conversion factors" to arrive at credit-equivalent amounts, which are then weighted in the same manner as balance sheet assets involving similar counterparties. For off-balance sheet items relating to interest rate and foreign exchange rate contracts, the credit-equivalent amounts are arrived at by estimating both the current exposure, mark to market value, and the potential exposure over the remaining life of each contract. The credit-equivalent amount is similarly assigned to the risk weight category appropriate to the counterparty. The guidelines include a measure for market risk inherent in the trading portfolio. Under the market risk requirements, capital is allocated to support the amount of market risk that relates to the Company's trading activities including off-balance sheet derivative contracts associated with trading activities. The guidelines include the concept of Tier 1 capital and total capital. The guidelines establish a minimum standard risk-based target ratio of 8%, of 28 which at least 4% must be in the form of Tier 1 capital. The following table shows the components of the Company's risk-based capital. December 31, ----------------------------- 2000 1999 ------- ------- in millions Common shareholder's equity $ 6,726 $ 6,778 Preferred stock 375 375 Guaranteed mandatorily redeemable preferred securities of subsidiaries 712 710 Less: Goodwill and identifiable intangibles (3,233) (3,309) Foreign currency translation adjustment (7) (1) ------- ------- Tier 1 capital 4,573 4,553 ------- ------- Long-term debt qualifying as risk- based capital 2,285 2,530 Qualifying aggregate allowance for credit losses 525 638 45% of unrealized gains on available for sale equity securities 10 2 ------- ------- Tier 2 capital 2,820 3,170 ------- ------- Total capital $ 7,393 $ 7,723 ======= ======= The capital adequacy guidelines establish a limit on the amount of certain deferred tax assets that may be included in (that is, not deducted from) Tier 1 capital for risk-based and leverage capital purposes. The deferred tax asset recognized by the Company meets the criteria for capital recognition and has been included in the calculation of the Company's capital ratios. The Company's total risk adjusted assets and off-balance sheet items were approximately $54.5 billion and $51.2 billion at year ends 2000 and 1999, respectively. Risk adjusted capital ratios were 8.39% at the Tier 1 level and 13.56% at the total capital level. These ratios compared with 8.89% at the Tier 1 level and 15.08% at the total capital level at December 31, 1999 after being restated. Banking industry regulators also have guidelines that set forth the leverage ratios to be applied to banking organizations in conjunction with the risk-based capital framework. Under these guidelines, strong bank holding companies must maintain a minimum leverage ratio of Tier 1 capital to quarterly average total assets of 3%. At December 31, 2000, the Company had a 5.73% leverage ratio compared with 14.49% at December 31, 1999 based on quarterly averages after being restated. Based on period end assets, the ratio was 5.42% at December 31, 1999. From time to time, the bank regulators propose amendments to or issue interpretations of risk-based capital guidelines. Such proposals or interpretations could, upon implementation, affect reported capital ratios and net risk adjusted assets. 29 Republic Acquisition As mentioned, the Company acquired Republic on December 31, 1999. The pro forma combined income statement for the year ended December 31, 1999 reflects the combination of historical operating results of the Company and Republic and includes the amortization of necessary acquisition adjustments as if the combination had taken place at the beginning of 1999. Historical adjustments have been made to reflect restatement of 1999 Republic results to exclude activity related to HRH and a Bahamian subsidiary divested in 2000 as part of the reorganization of HSBC's internal international private banking operations.

Historical Amortization ------------------- of HSBC Republic Historical Acquisition Pro Forma Year Ended December 31, 1999 USA Inc. NY Corp. Adjustments Adjustments Combined ------- -------- ----------- ----------- --------- in millions Net interest income $1,226 $1,044 $ (48) $ 29 $2,251 Provision for credit losses 90 12 - - 102 ------ ------ ----- ----- ------ Net interest income after provision for credit losses 1,136 1,032 (48) 29 2,149 Other operating income 464 628 (208) (4) 880 ------ ------ ----- ----- ------ 1,600 1,660 (256) 25 3,029 Operating expenses 828 1,086 (12) 150 2,052 ------ ------ ----- ----- ------ Income before taxes 772 574 (244) (125) 977 Income tax expense (benefit) 308 156 (83) (6) 375 ------ ------ ----- ----- ------ Net income $ 464 $ 418 $(161) $(119) $ 602 ====== ====== ===== ===== ======

The pro forma information may not be indicative of the results that actually would have occurred if the purchase had been consummated on January 1, 1999 or which may be obtained in the future. While the Company expects to achieve certain operating cost savings as a result of the combination, no adjustment has been included in the pro forma amounts for anticipated operating cost savings or revenue enhancements. No adjustment has been made for the costs of integrating businesses. Certain other foreign operations, not adjusted for in the pro forma results above, were transferred to other HSBC Group members or are expected to be transferred in the future. Further, both the Company and Republic recognized certain one-time items in their 1999 operating results. Pretax results for the Company included settlement with the U.S. Internal Revenue Service on Brazilian tax credits of $13.1 million and a gain on the sale of a student loan business of $15.0 million partially offset by an acquisition related restructuring charge of $26.7 million. Republic's 1999 pretax operating results included restructuring charges of $97.0 million (unrelated to the acquisition by the Company) partially offset by a gain of $69.8 million relating to a real estate investment. Republic also benefited in 1999 from securities gains and foreign exchange income related to Russia and Brazil. These positions have been exited. See Note 2 for an analysis of Republic goodwill at December 31, 2000. The projected annual goodwill amortization expense related to Republic going forward will be $149 million. This projected amortization is subject to change if Republic assets and liabilities are subsequently sold. 30 Item 7A. Quantitative and Qualitative Disclosures About Market Risk In consideration of the degree of interest rate risk inherent in the banking industry, the Company has interest rate risk management policies designed to meet performance objectives within defined risk/safety parameters. In the course of managing interest rate risk, a combination of risk assessment techniques, including dynamic simulation modeling, gap analysis, and capital at risk analysis are employed. The combination of these tools enables management to identify and assess the potential impact of interest rate movements and take appropriate action. Certain limits and benchmarks that serve as guidelines in determining the appropriate levels of interest rate risk for the institution have been established. One such limit is expressed in terms of the Present Value of a Basis Point (PVBP), which reflects the change in value of the balance sheet for a one basis point movement in all interest rates. The institutional PVBP limit as of December 31, 2000 was plus or minus $4.3 million, which includes distinct limits associated with trading portfolio activities and off-balance sheet instruments. Thus, for a one basis point change in interest rates, the policy dictates that the value of the balance sheet shall not change by more than $4.3 million. As of December 31, 2000, the Company had a position of $(3.7) million PVBP. Mortgage servicing rights are excluded from the PVBP determination as their interest rate risk is significantly different from other balance sheet items. The mortgage servicing rights risk is to lower interest rates, which is managed through the purchase of appropriate hedges. The Company also monitors changes in value of the balance sheet for large movements in interest rates with an overall limit of +/- 10%, after tax, change from the base case for a 200 basis point gradual rate movement. As of December 31, 2000, for a gradual 200 basis point increase in rates, the value was projected to drop by 6.2% and for a 200 basis point gradual decrease in rates, value was projected to drop by 8.2% were no management actions ever taken to manage exposures to the changing environment. In addition to the above mentioned limits, the Company's Asset and Liability Policy Committee monitors, on a monthly basis, the impact of a number of interest rate scenarios on net interest income. These scenarios include both rate shock scenarios which assume immediate market rate movements of +/- 10% and 200 basis points, as well as rate change scenarios in which rates rise or fall by 200 basis points over a twelve month period. The individual limit for such gradual 200 basis point movements is currently +/- 10%, pretax, of base case earnings over a twelve month period. Simulations are also performed for other relevant interest rate scenarios including immediate rate movements and changes in the shape of the yield curve or in competitive pricing policies. Net interest income under the various scenarios is reviewed over a twelve month period, as well as over a three year period. The simulations capture the effects of the timing of the repricing of all on-balance sheet assets and liabilities, as well as all off-balance sheet positions such as interest rate swaps, futures and option contracts. Additionally, the simulations incorporate any behavioral aspects such as prepayment sensitivity under various scenarios. For purposes of simulation modeling, base case earnings reflect the existing balance sheet composition, with balances generally maintained at current levels by the anticipated reinvestment of expected runoff. These balance sheet levels will however, factor in specific known or likely changes including material increases, decreases or anticipated shifts in balances due to management actions. Current rates and spreads are then applied to produce 31 base case earnings estimates on both a twelve month and three year time horizon. Rate shocks are then modeled and compared to base earnings (earnings at risk), and include behavioral assumptions as dictated by specific scenarios relating to such factors as prepayment sensitivity and the tendency of balances to shift among various products in different rate environments. It is assumed that no management actions are taken to manage exposures to the changing environment being simulated. Utilizing these modeling techniques, a gradual 200 basis point parallel rise and fall in the yield curve on January 1, 2001 would cause projected 2001 net interest income to decrease by $19 million and increase by $17 million, respectively. This +/- 2% change is well within the Company's +/- 10% limit. An immediate 100 basis point parallel rise and fall in the yield curve on January 1, 2001, would cause projected 2001 net interest income to decrease by $36 million and increase by $5 million, respectively. A 200 basis point parallel rise and fall would decrease projected net interest income by $23 million and $78 million, respectively. The projections noted above do not take into consideration possible complicating factors such as the effect of changes in interest rates on the credit quality, size and composition of the balance sheet. Therefore, although this provides a reasonable estimate of interest rate sensitivity, actual results will vary from these estimates, possibly by significant amounts. Management of Primary Market Risk Exposures The primary market risk to the Company's earnings associated with its investing, lending and borrowing activities historically lies in exposure to sudden and drastic shifts in interest rates. Management of these risks is undertaken with the overall objective of meeting the Company's overall performance objectives within defined risk and safety parameters. The strategies employed reflect the goal of minimizing exposure to sudden and drastic upward and downward movements in rates. These strategies entail the use of both on- and off-balance sheet instruments to effectively mitigate the risk inherent in the balance sheet. In addition to interest rate risk, the Company has an exposure to certain other market risks including fluctuations in foreign currency exchange rates and changes in global commodity and precious metals prices. Risk management practices reflect these changes in on- and off-balance sheet positions. Trading Activities The trading portfolios have distinct limits pertaining to items such as permissible investments, risk exposures, loss review, balance sheet size and product concentrations. "Loss review" refers to the maximum amount of loss that may be incurred before senior management intervention is required. The Company relies upon Value at Risk (VaR) analysis as a basis for quantifying and managing risks associated with the trading portfolio. Such analysis is based upon the following two general principles: (i) VaR applies to all trading positions across all risk classes including interest rate, equity, optionality and global/foreign exchange risks and 32 (ii) VaR is based on the concept of independent valuations, with all transactions being repriced by an independent risk management function using separate models prior to being stressed against VaR parameters. VaR attempts to capture the potential loss resulting from unfavorable market developments within a given time horizon (typically ten days) and given a certain confidence level (99%). It involves historical simulation of the changes in value of the portfolios based upon scenarios that reflect movements in various market variables covering each risk asset class dating back two years. The correlation between different markets and risk factors is implicitly captured in historical scenarios. A VaR report broken down by trading business and on a consolidated basis is distributed daily to management. To measure the accuracy of the VaR model output, the daily VaR will be compared to the actual result from trading activities. The VaR model incorporates estimates of the specific risk associated with certain securities traded by the Company. This includes elements such as spread risk on sovereign or corporate debt which is modeled through historical simulation of the relevant portfolio to past changes on spreads of U.S. treasury securities. Specific risk models are continually tested to alert risk management immediately to any shift in their relevance. On a historical simulation approach, trading VaR at December 31, 2000 was $11.7 million compared with $14.5 million at December 31, 1999. The maximum during 2000 was $37.1 million, the minimum $9.3 million and the average $18.8 million. The scope of the calculation of VaR was refined at June 30, 2000, following a review of its basis, to be more consistent with that of the rest of HSBC. The following table presents the maximum, minimum and average on a historical simulation approach for each half year of 2000. First Half Second Half 2000 2000 ---------- ----------- in millions Maximum in the half year $37.1 $19.1 Minimum in the half year 12.5 9.3 Average for the half year 22.7 13.6 ----- ----- 33 Item 8. Financial Statements and Supplementary Data Page Report of Management 35 Report of Independent Auditors 36 HSBC USA Inc.: Consolidated Balance Sheet 37 Consolidated Statement of Income 38 Consolidated Statement of Changes in Shareholders' Equity 39 Consolidated Statement of Cash Flows 40 HSBC Bank USA: Consolidated Balance Sheet 41 Summary of Significant Accounting Policies 42 Notes to Financial Statements 47 34 REPORT OF MANAGEMENT Management of HSBC USA Inc. is responsible for the integrity of the financial information presented in this annual report. Management has prepared the financial statements in conformity with accounting principles generally accepted in the United States of America. In preparing the financial statements, management makes judgments and estimates of the expected effect of unsettled transactions and events that are accounted for or disclosed. The Company's systems of internal accounting control are designed to provide reasonable but not absolute assurance that assets are safeguarded against loss from unauthorized acquisition, use or disposition and that the financial records are reliable for preparing financial statements. The selection and training of qualified personnel and the establishment and communication of accounting and administrative policies and procedures are elements of these control systems. Management believes that the system of internal control, which is subject to close scrutiny by management and by internal auditors, supports the integrity and reliability of the financial statements. The Board of Directors or their committees meet regularly with management, internal auditors and the independent auditors to discuss internal control, internal auditing and financial reporting matters, and also the scope of the annual audit and interim reviews. Both the internal auditors and the independent auditors have direct access to the Board of Directors. 35 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders of HSBC USA Inc. We have audited the accompanying consolidated balance sheets of HSBC USA Inc. and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the years in the three year period ended December 31, 2000, and the accompanying consolidated balance sheets of HSBC Bank USA and subsidiaries as of December 31, 2000 and 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of HSBC USA Inc. and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 2000, and the financial position of HSBC Bank USA and subsidiaries as of December 31, 2000 and 1999, in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP February 13, 2001 New York, New York 36 HSBC USA Inc. 2000 CONSOLIDATED BALANCE SHEET December 31, 2000 1999* ------------ ------------ in thousands Assets Cash and due from banks $ 1,860,713 $ 1,959,213 Interest bearing deposits with banks 5,129,490 4,137,571 Federal funds sold and securities purchased under resale agreements 1,895,492 2,318,361 Trading assets 5,770,972 4,515,009 Securities available for sale 17,336,832 24,617,319 Securities held to maturity (fair value $4,417,251 and $4,770,087) 4,260,492 4,770,087 Loans 40,417,847 38,330,464 Less - allowance for credit losses 524,984 637,995 ------------ ------------ Loans, net 39,892,863 37,692,469 Premises and equipment 787,721 744,581 Accrued interest receivable 785,287 696,539 Equity investments 55,596 47,931 Goodwill and other acquisition intangibles 3,233,133 3,307,147 Other assets 2,023,221 2,446,674 ------------ ------------ Total assets $ 83,031,812 $ 87,252,901 ============ ============ Liabilities Deposits in domestic offices Noninterest bearing $ 5,114,668 $ 5,979,189 Interest bearing 30,631,511 29,393,957 Deposits in foreign offices Noninterest bearing 282,737 187,099 Interest bearing 20,004,300 20,864,209 ------------ ------------ Total deposits 56,033,216 56,424,454 ------------ ------------ Trading account liabilities 2,766,825 2,437,315 Short-term borrowings 8,562,363 5,210,708 Interest, taxes and other liabilities 3,230,103 2,976,590 Payable to shareholders of acquired company - 7,091,209 Subordinated long-term debt and perpetual capital notes 3,027,014 3,427,649 Guaranteed mandatorily redeemable securities 711,737 710,259 Other long-term debt 1,357,904 1,747,131 ------------ ------------ Total liabilities 75,689,162 80,025,315 ------------ ------------ Shareholders' equity Preferred stock 500,000 500,000 Common shareholder's equity Common stock, $5 par; Authorized - 1,100 shares Issued - 704 shares 4 4 Capital surplus 6,114,484 6,106,538 Retained earnings 611,343 671,578 Accumulated other comprehensive income (loss) 116,819 (50,534) ------------ ------------ Total common shareholder's equity 6,842,650 6,727,586 ------------ ------------ Total shareholders' equity 7,342,650 7,227,586 ------------ ------------ Total liabilities and shareholders' equity $ 83,031,812 $ 87,252,901 ============ ============ The accompanying notes are an integral part of the consolidated financial statements. *Restated to exclude investments transferred to HSBC North America Inc. during 2000. See Note 1 for further discussion. 37 HSBC USA Inc. 2000 CONSOLIDATED STATEMENT OF INCOME Year Ended December 31, 2000 1999 1998 ----------- ----------- ----------- in thousands Interest income Loans $ 3,072,830 $ 1,841,396 $ 1,785,122 Securities 1,580,606 214,480 232,440 Trading assets 140,455 50,627 50,843 Other short-term investments 523,693 213,536 264,576 ----------- ----------- ----------- Total interest income 5,317,584 2,320,039 2,332,981 ----------- ----------- ----------- Interest expense Deposits 2,333,503 852,875 867,391 Short-term borrowings 444,718 129,604 204,171 Long-term debt 420,298 111,654 96,079 ----------- ----------- ----------- Total interest expense 3,198,519 1,094,133 1,167,641 ----------- ----------- ----------- Net interest income 2,119,065 1,225,906 1,165,340 Provision for credit losses 137,600 90,000 80,000 ----------- ----------- ----------- Net interest income, after provision for credit losses 1,981,465 1,135,906 1,085,340 ----------- ----------- ----------- Other operating income Trust income 84,906 52,212 47,290 Service charges 172,257 128,598 115,382 Mortgage banking revenue 32,484 30,455 43,153 Other fees and commissions 300,388 167,595 145,505 Trading revenues 140,192 10,014 3,700 Security gains, net 28,839 10,098 13,855 Interest on Brazilian tax settlement - 13,143 32,700 Other income 73,372 51,854 58,512 ----------- ----------- ----------- Total other operating income 832,438 463,969 460,097 ----------- ----------- ----------- 2,813,903 1,599,875 1,545,437 ----------- ----------- ----------- Other operating expenses Salaries and employee benefits 979,638 421,334 410,323 Occupancy expense, net 168,950 88,950 89,423 Goodwill amortization 176,162 33,328 37,747 Other expenses 581,149 284,251 242,777 ----------- ----------- ----------- Total other operating expenses 1,905,899 827,863 780,270 ----------- ----------- ----------- Income before taxes 908,004 772,012 765,167 Applicable income tax expense 340,500 308,300 238,100 ----------- ----------- ----------- Net income $ 567,504 $ 463,712 $ 527,067 =========== =========== =========== The accompanying notes are an integral part of the consolidated financial statements. 38 HSBC USA Inc. 2000 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY 2000 1999 1998 ----------- ----------- ----------- in thousands Preferred stock Balance, January 1, $ 500,000 $ - $ - Stock assumed in acquisition - 500,000 - ----------- ----------- ----------- Balance, December 31, 500,000 500,000 - ----------- ----------- ----------- Common stock Balance, January 1, 4 5 5 Redemption of stock - (1) - ----------- ----------- ----------- Balance, December 31, 4 4 5 ----------- ----------- ----------- Capital surplus Balance, January 1, 6,106,538 1,806,563 1,804,527 Capital contribution from parent Related to Republic acquisition* - 7,088,108 - Related to other merger - 22,145 - Return of capital* - (2,813,575) - Other 7,946 3,297 2,036 ----------- ----------- ----------- Balance, December 31, 6,114,484 6,106,538 1,806,563 ----------- ----------- ----------- Retained earnings Balance, January 1, 671,578 377,179 205,112 Net income 567,504 463,712 527,067 Accumulated deficit assumed in other merger - (14,313) - Cash dividends declared: Preferred stock (27,739) - - Common stock (600,000) (155,000) (355,000) ----------- ----------- ----------- Balance, December 31, 611,343 671,578 377,179 ----------- ----------- ----------- Accumulated other comprehensive income Balance, January 1, (50,534) 44,506 29,309 Other comprehensive income (loss) 167,353 (95,040) 15,197 ----------- ----------- ----------- Balance, December 31, 116,819 (50,534) 44,506 ----------- ----------- ----------- Total shareholders' equity, December 31, $ 7,342,650 $ 7,227,586 $ 2,228,253 =========== =========== =========== Comprehensive income Net income $ 567,504 $ 463,712 $ 527,067 Other comprehensive income (loss) 167,353 (95,040) 15,197 ----------- ----------- ----------- Comprehensive income $ 734,857 $ 368,672 $ 542,264 =========== =========== =========== The accompanying notes are an integral part of the consolidated financial statements. *See Notes 1 and 2 for further discussion. 39 HSBC USA Inc. 2000 CONSOLIDATED STATEMENT OF CASH FLOWS

