Item 1. Business
HSBC Americas, Inc. (the Company), formerly Marine Midland Banks, Inc., is a New York State based bank holding company registered under the Bank Holding Company Act of 1956, as amended. At December 31, 1995, the Company, together with its subsidiaries, had assets of $20.5 billion and employed approximately 8,300 full and part time employees.
All of the Company's common stock is owned by HSBC Holdings B.V., an indirect wholly owned subsidiary of HSBC Holdings plc (HSBC). HSBC, the ultimate parent company of The Hongkong and Shanghai Banking Corporation Limited (HongkongBank) and Midland Bank plc, is an international banking and financial services organization with major commercial and investment banking franchises operating under long established names in Asia, Europe, North America and the Middle East. Principal executive offices of HSBC are located in London. HSBC, with assets of $352 billion at December 31, 1995, is one of the world's largest banking groups.
The Company's principal subsidiary, Marine Midland Bank (the Bank), which had assets of $20.3 billion and deposits of $16.6 billion at December 31, 1995, is supervised and routinely examined by the Superintendent of Banks of the State of New York and the Board of Governors of the Federal Reserve System.
The Bank is a regional bank with a distinctive geographic franchise encompassing the entire State of New York. Selected 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 corporations, institutions, governments and individuals. 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.
The Bank is subject to banking laws and regulations which, among other things, require that reserves be maintained against deposits and currently limit the establishment of branch banking offices in the U.S. outside its home state. The Company is also prohibited, with certain exceptions, from engaging, directly or indirectly, in activities which are not closely related to banking. In addition, the Federal Reserve Act restricts certain transactions between banks and their nonbank affiliates.
The FDIC Improvement Act of 1991 (FDICIA) set standards for: addressing the safety and soundness of the deposit insurance system, supervision of domestic and foreign depository institutions, accounting, prompt regulatory action and federal deposit insurance. Pursuant to FDICIA, a well capitalized institution must have a Tier 1 risk-based capital ratio of at least 6%, a total risk-based capital ratio of at least 10%, a leverage ratio of at least 5% and not be subject to a capital directive order. The leverage ratio measures Tier 1 capital against total non-risk weighted assets. The Bank's ratios at December 31, 1995 exceeded the ratios required for the well capitalized category. Revisions to the risk-based capital guidelines regarding interest rate risk have been proposed. As proposed, these guidelines would not materially affect the Company's risk-based capital ratios.
PART I Continued
Item 1. Business Continued
In connection with establishing standards to assure the safety and soundness of financial institutions as required by FDICIA, the Federal Reserve Board issued guidelines on operations and management and compensation. The Federal Reserve Board has proposed standards for asset quality and earnings. The Company does not expect the guidelines and proposed regulations to have a material effect on its operations.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (IBBEA) authorized interstate acquisitions of banks and bank holding companies without geographic limitation beginning in 1995. In addition, beginning in 1997, a bank may merge with a bank in another state as long as neither of the states opt out of interstate branching. Also, IBBEA protects key provisions of state law, establishes a mechanism for de novo interstate branching, and includes provisions relating to interstate branching by foreign banks.
The Company and its subsidiaries face competition in all the markets they serve. Other commercial banks, thrift institutions, consumer finance companies, mortgage bankers, insurance companies and investment banking firms are traditional competitors. Many of these institutions are not subject to the same laws and regulations imposed on the Company and its subsidiaries.
Item 2.
Item 2. Properties
The principal executive offices of the Company and the Bank are located in Buffalo, New York, in a building under a long-term lease. The Bank has more than 300 other banking offices in New York State located in approximately 47 counties. More than half 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 9 states other than New York, none of which is materially important to the respective activities. For information relating to lease commitments, see Note 17 to the Financial Statements.
Item 3.
Item 3. Legal Proceedings
The Company and its subsidiaries are defendants in a number of legal proceedings arising out of, and incidental to, their businesses. Management of the Company, based on its review with counsel of the development of these matters to date, is of the opinion that the ultimate resolution of these pending proceedings will not have a material adverse effect on the business or financial position of the Company.
PART I Continued
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
Reference is made to Item 5.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters
Since all common stock of the Company is owned by HSBC Holdings B.V., shares of the Company's common stock are not listed or traded on a securities exchange.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The Company reported net income for 1995 of $291.7 million compared with $17.2 million in 1994 and a loss of $70.9 million in 1993 after the cumulative effect of an accounting change which increased income for 1993 by $40 million.
The Company's reported results are consolidated with Concord Leasing, Inc. (Concord). Concord, which provides equipment financing through secured loan and finance lease transactions, had assets of $1.5 billion at December 31, 1994. Concord was merged with the Company on January 1, 1995 through the contribution of Concord's outstanding common stock held by HSBC Holdings, B.V. to the Company. The merger transaction was accounted for as a transfer of assets between companies under common control, with the assets and liabilities of Concord combined with those of the Company at their historical carrying values. The Company's consolidated financial statements reflect a restatement of all prior periods to include the accounts and results of operations of Concord as though the merger transaction occurred as of the beginning of the earliest period presented.
A detailed review comparing 1995 operations with 1994 and 1993 follows. It should be read in conjunction with the consolidated financial statements of the Company which begin on page 33.
E A R N I N G S P E R F O R M A N C E R E V I E W
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, i.e., an amount equivalent to tax-exempt benefits is included in both interest income and applicable income taxes.
Net interest income of $879.8 million in 1995 improved from $769.9 million in 1994 due to a number of factors, including an increase in the volume of
accruing commercial and consumer loans, a higher prime rate and lower nonaccruing loans. 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".
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. Interest rates earned on assets generally rose faster than interest rates paid on interest bearing liabilities resulting in increased net yields on average earning assets to 5.06% in 1995 from 4.57% in 1994.
Yields on commercial loans increased from 7.32% in 1994 to 8.79% in 1995 as a result of several factors. Outstanding loans to middle sized and smaller sized businesses increased where rates are generally higher than larger commercial customers. The prime rate on which loan rates are generally based averaged 8.83% in 1995 compared with 7.63% in 1994. The level of nonaccruing loans decreased from $855 million at year-end 1994 to $381 million at year-end 1995.
Average residential mortgages increased to $2,898 million in 1995 from $2,654 million in 1994 and $2,092 million in 1993. In addition, the yield on these loans increased from 6.36% in 1994 to 7.47% in 1995 as a result of higher interest rates. Other consumer loans include credit card receivables and installment loans such as automobile loans. Average credit card receivables increased to $1,720 million in 1995 from $1,516 million in 1994.
Domestic time deposits, including NOW accounts, and consumer, commercial and public savings and other time deposits averaged $10.1 billion during 1995, compared with $9.2 billion in 1994. Average effective rates on these types of deposits were 3.88% in 1995, compared with 3.03% in 1994. This increase is reflective of a higher interest rate environment in 1995 in comparison to 1994.
Nontrading Income
Nontrading income was $298.3 million or $5.6 million lower than 1994. The increase in nontrading income between 1994 and 1993 relates primarily to mortgage servicing income (expense) which had been negatively impacted by accelerated mortgage prepayments due to the high volume of mortgage refinancings occurring within the industry during 1993 and 1992. Mortgage servicing rights amortization and write downs were $259.4 million in 1993 compared with $16.5 million in 1994 and $17.4 million in 1995. The carrying value of mortgage servicing rights at December 31, 1995 was $37 million compared with an estimated market value of $65 million.
Trading Revenues
Trading revenue includes securities trading gains and losses, commissions earned from distributing municipal obligations, and foreign exchange fees from transactions with corporate clients and correspondent banks. It does not include interest income from these activities (included as a component of net interest income), which is usually substantial. The following is an analysis of the average balance outstanding, interest income (on a taxable equivalent basis) and trading revenue related to trading assets. This analysis excludes foreign exchange revenue which is separately disclosed in the table relating to other operating income.
In 1994, the Company lowered its risk positions as a result of instability in the money markets driven by volatile interest rates. As interest rates stabilized in 1995, the Company increased its trading portfolio during the fourth quarter of 1995 to $617 million at year-end 1995 compared with $404 million at year-end 1994.
Securities Transactions
Securities transactions during 1995 resulted in net gains of $12.3 million compared with net gains of $7.9 million in 1994 and $6.5 million in 1993. The gains realized relate to equity investments classified as available for sale, primarily highly leveraged partnership interests.
Personnel Expense
Personnel expense was $354.2 million in 1995 compared with $363.8 million in 1994 and $372.7 million in 1993. Average staffing levels have declined during the three year period from 8,943 in 1993 to 8,301 in 1995. During 1994, the Company offered a voluntary retirement program. The charge for this program was included in other expenses.
Other Operating Expenses
Other operating expenses excluding personnel, have been reduced through operating efficiency programs as well as decreases in costs associated with problem credits. ORE and owned asset expenses were credits of $3.9 million in 1995 compared with expenses of $20.9 million in 1994 and expenses of $87.5 million in 1993. The years 1994 and 1993 include $10.5 million and $80.5 million, respectively, of revaluation adjustments related to ORE and owned assets. During 1995, these revaluations are considered in the level of provision provided for ORE and owned assets.
In mid-1995, the Federal Deposit Insurance Corporation (FDIC) lowered the insurance premium rate the Bank is assessed on deposits resulting in a $14.4 million expense reduction from 1994.
Marketing and other expenses in 1995 continued to include amounts associated with a multi-faceted image campaign which included a statewide advertising campaign and, in 1994, the adoption of a new logo.
In 1994, other expenses include $29.8 million as provision to cover the costs of an early retirement program. Other expenses in 1993 included a charge of $25.0 million relating to the planned disposition of excess space as a result of continuing centralization of operations.
Provision for Loan Losses
Provision for loan losses was $167.0 million in 1995 compared with $150.6 million in 1994 and $85.3 million in 1993. Upon merger of Concord into the Company, management adopted an aggressive strategy of accelerating the timing of disposal of a troubled aircraft portfolio. This strategy resulted in an increased provision in 1995. Nonaccruing loans were 56% less at December 31, 1995 than one year ago. An analysis of the loan loss allowance and the provision for loan losses begins on page 28.
Income Taxes
Effective January 1, 1993, the Company prospectively adopted Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (FAS 109), and reported the cumulative effect of the change at January 1, 1993 (a benefit of $40 million) separately in the consolidated statement of income for 1993. The recognition of the $40 million net deferred tax asset was based on the Company's forecast that it would generate taxable income of at least $118 million during 1993 and thus realize the benefit of a portion of its net reported operating loss carryforwards, which totaled approximately $300 million at January 1, 1993. The net operating loss carryforwards resulted from substantial loan losses in 1991 and 1990.
As of December 31, 1994, recognition of the $40 million deferred tax asset was based on the forecast that net temporary deductible differences of approximately $114 million will reverse during the years 1995 through 1997 and thus, be available for carryback to offset the Company's 1994 taxable income. For the years ended December 31, 1993, 1994 and 1995 the Company generated taxable income at a rate that was well in excess of that required to support the $40 million asset.
As of December 31, 1995, the Company had net deferred tax assets of $88.2 million, $73.5 million of which relates to a Federal net operating loss carryforward resulting from the merger of Concord into the Company. The recognition of the Federal net operating loss carryforward in 1995 was based on the Company's forecast that it would generate taxable income of at least $210.0 million during 1996 and thus realize the benefit of the net operating loss carryforward. Also as of December 31, 1995, recognition of the remaining $14.7 million of net deferred tax assets was based on a forecast that net temporary differences in excess of $42 million will reverse during the years 1996 through 1998 and, thus, be available for carryback to offset the Company's 1995 taxable income.
B A L A N C E S H E E T R E V I E W
Asset-Liability Management
The principal objectives of asset-liability management are to ensure adequate liquidity and to manage exposure to interest rate risk. 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 near term and longer term interest rate risk in order to provide a more stable base of net interest income.