Year Ended December 31, 2000 1999* 1998 ------------ ------------ ------------ in thousands Cash flows from operating activities Net income $ 567,504 $ 463,712 $ 527,067 Adjustments to reconcile net income to net cash provided (used) by operating activities Depreciation, amortization and deferred taxes 374,400 68,063 85,752 Provision for loan losses 137,600 90,000 80,000 Net change in other accrual accounts (5,975) 118,406 (60,602) Net change in loans originated for sale (1,345,756) 698,978 (789,258) Net change in trading assets and liabilities (913,046) (193,731) 10,663 Other, net (113,572) (92,693) (107,775) ------------ ------------ ------------ Net cash provided (used) by operating activities (1,298,845) 1,152,735 (254,153) ------------ ------------ ------------ Cash flows from investing activities Net change in interest bearing deposits with banks (813,245) 653,135 269,460 Net change in short-term investments 422,869 (2,571,317) 411,073 Purchases of securities held to maturity (58,720) -- -- Proceeds from maturities of securities held to maturity 580,539 -- -- Purchases of securities available for sale (14,624,091) (2,437,512) (2,423,032) Proceeds from sales of securities available for sale 8,795,549 2,061,740 1,421,318 Proceeds from maturities of securities available for sale 13,042,069 1,160,406 803,463 Payment to shareholders of acquired company (7,091,209) -- -- Net change in credit card receivables 24,768 (25,200) 37,422 Net change in other short-term loans 152,205 168,130 (212,732) Net originations and maturities of long-term loans (156,955) (298,541) (253,219) Sales of loans 169,234 -- 395,148 Expenditures for premises and equipment (108,157) (30,898) (21,255) Net cash provided (used) in acquisitions, net of cash acquired (585,756) 810,714 (1,619,278) Other, net 626,105 (53,579) (35,359) ------------ ------------ ------------ Net cash provided (used) by investing activities 375,205 (562,922) (1,226,991) ------------ ------------ ------------ Cash flows from financing activities Net change in deposits (1,115,254) 964,029 3,357,242 Net change in short-term borrowings 3,351,655 (692,644) (1,103,060) Issuance of long-term debt 659,338 400,407 500,000 Repayment of long-term debt (1,448,855) (409,815) (459,306) Dividends paid (621,744) (155,000) (480,000) ------------ ------------ ------------ Net cash provided by financing activities 825,140 106,977 1,814,876 ------------ ------------ ------------ Net change in cash and due from banks (98,500) 696,790 333,732 Cash and due from banks at beginning of year 1,959,213 1,262,423 928,691 ------------ ------------ ------------ Cash and due from banks at end of year $ 1,860,713 $ 1,959,213 $ 1,262,423 ============ ============ ============ Cash paid for: Interest $ 3,238,257 $ 1,115,201 $ 1,136,748 Income taxes 444,058 222,765 208,191 Non-cash activities: Fair value of assets acquired 851,930 48,328,158 1,711,227 Fair value of liabilities assumed 764,438 44,033,905 91,949 ------------ ------------ ------------ Net assets acquired 87,492 4,294,253 1,619,278 ------------ ------------ ------------

The accompanying notes are an integral part of the consolidated financial statements. * Restated to exclude investments transferred to HSBC North America Inc. during 2000. See Note 1 for further discussion. 40 HSBC Bank USA 2000 CONSOLIDATED BALANCE SHEET December 31, 2000 1999* ------------ ------------ in thousands Assets Cash and due from banks $ 1,856,372 $ 1,952,552 Interest bearing deposits with banks 4,402,749 3,709,683 Federal funds sold and securities purchased under resale agreements 1,895,492 2,318,361 Trading assets 5,468,281 4,194,067 Securities available for sale 16,372,529 17,046,153 Securities held to maturity (fair value $4,252,601 and $4,633,923) 4,102,701 4,633,923 Loans 40,209,326 38,229,738 Less - allowance for credit losses 499,234 624,450 ------------ ------------ Loans, net 39,710,092 37,605,288 Premises and equipment 773,407 735,997 Accrued interest receivable 777,765 686,932 Equity investments 22,618 19,038 Goodwill and other acquisition intangibles 2,530,111 2,761,339 Other assets 2,145,870 2,248,481 ------------ ------------ Total assets $ 80,057,987 $ 77,911,814 ============ ============ Liabilities Deposits in domestic offices Noninterest bearing $ 4,903,846 $ 5,849,039 Interest bearing 30,631,511 29,393,958 Deposits in foreign offices Noninterest bearing 282,737 187,099 Interest bearing 21,077,831 23,444,749 ------------ ------------ Total deposits 56,895,925 58,874,845 ------------ ------------ Trading account liabilities 2,780,237 2,424,556 Short-term borrowings 7,799,277 4,236,681 Interest, taxes and other liabilities 2,728,396 2,419,419 Subordinated long-term debt and perpetual capital notes 1,539,070 1,648,278 Other long-term debt 1,253,641 1,642,063 ------------ ------------ Total liabilities 72,996,546 71,245,842 ------------ ------------ Shareholder's equity Common shareholder's equity Common stock, $100 par; Authorized - 2,250,000 shares Issued - 2,050,001 shares 205,000 205,000 Capital surplus 6,377,255 6,369,308 Retained earnings 374,362 144,557 Accumulated other comprehensive income (loss) 104,824 (52,893) ------------ ------------ Total shareholder's equity 7,061,441 6,665,972 ------------ ------------ Total liabilities and shareholder's equity $ 80,057,987 $ 77,911,814 ============ ============ The accompanying notes are an integral part of the consolidated financial statements. * Restated to exclude investments transferred to HSBC North America Inc. during 2000. See Note 1 for further discussion. 41 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES HSBC USA Inc. (the Company), is a New York State based bank holding company. All of the common stock of the Company is owned by HSBC North America Inc. (HNAI), an indirect wholly owned subsidiary of HSBC Holdings plc (HSBC). The accounting and reporting policies of the Company and its subsidiaries, including its principal subsidiary, HSBC Bank USA (the Bank), conform to generally accepted accounting principles and to predominant practice within the banking industry. The preparation of financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions relating principally to unsettled transactions and events as of the date of the financial statements. Accordingly, upon settlement, actual results may differ from estimated amounts. The following is a description of the significant policies and practices. Principles of Consolidation The financial statements of the Company and the Bank are consolidated with those of their respective wholly owned subsidiaries. All material intercompany transactions and balances have been eliminated. Investments in companies in which the percentage of ownership is at least 20%, but not more than 50%, are generally accounted for under the equity method and reported as equity investments. Foreign Currency Translation The accounts of the Company's foreign operations are measured using local currency as the functional currency. Assets and liabilities are translated into United States dollars at period end exchange rates. Income and expense accounts are translated at average monthly exchange rates. Net exchange gains or losses resulting from such translation are included in accumulated other comprehensive income and reported as a separate component of shareholders' equity. Resale and Repurchase Agreements The Company enters into purchases of securities under agreements to resell ("resale agreements") and sales of securities under agreements to repurchase ("repurchase agreements") of substantially identical securities. Resale agreements and repurchase agreements are generally accounted for as secured lending and secured borrowing transactions, respectively. The amounts advanced under resale agreements and the amounts borrowed under repurchase agreements are carried on the consolidated balance sheet at the amount advanced or borrowed. Interest earned on resale agreements and interest paid on repurchase agreements are reported as interest income and interest expense, respectively. The Company offsets resale and repurchase agreements executed with the same counterparty under legally enforceable netting agreements that meet the applicable netting criteria. The Company takes possession of securities purchased under resale agreements. The market value of the securities subject to the resale and repurchase agreements are regularly monitored to ensure appropriate collateral coverage of these secured financing transactions. 42 Securities Debt securities that the Company has the ability and intent to hold to maturity are reported at cost, adjusted for amortization of premiums and accretion of discounts. Securities acquired principally for the purpose of selling them in the near term are classified as trading assets and reported at fair value, with unrealized gains and losses included in earnings. All other securities are classified as available for sale and carried at fair value, with unrealized gains and losses, net of related income taxes, included in accumulated other comprehensive income and reported as a separate component of shareholders' equity. Realized gains and losses on sales of securities are computed on a specific identified cost basis and are reported within other income in the consolidated statement of income. Adjustments of trading assets to fair value and gains and losses on the sale of such securities are recorded in trading revenues. Loans Loans are stated at their principal amount outstanding, net of unearned income, purchase premium or discount, unamortized nonrefundable fees and related direct loan origination costs. Loans held for sale are carried at the lower of aggregate cost or market value. Interest income is recorded based on methods that result in level rates of return over the terms of the loans. Commercial loans are categorized as nonaccruing when, in the opinion of management, reasonable doubt exists with respect to collectibility of interest or principal based on certain factors including period of time past due (principally ninety days) and adequacy of collateral. At the time a loan is classified as nonaccruing, any accrued interest recorded on the loan is generally reversed and charged against income. Interest income on these loans is recognized only to the extent of cash received. In those instances where there is doubt as to collectibility of principal, any interest payments received are applied to principal. Loans are not reclassified as accruing until interest and principal payments are brought current and future payments are reasonably assured. Residential mortgages are generally designated as nonaccruing when delinquent for more than ninety days. Loans to credit card customers that are past due more than ninety days are designated as nonaccruing if the customer has agreed to credit counseling. Other consumer loans are generally not designated as nonaccruing and are charged off against the allowance for credit losses according to an established delinquency schedule. Loans, other than those included in large groups of smaller balance homogenous loans, are considered impaired when, based on current information, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are valued at the present value of expected future cash flows, discounted at the loan's original effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. Restructured loans are loans for which the original contractual terms have been modified to provide for terms that are less than the Company would be willing to accept for new loans with comparable risk because of a deterioration in the borrowers' financial condition. Interest on these loans is accrued at the renegotiated rates. 43 Loan Fees Nonrefundable fees and related direct costs associated with the origination or purchase of loans are deferred and netted against outstanding loan balances. The amortization of net deferred fees and costs are recognized in interest income, generally by the interest method, based on the estimated lives of the loans. Nonrefundable fees related to lending activities other than direct loan origination are recognized as other income over the period the related service is provided. This includes fees associated with the issuance of loan commitments where the likelihood of the commitment being exercised is considered remote. In the event of the exercise of the commitment, the remaining unamortized fee is recognized in interest income over the loan term using the interest method. Other credit-related fees, such as standby letter of credit fees, loan syndication and agency fees and annual credit card fees are recognized as other operating income over the period the related service is performed. Allowance for Credit Losses The allowance for credit losses is that amount believed adequate to absorb estimated credit losses in the loan portfolios based on management's evaluation of various factors including overall growth in the portfolios, an analysis of individual credits, adverse situations that could affect a borrower's ability to repay (including the timing of future payments), prior and current loss experience, and current economic conditions. A provision for credit losses is charged to operations based on management's periodic evaluation of these and other pertinent factors. Mortgage Servicing Rights Mortgage servicing rights (MSRs) represent the right to service loans for others, whether acquired directly or in conjunction with the acquisition of mortgage loan assets. As originated or purchased loans are sold or securitized, their total cost is allocated between MSRs and the loans, based on relative fair values. MSRs are amortized over the expected life of the loans serviced, including expected prepayments, using a method that approximates the level yield method. As interest rates decline, prepayments generally accelerate, thereby reducing future net servicing cash flows from the mortgage portfolio. The carrying value of the MSRs is periodically evaluated for impairment based on the difference between the carrying value of such rights and their current fair value. For purposes of measuring impairment, which is recorded through the use of a valuation reserve, MSRs are stratified based upon interest rates and whether such rates are fixed or variable and other loan characteristics. The evaluation of future net servicing income is based on a discounted and disaggregated (individual portfolio) methodology. Goodwill and Other Acquisition Intangibles Goodwill, representing the excess of purchase price over the fair value of net assets acquired, results from purchase acquisitions made by the Company. Goodwill and other acquisition intangibles are amortized over the estimated periods to be benefited, under the straight-line method, not exceeding 20 years. 44 The Company reviews its goodwill and other acquisition intangibles periodically for other than temporary impairment. If such impairment is indicated, recoverability of the asset is assessed based on expected undiscounted net cash flows. Income Taxes The Company and its subsidiaries file a consolidated federal income tax return. Taxes of each subsidiary of the Company are generally determined on the basis of filing separate returns. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as the estimated future tax consequences attributable to net operating loss and tax credit carryforwards. A valuation allowance is established if, based on available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. Foreign taxes paid are applied as credits to reduce federal income taxes payable. Derivative Financial Instruments Derivatives used by the Company include futures, forwards, swaps, caps, floors and options in the interest rate, foreign exchange and precious metals markets. The Company uses these instruments for trading purposes and as part of its asset and liability management activities. Derivatives that are used for trading purposes or are linked to other trading instruments are carried on a mark to market basis with the resultant gains and losses from trading and foreign exchange activities aggregated as trading revenue. Unrealized gains and the balances of unamortized option premiums paid are included in trading account assets while unrealized losses and the unamortized balances of option premiums received are included in trading account liabilities. Foreign exchange trading positions are revalued daily by pricing spot foreign exchange and forward contracts for foreign exchange at prevailing rates. The Company is involved in various precious metals activities including arbitrage, purchases and sales of precious metals for forward delivery, options on precious metals and precious metals lending and borrowing. Precious metals inventory, outstanding open positions in contracts for forward delivery, options contracts and precious metals loans and borrowings will be revalued monthly at prevailing market rates. Precious metals interest arbitrage balances are recorded at cost, with the difference between the fixed forward contract price and cost to be accreted into trading revenue ratably over the life of the contracts. The Company uses a variety of derivative instruments to manage interest rate risk in conjunction with its asset and liability management process. Risk is managed by achieving a mix of derivative instruments and balance sheet assets and liabilities deemed consistent with expectations of interest rate movements, balance sheet changes and risk management strategies. These instruments follow either the synthetic alteration or hedge model of accounting with cash flows recognized on an accrual basis as an adjustment to the interest income or interest expense associated with the balance sheet items being synthetically altered or hedged. Derivatives hedging available for sale investment securities are marked to market through other 45 comprehensive income on a basis consistent with the underlying hedged item. Under both the synthetic alteration and hedge accounting models, derivative instruments are linked to specific individual assets or liabilities or pools of similar assets or liabilities by the notional and interest rate characteristics of the associated instruments. Under the hedge accounting model, it must be demonstrated that the hedged asset, liability or event being hedged exposes the enterprise to price or interest rate risk and that the related derivative reduces that risk. Accordingly there must be high correlation between changes in the market value of the derivative and the market value or cash flows associated with the hedged items so that it is probable that the results of the derivative will substantially offset the effects of price or interest rate movement on the hedged item. Derivatives that cease to qualify for synthetic alteration or hedge accounting are marked to market prospectively through current period earnings with any unrealized gains or losses at that time being deferred and amortized over the life of the original hedge. When the altered or hedged position is liquidated, any deferred amounts are immediately recognized in earnings. Gains or losses realized on terminated derivatives that were used as hedges are deferred and amortized over the life of the hedged item. On January 1, 2001 the Company adopted Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (FAS 133) as amended by FAS 137 and FAS 138. FAS 133 requires that all derivative financial instruments be recognized at fair value on the balance sheet. To the extent these derivatives qualify for special hedge accounting under FAS 133, changes in their value may be offset by the corresponding mark to market of hedged assets, liabilities or firm commitments or for forecasted transactions, deferred as component of shareholder's equity until the transaction occurs. The ineffective portion of the change in value of a derivative in a qualifying hedge relationship and derivative contracts that do not qualify for hedge accounting under FAS 133 are recognized currently in earnings. The Company will record an aftertax one-time transitional charge of $.5 million in its consolidated statement of income and record an aftertax unrealized transitional loss of $7.7 million as a component of accumulated other comprehensive income as a result of the initial adoption. This includes a $10.5 million unrealized loss related to the transfer of $189.9 million of held to maturity investment securities reclassified to available for sale investment securities on January 1, 2001, as was permitted upon transition to FAS 133. 46 NOTES TO FINANCIAL STATEMENTS Note 1. Divestitures In December 2000, as part of an internal international reorganization of the HSBC Group's global private banking operations, the Company distributed its 49% interest in HSBC Republic Holdings (Luxembourg) S.A. (HRH) from the Bank to its parent HSBC North America Inc. (HNAI). The distribution, in the form of a return of capital of $2.8 billion, included its investment in HSBC Investments (Bahamas) Limited in addition to the $2.5 billion investment in HRH. The assets transferred were acquired as a part of the acquisition and merger of Republic New York Corporation (Republic) on December 31, 1999. See Note 2, Acquisitions. The divestitures were accounted for as transfers of assets between companies under common control at historical cost. The accompanying consolidated financial statements and related notes reflect a restatement of the December 31, 1999 consolidated balance sheets of the Company and the Bank to exclude the transferred assets and liabilities as though they had not been acquired (depooling). Restatement of the 1999 income statement was not required as no income or expenses from Republic were included in the reported results. Note 2. Acquisitions On August 1, 2000, the Company purchased the banking operations of Chase Manhattan Bank, Panama (Chase Panama). The transaction was accounted for as a purchase. Accordingly, the results of operations of Chase Panama are included with those of the Company for the period subsequent to the date of the acquisition. The branch operations had over $750 million in assets and $720 million in deposit liabilities. The excess of cost over acquired net identifiable assets (goodwill) was $60 million and is being amortized on a straight-line basis over 20 years. On December 31, 1999, HSBC acquired Republic New York Corporation (Republic). Also on December 31, 1999, following the acquisition, HSBC merged Republic with the Company. The purchase price of the transaction was approximately $7.1 billion and was paid to Republic's shareholders on January 7, 2000. Republic had consolidated total assets of $46.9 billion, deposits of $29.9 billion and common shareholders' equity of $2.9 billion on December 31, 1999. The merger was accounted for as a purchase transaction. Accordingly, the results of operations of Republic are included with those of the Company for the period subsequent to the date of acquisition. Assets acquired and liabilities assumed were recorded at their estimated fair values. The fair value of the assets and liabilities of Republic are included in the financial statements of the Company as of December 31, 1999. The fair value of net identifiable assets acquired was $4.1 billion. The purchase price allocation resulted in an excess of cost over acquired net identifiable assets (goodwill) of approximately $2.9 billion, which is being amortized on a straight-line basis over 20 years. Liabilities assumed at acquisition date included employee termination costs of $133.9 million and other costs such as contract termination costs of $23.7 million associated with merging Republic's operations with those of the Company. 47 The following table is an analysis of Republic's goodwill, reflecting adjustments for transferred and liquidated companies as well as the finalization of items estimated at December 31, 1999, as permitted by generally accepted accounting principles. 2000 ---------- in thousands Balance at beginning of year $2,922,863 Adjustments: Asset valuations 19,718 Transferred and liquidated companies (7,019) Employee terminations 31,726 Taxes (97,040) Princeton note matter (See Note 26) 79,252 Other legal fees and provisions 9,494 Other 10,718 ---------- Total adjustments 46,849 ---------- Less: amortization expense 146,143 ---------- Balance at end of year $2,823,569 ---------- The following pro forma financial information presents the combined results of the Company and Republic as if the acquisition had occurred as of the beginning of 1999 after giving effect to certain adjustments. The pro forma financial information may not be indicative of the results that actually would have occurred if the purchase had been consummated on January 1, 1999 or which may be obtained in the future. While the Company expects to achieve certain operating cost savings as a result of the combination, no adjustment has been included in the pro forma amounts for anticipated operating cost savings or revenue enhancements. No adjustment has been made for the costs of integrating businesses. Certain other foreign operations, not adjusted for in the pro forma results below, were transferred to other HSBC Group members or are expected to be transferred in the future. Further, both the Company and Republic recognized certain one-time items in their 1999 operating results. Pretax results for the Company included settlement with the U.S. Internal Revenue Service on Brazilian tax credits of $13.1 million and a gain on the sale of a student loan business of $15.0 million partially offset by an acquisition related restructuring charge of $26.7 million. Republic's 1999 pretax operating results included restructuring charges of $97.0 million (unrelated to the acquisition by the Company) partially offset by a gain of $69.8 million relating to a real estate investment. Republic's results in 1999 also benefited from securities gains and foreign exchange income related to Russia and Brazil. These positions have been exited. Pro forma Year Ended December 31, 1999 ------------ (unaudited) in millions Net interest income after provision for credit losses $2,149 Other operating expenses 2,052 Income taxes 375 Net income 602 ------ In connection with the acquisition of Republic, restructuring costs relating to the planned severance of employees and exiting of businesses of the Company of $26.7 million were recognized in other operating expenses in the fourth quarter of 1999. Costs totalling $21.0 million were recognized relating to occupancy including cancellation of lease payments for specific lease premises that are to be vacated. Employee termination costs of $5.7 million include severance payments, related benefits and out placement services for employees terminated in connection with the acquisition. 48 During 2000, the Company refined its initial estimates of liabilities related to the acquisition. Additional accruals were recorded with an increase to goodwill, primarily for severance costs including payments to be made to certain former key executives of Republic. The Company also reversed a fourth quarter 1999 other operating expense accrual of $10.8 million during 2000, as a result of a negotiated settlement with a landlord involving certain primary office space in New York City. The landlord accepted a payment significantly less than the remaining lease obligation in order to open the space to a new tenant. The following table presents the activity in these reserves through December 31, 2000. Severance Related Premises Other Total ------- ------- ----- ------ in millions Liabilities assumed $133.9 $ 9.7 $14.0 $157.6 Restructuring charges 5.7 21.0 - 26.7 ------ ------ ----- ------ Balance December 31, 1999 139.6 30.7 14.0 184.3 Change in estimates 83.7 (17.8) 2.5 68.4 Less: Payments 71.5 2.1 11.2 84.8 ------ ------ ----- ------ Balance December 31, 2000 $151.8 $ 10.8 $ 5.3 $167.9 ------ ------ ----- ------ During 2000, $85.0 million of restructuring costs were expensed as systems and operations were combined. Although consolidation of most systems and operations took place in 2000 it is anticipated that some further restructuring costs will be incurred in 2001. On December 31, 1999 HSBC Asset Management Americas Inc. (HAMI), an indirect wholly owned subsidiary of HSBC, was merged with the Company. HAMI's outstanding stock was contributed to the Company. HAMI, an SEC registered investment advisor, had assets of $11.8 million and shareholder's equity of $7.8 million at December 31, 1999. Note 3. Cash and Due from Banks The Bank is required to maintain noninterest bearing balances at Federal Reserve Banks as part of its membership requirements in the Federal Reserve System. These balances averaged $224.6 million in 2000 and $128.0 million in 1999. Note 4. Trading Assets and Liabilities An analysis of trading assets and liabilities follows. December 31, 2000 1999 ---------- ---------- in thousands Trading assets: U.S. Government securities $ 372,615 $ 464,482 Mortgage and other asset backed securities 1,721,609 818,375 Other securities 973,705 891,926 Unrealized gains on derivatives 1,876,732 1,773,249 Precious metals 826,311 566,977 ---------- ---------- $5,770,972 $4,515,009 ---------- ---------- Trading liabilities: Securities sold, not yet purchased $ 217,830 $ 213,809 Payables for precious metals 487,905 407,540 Unrealized losses on derivatives 2,061,090 1,815,966 ---------- ---------- $2,766,825 $2,437,315 ---------- ---------- 49 Trading revenues are generated by the Company's participation in the foreign exchange and precious metals markets, trading activities in other derivative contracts, including interest rate swaps, and from trading securities. The Company reports the net revenues from these activities, which include mark to market adjustments and any related direct trading expenses, as trading revenues in the consolidated statement of income. Trading revenues are summarized by categories of financial instruments in the following table.