The Bank, as both a large retail and commercial bank with a well established franchise in New York State with access to domestic and international money markets, has a wide range of available techniques for implementing asset-liability management decisions. The asset-liability management process is designed to take advantage of the Company's strengths in managing diversified financial businesses. Overall balance sheet strategy is centralized under the Asset and Liability Management Policy Committee, comprised of senior officers. Authority and responsibility for implementation of the Committee's broad strategy is controlled under a framework of defined trading and balance sheet position limits.
The Company maintains a strong liquidity position. The size and stability of its New York State deposit base are complemented by its 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 $100 million at December 31, 1995. Wholesale liabilities increased to $4,205 million at December 31, 1995 from $3,175 million a year ago primarily as a result of increased money market activities. Deposits at December 31, 1995 were 111.1% of loans compared with 106.7% at December 31, 1994.
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 the effects of changes in interest rates, and to optimize net interest income within the ranges of interest rate risk that the Company's management considers acceptable, the Company maintains a portfolio of off-balance sheet financial instruments. Consisting principally of interest rate swaps and forward rate agreements, these derivative instruments mitigate interest rate risk by altering the repricing characteristics of certain on-balance sheet assets.
The Company employs a combination of risk assessment techniques, principally gap analysis and dynamic simulation modeling, to analyze the sensitivity of its earnings to changes in interest rates. These risk assessment techniques are comprehensive, in that they include all on-balance sheet and off-balance sheet items. In dynamic simulation modeling, reaction to a range of positive and negative interest rate movements is projected with consideration given to known activities and to the behavioral patterns of individual assets and liabilities in the corresponding rate environments. As a financial institution, patterns of certain asset and liability movements can
be reasonably estimated based upon available historical data. Gap analysis assumes static conditions in that the effect of interest rate changes is calculated with consideration basically given to only known, as opposed to projected, maturity and repricing patterns.
Management has primarily utilized interest rate swaps and forward rate agreements to alter the repricing characteristics of balance sheet assets, thereby decreasing the Company's overall sensitivity to changes in interest rates.
In addition to utilizing derivative positions to manage overall repricing risk, the Company also utilizes these instruments to manage basis risk associated with the potential divergence of market interest rate indices. Specifically, the variable component of the majority of the Company's overall interest rate risk management derivatives are based upon the London Interbank Offered Rate (LIBOR). Given that the majority of rate sensitive loan assets are prime based, consistent with risk management philosophy, the Company enters into certain interest rate swaps whereby the LIBOR and prime interest streams are exchanged. Derivative financial instruments are also utilized to a lesser extent to manage the risk associated with the cash flows generated by certain specific balance sheet positions. A further discussion of derivative activities can be found in Note 19 to the Financial Statements.
The following table shows the repricing structure of assets and liabilities as of December 31, 1995, with each maturity interval referring to the earliest repricing opportunity for each asset and liability, that is, the earlier of its actual maturity or its expected rate reset date. The resulting "gaps" indicate the sensitivity of 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.
The table provides approximate maturities of outstanding loans at year-end 1995. Maturities of outstanding loans are generally extended with the same credit approval process required of new credits. The table also shows the breakdown of the maturities which are at fixed or adjustable rates. Loans are considered to be rate sensitive, i.e., have floating or adjustable interest rates, when rates change within 100 days of fluctuations in key money market rates; otherwise, the loans are treated as fixed or predetermined interest rate obligations.
Securities Portfolios
Effective January 1, 1994, the Company prospectively adopted Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities (FAS 115), which specifies the accounting and reporting for all investments in debt securities and for investments in equity securities that have readily determinable fair values. Under FAS 115, 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 excluded from earnings and reported as a separate component of shareholders' equity.
In November 1995, the Financial Accounting Standards Board issued a Special Report, "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities" which provided a one-time opportunity for companies to reassess the appropriateness of the designations of all securities held upon the initial application of the Special Report. The Company reassessed the classifications of its securities held and, during December 1995 transferred securities with an amortized cost of $2,491 million and a fair value of $2,535 million from held to maturity to available for sale. The resulting redesignations were accounted for at fair value resulting in a net unrealized gain, net of tax of $29.4 million recorded in shareholders' equity.
The following table reflects the distribution of maturities of the available for sale portfolio at year-end 1995 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, 1995. Yields on tax-exempt obligations have been computed on a taxable equivalent basis using applicable statutory tax rates. The table excludes securities with total fair value of $79 million, including $43 million in Federal Reserve Bank stock, without fixed maturities which had a weighted average yield of 4.35%.
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 prepayments. Based on the anticipated cash flows, the total maturity distributions for the portfolio would be $672 million, $1,628 million, $189 million and $46 million for within one year, after one but within five years, after five years but within ten years and after ten years, respectively.
Domestic Office Deposits
Certificates of deposit of $100,000 or more issued by domestic offices which totaled $1,239 million at December 31, 1995, mature as follows: under 3 months, $971 million; 3 to 6 months, $123 million; 6 to 12 months, $83 million; and over 12 months, $62 million.
All other short-term borrowings include $746 million and $1 billion at year ends 1995 and 1994, respectively, from HSBC. See Notes 1 and 14 to the Financial Statements.
Capital Resources
Total shareholders' equity at year-end 1995 was $1,665 million, compared with $1,500 million at year-end 1994. The equity base was increased by $291.7 million from net income and $29.4 million from net unrealized gains on securities available for sale, and reduced by $150 million for common shareholder dividends paid to HSBC Holdings B.V. and $5.9 million for preferred shareholder dividends. The ratio of shareholders' equity to total year-end assets increased to 8.12% at December 31, 1995 from 8.02% at December 31, 1994.
Capital Adequacy
The Federal Reserve Board 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 the concept of Tier 1 capital and total capital. Tier 1 capital is essentially common equity, excluding net unrealized gain (loss) on securities available for sale and goodwill, plus certain types of perpetual preferred stock. Total capital includes Tier 1 capital and other forms of capital such as the allowance for loan losses, subject to limitations, and subordinated debt. The guidelines establish a minimum standard risk-based target ratio of 8%, of which at least 4% must be in the form of Tier 1 capital.
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 under FAS 109 meets the criteria for capital recognition and has been included in the calculation of the Company's capital ratios.
Under these guidelines, the Company's total risk adjusted assets and off-balance sheet items at December 31, 1995 was approximately $15.0 billion. Tier 1 capital was $1.6 billion and total capital was $2.4 billion resulting in risk adjusted capital ratios of 10.71% at the Tier 1 level and 16.21% at the total capital level. These ratios compared with 10.93% at the Tier 1 level and 17.25% at the total capital level at December 31, 1994.
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 banking
organizations are required to maintain a minimum leverage ratio of Tier 1 capital to quarterly average total assets of 3%. At December 31, 1995, the Company had a 8.32% leverage ratio compared with 8.16% at December 31, 1994.
The regulatory agencies established five capital categories applicable to banks: well capitalized, adequately capitalized, undercapitalized, signifi- cantly undercapitalized and critically undercapitalized. A well capitalized institution must have a Tier 1 capital ratio of at least 6%, a total risk- based capital ratio of at least 10%, a leverage ratio of at least 5% and not be subject to a capital directive order. The Bank's ratios at December 31, 1995 exceeded the ratios required for the well capitalized category.
From time to time, the bank regulators propose amendments to or issue interpretations of risk-based capital guidelines. The Federal Reserve Board has proposed amendments to the guidelines regarding interest rate risk. As proposed, this amendment would not materially affect the Company's risk-based capital.
Credit Management
The credit 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 improvement in credit policies and procedures and encourage consistency in the approach to, and management of, the credit process throughout the Company as it relates to both on- and off-balance sheet activities.
The Credit Policy Committee, comprised of senior line and credit managers, is responsible for the design and management of the credit function. The Committee is charged with the responsibility for 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' Examining Committee 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.
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 or to record interest at a reduced rate.
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 is generally 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.
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, 1995 totaled $381 million or 2.76% of total loans, compared with $855 million or 6.62% of total loans, a year ago. The reduced level of nonaccruing loans resulted from aggressive management of problem credits as well as improvement in the domestic economy. The merger of Concord into the Company resulted in an increased level of nonaccruing loans prior to 1995, primarily aircraft. During 1995 an aggressive strategy of accelerating the timing of gaining title to and disposing of these assets was adopted. As a result, provision for loan losses totaling $113 million was recorded in the first quarter of 1995 to reflect the change in strategy. The majority of the decline in nonaccruing loans at December 31, 1995 compared
with December 31, 1994 occurred in this portfolio. The large provision in the second quarter of 1994 was made to recognize deterioration in the used aircraft market.
Nonaccruing loans that have been restructured but remain in nonaccruing status amounted to $70 million, $11 million and $20 million at December 31, 1995, 1994 and 1993, respectively.
Of the nonaccruing loans at December 31, 1995 over 46% are less than 30 days past due as to cash payment of principal and interest. Cash payments received on loans on nonaccruing status during 1995, or since loans were placed on nonaccruing status, whichever was later, totaled $52 million, $21 million of which was applied as interest income and $31 million as reduction of loan principal.
Included in accruing loans contractually past due 90 days or more were consumer installment loans as follows: 1995, $36 million; 1994, $20 million; 1993, $24 million and residential real estate mortgages past due 90 days or more as follows: 1995, $15 million; 1994, $18 million; 1993, $12 million. When consumer loans cease to be accruing, rather than categorizing such loans as nonaccruing, they are generally charged off according to an established delinquency schedule.
The Company adopted Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan (FAS 114), as amended by Statement of Financial Accounting Standards No. 118, Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures (FAS 118) effective January 1, 1995. FAS 114 provides guidance in defining and measuring loan impairment. A loan is considered impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans so identified 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. The adoption of this statement did not result in any significant change in the Company's allowance for loan losses.
The Company identified impaired loans as defined by FAS 114 totaling $322 million at December 31, 1995 of which $117 million had a specific loan loss allowance of $61 million. No interest income was recognized on impaired loans during 1995.
Other Problem Assets
In situations where loans are secured by real estate or other assets and the borrower cannot continue to meet its obligations, the property can be acquired through foreclosure. When property is so acquired, the lower of cost or fair market value (including cost to dispose) is reported on the balance sheet as other real estate and other owned assets. Any part of the loan exceeding the value of the property at the time of transfer is charged against the loan loss allowance. Subsequent decreases in fair value are included in other operating expense.
Foreign Country Outstandings and Risk
Outstandings which are shown by category of borrower in the following table include loans, interest bearing deposits and other assets. Loans are distributed primarily on the basis of the location of the head office or residence of the borrower or, in the case of certain guaranteed loans, the guarantor. Interest bearing deposits with banks and their branches are grouped by the location of the head office of the foreign bank. Investments and acceptances are distributed on the basis of the location of the borrower. There were no loans to government and official institutions for the countries listed.
* The table excludes bonds issued by the United Mexican States and the Republic of Venezuela which are collateralized by zero-coupon U.S. Treasury securities with a face value equal to that of the underlying bonds. They are known as "Brady bonds." The fair value of such collateral for the $188 million of 6.25% Mexican bonds due 2019 was approximately $29 million, $27 million and $25 million at year ends 1995, 1994 and 1993, respectively. Interest payments are partially secured by cash equivalent instruments for an 18 month period. The fair value of such collateral for the $166 million book value, $177 million face value of 6.75% Venezuelan bonds due 2020 was approximately $26 million, $24 million and $22 million at year ends 1995, 1994 and 1993, respectively. Interest payments are partially secured by cash equivalent instruments for a 14 month period. These bonds had an aggregate fair value of $229 million at December 31, 1995.
Allowance for Loan Loss and Charge Offs
At year-end 1995, the allowance was $477.5 million, or 3.46% of total loans, compared with $495.4 million, or 3.84% of total loans, a year ago. The ratio of the allowance to nonaccruing loans was 125.49% at December 31, 1995 compared with 57.92% a year earlier. The Company's nonaccruing loans were reduced to $381 million at December 31, 1995 from $855 million at December 31, 1994.