Year Ended December 31, 2000 1999 1998 -------- ------- ------- in thousands Foreign exchange $104,138 $ 6,140 $ 5,455 Precious metals 6,685 - - Trading account profits (losses) and commissions 29,369 3,874 (1,755) -------- ------- ------- Trading revenues $140,192 $10,014 $ 3,700 -------- ------- -------

Note 5. Securities At December 31, 2000, the Company held no securities of any single issuer (excluding the U.S. Treasury and federal agencies) with a book value that exceeded 10% of shareholders' equity. The amortized cost and fair value of the securities available for sale and securities held to maturity portfolios follow.

2000 1999 ----------------------------------------------------- -------------------------- Gross Gross Amortized Unrealized Unrealized Fair Amortized Fair December 31, Cost Gains Losses Value Cost Value ----------- ---------- ---------- ----------- ----------- ----------- in thousands U.S. Treasury $ 318,378 $ 5,654 $ 1,445 $ 322,587 $ 1,554,263 $ 1,521,996 U.S. Government agency 8,943,188 242,444 66,442 9,119,190 16,428,949 16,383,416 Domestic debt securities 4,673,487 36,524 57,223 4,652,788 4,438,921 4,434,200 Foreign debt securities 2,542,658 31,825 19,182 2,555,301 1,805,447 1,805,447 Equity securities 665,648 21,318 - 686,966 468,630 472,260 ----------- -------- -------- ----------- ----------- ----------- Securities available for sale $17,143,359 $337,765 $144,292 $17,336,832 $24,696,210 $24,617,319 ----------- -------- -------- ----------- ----------- ----------- U.S. Government agency $ 3,530,285 $127,155 $ 54 $ 3,657,386 $ 4,091,875 $ 4,091,875 Obligations of U.S. states and political subdivisions 718,499 30,278 1,067 747,710 665,958 665,958 Domestic debt securities 11,708 456 9 12,155 12,254 12,254 ----------- -------- -------- ----------- ----------- ----------- Securities held to maturity $ 4,260,492 $157,889 $ 1,130 $ 4,417,251 $ 4,770,087 $ 4,770,087 ----------- -------- -------- ----------- ----------- -----------

At December 31, 1999, with regard to securities available for sale, the Company had gross unrealized gains of $1.7 million, $.6 million and $5.0 million and gross unrealized losses of $33.9 million, $46.1 million and $6.2 million related to U.S. Treasury, U.S. Government agency and other securities, respectively. At December 31, 1999, the cost and fair values of securities held to maturity were the same because they were acquired in the Republic purchase. The following table presents the components of investment securities transactions attributable to securities available for sale and securities held to maturity. 50

Year Ended December 31, 2000 1999 1998 ------------------------------ ---------------------------- -------------------------- Gross Net Gross Net Gross Net ------------------- Gains ----------------- Gains ----------------- Gains Gains (Losses) (Losses) Gains (Losses) (Losses) Gains (Losses) (Losses) ------- -------- ------- ------- ------- ------- ------- ------- ------- in thousands Securities available for sale $54,030 $(27,189) $26,841 $19,532 $(9,434) $10,098 $15,923 $(2,068) $13,855 Securities held to maturity: Maturities, calls and mandatory redemptions 2,205 (207) 1,998 - - - - - - ------- -------- ------- ------- ------- ------- ------- ------- ------- $56,235 $(27,396) $28,839 $19,532 $(9,434) $10,098 $15,923 $(2,068) $13,855 ======= ======== ======= ======= ======= ======= ======= ======= =======

The amortized cost and fair values of securities available for sale and securities held to maturity at December 31, 2000, by contractual maturity are shown in the following tables. Expected maturities differ from contractual maturities because borrowers have the right to prepay obligations without prepayment penalties in certain cases. The amounts exclude $666 million cost ($687 million fair value) of equity securities that do not have fixed maturities. Amortized Fair December 31, 2000 Cost Value ----------- ------------ in thousands Within one year $ 895,635 $ 896,793 After one but within five years 3,768,391 3,766,916 After five but within ten years 2,291,131 2,313,992 After ten years 9,522,554 9,672,165 ----------- ------------ Securities available for sale $16,477,711 $16,649,866 ----------- ------------ Within one year $ 33,267 $ 33,387 After one but within five years 98,590 99,713 After five but within ten years 662,530 684,557 After ten years 3,466,105 3,599,594 ----------- ------------ Securities held to maturity $ 4,260,492 $ 4,417,251 ----------- ------------ Note 6. Loans A distribution of the loan portfolio follows. December 31, 2000 1999 ----------- ------------ in thousands Domestic: Commercial: Construction and mortgage loans $ 5,645,641 $ 5,647,703 Other business and financial 12,550,766 12,002,029 Consumer: Residential mortgages 15,835,374 13,240,843 Credit card receivables 1,232,054 1,290,339 Other consumer loans 1,640,260 1,231,443 International 3,513,752 4,918,107 ----------- ------------ $40,417,847 $38,330,464 ----------- ------------ Residential mortgages include $1,874.4 million and $504.4 million of mortgages held for sale at December 31, 2000 and 1999, respectively. Other consumer loans include $368.5 million and $380.3 million of higher education loans also held for sale at December 31, 2000 and 1999, respectively. 51 International loans include certain bonds issued by the governments of Mexico and Venezuela as part of debt renegotiations (Brady bonds). These bonds had an aggregate carrying value of $355.8 million (face value $368.3 million) and an aggregate fair value of $306.7 million at year end 2000, compared with a year end 1999 fair value of $271.7 million. The Company's intent is to hold these instruments until maturity. The bonds are fully secured as to principal by zero-coupon U.S. Treasury securities with face value equal to that of the underlying bonds. At December 31, 2000 and 1999, the Company's nonaccruing loans were $423.2 million and $343.5 million, respectively. At December 31, 2000 and 1999, the Company had commitments to lend additional funds of $45.8 million and $7.6 million, respectively, to borrowers whose loans are classified as nonaccruing. A significant portion of these commitments include clauses that provide for cancellation in the event of a material adverse change in the financial position of the borrower.

Year Ended December 31, 2000 1999 1998 ------- ------- ------- in thousands Interest revenue on nonaccruing loans which would have been recorded had they been current in accordance with their original terms $28,004 $22,879 $19,802 Interest revenue recorded on nonaccruing loans 23,986 29,084 34,824 ------- ------- -------

Other real estate and owned assets included in other assets amounted to $20.6 million and $14.0 million at December 31, 2000 and 1999, respectively. The Company identified impaired loans totaling $223.5 million at December 31, 2000, of which $108.7 million had an allocation from the allowance of $46.3 million. At December 31, 1999, the Company had identified impaired loans of $215.6 million of which $110.2 million had an allocation from the allowance of $64.5 million. The average recorded investment in such impaired loans was $192.2 million, $184.9 million and $169.9 million in 2000, 1999 and 1998, respectively. The Company has loans outstanding to certain executive officers and directors. The loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other persons and do not involve more than normal risk of collectibility. The aggregate amount of such loans did not exceed 5% of shareholders' equity at December 31, 2000 and 1999. Note 7. Allowance for Credit Losses An analysis of the allowance for credit losses follows.

2000 1999 1998 --------- --------- --------- in thousands Balance at beginning of year $ 637,995 $ 379,652 $ 409,409 Allowance related to acquired (sold) businesses (11,302) 268,617 - Provision charged to income 137,600 90,000 80,000 Recoveries on loans charged off 34,248 34,825 42,908 Loans charged off (272,975) (135,099) (152,665) Translation adjustment (582) - - --------- --------- --------- Balance at end of year $ 524,984 $ 637,995 $ 379,652 --------- --------- ---------

Note 6 provides information on impaired loans and the related specific credit loss allowance. 52 Note 8. Mortgage Servicing Rights Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The outstanding principal balances of these loans were $19.52 billion and $19.31 billion at December 31, 2000 and 1999, respectively. Custodial balances maintained in connection with the foregoing loan servicing, and included in noninterest bearing deposits in domestic offices were $293.5 million and $282.3 million at December 31, 2000 and 1999, respectively. An analysis of MSRs, reported in other assets, follows. 2000 1999 1998 -------- -------- -------- in thousands Balance at beginning of year $269,774 $133,804 $111,501 Additions 39,695 166,179 48,765 Amortization (42,404) (30,209) (26,462) -------- -------- -------- Balance at end of year $267,065 $269,774 $133,804 -------- -------- -------- Additions to MSRs in 1999 include $115.1 million obtained in the acquisition of Republic. No valuation reserve has been established against MSRs. The fair value of MSRs as of December 31, 2000 and 1999 was approximately $355.8 million and $344.1 million, respectively. Note 9. Deposits The aggregate amount of time deposit accounts (primarily certificates of deposits) each with a minimum of $100,000 included in domestic office deposits were $4.82 billion and $4.83 billion at December 31, 2000 and 1999, respectively. The scheduled maturities of all domestic time deposits at December 31, 2000 follows. in thousands 2001 $11,759,682 2002 1,532,240 2003 221,048 2004 150,430 2005 50,233 Later years 22,809 ----------- $13,736,442 53 Note 10. Short-Term Borrowings The following table shows detail relating to short-term borrowings in 2000, 1999 and 1998. Average interest rates during each year are computed by dividing total interest expense by the average amount borrowed.

2000 1999 1998 ------------------ ----------------- ------------------- Average Average Average Amount Rate Amount Rate Amount Rate --------- ---- --------- ---- --------- ---- in thousands Federal funds purchased (day to day): At December 31 $1,974,589 4.90% $ 368,089 5.08% $ 607,124 4.59% Average during year 985,215 6.31 502,595 4.87 617,542 5.20 Maximum month-end balance 2,122,030 840,849 908,542 Securities sold under repurchase agreements: At December 31 893,567 5.13 1,046,984 6.23 206,048 4.41 Average during year 1,096,989 5.62 448,745 4.62 299,588 5.34 Maximum month-end balance 1,746,506 1,046,984 832,312 Commercial paper: At December 31 1,472,586 6.70 1,121,377 5.42 909,261 5.05 Average during year 1,131,819 6.36 838,739 5.18 826,650 5.49 Maximum month-end balance 1,629,704 1,121,377 1,002,479 Precious metals: At December 31 1,899,747 .95 1,679,118 2.45 - - Average during year 2,127,067 1.32 4,600 - - - Maximum month-end balance 2,684,805 1,679,118 - All other short-term borrowings: At December 31 2,321,874 7.44 995,141 5.56 1,163,576 4.57 Average during year 3,137,950 7.73 718,570 5.29 1,726,174 5.86 Maximum month-end balance 6,789,254 1,225,000 2,826,177 --------- ---- --------- ---- --------- ----

At December 31, 2000, the Company had unused lines of credit with HSBC aggregating $500 million. These lines of credit do not require compensating balance arrangements and commitment fees are not significant. Note 11. Income Taxes Total income taxes were allocated as follows.

Year Ended December 31, 2000 1999 1998 -------- -------- -------- in thousands To income before income taxes $340,500 $308,300 $238,100 To shareholders' equity as tax charge (benefit): Net unrealized gains and losses on securities available for sale 95,322 (51,546) 8,426 Foreign currency translation, net (4,033) - - -------- -------- -------- $431,789 $256,754 $246,526 -------- -------- -------- The components of income tax expense follow.

Year Ended December 31, 2000 1999 1998 -------- -------- -------- in thousands Current: Federal $219,610 $240,180 $209,729 State and local 12,000 59,017 56,487 Foreign 26,151 - - -------- -------- -------- Total current 257,761 299,197 266,216 Deferred, primarily federal 82,739 9,103 (28,116) -------- -------- -------- Total income taxes $340,500 $308,300 $238,100 -------- -------- --------

54 The following table is an analysis of the difference between effective rates based on the total income tax provision attributable to pretax income and the statutory U.S. Federal income tax rate. Year Ended December 31, 2000 1999 1998 ---- ---- ---- Statutory rate 35.0% 35.0% 35.0% Increase (decrease) due to: State and local income taxes .9 4.7 4.8 Goodwill amortization 6.3 .9 1.2 Change in valuation allowance for deferred tax assets - - (5.9) Tax exempt interest income (1.5) (.2) (.2) Brazilian tax credit settlement - - (3.1) Other items (3.2) (.5) (.7) ---- ---- ---- Effective income tax rate 37.5% 39.9% 31.1% ---- ---- ---- The components of the net deferred tax asset are summarized below. December 31, 2000 1999 -------- -------- in thousands Deferred tax assets: Allowance for credit losses $181,919 $219,557 Deferred charge offs 11,305 11,305 Accrued expenses not currently deductible 134,825 145,799 Investment securities 108,655 201,315 Other 107,928 105,826 -------- -------- 544,632 683,802 Less valuation allowance 28,329 28,329 -------- -------- Total deferred tax assets 516,303 655,473 -------- -------- Less deferred tax liabilities: Lease financing income accrued 48,319 35,800 Accrued pension cost 46,093 43,704 Accrued income on foreign bonds 20,094 20,518 Deferred net operating loss recognition 90,018 90,018 Domestic tax on overseas income - 135,768 Depreciation and amortization 81,052 83,320 Interest and discount income 82,062 82,061 Other 56,229 43,542 -------- -------- Total deferred tax liabilities 423,867 534,731 -------- -------- Net deferred tax asset $ 92,436 $120,742 -------- -------- Realization of deferred tax assets is contingent upon the generation of future taxable income or the existence of sufficient taxable income within the carryback period. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. In assessing the need for a valuation allowance, management considers the scheduled reversal of the deferred tax liabilities, the level of historical taxable income, and projected future taxable income over the periods in which the temporary differences comprising the deferred tax assets will be deductible. Based upon the level of historical taxable income and the scheduled reversal of the deferred tax liabilities over the periods which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences, net of the existing valuation allowance. 55 Note 12. Subordinated Long-Term Debt and Perpetual Capital Notes The following is a summary of subordinated long-term debt and perpetual capital notes. Interest rates shown are based on the face values of the instruments.

Face Value Book Value ------------------------- ------------------------- December 31, 2000 1999 2000 1999 ---------- ---------- ---------- ---------- in thousands 9.50-9.75% Subordinated notes due 2000 $ - $ 200,000 $ - $ 203,581 Floating rate subordinated notes due 2000 - 200,000 - 200,000 7.875-8.875% Subordinated notes due 2001 350,000 350,000 351,727 355,241 7.25-7.75% Subordinated notes due 2002 400,000 400,000 399,889 399,866 Floating rate subordinated notes due 2002 (6.689%, 6.696%) 245,700 245,700 243,798 242,670 7% Subordinated notes due 2006 300,000 300,000 298,530 298,278 5.875% Subordinated notes due 2008 250,000 250,000 222,766 219,252 6.625-9.70% Subordinated notes due 2009 550,000 550,000 565,198 567,081 Floating rate subordinated notes due 2009 (6.688%) 124,320 124,320 124,320 124,320 7% Subordinated notes due 2011 100,000 100,000 94,038 93,451 9.50% Subordinated debentures due 2014 150,000 150,000 166,663 167,921 9.125-9.30% Subordinated notes due 2021 200,000 200,000 218,494 219,402 7.20% Subordinated debentures due 2097 250,000 250,000 214,443 214,075 Perpetual Capital Notes (7.188%) 129,000 129,000 127,148 122,511 ---------- ---------- ---------- ---------- $3,049,020 $3,449,020 $3,027,014 $3,427,649 ---------- ---------- ---------- ----------

The above table excludes $1,550 million of debt issued by the Bank or its subsidiaries payable to the Company. Of this amount, the earliest note to mature is in 2006 and the latest note to mature is in 2097. Interest rates on floating rate notes are determined periodically by formulas based on certain money market rates or, in certain instances, by minimum interest rates as specified in the agreements governing the issues. Interest rates on the floating rate notes in effect at December 31, 2000 are shown in parentheses. The Perpetual Capital Notes (PCNs) are a component of total qualifying capital under applicable risk-based capital rules. The PCNs may be exchanged for securities that constitute permanent primary capital securities for regulatory purposes. The principal amount of each PCN will be payable as follows: (1) at the option of the holder on the put date in each year commencing in 2012, (2) at the option of the Company on 90 days prior notice, the PCNs may be either (i) redeemed on the specified redemption date, in whole, for cash and at par, but only with the proceeds of a substantially concurrent sale of capital securities issued for the purpose of such redemption or (ii) exchanged, in whole, for capital securities having a market value equal to the principal amount of the PCNs, and, in each case, the payment of accrued interest in cash or (3) in the event that the sum of the Company's retained earnings and surplus accounts becomes less than zero, the PCNs will automatically be exchanged, in whole, for capital securities having a market value equal to the principal amount of the PCNs and the payment of accrued interest in cash. Contractual scheduled maturities for the subordinated debt over the next five years are as follows: 2001, $350 million; 2002, $646 million; and none in 2003, 2004 and 2005. 56 Note 13. Guaranteed Mandatorily Redeemable Securities The following table presents the guaranteed mandatorily redeemable securities outstanding. Interest rates shown are based on the face values of the instruments. Face Value Book Value ---------- ---------------------- December 31, 2000/1999 2000 1999 ---------- -------- -------- in thousands 7.808% Capital Securities due 2026 $200,000 $200,000 $200,000 8.38% Capital Securities due 2027 200,000 200,000 200,000 7.75% Capital Securities due 2026 150,000 135,789 135,239 7.53% Capital Securities due 2026 200,000 175,948 175,020 -------- -------- -------- $750,000 $711,737 $710,259 -------- -------- -------- The guaranteed mandatorily redeemable securities (Capital Securities) are issued by trusts all of whose outstanding common securities are owned by the Company. The Capital Securities represent preferred beneficial interests in the assets of the trusts and are guaranteed by the Company. The sole assets of the trusts consist of junior subordinated debentures of the Company. The Capital Securities qualify as Tier 1 capital under the risk-based capital guidelines of the Federal Reserve Board. The Capital Securities are redeemable at the option of the Company in the case of a tax event or regulatory capital event at the prepayment price equal to the greater of (i) 100% of the principal amount of the Capital Securities or (ii) the sum of the present values of the stated percentage of the principal amount of the Capital Securities plus the remaining scheduled payments of interest thereon from the prepayment date. Tax event refers to notice that the interest payable on the Capital Securities would not be deductible. Regulatory capital event refers to notice that the Capital Securities would not qualify as Tier 1 capital. In the absence of a tax or regulatory capital event, the Capital Securities are redeemable at the option of the Company. The 7.808% Capital Securities are redeemable on December 15, 2006 at a premium of 3.904% in the first twelve months after December 15, 2006 and varying lesser amounts thereafter and without premium if redeemed after December 15, 2016. The 8.38% Capital Securities are redeemable on May 15, 2007 at a premium of 4.19% in the first twelve months after May 15, 2007 and varying lesser amounts thereafter and without premium if redeemed after May 15, 2017. The 7.75% Capital Securities are redeemable on November 15, 2006 at a premium of 3.66% in the first twelve months after November 15, 2006 and varying lesser amounts thereafter and without premium if redeemed after November 15, 2016. The 7.53% Capital Securities are redeemable on December 4, 2006 at a premium of 3.765% in the first twelve months after December 4, 2006 and varying lesser amounts thereafter and without premium if redeemed after December 4, 2016. 57 Note 14. Other Long-Term Debt The following table reports other long-term debt. Interest rates shown are based on the face values of the instruments.

Face Value Book Value --------------------------- -------------------------- December 31, 2000 1999 2000 1999 ---------- ---------- ---------- ---------- in thousands Issued or acquired by the Company or subsidiaries other than the Bank: 8.375% Debentures due 2007 $ 100,000 $ 100,000 $ 104,262 $ 104,963 Other - 105 - 105 ---------- ---------- ---------- ---------- 100,000 100,105 104,262 105,068 ---------- ---------- ---------- ---------- Issued or acquired by the Bank or its subsidiaries: Medium-term floating rate note due 2040 (6.40%) 24,999 - 24,999 - Fixed rate Federal Home Loan Bank of New York advances 232,838 482,779 232,838 482,779 Collateralized mortgage obligations 2,343 3,322 2,343 3,322 Collateralized repurchase agreements (3.25-7.45%) 936,205 1,113,250 936,205 1,075,506 Other 57,196 80,394 57,257 80,456 ---------- ---------- ---------- ---------- 1,253,581 1,679,745 1,253,642 1,642,063 ---------- ---------- ---------- ---------- $1,353,581 $1,779,850 $1,357,904 $1,747,131 ---------- ---------- ---------- ----------

The medium-term floating rate note due 2040 was issued under the Bank's Global Medium-Term Note Program which provides for the issuance of up to $4 billion of notes having maturities of 7 days or more from the date of issue. The fixed rate Federal Home Loan Bank of New York advances have interest rates ranging from 2.67% to 8.61%. The mortgage obligations are collateralized by a pledge of FHLMC mortgage-backed securities. All payments received on the pledged mortgage-backed securities, net of certain costs, must be applied to repay the bonds. The stated maturity and stated rate for the two bonds are: September, 2002 at 7.89% and October, 2006 at 7.27%. It is expected that the actual life of the bonds will be less than their stated maturity. Collateralized repurchase agreements consist of securities repurchase agreements with initial maturities exceeding one year. Contractual scheduled maturities for the debt over the next five years are as follows: 2001, $378 million; 2002, $273 million; 2003, $38 million; 2004, $27 million and $41 million in 2005. 58 Note 15. Preferred Stock The following table presents information related to the issues of preferred stock outstanding.

Amount Shares Dividend Outstanding Outstanding Rate --------------------- December 31, 2000 2000 2000 1999 --------- ----- -------- -------- in thousands $1.8125 Cumulative Preferred Stock ($25 stated value) 3,000,000 7.25% $ 75,000 $ 75,000 6,000,000 Depositary shares each representing a one-fourth interest in a share of Adjustable Rate Cumulative Preferred Stock, Series D ($100 stated value) 1,500,000 5.00 150,000 150,000 Dutch Auction Rate Transferable Securities(TM) Preferred Stock (DARTS) Series A ($100,000 stated value) 625 4.93 62,500 62,500 Series B ($100,000 stated value) 625 5.041 62,500 62,500 $2.8575 Cumulative Preferred Stock ($50 stated value) 3,000,000 5.715 150,000 150,000 CTUS Inc. Preferred Stock 100 - - - --------- ----- -------- -------- $500,000 $500,000 --------- ----- -------- --------

The $1.8125 Cumulative Preferred Stock may be redeemed, at the option of the Company, at $25 per share plus dividends accrued and unpaid to the redemption date. The dividend rate on the Adjustable Rate Cumulative Preferred Stock, Series D (Series D Stock) is determined quarterly, by reference to a formula based on certain benchmark market interest rates, but will not be less than 4 1/2% or more than 10 1/2% per annum for any applicable dividend period. The Series D Stock is redeemable by the Company at $100 per share (or $25 per depositary share), plus accrued and unpaid dividends to the redemption date. DARTS of each series are redeemable at the option of the Company, at $100,000 per share, plus accrued and unpaid dividends to the redemption date. Dividend rates for each dividend period are set pursuant to an auction procedure. The maximum applicable dividend rates on the shares of DARTS range from 110% to 150% of the 60 day "AA" composite commercial paper rate. DARTS are also redeemable, at the option of the Company, on any dividend payment date for such series, at a redemption price of $100,000 per share plus the payment of accrued and unpaid dividends, if the applicable rate for such series fixed with respect to the dividend period for such series ending on such dividend payment date equals or exceeds the 60 day "AA" composite commercial paper rate on the date of determination of such rate. The outstanding shares of $2.8575 Cumulative Preferred Stock have an aggregate stated value of $150 million. The Preferred Stock may be redeemed at the option of the Company on or after October 1, 2007, at $50 per share, plus dividends accrued and unpaid to the redemption date. The Company acquired CTUS Inc., a unitary thrift holding company in 1997 from CT Financial Services Inc. (the Seller). CTUS owned First Federal Savings and Loan Association of Rochester (First Federal). The acquisition agreement provided that the Company issue preferred shares to the Seller. The preferred shares provide for, and only for, a contingent dividend or redemption equal to the amount of recovery, net of taxes and costs, if any, by First Federal resulting from the pending action against the United States government 59 alleging breaches by the government of contractual obligations to First Federal following passage of the Financial Institutions Reform, Recovery and Enforcement Act of 1989. The Company issued 100 preferred shares at a par value of $1.00 per share in connection with the acquisition. Note 16. Common Stock All of the common stock of the Company is owned by HSBC North America Inc., an indirect wholly owned subsidiary of HSBC. Common shares authorized are 1,100 with a par value of $5.00. Shares issued were 704 at December 31, 2000 and 1999. Note 17. Retained Earnings Bank dividends are a major source of funds for payment by the Company of shareholder dividends and along with interest earned on investments, cover the Company's operating expenses which consist primarily of interest on outstanding debt. The approval of the Federal Reserve Board is required if the total of all dividends declared by the Bank in any year exceed the net profits for that year, combined with the retained profits for the two preceding years. Under a separate restriction, payment of dividends is prohibited in amounts greater than undivided profits then on hand, after deducting actual losses and bad debts. Bad debts are debts due and unpaid for a period of six months unless well secured, as defined, and in the process of collection. Under these rules the Bank can pay dividends to the Company as of December 31, 2000 of approximately $389 million, adjusted by the effect of its net income (loss) for 2001 up to the date of such dividend declaration. Note 18. Accumulated Other Comprehensive Income Accumulated other comprehensive income includes net income as well as certain items that are reported directly within a separate component of shareholders' equity. The following table presents changes in accumulated other comprehensive income balances.