The allowance for loan losses is an allowance for possible credit related losses. The allowance is increased as provisions for loan losses are charged to current operating income. The allowance is reduced as charge offs are recorded. Recoveries are added to the allowance. In determining the amount of provisions for loan losses, management considers a number of factors.
These include judgments covering possible losses on loans, loan evaluations and examination classifications and expected performance of various categories of loans within an anticipated range of economic conditions. This is an ongoing process. Charge offs of commercial loans reflect management's judgment with respect to the ultimate collectibility of all or part of a loan. Charge offs of consumer loans occur according to an established delinquency schedule. Recoveries on loans previously charged off are added to the allowance.
The loan loss allowance is considered by management to be a general allowance available to cover loan losses within the entire portfolio. The classifications within the table below are based on management's current assessment of the loss potential associated with specific loans and elements of the portfolio. Allocation is especially problematical because of the difficulties inherent in predicting and evaluating the impact of economic events on fully performing loans, work-outs and previously charged off loans. Amounts allocated to consumer installment loans represent estimates of charge offs based on formulas appropriate to the type of loan. Management cautions that the loan loss allowance allocation does not necessarily represent the total amount which may be available for actual future losses in any one or more of the categories. Management is of the opinion that the loan loss allowance as of December 31, 1995 is adequate as a general allowance.
The provisions of FAS 114 are described briefly on page 26. As a result of this statement, effective January 1, 1995, allowances are established against impaired loans equal to the difference between the recorded investment in the asset and the present value of the cash flows to be received or the fair value of the collateral, if the loan is collateral dependent. This statement does not address the overall adequacy of the allowance for loan losses. The allowance for loan losses did not change as a result of adopting FAS 114.
Item 8.
Item 8. Financial Statements and Supplementary Data
Page
Report of Management 31
Report of Independent Auditors 32
HSBC Americas, Inc.: Consolidated Balance Sheet 33 Consolidated Statement of Income 34 Consolidated Statement of Changes in Shareholders' Equity 35 Consolidated Statement of Cash Flows 36
Marine Midland Bank: Consolidated Balance Sheet 37
Summary of Significant Accounting Policies 38
Notes to Financial Statements 42
R E P O R T O F M A N A G E M E N T
Management of HSBC Americas, Inc., is responsible for the integrity of the financial information presented in this annual report. Management has prepared the financial statements in conformity with generally accepted accounting principles. In preparing the financial statements, management makes judgments and estimates of the expected effect of events that are accounted for or disclosed.
The Company's systems of internal accounting control are designed to provide reasonable 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 meets 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.
R E P O R T O F I N D E P E N D E N T A U D I T O R S
The Board of Directors and Shareholders of HSBC Americas, Inc.
We have audited the accompanying consolidated balance sheets of HSBC Americas, Inc. (formerly Marine Midland Banks, Inc.) and subsidiaries as of December 31, 1995 and 1994, 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, 1995, and the accompanying consolidated balance sheets of Marine Midland Bank and subsidiaries as of December 31, 1995, and 1994. 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 generally accepted auditing standards. 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 Americas, Inc. and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 1995, and the financial position of Marine Midland Bank and subsidiaries as of December 31, 1995 and 1994, in conformity with generally accepted accounting principles.
As discussed in the Summary of Significant Accounting Policies, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes" and SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" in 1993, the provisions of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities" in 1994, and the provisions of SFAS No. 114, "Accounting by Creditors for Impairment of a Loan" as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures" in 1995.
/s/ KPMG PEAT MARWICK LLP
Buffalo, New York January 26, 1996
S U M M A R Y O F S I G N I F I C A N T A C C O U N T I N G P O L I C I E S
HSBC Americas, Inc. (the Company), formerly Marine Midland Banks, Inc., is a New York State based bank holding company. All of the common stock of the Company is owned by HSBC Holdings B.V., 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, Marine Midland Bank (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 balance sheet date of the financial statements. Accordingly, upon settlement, actual results may differ from estimated amounts. Prior years' financial statements have been reclassified to conform with the current financial statement presentation.
The following is a description of the more 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 accounted for under the equity method and are included in other assets in the consolidated balance sheet.
Securities
Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities (FAS 115), which specifies the prospective accounting and reporting for all investments in debt securities and for investments in equity securities that have readily determinable fair values. Under FAS 115, 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, excluded from earnings 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.
Prior to the adoption of FAS 115, securities available for sale were reported at the lower of aggregate cost or market value with any valuation adjustments reflected in income.
Loans
Loans are stated at their principal amount outstanding, net of unearned income and the net of 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. Loans include lease financing transactions representing the aggregate of lease receivables plus estimated residual values net of unearned income. Unearned income is amortized over the lease terms by methods producing a constant rate of return on net lease assets.
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. Consumer loans, including residential mortgages, are charged off against the allowance for loan losses according to an established delinquency schedule.
Effective January 1, 1995, the Company adopted Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan (FAS 114), as amended by Statement of Financial Accounting Standards No. 118, Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures (FAS 118). FAS 114 considers a loan impaired when, based on current information and events, it is probable that a creditor 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.
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 contractual terms 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 Loan Losses
The allowance for loan losses is an allowance for possible credit related losses. Additions to the allowance are made by provisions charged to current operating income. The determination of the balance of the allowance is based on many factors including credit evaluation of the loan portfolio, current economic conditions, and past loan loss experience. The allowance for loan losses includes a general component which, in management's judgment, is adequate to provide for unidentified losses in the loan portfolio.
Other Real Estate and Other Owned Assets
In situations where loans are secured by real estate or other property and the borrower cannot continue to meet its obligations, the property can be acquired through foreclosure. Such properties are recorded at the lower of cost or fair value (including costs to dispose of the property) on the acquisition dates. Any part of the loan exceeding the fair value of the property at the time of transfer is charged against the loan loss allowance. Subsequent decreases in fair value and net operating results on the property are included in other operating expenses.
Mortgage Servicing Rights
Mortgage servicing rights (MSRs) include purchased mortgage servicing rights (PMSRs) and excess mortgage servicing rights (EMSRs). PMSRs represent the cost of rights acquired in a purchase of mortgage loans where a definitive plan for the sale of loans exists when the transaction was initiated or the cost to acquire the rights to service a pool of mortgages that have previously been sold. EMSRs are recognized when mortgage loans are sold with servicing retained and the net servicing fee rate exceeds the normal servicing fee. The selling price of the loans is adjusted for such excess.
MSRs are amortized over the expected life of the loans serviced, including expected prepayments, using a method that approximates the level yield method. The carrying value of the MSRs is periodically evaluated in relation to estimated future net servicing revenue. Write downs of MSRs are recognized when unexpected prepayments are experienced or anticipated, so that estimated future net servicing income exceeds the carrying amount. The evaluation of future net servicing income is based on a discounted and disaggregated (individual portfolio) methodology.
Income Taxes
Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (FAS 109). FAS 109 requires an asset and liability method of accounting for income taxes. Under this method, 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 to reduce deferred tax assets to the amounts expected to be realized.
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.
Derivative Financial Instruments
Derivative financial instruments, principally interest rate swaps and forward rate agreements are utilized by the Company to manage risk pursuant to an overall asset-liability management strategy. To the extent that these risk management positions are linked to assets-liabilities that are valued on an historical cost basis, accrual or deferral based accounting is applied. As such, risk management positions are not marked to current market value, rather cash flows and/or gains and losses realized are accrued and/or amortized as an adjustment to net interest income, or to the income or expense generated by the corresponding specific asset-liability position.
Derivative financial instruments specifically linked to and utilized to offset the risk associated with securities classified as available for sale, are accounted for on the same basis as the underlying securities. The mark to market value of the derivatives are included with the fair value of the related instruments and as such become a component of the unrealized gains (losses) recorded in the shareholders' equity adjustment account.
Trading positions in derivative financial instruments utilized to offset risk associated with cash trading instruments and foreign exchange trading activity are accounted for on a mark to market (fair value) basis consistent with the accounting applied to the related activity. The mark to market adjustment, which is recorded through the use of a valuation reserve and may include an interest receivable/payable component, along with any related gains or losses realized upon liquidation of a derivative trading position, is recorded as a component of trading revenues (loss).
Derivative financial instruments entered into to facilitate the needs of customers are immediately matched off by taking corresponding and offsetting positions with other counterparties. The Company considers this activity to be a fee generating service offered to certain select customers and does not maintain unmatched positions within this portfolio. With the exception of a small spread between the pay and receive rates, representing compensation for facilitating the transaction, the periodic accrual amounts effectively offset each other. If a position becomes unmatched for any reason, it is immediately accounted for on a mark to market basis.
N O T E S T O F I N A N C I A L S T A T E M E N T S
Note 1. Significant Acquisitions
On January 1, 1995 Concord Leasing, Inc. (Concord), an indirect wholly owned subsidiary of HSBC, was merged with the Company. Concord's outstanding stock was contributed to the Company. Concord provides equipment financing through secured loan and finance lease transactions. Assets of Concord totaled $1.5 billion at December 31, 1994.
The merger transaction was accounted for as a transfer of assets between companies under common control, with the assets and liabilities of Concord combined with those of the Company at their historical carrying values. The Company's accompanying consolidated financial statements reflect a restatement of prior periods to include the accounts and results of operations of Concord as though the merger transaction occurred as of the beginning of the earliest period presented. Previously reported information was as follows:
On January 1, 1996 Oleifera Investments, Ltd., (OIL), an indirect wholly owned subsidiary of HSBC, was transferred to the Company. OIL's outstanding stock was contributed to the Company. Assets of OIL totaling $183 million at December 31, 1995 consisted primarily of commercial loans and other real estate. The merger transaction was accounted for as a transfer of assets between companies under common control similar to the accounting followed by the Concord merger.
The following unaudited pro forma data summarizes the combined results of operations of the Company and OIL.
The Company has reached an agreement to acquire the East River Savings Bank branch network and deposits, and selected commercial, residential and consumer loans for $93 million. The agreement calls for the Company to acquire all 11 branches, and $1.1 billion in assets and to assume $1.2 billion in deposits. The purchase transaction is subject to regulatory approvals and is expected to be consummated in the second quarter of 1996.
Note 2. 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 $214,338,000 in 1995 and $203,669,000 in 1994.
Note 3. Trading Assets
Note 4. Securities
On October 1, 1993, the Company transferred its entire available for sale portfolio having a market value of $881,354,000 to trading assets. As a result of the transfer, the adoption of Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities (FAS 115), on January 1, 1994 had no effect on the Company's financial statements.
In November 1995, the Financial Accounting Standards Board issued a Special Report, "A Guide to the Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities" which provided a one-time opportunity for companies to reassess the appropriateness of the classifications of securities under FAS 115. The Company reassessed the classifications of its securities held and during December 1995 transferred securities from held to maturity with an amortized cost of $2,491,402,000 and a fair value of $2,535,262,000 to available for sale. The redesignations were accounted for at fair value resulting in an unrealized gain net of taxes of $29,390,000 recorded in shareholders' equity. The one-time reassessment does
not call into question management's ability and intent to hold securities to maturity in the future. The amortized cost and fair value of securities follows.
At December 31, 1994, with regard to securities held to maturity, the Company had gross unrealized gains of $29,000, $267,000 and $722,000 and gross unrealized losses of $27,750,000, $32,210,000 and $1,046,000 related to U.S. Treasury, U.S. Government agency and other debt securities, respectively.
Proceeds from the sale of securities available for sale during 1995 were $20,732,000 resulting in gross realized gains of $16,680,000 and gross realized losses of $4,340,000 compared with proceeds of $16,136,000 and gross realized gains of $8,935,000 and gross realized losses of $1,029,000 in 1994. The net gains realized related to equity investments classified as available for sale during 1995 and 1994. During 1993, proceeds from the sale of securities totaled $1,875,322,000 resulting in gross gains and losses of $2,900,000 and $7,300,000 respectively. Substantially all interest income on securities is taxable.