2000 1999 1998 -------- -------- ------- in thousands Accumulated other comprehensive income (loss) at beginning of year $(50,534) $ 44,506 $29,309 Fair value adjustments on securities available for sale: Change in fair value, net of taxes of $104,717, $(48,012), $13,275 in 2000, 1999 and 1998, respectively 194,286 (88,476) 24,203 Reclassification adjustment, net of taxes of $9,395, $3,534 and $4,849 in 2000, 1999 and 1998, respectively (19,444) (6,564) (9,006) -------- -------- ------- 174,842 (95,040) 15,197 -------- -------- ------- Accumulated foreign currency translation adjustment: Translation loss, net of taxes of (4,033) in 2000 (7,489) - - -------- -------- ------- (7,489) - - -------- -------- ------- Net change in accumulated other comprehensive income (loss) 167,353 (95,040) 15,197 -------- -------- ------- Total accumulated other comprehensive income (loss) at end of year $116,819 $(50,534) $44,506 -------- -------- -------

60 Note 19. Impact of Recently Issued Accounting Standards In September 2000, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (FAS 140). FAS 140 replaces Statement of Financial Accounting Standards No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (FAS 125). It revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of FAS 125's provisions without change. FAS 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities of the Company occurring after March 31, 2001. However, the provisions of FAS 140 concerning the recognition and reclassification of collateral and disclosures relating to securitization transactions and collateral are effective for the Company for the year ending December 31, 2000 and have been reflected in this report. No reclassification of collateral in the consolidated balance sheet was required at December 31, 2000. See Summary of Significant Accounting Policies for further discussion of derivative financial instruments and FAS 133. Note 20. Regulatory Matters The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, specific capital guidelines must be met that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the maintenance of minimum amounts and ratios of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) of 8% and 4%, respectively. Also required are ratios of Tier 1 capital (as defined) to average assets (as defined) of 4% at the Bank level and 3% at the Company level as long as the Company has a strong supervisory rating. As of December 31, 2000, the most recent notification from the Federal Reserve Board (FRB) categorized the Company and the Bank as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, a banking institution must have minimum total risk-based ratio of at least 10%, Tier 1 risk-based ratio of at least 6%, and Tier 1 leverage ratio of at least 5%. There are no conditions or events since that notification that management believes have changed the categories. The capital amounts and ratios are presented in the table. 61

2000 1999 1999 -------------------- ------------------- --------------------- As Originally Actual Restated Reported -------------------- ------------------- -------------------- December 31, Amount Ratio Amount Ratio Amount Ratio ------------ ------ ----- ------ ----- ------ ----- in millions Total capital (to risk weighted assets) Company $7,393 13.56% $7,723 15.08% $8,143 15.53% Bank 6,458 12.01 6,127 12.86 6,361 13.00 Tier 1 capital (to risk weighted assets) Company 4,573 8.39 4,553 8.89 7,370 13.42 Bank 4,420 8.22 3,954 8.30 6,683 13.00 Tier 1 capital (to average assets) Company 4,573 5.73 4,553 14.49 7,370 23.41 Bank 4,420 5.69 3,954 12.49 6,683 21.08

Note 21. Transactions with Principal Shareholder and Related Parties The Company's common stock is owned by HSBC North America Inc., an indirect wholly owned subsidiary of HSBC. In the normal course of business, the Company conducts transactions with HSBC, including its 25% or more owned subsidiaries (HSBC Group). These transactions occur at prevailing market rates and terms and include deposits taken and placed, short-term borrowings and interest rate contracts. At December 31, 2000 and 1999 assets of $927.5 million and $1,562.3 million, respectively, and liabilities of $3,712.0 million and $3,252.4 million, respectively, related to such transactions with the HSBC Group were included in the Company's balance sheet. Income and expense associated with such transactions was not significant to the Company's financial results of operation. Derivative contracts entered into with the HSBC Group are used primarily to manage interest rate risk. At December 31, 2000 and 1999, the notional amounts of these contracts with members of the HSBC Group were $6.32 billion and $10.45 billion, respectively. Legal restrictions on extensions of credit by the Bank to the HSBC Group require that such extensions be secured by eligible collateral. At December 31, 2000 and 1999, outstanding extensions of credit secured by eligible collateral were $950.4 million and $614.1 million, respectively. Refer to Note 1 for a discussion of the Company's distribution of its 49% interest in HRH and its investment in HSBC Investments (Bahamas) Limited to its parent, HNAI. In the fourth quarter of 2000, HSBC acquired Credit Commercial de France. As part of the consolidation of HSBC's commercial banking activities in the U.S., the Company acquired in a cash purchase the commercial loan portfolio of approximately $500 million of the New York office of Credit Commercial de France. Additionally, $2.4 billion of commitments to lend were assumed as part of the acquisition. 62 Note 22. Stock Option Plans Options have been granted to employees of the Company under the HSBC Holdings Executive Share Option Scheme (the Executive Plan) and under the HSBC Savings Related Share Option Contribution Program (the Savings Plan). Compensation expense associated with such options is recognized over the vesting period based on the estimated fair value of such options at grant date. Under the Executive Plan, options have been awarded to certain officers of the Company to acquire shares of HSBC. The exercise price of each option is equal to the market price of the stock of HSBC on the date of grant. The maximum term of the options is ten years and they vest at the end of three years. Additionally, the Company adopted the Savings Plan effective July 1, 1996 whereby eligible employees can elect to participate in the Savings Plan through the Company's 401(k) plan and acquire contributions based on HSBC stock at 85% of market value on date of grant. An employee's agreement to participate is a five year commitment. At the end of each five year period employees receive the appreciation of the HSBC stock over the initial exercise price in the form of stock of HSBC. Since the shares and contribution commitment have been granted directly by HSBC, the offset to compensation cost was a credit to capital surplus, representing a contribution of capital from HSBC. The options granted resulted in compensation cost of $7.9 million in 2000. Republic had benefit plans including: (1) Long Term Incentive Stock Plan which provided for the award of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock and other stock-based awards; (2) the Restricted Stock Election Plan which allowed certain officers who had earned deferred compensation to elect to receive payment in the form of restricted stock; (3) the Performance Based Incentive Compensation Plan which was designed to provide an incentive to officers who served on the Management Executive Committee and were in a position to make a material contribution to Republic for which certain awards were paid out in the form of restricted stock under the Long Term Incentive Plan; and (4) the Long Term Incentive Compensation Plan which granted deferred restricted cash awards to certain employees. Employees vested in the assets awarded under the Plans based on the terms of each Plan. Employees will continue to vest in these Plans under the original terms of the Plans unless they are terminated, at which time they will become fully vested. As part of the acquisition, liabilities of $240.3 million were assumed in connection with the Plans. As a result of the Company's purchase of 100% of Republic's outstanding common stock, amounts earned under these various Plans will be satisfied through future payments of cash rather than the issuance of shares of Republic common stock. 63 Note 23. Postretirement Benefits The Company, the Bank and certain other subsidiaries maintain noncontributory pension plans covering substantially all of their employees hired prior to January 1, 1997 and those who joined the Company through acquisitions. Certain other HSBC subsidiaries participate in this plan. The Company also maintains unfunded noncontributory health and life insurance coverage for all employees who retired from the Company and were eligible for immediate pension benefits from the Company's retirement plan. Employees retiring after 1992 will absorb a portion of the cost of these benefits. Employees hired after that same date are not eligible for these benefits. A premium cap has been established for the Company's share of retiree medical cost. The following table provides data concerning the Company's benefit plans.

Other Pension Benefits Postretirement Benefits ----------------------- ------------------------- 2000 1999 2000 1999 -------- --------- --------- --------- in thousands Change in benefit obligation Benefit obligation, January 1 $687,731 $ 452,105 $ 107,214 $ 77,970 Service cost 26,820 17,900 2,130 2,060 Interest cost 53,090 31,080 8,778 5,479 Participant contributions - - 267 234 Actuarial (gain) loss 14,829 (62,079) 10,602 2,380 Republic acquisition - 263,400 - 26,800 Benefits paid (26,432) (14,675) (10,435) (7,709) -------- --------- --------- --------- Benefit obligation, December 31 $756,038 $ 687,731 $ 118,556 $ 107,214 ======== ========= ========= ========= Change in plan assets Fair value of plan assets, January 1 $916,470 $ 520,389 $ - $ - Actual return on plan assets (69,405) 60,311 - - Company contribution - - 10,168 7,475 Participant contributions - - 267 234 Republic acquisition - 350,445 - - Benefits paid (26,432) (14,675) (10,435) (7,709) -------- --------- --------- --------- Fair value of plan assets, December 31 $820,633 $ 916,470 $ - $ - ======== ========= ========= ========= Funded status of plan Funded status, December 31 $ 64,595 $ 228,739 $(118,556) $(107,214) Unrecognized actuarial (gain) loss 57,123 (116,161) 7,015 (3,587) Unrecognized prior service cost 5,005 5,947 - - Unrecognized net transition obligation - - 38,965 42,212 -------- --------- --------- --------- Recognized amount $126,723 $ 118,525 $ (72,576) $ (68,589) ======== ========= ========= ========= Amount recognized in the consolidated balance sheet Prepaid benefit cost $126,723 $ 118,525 $ - $ - Accrued benefit liability - - (72,576) (68,589) -------- --------- --------- --------- Recognized amount $126,723 $ 118,525 $ (72,576) $ (68,589) ======== ========= ========= =========

64 Operating expenses for 2000, 1999 and 1998 included the following components.

Other Pension Benefits Postretirement Benefits --------------------------------- ----------------------------------- 2000 1999 1998 2000 1999 1998 -------- -------- -------- ------- ------- ------- in thousands Net periodic benefit cost (credit) Service cost $ 26,820 $ 17,900 $ 17,512 $ 2,130 $ 2,060 $ 1,959 Interest cost 53,090 31,080 29,014 8,778 5,479 5,064 Expected return on plan assets (85,965) (48,748) (40,631) - - - Prior service cost amortization 944 959 961 - - - Actuarial gain (3,087) - - - - - Transition amount amortization - - (1,340) 3,247 3,247 3,247 -------- -------- -------- ------- ------- ------- Net periodic benefit cost (credit) $ (8,198) $ 1,191 $ 5,516 $14,155 $10,786 $10,270 ======== ======== ======== ======= ======= ======= Weighted-average assumptions as of December 31 Discount rate 7.75% 8.00% 7.00% 7.25% 7.75% 6.25% Expected return on plan assets 9.50 9.50 9.50 - - - Rate of compensation increase 5.15 5.15 4.65 5.15(1) 5.15(1) 4.65(1) -------- -------- -------- ------- ------- -------

(1) Applicable to life insurance only. Net periodic pension cost includes none, $1.7 million and $1.9 million for 2000, 1999 and 1998, respectively, recognized in the financial statements of other HSBC subsidiaries participating in the Company's pension plan. The Company has assumed a health care cost trend rate of 8% for 2000, decreasing to 7% in the year 2002. The assumed health care cost trend rate has an effect on the amounts reported. For example, increasing the assumed health care cost trend by 1% would increase the aggregate service and interest cost component by $.2 million and the accumulated postretirement benefit obligation by $2.5 million. Decreasing the health care cost trend rate by 1% would decrease the aggregate service and interest cost components by $.2 million and the accumulated post retirement benefit obligation by $2.2 million. Employees hired after January 1, 1997 become participants in a defined contribution plan after one year of service. Contributions to the plan are based on a percentage of employees' compensation. Total expense recognized for the plan was $2.4 million in 2000, $1.3 million in 1999 and $.4 million in 1998. The Company maintains a 401(k) plan covering substantially all employees. Contributions to the plan by the Company are based on employee contributions. Total expense recognized for the plan was $11.7 million in 2000, $8.9 million in 1999 and $8.5 million for 1998. Note 24. Business Segments As a result of the Republic acquisition, the Company altered its business segments that it uses to manage operations as of January 1, 2000. Prior year disclosures have been conformed to the presentation of current segments. 65

Segments ---------------------------------------------------- Corporate/ Investment Commercial Institutional Personal Banking/ Banking Banking Banking Markets Other Total ---------- ------------ ------- --------- ------ ------- 2000 in millions ---- Net interest income (1) $ 567 $ 141 $ 1,044 $ 405 $ (38) $ 2,119 Other operating income 127 95 362 245 3 832 ------- ------ ------- ------- ------ ------- Total income 694 236 1,406 650 (35) 2,951 Operating expenses (2) 338 88 830 342 307 1,905 ------- ------ ------- ------- ------ ------- Pretax income (loss) before provision for credit losses 356 148 576 308 (342) 1,046 Provision for credit losses (3) 107 35 73 (2) (75) 138 ------- ------ ------- ------- ------ ------- Pretax income (loss) 249 113 503 310 (267) 908 Taxes/preferred dividends 79 36 160 99 (6) 368 ------- ------ ------- ------- ------ ------- Net income (loss) after preferred dividends 170 77 343 211 (261) 540 ------- ------ ------- ------- ------ ------- Average assets 14,219 5,703 20,527 38,990 3,350 82,789 Average liabilities/equity (4) 9,715 4,814 27,931 30,922 9,407 82,789 ------- ------ ------- ------- ------ ------- 1999 ---- Net interest income (1) $ 351 $ 123 $ 693 $ 28 $ 31 $ 1,226 Other operating income 87 76 263 5 33 464 ------- ------ ------- ------- ------ ------- Total income 438 199 956 33 64 1,690 Operating expenses (2) 183 59 505 8 73 828 ------- ------ ------- ------- ------ ------- Pretax income (loss) before provision for credit losses 255 140 451 25 (9) 862 Provision for credit losses (3) 40 8 77 - (35) 90 ------- ------ ------- ------- ------ ------- Pretax income 215 132 374 25 26 772 Taxes 86 53 149 10 10 308 ------- ------ ------- ------- ------ ------- Net income 129 79 225 15 16 464 ------- ------ ------- ------- ------ ------- Average assets 7,411 3,799 12,452 8,401 2,167 34,230 Average liabilities/equity (4) 6,065 2,258 16,169 6,816 2,922 34,230 ------- ------ ------- ------- ------ ------- 1998 ---- Net interest income (1) $ 344 $ 75 $ 690 $ 29 $ 27 $ 1,165 Other operating income 84 52 264 4 56 460 ------- ------ ------- ------- ------ ------- Total income 428 127 954 33 83 1,625 Operating expenses (2) 183 44 495 7 51 780 ------- ------ ------- ------- ------ ------- Pretax income before provision for credit losses 245 83 459 26 32 845 Provision for credit losses (3) 29 5 67 - (21) 80 ------- ------ ------- ------- ------ ------- Pretax income 216 78 392 26 53 765 Taxes 86 31 156 10 (45) 238 ------- ------ ------- ------- ------ ------- Net income 130 47 236 16 98 527 ------- ------ ------- ------- ------ ------- Average assets 6,782 1,940 12,835 9,323 1,967 32,847 Average liabilities/equity (4) 5,495 1,440 15,852 7,160 2,900 32,847 ------- ------ ------- ------- ------ -------

(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 with the exception of non-recurring corporate expenses and goodwill amortization. (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. The difference between segment provisions and the Company provision is included in other. (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. Preferred stock dividends are not allocated to the segments and are included in other. 66 The Company has four distinct segments that it utilizes for management reporting and analysis purposes. These segments are based upon products and services offered and are identified in a manner consistent with the requirements outlined in Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information. The segment results show the financial performance of the major business units. These results are determined based on the Company's management accounting process, which assigns balance sheet, revenue and expense items to each reportable business unit on a systematic basis. Management does not analyze depreciation and amortization expense or expenditures for additions to long-lived assets which are not considered significant. As such, these amounts are included in other expenses and average assets, respectively, in the table. The following describes the four reportable segments. The Commercial Banking Segment provides a diversified range of financial products and services. This segment provides loan and deposit products to small and middle-market corporations including specialized products such as equipment and real estate financing. These products and services are offered through multiple delivery systems, including the branch banking network. In addition, various credit and trade related products are offered such as standby facilities, performance guarantees, acceptances and accounts receivable factoring. The Corporate and Institutional Banking Segment provides deposit and lending functionality to large corporate and multi-national corporations. U.S. dollar clearing services are offered for domestic and international wire transfer transactions. Corporate trust provides various trustee, agency and custody products and services for both corporate and municipal customers. Credit and trade related products such as standby facilities, performance guarantees and acceptances are also provided to large corporate entities. The Personal Banking Segment provides an extensive array of products and services including installment and revolving term loans, deposits, branch services, mutual funds, insurance, estate planning and other investment management services. These products are marketed to individuals through the branch banking network. Residential mortgage lending provides loan financing through direct retail and wholesale origination channels. Mortgage loans are originated through a network of brokers, wholesale agents and retail originations offices. Servicing is performed for the individual mortgage holder or on a contractual basis for mortgages owned by third parties. The Investment Banking and Markets Segment comprises treasury, traded markets and international private banking businesses. The treasury function maintains overall responsibility for the investment and borrowing of funds to ensure liquidity, maximize return and manage interest rate risk. Traded markets encompasses the trading and sale of foreign exchange, banknotes, derivatives, precious metals, securities and emerging markets instruments, both domestically and internationally. International private banking offers a full range of services for high net worth individuals throughout the world including deposit, lending, trading, trust and investment management. Other consists of certain non-recurring expenses, including Republic related restructuring costs, goodwill amortization, preferred stock dividends and the provision for credit losses not assigned to business units. Note 25. Commitments and Contingent Liabilities At December 31, 2000 securities, loans and other assets carried in the consolidated balance sheet at $11.5 billion were pledged as collateral for borrowings, to secure governmental and trust deposits and for other purposes. 67 The Company and its subsidiaries are obligated under a number of noncancellable leases for premises and equipment. Certain leases contain renewal options and escalation clauses. Rental expense under all operating leases, net of sublease rentals, was $65.9 million, $43.5 million and $43.2 million in 2000, 1999 and 1998, respectively. Minimum future rental commitments on operating leases in effect at December 31, 2000 were as follows: 2001, $65 million; 2002, $54 million; 2003, $47 million; 2004, $43 million; 2005, $35 million and $100 million thereafter. Note 26. Litigation The Company 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 relating to the Princeton Note Matter that are described below. On September 1, 1999, Republic announced that, as a result of an inquiry received from the Financial Supervisory Agency of Japan, it had commenced an internal investigation of the Futures Division of its wholly owned subsidiary, Republic New York Securities Corporation (RNYSC). The investigation focused on the involvement of the Futures Division of RNYSC with its customers Princeton Global Management Ltd. and affiliated entities (Princeton) and their Chairman, Martin Armstrong (the Princeton Note Matter). Regulatory and law enforcement agencies, including the U.S. Attorney for the Southern District of New York, the Securities and Exchange Commission and the Commodity Futures Trading Commission, are continuing to investigate the Princeton Note Matter, including the activities of Republic and RNYSC with respect to the Princeton Note Matter. The Company understands that RNYSC is a target of the federal grand jury investigation being conducted by the U.S. Attorney for the Southern District of New York. At the core of both the investigations described above and the civil actions described below are allegations that Mr. Armstrong and Princeton perpetrated a fraud in selling $3 billion (face value) of promissory notes to certain Japanese entities, approximately $1 billion (face value) of which allegedly remain outstanding. Since 1995, Princeton had maintained accounts at the Futures Division of RNYSC through which funds, allegedly including proceeds from the sale in Japan of such promissory notes, were invested and traded by Princeton. Mr. Armstrong is alleged to have caused employees of the Futures Division of RNYSC to issue letters containing inflated balances of the net asset values in the accounts of Princeton, some of which letters allegedly were provided by Mr. Armstrong and Princeton to at least some of its noteholders. Eighteen separate civil actions have been brought to date against RNYSC by Japanese entities in connection with the Princeton Note Matter. All eighteen actions are pending in the United States District Court for the Southern District of New York, and allege that Armstrong and Princeton perpetrated a fraud on the plaintiffs by selling them notes that remain unpaid. The eighteen complaints allege that employees of RNYSC issued letters concerning the Princeton accounts that contained material misstatements. All but one of these actions also assert claims against Republic and Republic National Bank or HSBC USA Inc. and HSBC Bank USA as their respective successors (together with RNYSC, the Republic Parties). The eighteen civil proceedings against one or more of the Republic Parties are Amada Co. v. Republic New York Securities Corporation, filed November 29, 1999, Gun-ei Chemical Industry Co., Ltd. v. Princeton Economics International Ltd. et al., filed December 22, 1999, Chudenko Corp., v. Republic New York 68 Securities Corporation, et al., filed January 20, 2000, Alps Electric Co., Ltd. v. Republic New York Securities Corporation, et al., filed February 7, 2000, Itoki Crebio Corp. v. HSBC USA Inc., et al., Kissei Pharmaceutical Co., Ltd. v. HSBC USA Inc., et al., Maruzen Company, Ltd., v. HSBC USA Inc., et al., SMC Corporation v. HSBC USA Inc., et al., and Asatsu-DK Inc. v. HSBC USA Inc., filed February 14, 2000, Starzen Co., Ltd. v. Republic New York Securities Corporation, et al., filed February 23, 2000, Yakult Honsha Co., Ltd. v. Republic New York Securities Corp., filed February 25, 2000, Nichimen Europe, PLC v. Republic New York Securities Corporation, et. al., filed April 10, 2000, Kita-Hyogo Shinyo-Kumiai v. Republic New York Securities Corporation, et. al., filed June 1, 2000, Ozawa Denki Koji Co., et. al. v. Republic New York Securities Corporation, et. al., filed June 16, 2000, Kofuku Bank Ltd. and Namihaya Bank Ltd. v. Republic New York Securities Corporation, et. al., filed April 28, 2000, Eichi Takagi and Koei Shoji, Ltd. v. HSBC USA Inc., et. al., filed August 30, 2000, Akio Maruyama v. HSBC USA Inc., et. al., filed January 12, 2001, and Kunio Kanzawa v. HSBC USA Inc., et. al., filed January 12, 2001. The Amada action alleges unpaid notes in the amount of Yen 12.5 billion (approximately $109.8 million), the Gun-ei action alleges unpaid notes in the amount of Yen 11.8 billion (approximately $102.7 million), the Chudenko action, which is brought by 22 separate Japanese entities, alleges unpaid notes totaling approximately $360 million, the Alps action alleges unpaid notes in the amount of approximately $212 million, the Itoki action alleges unpaid notes in the amount of approximately $4.4 million, the Kissei action alleges unpaid notes of approximately $24.8 million, the Maruzen action alleges unpaid notes of approximately $50 million, the SMC action alleges unpaid notes of approximately $19.5 million, the Asatsu-DK action alleges unpaid notes of approximately $24.6 million, the Starzen action alleges an unpaid note of $28.6 million, the Yakult action alleges an outstanding note of $120 million of which approximately $25 million remains unpaid, and an unpaid note of approximately $50 million, the Nichimen action alleges unpaid notes of $15 million, the Kita-Hyogo action alleges unpaid notes of $21.4 million, the Ozawa action alleges unpaid notes of $29.6 million, the Kofuku action alleges unpaid notes of $39.5 million, the Takagi action alleges unpaid notes of approximately $2.1 million and $1.21 million on behalf of an individual and corporation, the Maruyama action alleges an unpaid note of Yen 200 million (approximately $1.7 million), and the Kanzawa action alleges unpaid notes of $1.6 million and Yen 250 million (approximately $2.2 million). All of the actions assert common law claims and claims under the federal securities laws and/or the federal commodities laws. All but the Amada and Gun-ei actions seek treble damages under the Racketeer Influenced and Corrupt Organization Act. Discovery proceedings are under way in all of these civil actions. In addition to the eighteen actions arising out of the Princeton Note Matter described above, on October 7, 1999, a purported class action entitled Ravens v. Republic New York Corporation, et al., was filed in the United States District Court for the Eastern District of Pennsylvania on behalf of investors who acquired common stock of Republic between May 14, 1999 and September 15, 1999. On October 16, 2000 an amended complaint in the Ravens action was filed, alleging that the defendants violated the federal securities laws in the merger transaction between Republic and HSBC by failing to disclose facts relating to potential liabilities with respect to the Princeton Note Matter. The amended complaint seeks unspecified damages on behalf of the class. On January 16, 2001, defendants filed a motion to dismiss the Ravens action. At the present time it is not possible to assess the outcome of the civil proceedings described above relating to the Princeton Note Matter. The matter will be defended vigorously. In addition, in the light of a probable law enforcement proceeding against RNYSC in connection with the Princeton Note Matter, a matter that came to light before the acquisition of Republic, a 69 provision of $79 million, the amount of shareholder's equity of RNYSC, has been taken as part of the goodwill cost of the acquisition. See Note 2 for further discussion. At the present time it is not possible to estimate what additional cost may be incurred by the Company as a result of the Princeton Note Matter. Note 27. Financial Instruments With Off-Balance Sheet Risk The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers, to reduce its own exposure to fluctuations in interest rates and to realize profits. These financial instruments involve, to varying degrees, elements of credit and market risk in excess of the amount recognized in the consolidated balance sheet. Credit risk represents the possibility of loss resulting from the failure of another party to perform in accordance with the terms of a contract. The Company uses the same credit policies in making commitments and conditional obligations as it does for balance sheet instruments. Market risk represents the exposure to future loss resulting from the decrease in value of an on- or off-balance sheet financial instrument caused by changes in interest rates. Market risk is a function of the type of financial instrument involved, transaction volume, tenor and terms of the agreement and the overall interest rate environment. The Company controls market risk by managing the mix of the aggregate financial instrument portfolio and by entering into offsetting positions. A summary of financial instruments with off-balance sheet risk follows.

December 31, 2000 1999 -------- --------- in millions Financial instruments whose contractual amounts represent the associated risk: Standby letters of credit and financial guarantees (net of risk participations of $369 and $223) $ 4,892 $ 3,474 Other letters of credit 609 838 Commitments to extend credit 23,957 23,108 Commitments to deliver mortgaged-backed securities 409 210 Financial instruments whose notional or contractual amounts do not represent the associated risk: Interest rate contracts 145,599 115,791 Foreign exchange contracts 128,423 102,487 Commodity, equity and other contracts 4,549 42,025

For commitments to extend credit, standby letters of credit and guarantees, the Company's exposure to credit loss in the event of non-performance by the counterparty to the financial instrument, is represented by the contractual amount of those instruments. Management has an allowance for credit loss related to these instruments of $39.2 million included in interest, taxes and other liabilities on the consolidated balance sheet at December 31, 2000. For those financial instruments whose contractual or notional amount does not represent the amount exposed to credit loss, risk at any point in time represents the cost, on a present value basis, of replacing these existing instruments at current interest and exchange rates. Based on this measurement, $2,762 million was at risk at December 31, 2000. See Note 28 for further discussion of activities in derivative financial instruments. The Company controls the credit risk associated with off-balance sheet derivative financial instruments established for each counterparty through the normal credit approval process. See Note 21 for contracts entered into with the HSBC Group. Collateral is maintained on these positions, the amount of which is consistent with the measurement of exposure used in the risk-based capital ratio calculations under the banking regulators' guidelines. 70 Note 28. Derivative Financial Instruments The Company is party to various derivative financial instruments as an end user to manage its overall interest rate risk within the context of a comprehensive asset and liability management strategy, to offset the risk associated with changes in value of various assets and liabilities accounted for on a mark to market basis including its trading account and available for sale investment securities portfolio, to protect against impairment in value of its mortgage servicing rights portfolio, and for trading in its own account. The Company is also an international dealer in derivative instruments denominated in U.S. dollars and other currencies which include futures, forwards, swaps and options related to interest rates, foreign exchange rates, equity indices and commodity prices, focusing on structuring of customized transactions to meet clients' needs. Counterparties generally include financial institutions including banks, central banks, other government agencies, both foreign and domestic, and insurance companies. Derivative instruments are contracts whose value is derived from that of an underlying financial instrument, physical commodity or market index and generally do not involve the exchange of principal but may involve the payment of a fee or receipt of a premium at inception of a contract. Certain instruments, such as futures and forward contracts, commit the Company to buy or sell a specified financial instrument, currency, precious metals or other commodities at a future date. Futures contracts are exchange traded instruments that settle through an independent clearinghouse and require daily cash settlement. Forward contracts are customized transactions that require no cash settlement until the end of the contract. Other contracts, such as interest rate swaps, involve commitments to make periodic cash settlements based upon the differentials between specified rates or indices applied to a stated notional amount. Purchased option contracts give the right, but do not obligate the holder, to acquire or sell for a limited time a financial instrument, precious metal or commodity at a designated price upon payment of an up front fee. The writer of an option receives an up front premium as payment for assuming the risk of unfavorable changes in the price of the underlying instrument or index. The derivative instrument portfolios are actively managed in response to changes in overall and specific balance sheet positions, cash requirements, and expectations of future interest rates, market environments and business strategies. Market risk associated with derivatives arises principally from the potential for future changes in the prices of underlying securities, commodities or indices, or the volatility of such prices or rates. The credit risk with derivatives arises principally from the potential of the counterparty to fail to meet its obligation to settle the contract on a timely basis. The Company controls these risks through the establishment and monitoring of approved limits and by dealing with investment grade counterparties including other members of the HSBC Group, obtaining collateral where appropriate and by using master netting agreements where available. Pursuant to an overall balance sheet risk management strategy, derivative instruments are used to alter the cash flows and maturity characteristics of certain of these assets and liabilities and hedge anticipated repricing in order to maintain net interest margin within a range that management considers acceptable given assumptions as to changes in interest rates. In addition, the Company utilizes derivative instruments to mitigate the effects of changes in interest rates on the market valuation of its available for sale investment securities portfolio and to protect against the erosion in value of mortgage 71 servicing rights in declining rate environments. Derivatives used for these purposes are collectively referred to as asset and liability management positions. The Company deploys a portion of its excess liquidity by maintaining active positions in a variety of debt instruments in its trading portfolio. Derivative instruments are utilized to hedge market and interest rate risk associated with the on-balance sheet instruments held in this portfolio. The Company also holds derivative instruments for speculative purposes, as hedges in conjunction with the acquired precious metals businesses, foreign exchange trading activities and to facilitate customer transactions. Derivatives used for these purposes are collectively referred to as trading positions. The following table summarizes the notional or contractual amounts of derivative instruments used for both trading and asset and liability management purposes. These amounts serve as volume indicators to denote the level of activity by instrument class and include contracts that have both favorable and unfavorable value to the Company. These notional amounts do not represent the amounts to be exchanged by the Company, nor do they measure the exposure to credit or market risk. Asset and liability management positions include intercompany transactions that are established between independent trading departments of the Company that act as counterparties. The exposure may be limited by offsetting asset or liability positions held by the Company or by the use of master netting agreements.