The carrying and fair values of debt securities available for sale at December 31, 1995, by contractual maturity are shown in the following table. Expected maturities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties. The amounts reflected in the table exclude $77,212,000 amortized cost, ($78,568,000 fair value) of equity securities available for sale that do not have fixed maturities.
Note 5. Loans
Loans are presented net of unearned income of $196,399,000 and $253,980,000 at December 31, 1995 and 1994, respectively. A distribution of the loan portfolio follows. International loans include "Brady bonds" issued by the United Mexican States and the Republic of Venezuela in the refinancing of their debt obligations. These bonds had an aggregate carrying value of $353,334,000 (face value $365,600,000) and an aggregate fair value of $228,679,000, $185,907,000 and $284,729,000 at year ends 1995, 1994 and 1993, respectively. 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.
Residential mortgages include $121,586,000 and $21,350,000 of residential mortgages held for sale at December 31, 1995 and 1994, respectively. Other consumer loans include $397,250,000 and $406,009,000 of higher education loans also held for sale at December 31, 1995 and 1994, respectively.
At December 31, 1995 and 1994, the Company's nonaccruing loans were $380,524,000 and $855,409,000, respectively. At December 31, 1995 and 1994, the Company had commitments to lend additional funds of $10,379,000 and $9,869,000, 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.
As a result of adopting the provisions of FAS 114, insubstance foreclosed real estate (ISORE) and insubstance foreclosed other assets are now classified as nonaccruing loans. ISORE totaling $67,000,000 and insubstance foreclosed other assets totaling $3,200,000 at December 31, 1994 have been reclassified to loans in the consolidated balance sheet to reflect consistent presentation.
The Company identified impaired loans as defined by FAS 114 totaling $321,919,000 at December 31, 1995, of which $116,661,000 had specific loan loss allowance of $61,159,000. All impaired loans are classified as nonaccruing. The average recorded investment in such impaired loans during 1995 was $415,691,000. No interest income was recognized on impaired loans during 1995.
The Company has loans outstanding to certain nonemployee directors and to certain entities in which a director is a general partner or has a 10% or more ownership. The loans were made in the ordinary course of business 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 or present other unfavorable features. The aggregate amount of such loans does not exceed 5% of shareholders' equity at December 31, 1995 and 1994.
Note 6. Allowance for Loan Losses
Note 5 provides information on impaired loans as defined by FAS 114 and the related specific loan loss allowance. The allowance did not change as a result of adopting FAS 114 and FAS 118.
Note 7. Mortgage Servicing Rights
The Company services mortgages for others. The unpaid balances of these loans were $6.5 billion, $6.9 billion and $7.3 billion at December 31, 1995, 1994, and 1993, respectively.
The MSRs at December 31, 1995 were estimated to have a market value of $65 million. The carrying value of MSRs is periodically evaluated in relation to the estimated future net servicing revenue. The evaluation of estimated future net servicing revenue is based on a discounted and disaggregated methodology incorporating prepayment speeds based on the published security dealer estimates and other assumptions. At December 31, 1995, the carrying value of both PMSRs and EMSRs was below the estimated future net servicing revenue. Amortization and writedowns related to MSRs was $17 million, $16 million and $259 million for the years 1995, 1994 and 1993, respectively.
The Company is required to adopt Statement of Financial Accounting Standards No. 122, Accounting for Mortgage Servicing Rights (FAS 122), effective January 1, 1996. FAS 122 requires that a mortgage banking enterprise recognize as separate assets the rights to service mortgage loans for others, however those servicing rights are acquired. FAS 122 also introduces the concept of evaluating impairment in servicing rights based on fair value. The Company does not expect that the adoption of FAS 122 will have a material effect on its financial position or results of operation.
Note 8. Short-Term Borrowings
At December 31, 1995, the Company had unused lines of credit with HSBC aggregating $100,000,000. These lines of credit do not require compensating balance arrangements and commitment fees are not significant. Outstanding domestic commercial paper borrowings were $276,590,000 and $226,152,000 at December 31, 1995 and 1994, respectively.
Note 9. Income Taxes
Effective January 1, 1993, the Company prospectively adopted Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (FAS 109). Total income tax expense (benefit) for the years ended December 31, 1995, 1994 and 1993 was allocated as follows including the deferred Federal income tax benefit of $40,000,000 reflected as the cumulative effect at January 1, 1993, of the change in accounting for income taxes.
The following table is an analysis of the difference between effective rates based on the total income tax provision attributable to income from operations and the statutory U.S. Federal income tax rate.
During 1995, gross deferred tax assets declined by $45,605,000 and deferred tax liabilities increased by $11,999,000. These changes were offset by a decrease of $105,779,000 in the valuation allowance, resulting in an increase of $48,175,000 in the net deferred tax asset. The recognition of the $88,175,000 net deferred tax asset at December 31, 1995 was based principally on the forecast that taxable income in 1996 would be sufficient to fully utilize the Federal net operating loss carryforward.
Note 10. Long-Term Debt
Debt issued by Marine Midland Bank or its subsidiaries excludes a floating rate note payable to the Company of $100,000,000 due 2000.
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 respective issues. Interest rates on the floating notes in effect at December 31, 1995 are shown in parentheses.
At maturity, the floating rate subordinated capital notes due 1999 and the 8 5/8% subordinated capital notes due 1997 will be exchanged by the Company for capital securities of the Company, or at the Company's option, the principal amount may be paid from funds designated by the Board of Governors of the Federal Reserve System as available for the retirement or redemption of the notes.
The floating rate subordinated capital notes due 1996 issued by the Bank are to be purchased by the Company at maturity for consideration consisting of (i) cash equal to any net proceeds of the sale of capital securities, (ii) capital securities of the Company having a market value equal to the principal amount of the notes, or (iii) a combination thereof.
Scheduled maturities for the debt, excluding obligations under capital leases, over the next five years are as follows: 1996, $125,052,000; 1997, $125,057,000; 1998, $63,000; 1999, $100,069,000; and 2000, $200,011,000. Maturities for obligations under capital leases are reported in Note 17, Commitments and Contingent Liabilities.
Note 11. Preferred Stock
The $5.50 cumulative preferred stock has a stated value and a liquidation value of $100 per share and is redeemable at the election of the Company at $100 per share.
The adjustable rate cumulative preferred stock has a liquidation preference of $50 per share. The dividend rate is determined quarterly and is based on a formula which considers certain short- and long-term interest rates. The dividend rate per annum for any dividend period will not be less than 6% nor greater than 12%. This stock is redeemable at the option of the Company at $50 per share.
Note 12. Common Stock
All of the common stock of the Company is owned by HSBC Holdings B.V. Common shares authorized and issued are 1,100 and 1,001, respectively, with a par value of $5.00.
Note 13. 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 would exceed the net profits for that year, combined with the retained profits for the two preceding years. Under a separate restriction, payment of dividends are 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 and in the process of collection. These rules currently restrict the Bank from paying dividends to the Company as of December 31, 1995.
Restrictions on the Company's ability to pay common dividends are contained in its Certificate of Incorporation. Under the covenant, the aggregate amount of all common dividends, distributions and payments declared or made after December 31, 1963 cannot exceed an amount computed under a formula set forth in the certificate. As of December 31, 1995, the amount available under the formula exceeded such payments since December 31, 1963 by $1.5 billion.
Note 14. Transactions with Principal Shareholder
The Company's common stock is owned by HSBC Holdings B.V., 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, 1995 and 1994 assets of $537,382,000 and $358,732,000, respectively, and liabilities of $1,796,463,000 and $1,731,223,000, respectively, related to such transactions with the HSBC Group were included in the Company's balance sheet. In anticipation of the merger transaction
described in Note 1, HSBC transferred $1 billion to the Company in December 1994. These funds were used by Concord to extinguish its debt payable to nonaffiliated parties prior to January 1, 1995. Borrowings from HSBC, included in other short-term borrowings on the balance sheet, were $745,500,000 at December 31, 1995.
Interest rate forward and futures contracts and interest rate swap contracts entered into with the HSBC Group are used primarily as an asset and liability management tool to manage interest rate risk. At December 31, 1995 and 1994 the notional value of these contracts with members of the HSBC Group were $17,302,744,000 and $15,216,960,000, 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, 1995 and 1994, outstanding extensions of credit secured by eligible collateral were $362,406,000 and $99,428,000, respectively.
Note 15. Employee Benefit Plans
The Company, the Bank and certain other subsidiaries maintain a noncontributory pension plan covering substantially all of their employees. Certain other HSBC subsidiaries participate in this plan. Benefits under the plan are based on age, years of service and employee's compensation during the last five years of employment. The following table sets forth the plan's funded status.
Accrued pension cost at December 31, 1995 and December 31, 1994, includes $460,000 and $545,000, respectively, and net pension expense includes $905,000 for 1995 and $696,000 for 1994 and 1993 recognized in the financial statements of other HSBC subsidiaries.
The Company 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 January 1, 1993 will absorb a portion of the cost of these benefits. Employees hired after this same date are not eligible for these benefits. A premium cap has been established for the Company's share of retiree medical costs.
For measurement purposes, the health care cost trend rate was assumed initially decreasing 1% per year to increases of 7% per year in the year 2002. The health care cost trend rate assumption has an effect on the amounts
reported. For example, increasing the assumed health care cost trend rates by 1% point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1995 by $1,124,000 and the aggregate of the interest cost and service cost components of the net periodic cost by $104,000. The amortization of the initial liability of $66,064,000 over 20 years beginning January 1, 1993 is reflected in the amortization of unrecognized transition obligation. The initial liability represented an accumulated postretirement benefit obligation of $43,987,000 for current retirees and $22,077,000 for active employees based on a weighted-average discount rate of 8.25%.
During 1994, the Company reflected the expense impact of a voluntary retirement program. Based on Statement of Financial Accounting Standards No. 88, Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination of Benefits, the Company recorded $19,950,000 for specific termination benefits relating to pension payments in operating expenses. The Company also recorded an additional $393,000 expense relating to retiree health and life insurance as a result of this program.
Effective in 1994, the Company adopted Statement of Financial Accounting Standards No. 112, Employers' Accounting for Postemployment Benefits (FAS 112) which requires recognition of the cost of benefits provided to former or inactive employees after employment but before retirement on an accrual basis, rather than expensing such costs when paid. Since the Company was substantially in compliance with the provisions of FAS 112, the adoption of this statement had an immaterial impact on 1994 earnings.
Note 16. International Operations
International activities are defined as those conducted with non-U.S. domiciled customers. 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 and their branches are grouped by the location of the head office of the foreign bank. Investments and acceptances are distributed on the basis of the location of the issuers or borrowers. The following tables summarize the Company's international activities.
Total international assets averaged $1,555,000,000, $1,729,000,000 and $1,924,000,000, or 8.4%, 9.6% and 10.4% of total average assets, during 1995, 1994 and 1993, respectively. Total international liabilities averaged $1,433,000,000, $1,597,000,000 and $1,800,000,000, or 8.4%, 9.6% and 10.5% of total average liabilities, during 1995, 1994 and 1993, respectively.
Interest and fee related income on international assets is distributed geographically on the same basis as the related asset. Other international operating income is distributed to the geographic area where the service or operation is performed. Included in consolidated other income are foreign currency exchange gains of $3,845,000, $3,625,000 and $7,282,000 for 1995, 1994 and 1993, respectively.
In order to arrive at income before taxes and change in accounting by geographic areas, various allocations, some of which are subjective by necessity, have been made. In addition to estimating a provision for loan losses, allocations of indirect expenses and administrative overhead are made among areas to best reflect services provided and a charge or credit is made at market rates for use of funds after consideration has been given for the use of capital. Taxes are estimated for international operations and are allocated geographically in proportion to income before taxes.
Note 17. Commitments and Contingent Liabilities
At December 31, 1995 securities, loans and other assets carried in the consolidated balance sheets at $1,198,480,000 were pledged as collateral for borrowings, to secure governmental and trust deposits and for other purposes.
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. Minimum future rental commitments on leases in effect at December 3l, l995 were:
Operating expenses include rental expense, net of sublease rentals, of $36,608,000, $33,832,000 and $42,301,000 in 1995, 1994 and 1993, respectively.
The Company and its subsidiaries are defendants in a number of legal proceedings arising out of, and incidental to, their businesses. Management of the Company, based on its review with counsel of the development of these matters to date, is of the opinion that the ultimate resolution of these pending proceedings will not have a material adverse effect on the business or financial position of the Company.
Note 18. 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. The contract or notional amount of those instruments expresses the extent of involvement the Company has in particular classes of financial instruments. 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.
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 does not anticipate any material losses as a result of these transactions.
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 transactions at current interest and exchange rates. Based on this measurement, $118,293,000 was at risk at December 31, 1995. See Note 19 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. The Company generally does not require collateral or other security to support these financial instruments.
Standby letters of credit and guarantees have been reduced by $56,567,000 and $44,966,000 at December 31, 1995 and 1994, respectively, which represent the amounts participated to other institutions. Maturities of guarantees for certain debt obligations of borrowers range from 1996 to 2015. Fees received are generally recognized as revenue over the life of the guarantee.
Foreign exchange contracts represent the gross amount of contracts to purchase and sell foreign currencies, and do not consider the extent to which offsets may exist.
Note 19. Derivative Financial Instruments
As principally an end-user of off-balance sheet financial instruments, the Company uses various derivative products to manage its overall interest rate risk by reducing the risk associated with changes in the income stream of certain on-balance sheet assets. The Company also maintains various derivatives in its trading and available for sale securities portfolio to offset risk associated with changes in market value of the related assets, and to satisfy the foreign currency requirements of customers.
The derivative instrument portfolios are actively managed in response to changes in overall and specific balance sheet positions, cash requirements, expectations of future interest rates, market environments and business strategies. Associated credit risk is controlled through the establishment and monitoring of approved limits in derivative positions. Credit risk is also mitigated by the fact that almost all derivative contracts are executed with members of the HSBC group, and such contracts are subject to enforceable master netting agreements.
Risk management activities - Through the normal course of operations, the Company is subject to the risk of interest rate fluctuations to the extent that interest earning assets and interest bearing liabilities mature or reprice at different times or by differing amounts. The Company's risk management activities are designed to optimize net interest income within ranges of interest rate risk that management considers acceptable. Currently, the Company conducts its risk management activities within the context of an asset-sensitive balance sheet position. This asset-sensitive position, while improving net interest margin when interest rates rise and assets are repricing to higher rates in advance of liabilities, negatively impacts margin when interest rates are falling. At December 31, 1995, interest rate swaps included pay variable/receive fixed positions of $6,122,000,000, pay fixed/receive variable positions of $5,699,000,000 and pay variable/receive variable positions of $870,000,000.
The Company uses interest rate swaps and forward rate agreements in its risk management activities which are linked as hedges of various on-balance sheet assets. As net interest margins decrease as a result of decreases in interest rates, cash flows from the derivative contracts will increase to replace a portion of the lost margins. Conversely, as net interest margins improve as interest rates rise, amounts due under the derivative contracts increase to dampen the positive effect of rate increases.
Interest rate risk is measured through a combination of various simulation modeling techniques and repricing analyses.
At December 31, 1995, derivative contracts with a notional value of $9,410,000,000 and unrecognized fair value loss of $2,847,000 were being effectively utilized to hedge interest rate risk associated with certain residential mortgage assets. In addition, $6,531,000,000 in notional value contracts, with an unrecognized loss of $2,613,000 were being utilized to hedge interest rate risk associated with certain commercial loan assets. The Company also has $155,750,000 in notional value contracts with an unrecognized fair value gain of $857,000 being utilized to hedge risk associated with mortgage servicing rights. Further $135,818,000 in notional value contracts with an unrecognized fair value gain of $17,000 were entered into to facilitate the needs of certain customers and $525,300,000 in notional value of derivative contracts with a fair value loss of $6,066,000 are specifically linked to securities reported as available for sale.
For those assets reported on an historical cost basis, risk management positions are not marked to current market value, rather, cash flows and/or gains and losses realized are accrued and/or amortized as an adjustment to the interest income generated by the corresponding specific asset position.
For investment securities reported as available for sale, the mark to market of the related derivative contacts are considered a component of the fair value of the securities they are linked to for purposes of determining the adjustment to shareholders' equity that results pursuant to the valuation of these instruments.
Trading activities - The Company deploys excess liquidity by maintaining active trading positions in a variety of highly-liquid debt instruments including U.S. Government obligations, non-high risk mortgage and asset-backed and other securities for the purpose of generating income. The trading portfolio is managed to realize profits from short-term price movements associated with holding high credit quality securities and associated off- balance sheet derivative instruments.
The majority of derivative instruments held in the trading portfolio are utilized to hedge market and interest rate risk associated with the on-balance sheet cash instruments they are linked to. That is, changes in value of cash instruments are effectively offset by changes in value of the related derivative to the extent the on-balance sheet positions are hedged. The Company had no speculative derivative positions at December 31, 1995.
The Company's derivative trading positions, which are currently limited to interest rate swaps, exchange traded forwards, futures and open foreign
exchange contracts, are subject to interest rate risk, maturity and credit exposure limits. Stop loss limits have been imposed on all trading positions, including derivatives, to mitigate exposure to price movements.
Derivative trading positions are marked to market with gains and losses recorded as a component of net trading revenues. Generally, as individual trading assets are sold, the corresponding derivative positions are liquidated and gains and losses realized.
Foreign exchange trading activities - The Company maintains open positions in various foreign exchange contracts, principally to accommodate customer demands for specific currencies. Foreign currencies are purchased and sold on a spot basis, with settlement occurring within a two day period. Addition- ally, certain forward purchase and sale agreements are entered into in order to match customer requests with settlement requirements associated with foreign markets. The Company also maintains a limited number of open positions.
Approximately 75% of the contracts outstanding are denominated in major currencies. All open foreign exchange contracts are marked to market on a daily basis with gains and losses recorded as a component of net trading revenues.
Relating to certain contracts, the Company records unrealized gains as assets and unrealized losses as liabilities on the balance sheet. Offsetting of unrealized gains and losses is recognized for multiple contracts executed with the same counterparty if a valid right and intent to set off exists. The majority of the Company's arrangements are subject to legally enforceable master netting agreements with affiliated companies which provide for the right of set off.
Note 20. 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. Although the Company actively participates in lending activity throughout the United States and on a limited basis abroad, credit risk is concentrated in the Northeastern United States. The ability of individual borrowers to repay is 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.
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 in support of on- and off-balance sheet transactions, when it is deemed appropriate. Varying degrees and types of collateral are secured dependent upon management's credit evaluation.
Note 21. 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, determined on a basis consistent with the requirements as outlined in Financial Accounting Standards No. 107, Disclosures About Fair Value of Financial Instruments (FAS 107). To the extent possible, these values have been determined by reference to current market quotations. In those instances where market quotes are not available, fair values have been estimated by management based upon quoted prices for financial instruments with similar characteristics or on reasonable valuation techniques such as present value analyses using appropriate discount rates and adjustments for associated credit risk. The Company has employed
the following methods and assumptions 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, carrying value is considered to be equal to fair value.
Securities and trading assets - For securities, 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 calculated. Depending upon the type of loan involved, maturity assumptions have been based on either contractual or expected maturity.
Pursuant to the valuation methodology, 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 performing the present value calculation.
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.
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.
The portion of the allowance attributable to nonperforming loans has been deducted from carrying value to arrive at an estimate of fair value for nonperforming loans.
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 of core deposits and credit card receivables. 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 other types of 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 on-balance sheet financial instruments. Fair values have been determined on a basis consistent with the requirements of FAS 107 and do not necessarily represent the amount that would be realized upon their liquidation.
The above table excludes $155,750,000 notional value interest rate floors with a fair value of $857,000 associated with mortgage servicing rights and $135,818,000 of notional value customer facilitation interest rate swaps with a fair value of $17,000 which are outside of the scope required in this footnote.
The amounts reported for 1995 include the carrying value and fair value of derivatives used for asset-liability management activities. Derivatives associated with loans are hedging interest rate risk on certain variable rate commercial loans and fixed rate residential mortgage assets. The fair value of the related derivatives hedging the market value of securities available for sale is included in determining the net unrealized gain on securities reported as a separate component of shareholders' equity.
In 1994, the Company did not disclose the linkage between on-balance sheet assets carried at historical cost and the related derivative contracts even though these contracts were effectively hedging the associated interest rate risk. The carrying value of derivatives used for asset-liability management was included in other assets and other liabilities.
The fair value of derivative financial instruments is disclosed in Note 19, Derivative Financial Instruments.
The notional amount of off-balance sheet commitments to extend credit, standby letters of credit and financial guarantees, is considered equal to fair value. Due to the uncertainty involved in attempting to assess the likelihood and timing of a commitment being drawn upon, coupled with lack of an established market and the wide diversity of fee structures, the Company does not believe it is meaningful to provide an estimate of fair value that differs from the notional value of the commitment. Further detail with respect to off-balance sheet financial instruments is provided in Note 18, Financial Instruments With Off-Balance Sheet Risk.
The Bank is subject to legal restrictions on certain transactions with its nonbank affiliates in addition to the restrictions on the payment of dividends by the Bank to the Company (see Note 13). Restricted net assets of consolidated subsidiaries were $1,645,364,000 at December 31, 1995.
Item 9.
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 1995.
PART III
Item 10.
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. The information includes principal occupation, age, the year first elected a director of the Company, and other directorships. There are no family relationships among the directors.
John R. H. Bond, age 54, Group Chief Executive Officer of HSBC since 1993. Formerly President and Chief Executive Officer of the Company and the Bank since 1991. Previously Executive Director Banking, HongkongBank from 1990 to 1991 and Executive Director Americas from 1988 to 1990. Mr. Bond is Chairman of Hongkong Bank of Canada and a director of HSBC, Hang Seng Bank Limited, HongkongBank, Midland Bank plc, British Steel plc, the London Stock Exchange, Saudi British Bank, Eurorail CTRL Limited and VISA International. Elected in 1987.
James H. Cleave, age 53, President and Chief Executive Officer of the Company and the Bank since 1992. Formerly Executive Director from June 1992 through December 1992. Previously Director, President and Chief Executive Officer of Hongkong Bank of Canada since 1987. Mr. Cleave is also a director of Hongkong Bank of Canada, HSBC Markets, Inc., HSBC Holdings B.V., and Wells Fargo HSBC Trade Bank, N.A., and he is a member of the Executive Committee of HSBC. Elected in 1991.
William R. P. Dalton, age 52, President and Chief Executive Officer of Hongkong Bank of Canada since 1992 and a director since 1987. Appointed Chief Operating Officer Hongkong Bank of Canada in 1987. Joined the HSBC Group in 1980 as an officer of Wardley Canada Limited, which converted to the Hongkong Bank of Canada in 1981. Elected January 1, 1996.
Northrup R. Knox, age 67, Chairman of the Company and the Bank since 1988. Formerly President, Niagara Frontier Hockey Corporation, professional hockey team. Mr. Knox is a director of HSBC. He is President and a director of The Seymour H. Knox Foundation, Inc. and Vice President of The Buffalo Fine Arts Academy. Elected in 1973.
Sir William Purves, age 64, Chairman, HSBC. Formerly Chairman and Chief Executive Officer, HSBC, from 1990 to 1992. Formerly, Chairman and Chief Executive Officer, Deputy Chairman, Executive Director Banking and General Manager International, HongkongBank. Sir Purves is Chairman of The British Bank of the Middle East and Midland Bank plc. He is a director of HongkongBank, The "Shell" Transport and Trading Company, plc. and The East Asiatic Company Ltd. Elected in 1984.