Contractual/Notional Amounts ----------------------------------------------------------------- 2000 1999 ----------------------------- ------------------------------- Asset/Liability Asset/Liability December 31, Trading Management Trading Management -------- --------------- -------- --------------- in millions Interest rate: Futures and forwards $ 40,538 $ 3,922 $ 27,545 $ 6,766 Swaps 48,892 11,262 38,191 20,291 Options written 13,057 - 7,232 150 Options purchased 13,066 13,891 6,564 8,182 Other - 971 - 870 -------- ------- -------- ------- $115,553 $30,046 $ 79,532 $36,259 ======== ======= ======== ======= Foreign exchange: Swaps, futures and forwards $103,745 $ 3,752 $ 58,159 $ 1,535 Options written 6,593 - 21,057 - Options purchased 6,460 - 20,957 - Spot 7,583 8 772 7 Other 282 - - - -------- ------- -------- ------- $124,663 $ 3,760 $100,945 $ 1,542 ======== ======= ======== ======= Other: Swaps, futures and forwards $ 3,047 $ 545 $ 27,527 $ 1,242 Options written 300 - 5,969 682 Options purchased 241 127 6,047 537 Other 270 19 21 - -------- ------- -------- ------- $ 3,858 $ 691 $ 39,564 $ 2,461 ======== ======= ======== =======

The net positive fair value of derivative financial instruments held for asset and liability management purposes was $214 million and $164 million at December 31, 2000 and 1999, respectively. The net negative fair value of derivative financial instruments held for trading purposes was $111 million and $53 million at December 31, 2000 and 1999, respectively. 72 Note 29. Concentrations of Credit Risk The Company enters into a variety of transactions in the normal course of business that involve both on- and off-balance sheet credit risk. Principal among these activities is lending to various commercial, institutional, governmental and individual customers. The Company participates in lending activity throughout the United States and on a limited basis internationally with credit risk concentrated in the Northeastern United States. A real estate portfolio, concentrated in the New York metropolitan area, is secured by multi-family, commercial and residential properties. See Note 30 for a geographic distribution of year-end assets. The ability of individual borrowers to repay is generally linked to the economic stability of the regions from where the loans originate, as well as the creditworthiness of the borrower. With emphasis on the Western, Central and Metropolitan regions of New York State, the Company maintains a diversified portfolio of loan assets. At December 31, 2000 41% of residential mortgages and 79% of commercial construction and mortgage loans were located within the Northeastern United States. In general, the Company controls the varying degrees of credit risk involved in on- and off-balance sheet transactions through specific credit policies. These policies and procedures provide for a strict approval, monitoring and reporting process. It is the Company's policy to require collateral when it is deemed appropriate. Varying degrees and types of collateral are secured depending upon management's credit evaluation. Note 30. International and Domestic Operations In the following table, international loans are distributed geographically primarily on the basis of the location of the head office or residence of the borrowers or, in the case of certain guaranteed loans, the guarantors. Interest bearing deposits with banks are grouped by the location of the head office of the bank. Investments and acceptances are distributed on the basis of the location of the issuers or borrowers. International Assets by Geographic Distribution and Domestic Assets December 31, 2000 1999 ------- ------- in millions International: Asia/Pacific $ 876 $ 1,249 Europe/Middle East/Africa 4,282 4,415 Other Western Hemisphere 2,078 2,518 ------- ------- Total international 7,236 8,182 Domestic 75,796 79,071 ------- ------- Total international/domestic $83,032 $87,253 ------- ------- The following table presents income statement information relating to the international and domestic operations of the Company. Geographical information has been classified by the location of the principal operations of the subsidiary, or in the case of the Bank, by the location of the branch office. As a result of the Republic acquisition, the Company altered the methodology used to report international income statement information. Due to the nature of the Company's structure, the following analysis includes intra-Company items between geographic regions. Under the new methodology, the international components for 1999 and 1998 were not significant and therefore are not disclosed. 73 Revenues and Earnings - International and Domestic Total Total Income Year Ended December 31, 2000 Revenue (1) Expenses (2) Before Taxes ----------- ------------- ------------ in millions International: Asia/Pacific $ 339.7 $ 290.3 $ 49.4 Europe 254.4 129.4 125.0 Other Western Hemisphere 158.7 147.8 10.9 -------- -------- ------ Total international 752.8 567.5 185.3 Domestic (3) 5,397.2 4,674.5 722.7 -------- -------- ------ Total international/domestic $6,150.0 $5,242.0 $908.0 -------- -------- ------ (1) Includes net interest income and other operating income. Total revenue for 2000 includes intra-Company income of $264.2 million. (2) Includes operating expenses and provision for credit losses. Total expenses for 2000 include intra-Company expenses of $264.2 million. (3) Includes the Caribbean and Canada. Note 31. Fair Value of Financial Instruments The following disclosures represent the Company's best estimate of the fair value of on- and off-balance sheet financial instruments. The following methods and assumptions have been used to estimate the fair value of each class of financial instrument for which it is practicable to do so. Financial instruments with carrying value equal to fair value - The carrying value of certain financial assets including cash and due from banks, interest bearing deposits with banks, federal funds sold and securities purchased under resale agreements, accrued interest receivable, and customers' acceptance liability and certain financial liabilities including short-term borrowings, interest, taxes and other liabilities and acceptances outstanding, as a result of their short-term nature, are considered to be equal to fair value. Securities and trading assets and liabilities - Fair value has been based upon current market quotations, where available. If quoted market prices are not available, fair value has been estimated based upon the quoted price of similar instruments. Loans - The fair value of the performing loan portfolio has been determined principally based upon a discounted analysis of the anticipated cash flows, adjusted for expected credit losses. The loans have been grouped to the extent possible, into homogeneous pools, segregated by maturity and the weighted average maturity and average coupon rate of the loans within each pool. Depending upon the type of loan involved, maturity assumptions have been based on either contractual or expected maturity. Credit risk has been factored into the present value analysis of cash flows associated with each loan type, by allocating the allowance for credit losses. The allocated portion of the allowance, adjusted by a present value factor based upon the timing of expected losses, has been deducted from the gross cash flows prior to calculating the present value. As a result of the allocation of the allowance to adjust the anticipated cash flows for credit risk, a published interest rate that equates as closely as possible to a "risk-free" or "low-risk" loan has been selected for the purpose of discounting the commercial loan portfolio, adjusted for a liquidity factor where appropriate. 74 Consumer loans have been discounted at the estimated rate of return an investor would demand for the product, without regard to credit risk. This rate has been formulated based upon reference to current market rates. The fair value of the residential mortgage portfolio has been determined by reference to quoted market prices for loans with similar characteristics and maturities. Intangible assets - The Company has elected not to specifically disclose the fair value of certain intangible assets. In addition, the Company has not estimated the fair value of unrecorded intangible assets associated with its own portfolio such as core deposits. The fair value of the Company's intangibles is believed to be significant. Deposits - The fair value of demand, savings and certain money market deposits is equal to the amount payable on demand at the reporting date. For deposits with fixed maturities, fair value has been estimated based upon interest rates currently being offered on deposits with similar characteristics and maturities. Long-term debt - Fair value has been estimated based upon interest rates currently available to the Company for borrowings with similar characteristics and maturities. The following, which is provided for disclosure purposes only, provides a comparison of the carrying value and fair value of the Company's financial instruments. Fair values have been determined based on applicable requirements and do not necessarily represent the amount that would be realized upon their liquidation.

2000 1999 ----------------------- ------------------------- Carrying Fair Carrying Fair December 31, Value Value Value Value -------- ------- -------- -------- in millions Financial assets: Instruments with carrying value equal to fair value $ 9,910 $ 9,910 $ 9,652 $ 9,652 Related derivatives 2 2 24 (4) Trading assets 5,771 5,771 4,515 4,515 Related derivatives - - 1,773 1,773 Securities available for sale 17,337 17,337 24,617 24,617 Related derivatives (20) (2) - - Securities held to maturity 4,260 4,417 4,770 4,770 Loans, net of allowance 39,893 40,406 37,692 37,544 Related derivatives 9 (6) 36 5 Financial liabilities: Instruments with carrying value equal to fair value 9,191 9,191 6,711 6,711 Related derivatives 5 4 8 (1) Deposits: Without fixed maturities 42,795 42,795 45,604 45,604 Fixed maturities 13,238 13,258 10,820 10,852 Related derivatives 98 112 (3) 5 Trading account liabilities 2,767 2,767 2,437 2,437 Related derivatives - - 1,817 1,817 Long-term debt 5,097 5,248 5,885 5,853 Related derivatives 2 30 (4) 27

Excluded from the above is the $169 million mark to market and the $175 million of accrued receivables recorded on the December 31, 1999 balance sheet associated with derivative contracts acquired from Republic that are held for asset and liability management purposes. 75 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. Further detail with respect to off-balance sheet financial instruments is provided in Note 27, Financial Instruments With Off-Balance Sheet Risk. Note 32. Financial Statements of HSBC USA Inc. (parent) Condensed parent company financial statements follow.

Balance Sheet December 31, 2000 1999 (1) ----------- ----------- in thousands Assets: Cash and due from banks $ 3,600 $ 315 Interest bearing deposits with banks (including $775,499 and $2,306,481 in banking subsidiary) 840,499 2,371,481 Trading assets 167,564 213,398 Securities available for sale 299,261 6,821,320 Securities held to maturity (fair value $163,742 and $135,212) 156,903 135,212 Loans (net of allowance for credit losses of $25,732 and $13,208) 114,053 82,903 Receivable from subsidiaries 1,814,832 1,839,346 Investment in subsidiaries at amount of their net assets Banking 7,062,066 6,665,972 Other 1,273,465 1,191,268 Goodwill and other acquisition intangibles 703,022 545,808 Other assets 260,075 393,744 ----------- ----------- Total assets $12,695,340 $20,260,767 ----------- ----------- Liabilities: Interest, taxes and other liabilities $ 544,084 $ 497,977 Payable to shareholders of acquired company - 7,091,209 Short-term borrowings 892,586 1,135,821 Long-term debt (2) 3,140,736 3,532,612 Long-term debt due to subsidiary (2) 775,284 775,562 ----------- ----------- Total liabilities 5,352,690 13,033,181 Shareholders' equity * 7,342,650 7,227,586 ----------- ----------- Total liabilities and shareholders' equity $12,695,340 $20,260,767 ----------- -----------

* See Consolidated Statement of Changes in Shareholders' Equity, page 39. (1) Restated to exclude investments transferred to HSBC North America Inc. during 2000. See Note 1 for further discussion. (2) Contractual scheduled maturities for the debt over the next five years are as follows: 2001, $350 million; 2002, $646 million and none for 2003, 2004 and 2005. 76

Statement of Income Year Ended December 31, 2000 1999 1998 --------- -------- -------- Income: in thousands Dividends from banking subsidiaries $ 400,000 $450,000 $405,000 Dividends from other subsidiaries 7,501 1,001 7,001 Interest from banking subsidiaries 120,802 96,836 91,405 Interest from other subsidiaries 222 - 241 Other interest income 137,600 15,469 7,641 Securities transactions 6,542 7,800 7,529 Other income 13,218 4,014 2,226 --------- -------- -------- Total income 685,885 575,120 521,043 --------- -------- -------- Expenses: Interest (including $61,338, $33,378, and $33,382 paid to subsidiaries) 378,101 123,920 123,053 Goodwill amortization 28,396 - 2,241 Other expenses 72,788 13,831 4,263 --------- -------- -------- Total expenses 479,285 137,751 129,557 --------- -------- -------- Income before taxes and equity in undistributed income of subsidiaries 206,600 437,369 391,486 Income tax benefit (92,762) (4,360) (5,962) --------- -------- -------- Income before equity in undistributed income of subsidiaries 299,362 441,729 397,448 Equity in undistributed income of subsidiaries 268,142 21,983 129,619 --------- -------- -------- Net income $ 567,504 $463,712 $527,067 --------- -------- --------

77

Statement of Cash Flows Year Ended December 31, 2000 1999 1998 ----------- ---------- --------- in thousands Cash flows from operating activities: Net income $ 567,504 $ 463,712 $ 527,067 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 43,236 853 3,128 Net change in other accrued accounts 44,326 33,788 (4,294) Undistributed income of subsidiaries (268,142) (21,983) (129,619) Other, net (6,783) (12,879) 116,636 ----------- ---------- --------- Net cash provided by operating activities 380,141 463,491 512,918 ----------- ---------- --------- Cash flows from investing activities: Net change in interest bearing deposits with banks 1,530,982 (298,400) 57,600 Purchases of securities (3,632,912) - - Sale of securities 10,163,473 13,198 12,366 Payment to shareholders of acquired company (7,091,209) - - Net originations and maturities of loans (25,175) (38,912) (180,066) Other, net (61,629) (19,937) 14,156 ----------- ---------- --------- Net cash provided (used) by investing activities 883,530 (344,051) (95,944) ----------- ---------- --------- Cash flows from financing activities: Net change in short-term borrowings (243,235) (64,125) 63,026 Issuance of long-term debt - 200,000 - Repayment of long-term debt (400,000) (100,000) - Dividends paid (621,744) (155,000) (480,000) Other, net 4,593 - - ----------- ---------- --------- Net cash used by financing activities (1,260,386) (119,125) (416,974) ----------- ---------- --------- Net change in cash and due from banks 3,285 315 - Cash and due from banks at beginning of year 315 - - ----------- ---------- --------- Cash and due from banks at end of year $ 3,600 $ 315 $ - ----------- ---------- --------- Cash paid for: Interest paid $ 384,883 $ 120,963 $ 121,889 Non-cash activities related to acquisitions: Preferred stock assumed - 500,000 - Capital contributed principally in the form of treasury securities - 7,088,108 - ----------- ---------- ---------

The Bank is subject to legal restrictions on certain transactions with its nonbank affiliates in addition to the restrictions on the payment of dividends to the Company (see Note 17). 78 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There were no disagreements on accounting and financial disclosure matters between the Company and its independent accountants during 2000. PART III Item 10. Directors and Executive Officers of the Registrant Directors Set forth below is certain biographical information relating to the members of the Company's Board of Directors. Each director is elected annually. There are no family relationships among the directors. Sal H. Alfiero, age 63, Founder, Chairman and Chief Executive Officer, Mark IV Industries, Inc. Mr. Alfiero has been a director of the Bank since 1996. He is also a director of Phoenix Home Life Mutual Insurance Company, Southwire Company, Niagara Mohawk Holdings Inc., National Health Care Affiliates, Inc., Kaleida Health System and a trustee for the University of Buffalo Foundation. Elected January, 2000. Sir John R. H. Bond, age 59, Chairman of the Company and the Bank since 1997 and Group Chairman of HSBC since 1998. Formerly President and Chief Executive Officer of the Company and the Bank from 1991 through 1992. Previously Executive Director Banking, The Hongkong and Shanghai Banking Corporation Limited from 1990 to 1991 and Executive Director Americas from 1988 to 1990. Sir John is director and Chairman of HSBC Finance (Netherlands), Chairman of HSBC Bank plc, Chairman of HSBC Bank Middle East and a director of The Hongkong and Shanghai Banking Corporation Limited, and Ford Motor Company. Elected in 1987. James H. Cleave, age 58, formerly President and Chief Executive Officer of the Company and the Bank from 1993 through 1997 and formerly Executive Director from June 1992 through December 1992. Previously Director, President and Chief Executive Officer of HSBC Bank Canada since 1987. Mr. Cleave is also a director and Chairman of HSBC Bank Canada. Elected in 1991. Frances D. Fergusson, age 56, President, Vassar College since 1986. Formerly Provost and Vice President for Academic Affairs, Bucknell University. Dr. Fergusson is a member of the Board of Trustees of the Ford Foundation and Chair of the Board of the Mayo Foundation, and is a director of C H Energy Group. She was a director of the Company from 1990 through 1994 and has been a director of the Bank since 1990. Reelected January, 2000. Douglas J. Flint, age 45, Group Finance Director, HSBC and an Executive Director of HSBC since 1995. A director of HSBC Investment Bank Holdings plc, HSBC Bank Malaysia Berhad, HSBC Argentina Holdings S.A., and a director of the Bank since 1998. Mr. Flint is a member of the Urgent Issues Task Force of the Accounting Standards Board and a former partner in KPMG. Elected January, 2000. Martin J. G. Glynn, age 49, Director, President and Chief Executive Officer, HSBC Bank Canada. He joined HSBC Bank Canada in 1982. He is also a director of the Bank and Chair of the Canadian Chamber of Commerce since October 2000. Elected January, 2000. 79 Stephen K. Green, age 52, Executive Director Investment Banking and Markets, HSBC and an Executive Director of HSBC since 1998. Joined HSBC in 1982. Group Treasurer from 1992 to 1998. Mr. Green is Chairman of HSBC Investment Bank Holdings plc and a director of HSBC Bank plc, Credit Commercial de France S.A., HSBC Guyerzeller Bank AG, HSBC Private Banking Holdings (Suisse) S.A. and HSBC Trinkaus & Burkhardt KGaA. A director of the Bank and the Company since January, 2000. Ulric Haynes, Jr., age 69, Executive Dean for University International Relations, Hofstra University. Formerly Dean, School of Business, Hofstra University and a consultant on international business. Mr. Haynes was American Ambassador to Algeria from 1977 to 1981 and is a director of Pall Corporation, Reliastar Life of New York, INNCOM International, Inc. and DYNAX Solutions, Inc. He was a director of the Company from 1981 through 1994 and has been a director of the Bank since 1981. Reelected January, 2000. Richard A. Jalkut, age 56, President and Chief Executive of Pathnet. Formerly President and Group Executive, NYNEX Telecommunications and Executive Vice President and Chief Operating Officer of New England Telephone and New York Telephone. He was a director of the Company from 1992 through 1994 and has been a director of the Bank since 1992. He is a director of Digex Corp., IKON Office Solution, Birch Telecom and Home Wireless Networks. Reelected January, 2000. Bernard J. Kennedy, age 69, Chairman and Chief Executive Officer of National Fuel Gas Company. Also Chairman of National Fuel Gas Distribution Corporation, National Fuel Gas Supply Corporation and Seneca Resources Corporation. He is a director of Merchants Mutual Insurance Co., AEGIS Insurance Services Inc., Niagara Independence Marketing Company and Seneca Independence Pipeline Company. Mr. Kennedy was a director of the Company from 1991 through 1994 and has been a director of the Bank since 1991. Reelected January, 2000. Peter Kimmelman, age 56, Private Investor. Formerly a director of Republic and Republic Bank since 1976. A director of the Bank and the Company since January, 2000. Charles G. Meyer, Jr., age 63, President of Cord Meyer Development Company. Formerly a director of Republic Bank. A director of the Bank and the Company since January, 2000. James L. Morice, age 63, Sole member, J.L. Morice & Company, LLC, a management consulting firm. Formerly a director of Republic and Republic Bank since 1987. A director of the Bank and the Company since January, 2000. Youssef A. Nasr, age 46, President and Chief Executive Officer of the Company and the Bank since January, 2000 and a director of the Company and the Bank since 1998. Mr. Nasr is a director of HSBC Bank Canada and was President and Chief Executive Officer of HSBC Bank Canada from 1998 through 1999. He joined HSBC in 1976 and was appointed a Group General Manager in 1998. Elected in 1998. Jonathan Newcomb, age 54, Chairman & CEO, Simon & Schuster, Inc. Prior to that he held the office of President and Chief Operating Officer. He was previously President of McGraw Hill Financial & Economic Information Group which included the business units of Standard & Poor's and Data Resources Inc. He is a director of the Bank, Edison Schools and LearnX.com. He is also a member of the Board of Trustees of Dartmouth College and the Board of Overseers for Dartmouth's Amos Tuck School of Business Administration. Elected January, 2000. 80 Henry J. Nowak, age 65, Attorney, Consultant and a member of the U.S. House of Representatives from 1974 through 1992. Prior to his service in the U.S. House of Representatives, he was elected to the office and served as Comptroller of the County of Erie. Mr. Nowak is a director of A&G Resources Corporation and is a member of the New York State and Erie County Bar Associations. He was a director of the Company from 1993 through 1994 and has been a director of the Bank since 1993. Reelected January, 2000. Keith R. Whitson, age 57, Group Chief Executive Officer of HSBC since 1998 and a director of HSBC since 1994. Chief Executive Officer of HSBC Bank plc from 1994 through 1998 and formerly Deputy Chief Executive Officer from 1992 through 1994. Prior to that he was Executive Director of the Company from 1990 through 1992. He is also a director of HSBC Argentina Holdings S.A., HSBC Bank plc, HSBC Bank Canada and HongkongBank. He has been with HSBC since 1961. Elected in 1998. Directors' Compensation For their services as directors of both the Company and the Bank, all nonemployee directors receive an annual retainer of $30,000, plus a fee of $1,000 for each Board meeting attended. Directors who are employees of HSBC or other Group affiliates do not receive annual retainers or fees. In addition, nonemployee directors who are members of any committee of the Board of Directors other than the Audit and Examining Committee also receive a fee of $1,000 for attendance at committee meetings except, when a meeting is held on the same day as a Board meeting or if participation is by conference telephone, the fee is $500. Additionally, committee chairmen receive annual fees of $2,500 for acting in that capacity. Members of the Audit and Examining Committee receive an annual fee which is $9,000 for the chairman and $6,000 for the other members and $500 per meeting for special meetings. Directors are reimbursed for their expenses incurred in attending meetings. The Company and the Bank have standard arrangements pursuant to which directors may defer all or part of their fees. The Directors' Retirement Plan covers nonemployee directors elected prior to 1998 and excludes those serving as directors at the request of HSBC. Eligible directors with at least five years of service will receive quarterly retirement benefit payments commencing at the later of age 65 or retirement from the Board, and continuing for ten years. The annual amount of the retirement benefit is a percent of the annual retainer in effect at the time of the last Board meeting the director attended. The percentage is 50 percent after five years of service and increases by five percent for each additional year of service to 100 percent upon completion of 15 years of service. If a director who has at least five years of service dies before his retirement benefit has commenced, his beneficiary will receive a death benefit calculated as if the director had retired on the date of his death. If a retired director dies before receiving retirement benefit payments for the ten year period, the balance of the payments will be continued to his beneficiary. The Plan is unfunded and payment will be made out of the general funds of the Company or the Bank. 81 Executive Officers The table below shows the names and ages of all executive officers of the Company and the positions held by them as of March 15, 2001 and the dates when elected an executive officer of the Company or the Bank. Year Name Age Elected Present Position with the Company ---------------------- --- ------- --------------------------------- Youssef A. Nasr 46 2000 President and Chief Executive Officer Leslie E. Bains 57 2000 Senior Executive Vice President Robert M. Butcher 57 1988 Senior Executive Vice President and Chief Financial Officer Alexander A. Flockhart 49 1999 Senior Executive Vice President Paul L. Lee 54 2000 Senior Executive Vice President and General Counsel Vincent J. Mancuso 54 1996 Senior Executive Vice President and Group Audit Executive, USA Robert H. Muth 48 1993 Senior Executive Vice President Joseph M. Petri 48 2001 Senior Executive Vice President Gerald A. Ronning 53 1991 Executive Vice President and Controller Iain A. Stewart 42 2000 Senior Executive Vice President Philip S. Toohey 57 1990 Senior Executive Vice President and Secretary George T. Wendler 56 2000 Senior Executive Vice President and Chief Credit Officer Youssef A. Nasr had been a Director of the Company since 1998. From 1998 through 1999, he had been President and Chief Executive Officer of HSBC Bank Canada. He has been a member of the HSBC Group since 1976. Leslie E. Bains managed domestic private banking and investments at Republic. Ms. Bains joined Republic in 1993. Alexander A. Flockhart previously was HSBC's Managing Director of the Saudi British Bank. From 1992 to 1994, he served as the Chief Executive Officer of HSBC Thailand. He joined HSBC in 1974. Joseph M. Petri was Executive Managing Director and head of sales for HSBC's Investment Banking and Markets, Americas from 1999 to 2000. He was President and Senior Partner of Summit Capital Advisors LLC, a New Jersey based hedge fund from 1995 to 1998. Prior to that, Mr. Petri held a variety of management positions with Merrill Lynch. Iain A. Stewart is an HSBC International Manager who was Group Treasurer in London from 1994 to 1999 and formerly manager of Group Market Risk. He joined HSBC in 1981 and was Treasurer USA from 1989 to 1993. Messrs. Lee and Wendler each served Republic or Republic Bank in executive capacities for more than five years. Messrs. Butcher, Mancuso, Muth, Ronning and Toohey each served the Company or the Bank in executive capacities for more than five years. There are no family relationships among the above officers. 82 Item 11. Executive Compensation The following table sets forth information as to the compensation earned through December 31, 2000 by the President and Chief Executive Officer and by the four most highly compensated officers of the Company and the Bank for their services on behalf of the Company. Principal position indicates capacity served in 2000. Summary Compensation Table