Directors' Compensation
Directors who are employees of the Company, HSBC or other group affiliates do not receive any compensation for their services as Company directors. As nonexecutive Chairman of the Company and the Bank, Mr. Knox, the only nonemployee director of the Company, receives an annual fee of $50,000 in lieu of the current nonemployee $20,000 annual retainer and attendance fees. The Company has standard arrangements pursuant to which a nonemployee director may defer all or part of their fees.
The Directors' Retirement Plan covers nonemployee directors of the Company, except those serving as directors at the request of HSBC. Mr. Knox is currently the only director participating in this Plan. Upon retirement from the Board, Mr. Knox will receive benefit payments for a period of ten years. Mr. Knox's annual benefit will be 100 percent of the annual retainer for nonemployee directors that is in effect at the last Board meeting attended. The retirement benefit for Mr. Knox is fully vested and will be paid out over the ten year period to his beneficiary in the event of death before benefit payments commence, and for the balance of the period if death occurs after retirement. The Plan is unfunded and payment will be made out of the general funds of the Company or the Bank.
James H. Cleave joined the Bank and the Company as Executive Director in 1992. Mr. Cleave had been Director, President and CEO of Hongkong Bank of Canada since 1987 and a director of the Company since 1991.
Colin Bamford joined the Company as Senior Executive Vice President in November 1995. Mr. Bamford had been Chief Executive Officer, HongkongBank Japan since 1990.
Kerry B. Alberti joined the Bank and the Company as Senior Executive Vice President, Investment Services in 1993. Mr. Alberti had been Managing Director, Midland Financial Services, Midland Bank plc and an employee of Midland Bank since 1988.
K. Stewart Armstrong joined the Bank and the Company as Executive Vice President and Group Audit Executive, USA in 1994. Mr. Armstrong had been Vice President and Chief Auditor of Hongkong Bank of Canada since 1988.
Gerald A. Ronning joined the Bank and the Company as Executive Vice President & Controller in 1991. Mr. Ronning had been Senior Vice President, Chief Financial Officer and Corporate Controller, Goldome.
All other executive officers have served the Company or the Bank in executive capacities for more than five years. There are no family relationships among the above officers.
Item 11.
Item 11. Executive Compensation
The following table sets forth information as to the compensation earned through December 31, 1995 by James H. Cleave, President and Chief Executive Officer and by the four most highly compensated officers of the Company and the Bank. Three executive officers have been seconded to the Bank by HSBC, which pays their salary and other benefits pursuant to arrangements applicable to international HSBC officers. The three officers are: I.M. Burnett, Chief Operating Officer; John A.D. Hamilton, Executive Vice President, Information Technology; and Eric W. Gill, Executive Vice President and Regional President, Central Region. The Bank reimbursed HSBC for the salary and certain benefits paid to these officers and that reimbursement amounted to $1,731,730.
Other Annual Compensation for Mr. Cleave includes $109,917, $115,802 and $125,492 for 1995, 1994 and 1993, respectively, received for housing allowance together with miscellaneous other benefit payments. Other Annual Compensation for the other named executives includes health and insurance benefits.
Amounts reported as All Other Compensation for 1995 include the Company's contributions to its 401(K) plan 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. HSBC secondees to the Company do not participate in these benefit plans. Reimbursed moving expenses are included in All Other Compensation for Mr. Alberti in 1993 and for Mr. Davidson in 1994 and 1993.
HSBC has granted options on HSBC common stock to the named executives. Options were granted on March 7, 1995, exercisable beginning March 7, 1998 and expiring March 7, 2005.
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.
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 Pension Plan includes regular basic earnings (including salary reduction contributions to the 401(K) plan) and general staff bonuses, but not other 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, 1995, the individuals listed in the Summary Compensation Table have total years of credited service in determining benefits payable under the plans as follows: Mr. Cleave, 7.2; Mr. Butcher, 13.7; Mr. Alberti, 10.0; Mr. Davidson, 4.8; and Mr. Toohey, 14.5. HSBC secondees to the Company do not participate in the retirement plans.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Principal Holder of Securities The Company is 100 percent owned by HSBC Holdings B.V. HSBC Holdings B.V. is an indirect wholly owned subsidiary of HSBC Holdings plc.
Messrs. Purves, Bond and Knox are directors of HSBC. Messrs. Purves and Bond are officers of HSBC.
None of the directors or executive officers owned any of the Company's common or preferred stock at December 31, 1995.
Item 13.
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 1995. 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.
PART I V
Item 14.
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 Americas, Inc.: Consolidated Balance Sheet Consolidated Statement of Income Consolidated Statement of Changes in Shareholders' Equity Consolidated Statement of Cash Flows Marine Midland Bank: 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 all Indentures and other Instruments Defining the Rights of Security Holders 22 Subsidiaries of the Registrant The Company's only significant subsidiary, as defined, is Marine Midland Bank, a state bank organized under the laws of New York State.
B
Reports on Form 8-K A Current Report on Form 8-K dated October 2, 1995, was filed with the Securities and Exchange Commission on October 2, 1995, reporting that the Company had changed its name from Marine Midland Banks, Inc. to HSBC Americas, Inc.
S I G N A T U R E S
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 Americas, Inc. Registrant
/s/ Philip S. Toohey Philip S. Toohey Legal Advisor, Americas and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on February 29, 1996 by the following persons on behalf of the Registrant and in the capacities indicated:
/s/ Robert M. Butcher Robert M. Butcher Executive Vice President & Chief Financial Officer (Principal Financial Officer)
/s/ Gerald A. Ronning Gerald A. Ronning Executive Vice President & Controller (Principal Accounting Officer)
Northrup R. Knox* Chairman of the Board James H. Cleave* Director, President & Chief Executive Officer John R. H. Bond* Director William R. P. Dalton* Director William Purves* Director
* /s/ Philip S. Toohey Philip S. Toohey Attorney-in-fact
RESTATED CERTIFICATE OF INCORPORATION
OF
HSBC AMERICAS, INC.
HSBC Americas, Inc. a corporation organized and existing under the laws of the State of Delaware (the "Corporation"), hereby certifies as follows:
1. The name of the Corporation is HSBC Americas, Inc. HSBC Americas, Inc. was originally incorporated under the name of Marine Midland Corporation, and the original Certificate of Incorporation of the Corporation was filed with the Secretary of State of the State of Delaware on September 23, 1929.
2. Pursuant to Sections 242 and 245 of the General Corporation Law of the State of Delaware, this Restated Certificate of Incorporation restates and integrates and also further amends the provisions of the Certificate of Incorporation of this Corporation, and has been duly adopted in accordance with Sections 228, 242, and 245 of the General Corporation Law of the State of Delaware pursuant to a written consent adopted by the sole holder of all outstanding shares of common stock, par value $5.00 per share, of the Corporation.
3. The text of the Restated Certificate of Incorporation as heretofore amended or supplemented is hereby restated and further amended to read in its entirety as follows:
First: The name of this corporation is HSBC Americas, Inc.
Second: Its registered office in the State of Delaware is located at 32 Loockerman Square, Suite L-100, Dover, Kent County, Delaware. The name and address of its registered agent is The Prentice-Hall Corporation System, Inc., 32 Loockerman Square, Suite L-100, Dover, Kent County, Delaware 19901.
Third: The nature of the business and the objects and purposes proposed to be transacted, promoted and carried on, are to do any or all of the things herein mentioned as fully and to the same extent as natural persons might or could do in any part of the world as set forth below. (Wherever used in this Article Third, the expression "evidence of indebtedness" or "evidences of indebtedness" shall mean and include, without limiting its generality, any and all bonds, debentures, notes, coupons, mortgages, commercial paper and/or any other instruments evidencing indebtedness, however created, issued or granted and whether fully paid or subject to further payments; and the expression "certificate of interest," or "certificates of interest" shall mean and include, without limiting its generality, any and all certificates or shares of stock, scrip, interim receipts, participation certificates, voting trust certificates, subscription warrants, option warrants and/or any other instruments evidencing interest in share capital or other property, however created, issued or granted and whether fully paid or subject to further payments.)
(1) To acquire by purchase, subscription, contract or otherwise, hold for investment or otherwise, own, sell, exchange, mortgage, pledge or otherwise dispose of, and generally deal in and with evidences of indebtedness and/or certificates of interest issued or created in any and all parts of the world by banks, trust companies, financial institutions of every kind and description, corporations, associations, partnerships, firms, trustees, syndicates, individuals, governments, states, municipalities or other political or governmental divisions or subdivisions, or by any combinations, organizations or entities whatsoever, irrespective of their form or the name by which they may be described, and to issue in exchange therefor or in payment thereof, in any manner permitted by law, its own evidences of indebtedness and/or certificates of interest, or to make payment therefor by any other lawful means of payment whatsoever; and to exercise any and all of said powers, either on its own account, or with or as agent for other persons, firms, corporations or organizations.
(2) To receive, collect and dispose of interest, dividends and income upon, of and from any evidence of indebtedness or certificate of interest and any other property held or owned by it, and to exercise any and all rights, powers and privileges of individual ownership or interest in respect of any and all such evidences of indebtedness or certificates of interest, including the right to vote thereon for any and all purposes.
(3) To endorse or guarantee the payment of principal and/or interest or dividends upon, and to guarantee the performance of sinking fund or other obligations of, any evidences of indebtedness or certificates of interest, and to guarantee the performance of any of the contracts or other undertakings in which the corporation may otherwise be or become interested, of any corporation, association, partnership, firm, trustee, syndicate, individual, government, state, municipality or other political or governmental division or subdivision, domestic or foreign, in so far as may be permitted by law to a corporation of this character. (4) To enter into, make, perform and carry out or cancel and rescind contracts relating to or underwritings of evidences of indebtedness or certificates of interest, of any corporation, association, partnership, firm, trustee, syndicate, individual, government, state, municipality or other political or governmental division or subdivision, domestic or foreign, or of any combination, organization, or entity, domestic or foreign, and to act as manager of any underwriting or purchasing or selling syndicate.
(5) To lend money, whether or not secured by mortgages or other liens on real estate or personal property, and to negotiate and make, either as principal or broker or agent, contracts or other agreements in connection therewith.
(6) To borrow money with or without security, to make, accept, endorse, guarantee, execute and issue evidences of indebtedness and to secure the same by a mortgage, pledge, deed of trust, other lien or otherwise, upon all or any part of the property of the corporation, wherever situated.
(7) To act as agent or representative of individuals, firms and corporations, and as such to develop and extend the business interests of individuals, firms and corporations.
(8) To purchase, hold, sell and transfer the shares of its own capital stock, provided it shall not use its funds or property for the purchase of its own shares of capital stock when such use would cause any impairment of its capital, and provided that shares of its own capital stock belonging to it shall not be voted upon, directly or indirectly, but nothing in this subdivision shall be construed as limiting the exercise of the rights given by Section 243 of the General Corporation Law of the State of Delaware.
(9) To take, lease, purchase or otherwise acquire and to own, use, hold, sell, convey, lease, exchange, mortgage, improve, develop, cultivate and otherwise handle, deal in and dispose of real estate, real property and any interest or right therein.
(10) To purchase, manufacture, acquire, hold, own, mortgage, pledge, lease, sell, assign and transfer, and to invest, trade, deal in and with goods, wares, merchandise, patents, trade-marks, rights, privileges, franchises, grants and property of every kind and description; to carry on any of the above businesses or any other business connected therewith, wherever the same may be permitted by law, and to the same extent as the laws of this State will permit and as fully and with all the powers that the laws of this State confer upon corporations and organizations under the General Corporation Law of the State of Delaware.
(11) To acquire and take over as a going concern and/or carry on the business of any person, firm, association or corporation engaged in any business which this corporation is authorized to carry on.
(12) To render service, assistance, counsel and advice to any person, firm, association or corporation in the conduct of his or its business.
(13) To do all and everything necessary, suitable and proper for the accomplishment of any of the purposes or the attainment of any of the objects or the furtherance of any of the powers hereinbefore set forth, either as principal or agent, either alone or associated with other corporations or with firms or individuals, and either directly or indirectly through one or more subsidiary company or companies organized or utilized for the purpose, and to do any other act or acts, thing or things, incidental or pertaining to or growing out of, or connected with the aforesaid business, or powers, or any parts thereof, provided the same be not inconsistent with the law under which this corporation is organized.
(14) The business or purpose of the corporation is from time to time to do any one or more acts and things herein set forth; and it may conduct such business in all its branches or any part thereof either within or outside the State of Delaware, and in other states and territories and dependencies of the United States and in foreign countries.
The foregoing enumeration of specific powers shall not be deemed to limit or restrict in any manner the general powers of the corporation and the enjoyment and exercise thereof as conferred by the laws of the State of Delaware upon corporations formed under the General Corporation Law of said State, and the doing of any or all the things hereinbefore set forth to the same extent as natural persons might or could do; but this corporation shall not, by any implication or construction, be deemed to possess the power of issuing bills, notes, or other evidences of debt for circulation as money, or the power of carrying on the business of receiving deposits of money, or the business of buying gold and silver bullion or foreign coins.
Fourth: The total number of shares of all classes of stock which the Corporation shall have authority to issue is ten million, fifty thousand, two hundred, fifty-eight (10,050,258) shares of which forty-nine thousand, one hundred, fifty-eight (49,158) shares without par value are to be of a class designated Cumulative Preferred Stock, ten million (10,000,000) shares of the par value of $1.00 each are to be designated Preferred Stock and one thousand, one hundred (1,100) of the par value of $5.00 each are to be of a class designated Common Stock.
The designations and the voting powers, preferences, and relative, participating, optional and other special rights of the Cumulative Preferred Stock and the Common Stock, and the qualifications, limitations and restrictions thereof, are as follows:
1. Issue of Cumulative Preferred Stock in Series. The Cumulative Preferred Stock shall be issued from time to time in series as hereinafter provided. All shares of Cumulative Preferred Stock, regardless of series, shall be of equal rank with each other and shall be identical with each other in all respects except as provided in this Article Fourth; and the shares of Cumulative Preferred Stock of any one series shall be identical with each other in all respects except as to the dates from and after which dividends thereon shall be cumulative.
2. $5.50 Convertible Preferred Stock. There is hereby established a first series of Cumulative Preferred Stock, which shall consist (and shall not be increased to a number in excess) of 24,579 shares. Such first series shall have the designation, voting powers, preferences and rights, and the qualifications, limitations and restrictions thereof, which are set forth in this Article Fourth in respect of the Cumulative Preferred Stock of all series and in addition, the following:
(a) The designation of such first series of Cumulative Preferred Stock shall be "$5.50 Convertible Preferred Stock" (hereinafter called the $5.50 Preferred Stock).
(b) The dividend rate for the $5.50 Preferred Stock shall be $5.50 per share per annum, and the date from and after which dividends on each share of the $5.50 Preferred Stock shall be cumulative is the date of issue of the $5.50 Preferred Stock.
(c) The $5.50 Preferred Stock may not be redeemed prior to the fifth anniversary of the date of issue thereof. On and after such anniversary the $5.50 Preferred Stock shall be redeemable at the option of the corporation at the following respective redemption prices per share during the year commencing on the indicated anniversary of the above-mentioned date of issue:
Redemption Redemption Price Per Price Per Anniversary Share Anniversary Share Fifth . . . . .$105.00 Tenth . . . .$102.50 Sixth . . . . . 104.50 Eleventh . . 102.00 Seventh . . . . 104.00 Twelfth . . . 101.50 Eighth . . . . 103.50 Thirteenth . 101.00 Ninth . . . . . 103.00 Fourteenth . 100.50
and thereafter at the redemption price of $100.00 per share, plus, in each case, an amount equal to all accrued and unpaid dividends thereon to the date fixed for redemption.
(d) In the event of any liquidation, dissolution or winding up of the affairs of the corporation, the holders of the $5.50 Preferred Stock then outstanding shall be entitled to receive out of the assets of the corporation, before any distribution or payment shall be made to the holders of any junior stock, (i) if such liquidation, dissolution or winding up shall be voluntary, (A) prior to the second anniversary of the date of issue of the $5.50 Preferred Stock, $111.00 per share or (B) thereafter and prior to the fifth anniversary of the date of issue of the $5.50 Preferred Stock, $105.00 per share or (C) on or after such fifth anniversary, an amount equal to the redemption price set forth in paragraph (c) of this subdivision 2 then in effect, and (ii) if such liquidation, dissolution or winding up shall be involuntary, the amount of $100.00 per share, plus, in each case, an amount equal to all accrued and unpaid dividends thereon to the date fixed for payment of such distributive amounts.
(e) So long as any shares of the $5.50 Preferred Stock shall be outstanding, the corporation shall not, without the consent, given in writing or by resolution adopted at a meeting duly called for that purpose, of the holders of record of at least a majority of that number of shares of the $5.50 Preferred Stock then outstanding, reduce its capital in respect of the $5.50 Preferred Stock below an amount equal to $100 times the number of shares of the $5.50 Preferred Stock then outstanding.
3. Provisions Applicable to all Series of Cumulative Preferred Stock. The voting powers, preferences and rights, and the qualifications, limitations and restrictions thereof, applicable to the Cumulative Preferred Stock of all series, are as follows:
(a) Dividends on Cumulative Preferred Stock. The holders of the Cumulative Preferred Stock of each series shall be entitled to receive, in preference to the holders of any junior stock, when and as declared by the Board of Directors, but only out of net profits or net assets of the corporation legally available for the payment of dividends, cumulative cash dividends at the annual rate for such series fixed in this Article FOURTH, and no more, payable on the first days of January, April, July, and October in each year (such days being herein called "dividend payment dates" and the quarterly periods ending on such days being herein called "dividend periods"), to stockholders of record on the respective dates, which shall be the same dates for all series, fixed for the purpose by the Board of Directors in advance of payment of each particular dividend. The holders of shares of the Cumulative Preferred Stock shall not be entitled to receive any dividends thereon other than the dividends referred to in this paragraph (a).
No dividends shall be paid upon, or declared or set apart for, any share of Cumulative Preferred Stock of any series for any dividend period unless at the same time a like proportionate dividend for the same dividend period, ratably in proportion to the respective annual dividend rates fixed therefor, shall be paid upon, or declared and set apart for, all shares of Cumulative Preferred Stock of all series then issued and outstanding and entitled to receive such dividend.
(b) Dividends on Junior Stock. So long as any shares of the Cumulative Preferred Stock shall be outstanding, the corporation will not declare or pay any dividend on any junior stock (other than dividends payable solely in junior stock) or make any other distribution of any sort, either directly or indirectly, in respect of any junior stock or make any payment on account of the purchase, redemption or other acquisition of any junior stock, unless, at the date of such declaration in the case of a dividend or at the date of such distribution or other payment
(i) all cumulative dividends on the then outstanding shares of Cumulative Preferred Stock for all past dividend periods shall have been paid or declared and a sum sufficient for the payment thereof set apart; and
(ii) after giving effect, as if paid, to the proposed dividend, distribution or payment, the aggregate amount of all such dividends, distributions and payments declared or made after December 31, 1963 does not exceed the sum of
(A) Consolidated Net Operating Income from December 31, 1963 to such date of declaration, distribution or payment,
(B) the net proceeds to the corporation, valued where other than cash by the Board of Directors, from the issuance or sale after June 30, 1964 of any shares of junior stock and of any convertible securities (other than junior stock) which have been converted into junior stock, and
(C) $17,000,000. Subject to the foregoing provisions of this paragraph (b), such dividends (payable in cash, stock or otherwise) as may be determined by the Board of Directors may be declared and paid on any junior stock from time to time out of the net profits or net assets of the corporation legally available therefor, and the Cumulative Preferred Stock shall not be entitled to participate in any such dividends.
(c) Redemption of Cumulative Preferred Stock. Subject to the provisions of paragraph (d) of this subdivision 3, the corporation at its option (expressed by resolution of the Board of Directors) may (except as provided in subdivision 2 in respect of the $5.50 Preferred Stock) redeem the outstanding shares of Cumulative Preferred Stock, or of any series thereof, at any time in whole, or from time to time in part, upon notice duly given as hereinafter specified, at the applicable redemption price or prices for such shares fixed in subdivision 2 of this Article Fourth, plus, in each case, an amount equal to all accrued and unpaid dividends thereon to the date fixed for redemption. Notice of every such redemption of Cumulative Preferred Stock, in form approved by the Board of Directors, shall be given by mailing such notice not less than thirty nor more than sixty days prior to the date fixed for such redemption to each holder of record of shares so to be redeemed at his address as the same shall appear on the books of the corporation. In case of redemption of a part only of the Cumulative Preferred Stock of any series at the time outstanding, the redemption may be either pro rata or by lot, as determined by the Board of Directors. Subject to the foregoing, the Board of Directors shall have full power and authority to prescribe the manner in which the drawings by lot or the pro rata redemption shall be conducted and the terms and conditions upon which the Cumulative Preferred Stock shall be redeemed from time to time.
If any such notice of redemption shall have been duly given, then, from and after the date fixed in such notice as the redemption date (unless default be made by the corporation in providing funds for the payment of the redemption price, and accrued and unpaid dividends to the date fixed for redemption), notwithstanding that any certificate for shares so called for redemption shall not have been surrendered for cancellation, all shares so called for redemption shall no longer be deemed outstanding on and after such redemption date, and the right to receive dividends thereon and all other rights with respect to such shares shall forthwith on such redemption date cease and terminate, except only the right of the holders thereof to receive the amount payable on redemption thereof, without interest.
If any such notice of redemption shall have been duly given or if the corporation shall have given to the bank or trust company hereinafter referred to irrevocable written authorization promptly to give or complete such notice, and if on or before the redemption date specified therein the funds necessary for such redemption shall have been deposited by the corporation with a bank or trust company designated in such notice, doing business in the Borough of Manhattan, the City of New York, State of New York, and having a capital, surplus and undivided profits aggregating at least $5,000,000 according to its last published statement of condition, in trust for the pro rata benefit of the holders of the shares so called for redemption, then, notwithstanding that any certificate for shares so called for redemption shall not have been surrendered for cancellation, from and after the time of such deposit all shares so called for redemption shall no longer be deemed outstanding and all rights with respect to such shares shall forthwith cease and terminate, except only the right of the holders thereof to receive from such bank or trust company at any time after the time of such deposit the funds so deposited, without interest, and the right to exercise, before the date fixed for redemption, all privileges of conversion or exchange, if any, not theretofore expired. Any interest accrued on such funds shall be paid to the corporation from time to time. Any funds so deposited and unclaimed at the end of six years from such redemption date shall be repaid to the corporation, after which the holders of the shares so called for redemption shall look only to the corporation for payment thereof; provided that any funds so deposited which shall not be required for redemption because of the exercise of any privilege of conversion or exchange subsequent to the date of deposit shall be repaid to the corporation forthwith.
None of the shares of Cumulative Preferred Stock of any series redeemed pursuant to the foregoing provisions or converted into or exchanged for other shares of the corporation or purchased or otherwise acquired by the corporation shall be reissued, and the corporation may from time to time take such appropriate corporate action as may be necessary to eliminate such shares from its authorized capital stock.
(d) Limitation of Right to Redeem or Purchase Cumulative Preferred Stock. If and so long as all cumulative dividends on the outstanding shares of Cumulative Preferred Stock of all series for all past dividend periods shall not have been paid or declared and a sum sufficient for the payment thereof set apart, the corporation shall not redeem less than all of the Cumulative Preferred Stock at the time outstanding, and neither the corporation nor any subsidiary shall purchase or otherwise acquire for value any of the Cumulative Preferred Stock at the time outstanding unless such purchase or other acquisition shall be pursuant to tenders called for on at least twenty days' previous notice by mail to all the holders of record of the Cumulative Preferred Stock at their respective addresses as the same shall appear on the books of the corporation, and the shares so purchased or otherwise acquired shall be those tendered at the lowest prices pursuant to such call for tenders; provided, however, that if some, but less than all, of the shares tendered at a particular price are to be purchased or otherwise acquired pursuant to such call for tenders, the number of shares to be purchased or acquired from each holder who has tendered shares at such price shall be in the proportion which the number of shares he has tendered at such price bears to the total number of shares tendered at such price.