Annual Compensation Long Term Compensation --------------------------------------- ----------------------- Restricted All Name and Stock LTIP Other Principal Position Year Salary Bonus Other Awards Payouts Compensation ---- -------- ---------- -------- -------- ---------- ------------ Youssef A. Nasr 2000 $738,461 $1,100,000 $145,172 $441,000 $ - $423,706 President and Chief Executive Officer Elias Saal 2000 490,385 2,546,250 7,973 - 1,355,884 11,193 Senior Executive Vice President Treasury and International Private Banking Iain A. Stewart 2000 569,288 2,000,000 80,664 1,466,000 - 243,351 Senior Executive Vice President Investment Banking and Markets Robert H. Muth 2000 550,000 550,000 117,241 150,000 - 118,859 Senior Executive Vice President 1999 296,596 275,000 1,469 152,000 - 110,175 Administration 1998 299,593 211,825 5,093 121,000 - 10,400 George T. Wendler 2000 543,269 500,000 9,647 100,000 1,310,000 2,089 Senior Executive Vice President and Chief Credit Officer

Prior to 2000, Messrs. Nasr and Stewart were compensated by HSBC entities other than the Company and Messrs. Saal and Wendler were compensated by Republic. Mr. Muth's 1999 compensation reflects only the amounts paid by the Company and does not include compensation received while on secondment to another HSBC entity. Other Annual Compensation for Mr. Nasr includes reimbursement for rental expenses amounting to $69,567 and related tax gross-ups of $72,552. Other Annual Compensation for Mr. Stewart includes an executive travel allowance of $22,288 and tax gross-ups of $28,933. Mr. Muth's Other Annual Compensation includes tax gross-ups of $96,448. Other Annual Compensation for the other named executives includes health and insurance benefits. The Restricted Share Awards represent the monetary value at grant date of awards made under the HSBC Restricted Share Plan for performance in the year indicated. The number of shares of HSBC Holdings plc common stock corresponding to the 2000 award will not be known until HSBC actually purchases the shares, which is expected to occur late in the first quarter of 2001. The aggregate number and value at December 31, 2000 of restricted share holdings through 1999 for each of the named executives was: Mr. Nasr: 46,326 shares ($681,922); Mr. Saal: none; Mr. Stewart: 73,446 shares ($1,081,127); Mr. Muth: 26,534 shares ($390,576); and Mr. Wendler: none. The shares awarded to Messrs. Nasr and Stewart for holdings through 1999, are for performance while employed by other HSBC entities. Dividends are paid on all restricted shares. No stock options on HSBC Holdings plc common stock were granted under the HSBC Executive Share Option Plan to any of the named executives for the performance years indicated. 83 The Long-Term Incentive Plan payouts to Messrs. Saal and Wendler represent payments made under Republic's Long-Term Incentive Stock Plan. All Other Compensation for Mr. Nasr includes reimbursement for moving expenses of $359,214, unused vacation pay of $57,692 earned while working for another HSBC entity and the Company's matching contributions to its 401(k) plan. All Other Compensation for Mr. Stewart represents a reimbursement for moving expenses. All Other Compensation for Mr. Muth in 2000 consists of moving expense reimbursement of $104,059, the Company's matching 401(k) plan contribution and a four percent credit on salary deferred under the Company's deferred salary plan. Since deferred salary is not eligible for the Company matching contributions under the 401(k) plan, salary deferrals are increased by four percent, which is the maximum matching contribution available under the 401(k) plan. All Other Compensation for Messrs. Saal and Wendler represent payments from Republic's deferred compensation and profit sharing plans.

Aggregated Stock Option Exercises in 2000 and Option Values as of Year-End 2000 Number of Securities Value of Unexercised Underlying Unexercised Options In-the-Money Options as of December 31, 2000 as of December 31, 2000 (1) Shares Acquired Value ------------------------------- --------------------------- Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable ----------------- --------------- -------- ----------- ------------- ----------- ------------- Youssef A. Nasr - $- 81,000 45,000 $725,307 $240,153 Elias Saal - - - - - - Iain A. Stewart - - 66,000 40,500 551,899 216,137 Robert H. Muth - - 39,000 19,500 330,578 104,066 George T. Wendler - - - - - -

(1) Value based on the closing price per share of HSBC Holdings plc common stock on December 29, 2000 of 9.85 GBP and a US $ exchange rate of 1.4935 per GBP. The unexercised stock options included above on HSBC Holdings plc common stock were granted under the HSBC Executive Share Option Plan for performance years 1997 and prior. The option awards for Messrs. Nasr and Stewart are for performance while employed by other HSBC entities. The following table shows the estimated annual retirement benefit payable upon normal retirement on a straight life annuity basis to participating employees, including officers, in the compensation and years of service classifications indicated under the Company's retirement plans which cover most officers and employees on a non-contributory basis. The amounts shown are before application of social security reductions. Years of service credited for benefit purposes is limited to 30 years in the aggregate.

Estimated Annual Retirement Benefits for Five Year Average Representative Years of Credited Service Compensation 15 20 25 30 35 ----------------- -------- -------- -------- -------- -------- $125,000 $ 36,750 $ 49,250 $ 61,750 $ 74,250 $ 74,563 150,000 44,100 59,100 74,100 89,100 89,475 175,000 51,450 68,950 86,450 103,950 104,388 200,000 58,800 78,800 98,800 118,800 119,300 225,000 66,150 88,650 111,150 133,650 134,213 250,000 73,500 98,500 123,500 148,500 149,125 300,000 88,200 118,200 148,200 178,200 178,950 350,000 102,900 137,900 172,900 207,900 208,775 400,000 117,600 157,600 197,600 237,600 238,600 450,000 132,300 177,300 222,300 267,300 268,425 500,000 147,000 197,000 247,000 297,000 298,250 600,000 176,400 236,400 296,400 356,400 357,900

The Pension Plan is a non-contributory defined benefit pension plan under which the Bank and other participating subsidiaries of the Company make contributions in actuarially determined amounts. Compensation covered by the 84 Pension Plan includes regular basic earnings (including salary reduction contributions to the 401(k) plan), but not incentive awards, bonuses, special payments or deferred salary. The Company maintains supplemental benefit plans which provide for the difference between the benefits actually payable under the Pension Plan and those that would have been payable if certain other awards, special payments and deferred salaries were taken into account and if compensation in excess of the limitations set by the Internal Revenue Code could be counted. Payments under these plans are unfunded and will be made out of the general funds of the Bank or other participating subsidiaries. The calculation of retirement benefits is based on the highest five-consecutive year compensation. Members of the Senior Management Committee of the Bank receive two times their normal credited service for each year and fraction thereof served as a committee member in determining pension and severance benefits to a maximum of 30 years of credited service in total. This additional service accrual is unfunded and payments will be made from the general funds of the Bank or other subsidiaries. As of December 31, 2000, the individuals listed in the Summary Compensation Table, have total years of credited service in determining benefits payable under the plans as follows: Mr. Nasr, 13.25; Mr. Saal, 19.58; Mr. Muth, 15.5 and Mr. Wendler, 13.75. Since Mr. Stewart is an HSBC International Manager, he does not participate in the Company's retirement plan. In addition to the pension benefits payable under the Company plan, Messrs. Nasr and Muth are also entitled to receive pension benefits under the plan of HSBC Bank Canada. Under terms of employment with the Company, they may receive additional pension benefits which take into account their combined total years of service with HSBC. Payments under these arrangements are unfunded and any additional amounts due would be paid out of the general funds of the Bank. Effective February 28, 2001, Elias Saal resigned his position with the Company. Mr. Saal will serve the Company as a consultant on Treasury and International Private Banking issues. In accordance with the terms of an employment agreement dated April 30, 1999 between Republic (and the Company as successor thereto) and Mr. Saal, a lump sum payment of $10.6 million representing salary and bonus to April 30, 2004, the end of his employment period, was made to Mr. Saal on March 7, 2001. In January 2002, a lump sum payment of approximately $7.5 million representing supplemental executive retirement plan benefits, plus approximately $4.0 million in excise tax gross-ups on these benefits, will be paid to Mr. Saal. These payments were provided for in a Republic acquisition reserve, and are included in the severance related balance at December 31, 2000. See Note 2 for further discussion. For the remainder of Mr. Saal's life and that of his spouse, the Company will provide medical and dental benefits to Mr. Saal, his spouse and children under age 25 up to an aggregate amount not to exceed $1 million. Item 12. Security Ownership of Certain Beneficial Owners and Management Principal Holder of Securities The Company is 100 percent owned by HSBC North America Inc. HSBC North America Inc., is an indirect wholly owned subsidiary of HSBC Holdings plc. Messrs. Bond, Flint, Green and Whitson are officers and directors of HSBC. None of the directors or executive officers owned any of the Company's common stock at December 31, 2000. 85 Item 13. Certain Relationships and Related Transactions Directors and officers of the Company, members of their immediate families and HSBC and its affiliates were customers of, and had transactions with, the Company, the Bank and other subsidiaries of the Company in the ordinary course of business during 2000. Similar transactions in the ordinary course of business may be expected to take place in the future. All loans to executive officers and directors and members of their immediate families and to HSBC and its affiliates were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and did not involve more than normal risk of collectibility or present other unfavorable features. James H. Cleave, director, served as consultant in connection with the transaction between HSBC and Republic and the integration of the operations of Republic and the Company. For these services he received compensation from the Company of approximately $419,000 and $625,000 for 2000 and 1999, respectively. Also in 2000, for his work on the merger, Mr. Cleave was awarded restricted shares of HSBC Holdings plc common stock valued at $1,205,000. 86 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K A 1. and 2. Financial Statements and Schedules The following financial statements and schedules of the Company and its subsidiaries are included in Item 8: Report of Independent Auditors HSBC USA Inc.: Consolidated Balance Sheet Consolidated Statement of Income Consolidated Statement of Changes in Shareholders' Equity Consolidated Statement of Cash Flows HSBC Bank USA: Consolidated Balance Sheet Summary of Significant Accounting Policies Notes to Financial Statements 3. Exhibits 3 a Registrant's Restated Certificate of Incorporation and Amendments Thereto b Registrant's By-Laws, as Amended to Date 4 Instruments Defining the Rights of Security Holders, Including Indentures Registrant has previously filed with the Commission as Exhibits to various registration statements and periodic reports the Restated Certificate of Incorporation, as amended, By-Laws and all indentures and other Instruments Defining the Rights of Security Holders. 12.01 Computation of Ratio of Earnings to Fixed Charges (filed herewith) 12.02 Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Dividends (filed herewith) 22 Subsidiaries of the Registrant The Company's only significant subsidiary, as defined, is HSBC Bank USA, a state bank organized under the laws of New York State. 23 Consent of Independent Accountants B Reports on Form 8-K 1. On December 21, 2000 a report on Form 8-K was filed describing a distribution by the Company to its parent. 87 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HSBC USA Inc. Registrant /s/ Philip S. Toohey ------------------------------- Philip S. Toohey Senior Executive Vice President and Secretary Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on March 6, 2001 by the following persons on behalf of the Registrant and in the capacities indicated: Sal H. Alfiero* Director /s/ Robert M. Butcher John R. H. Bond* -------------------------------- Chairman of the Board Robert M. Butcher James H. Cleave* Director Senior Executive Vice President Frances D. Fergusson* Director and Chief Financial Officer Douglas J. Flint* Director (Principal Financial Officer) Martin J. G. Glynn* Director Stephen K. Green* Director Ulric Haynes, Jr.* Director /s/ Gerald A. Ronning Richard A. Jalkut* Director -------------------------------- Bernard J. Kennedy* Director Gerald A. Ronning Peter Kimmelman* Director Executive Vice President Charles G. Meyer, Jr.* Director and Controller James L. Morice* Director (Principal Accounting Officer) Youssef A. Nasr* Director, President and Chief Executive Officer Jonathan Newcomb* Director Henry J. Nowak* Director Keith R. Whitson* Director * /s/ Philip S. Toohey -------------------------- Philip S. Toohey Attorney-in-fact 88