(e) Voting Rights. Except as otherwise provided by law and as otherwise provided in this Article Fourth, and subject to the provisions of the by-laws of the corporation, as from time to time amended, with respect to the closing of the transfer books and the fixing of a record date for the determination of stockholders entitled to vote, the holders of the Common Stock shall exclusively possess voting power for the election of directors and for all other purposes, and the holders of the Cumulative Preferred Stock shall have no voting power and shall not be entitled to any notice of any meeting of stockholders; provided, however, that if at the time of the giving of notice of any annual meeting of stockholders for the election of directors a default in preferred dividends, as hereinafter defined, shall exist, the holders of the Cumulative Preferred Stock, voting separately as a class and without regard to series, shall have the right at such annual meeting to elect two members of the Board of Directors but shall not be entitled to vote in the election of any of the other directors of the corporation, and the holders of the Common Stock, voting separately as a class, shall be entitled to elect the remaining members of the Board of Directors but shall not be entitled to vote in the election of the two directors of the corporation so to be elected by the holders of the Cumulative Preferred Stock. Any director elected by the holders of the Cumulative Preferred Stock, voting as a class as aforesaid, together with each director elected to fill a vacancy in the office of a Preferred Director as hereinafter provided (hereinafter called a "Preferred Director"), shall continue to serve as such director until the next annual meeting of stockholders and until his successor shall be elected and qualified, notwithstanding that prior to the end of such term a default in preferred dividends shall cease to exist. Any Preferred Director may be removed with or without cause by, and shall not be removed except by, the vote of the holders of the Cumulative Preferred Stock, voting separately as a class without regard to series, at a meeting of stockholders or at a meeting of the holders of shares of Cumulative Preferred Stock called for the purpose. So long as a default in preferred dividends shall exist (i) any vacancy in the office of a Preferred Director may, except as provided in the following clause (ii), be filled for the unexpired term by the remaining Preferred Director or, if there shall at the time be no Preferred Director in office, by the remaining members of the Board of Directors, and (ii) in the case of the removal of any Preferred Director, the vacancy may be filled for the unexpired term by the vote of the holders of the Cumulative Preferred Stock, voting separately as a class without regard to series, at the same meeting at which such removal shall be voted or at any subsequent meeting. So long as there is a Preferred Director in office (i) if there shall be an executive or similar committee of the Board of Directors, at least one Preferred Director shall be a member of such committee, (ii) notice of each special meeting of the Board of Directors shall be given to each Preferred Director not less than three days by mail or one day by telegraph or telephone prior to the meeting, and (iii) notice of each special meeting of the executive or similar committee of the Board of Directors, if any, shall be given to each Preferred Director who is a member thereof not less than three days by mail or one day by telegraph or telephone prior to the meeting. Preferred Directors need not be stockholders. For the purposes of this paragraph (e), a default in preferred dividends shall be deemed to have occurred whenever at the time of giving of notice of any annual meeting of stockholders for the election of directors the amount of accrued and unpaid dividends upon any shares of any series of the Cumulative Preferred Stock shall be equivalent to four quarterly dividends or more, and, having so occurred, such default in preferred dividends shall be deemed to exist thereafter until, but only until, all cumulative dividends on all shares of Cumulative Preferred Stock then outstanding, of each and every series, for all past dividend periods shall have been paid or declared and set apart for payment. Nothing herein contained shall be deemed to prevent an amendment of the by-laws of the corporation, in the manner therein provided, which shall increase the number of directors of the corporation so as to provide additional places on the Board of Directors for either one or both of the two directors so to be elected by the holders of the Cumulative Preferred Stock, or so as to increase the number of directors to be elected by the holders of the Common Stock, or to prevent any other change in the number of the directors of the corporation.
So long as a default in preferred dividends shall exist (i) the presence in person or by proxy of the holders of twenty- five percent of the outstanding shares of the Cumulative Preferred Stock, considered as a class without regard to series, shall be (except as provided above in respect of the filling of a vacancy caused by the removal of a Preferred Director) required to constitute a quorum of such class at any meeting of stockholders or at any meeting of the holders of shares of Cumulative Preferred Stock called for the purpose of electing a Preferred Director or Preferred Directors; provided, however, that a majority of the holders of the Cumulative Preferred Stock who are present in person or represented by proxy at any such meeting at which there shall be no quorum of such class shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, solely for the purpose of electing a Preferred Director or Preferred Directors at an adjourned session of such meeting at which there shall be a quorum of such class; and (ii) the presence in person or by proxy of the holders of a majority (or such lesser number as may at the time be specified in the by-laws of the corporation) of the outstanding shares of Common Stock shall be required to constitute a quorum of such class at any meeting of stockholders at which the holders of the Common Stock, voting as a class aforesaid, shall be entitled to vote for the election of directors of the corporation. No delay or failure by the holders of the Cumulative Preferred Stock to elect a Preferred Director shall invalidate the election of the members of the Board of Directors elected by the holders of the Common Stock. Holders of Cumulative Preferred Stock shall be entitled to notice of each meeting of stockholders at which they shall have the right to elect a Preferred Director, such notice to be mailed to such holders at least 10 days prior to such meeting.
Each stockholder entitled to vote at any particular time in accordance with the provisions of this Article Fourth shall have one vote for each share of stock held of record by him and at the time entitled to voting power.
(f) Restrictions on Certain Capital Changes. So long as any shares of the Cumulative Preferred Stock of any series shall be outstanding, the corporation shall not, without the consent, given in writing or by resolution adopted at a meeting duly called for that purpose, of the holders of record of at least two-thirds of the number of shares of the Cumulative Preferred Stock of all series then outstanding, considered as a class without regard to series,
(i) create or issue any shares of any new class of stock ranking prior to the Cumulative Preferred Stock or alter or change the designations or the voting powers, preferences or rights, or the qualifications, limitations or restrictions thereof, of the Cumulative Preferred Stock or of any series thereof; provided, however, that any such alteration or change of the designations or of the voting powers, preferences or rights, or the qualifications, limitations or restrictions thereof, of any particular series of the Cumulative Preferred Stock which does not affect the holders of the Cumulative Preferred Stock of any other series may be effected with the consent, given as aforesaid, of the holders of record of at least two-thirds of the number of shares of the particular series of Cumulative Preferred Stock affected by such alteration or change; and provided, further, that nothing in this clause (i) shall require the vote or consent of the holders of the Cumulative Preferred Stock for or in respect of the creation or increase in the authorized number of shares of any junior stock or any stock (other than the Cumulative Preferred Stock) ranking on a parity with the Cumulative Preferred Stock; or
(ii) create or issue any shares of any new class of stock ranking on a parity with the Cumulative Preferred Stock, unless, after giving effect to the issue of such shares, (A) the sum of (1) the aggregate par value (or stated value in the case of shares without par value) of all outstanding shares of stock of the corporation, (2) the aggregate amount of the surplus (whether capital, earned or other) and the contingency or other surplus reserves of the corporation, all as determined in accordance with generally accepted accounting principles applicable to banks and bank holding companies, and (3) the sum of the combined reserves for possible loan losses and other valuation reserves of the constituent banks, as determined in accordance with generally accepted accounting principles applicable to banks, will be at least 250% of the aggregate par value (or stated value in the case of shares without par value) of all shares of the Cumulative Preferred Stock and all shares of stock of the corporation of every other class ranking prior to or on a parity with the Cumulative Preferred Stock, and (B) the Consolidated Net Operating Income earned during the three calendar years immediately preceding such issue shall have averaged at least four times the annual dividend requirements on all shares of Cumulative Preferred Stock and all shares of stock of the corporation of every other class ranking prior to or on a parity with the Cumulative Preferred Stock which will be outstanding.
(g) Rights on Liquidation. In the event of any liquidation, dissolution or winding up of the affairs of the corporation, the holders of the Cumulative Preferred Stock of each series shall be entitled to receive out of the assets of the corporation, before any distribution or payment shall be made to the holders of any junior stock, the amount per share specified in this Article FOURTH with respect thereto, and the holders of the junior stock shall be entitled, to the exclusion of the holders of the Cumulative Preferred Stock of any and all series, to share ratably in all the remaining assets of the corporation in accordance with their respective rights. If upon any liquidation, dissolution or winding up of the affairs of the corporation the assets available for distribution shall be insufficient to pay the holders of all outstanding shares of Cumulative Preferred Stock the full amounts to which they respectively shall be entitled, the holders of shares of Cumulative Preferred Stock of all series shall share ratably in any distribution of assets in accordance with the sums which would be payable on such distribution if all sums payable were paid in full. Neither the consolidation or merger of the corporation with or into any other corporation, nor any sale, lease or conveyance of all or any part of the property or business of the corporation, shall be deemed to be a liquidation, dissolution or winding up of the affairs of the corporation within the meaning of this paragraph (g).
(h) Preemptive Rights. No holder of Cumulative Preferred Stock of any series shall be entitled as such, as a matter of right, to subscribe for or purchase any part of any new or additional issue of stock of any class whatsoever, or of obligations or other securities convertible into, or exchangeable for, any stock of any class whatsoever, whether now or hereafter authorized and whether issued for cash or other consideration or by way of dividend.
4. Definitions. For all purposes of this Article Fourth:
The term "accrued and unpaid dividends" when used with reference to any share of any series of the Cumulative Preferred Stock shall mean (whether or not in any dividend period there shall have been net profit or net assets of the corporation legally available for the payment of dividends) an amount computed at the annual dividend rate for the shares of such series from the date on which dividends on such share become cumulative to and including the date to which such dividends are to be accrued, less the aggregate amount of all dividends theretofore paid on such share; but no interest shall be payable upon any arrearages.
The term "Board of Directors" shall mean the Board of Directors of the corporation.
The term "Consolidated Net Operating Income" shall mean the consolidated net operating income of the corporation, the constituent banks and such subsidiaries the accounts of which are in fact consolidated with those of the corporation in its annual report to stockholders, all as determined from time to time in accordance with generally accepted accounting principles applicable to banks and bank holding companies.
The term "constituent banks" shall mean all commercial banks and trust companies, whether organized under Federal or State law, at least a majority of the shares of voting stock of which shall at the time be owned, directly or indirectly, by the corporation or by one or more subsidiaries or by the corporation and one or more subsidiaries.
The term "junior stock", when used with reference to the Cumulative Preferred Stock, shall mean the Common Stock and any other stock of the corporation, now or hereafter authorized, over which the Cumulative Preferred Stock has preference or priority either in the payment of dividends or in the distribution of assets upon any liquidation, dissolution or winding up of the affairs of the corporation.
The term "stock ranking on a parity with the Cumulative Preferred Stock" shall mean any stock of the corporation, now or hereafter authorized, which has preference on a parity with the Cumulative Preferred Stock either in the payment of dividends or in the distribution of assets upon any liquidation, dissolution or winding up of the affairs of the corporation.
The term "stock ranking prior to the Cumulative Preferred Stock" shall mean any stock of the corporation, now or hereafter authorized, which has preference over the Cumulative Preferred Stock either in the payment of dividends or in the distribution of assets upon any liquidation, dissolution or winding up of the affairs of the corporation.
The term "subsidiary" shall mean any corporation, association or business trust at least a majority of the shares of the voting stock of which shall at the time be owned, directly or indirectly, by the corporation or by one or more subsidiaries or by the corporation and one or more subsidiaries.
The term "voting stock", as applied to the stock (or the equivalent thereof, in the case of corporations incorporated outside the continental limits of the United States of America) of any corporation, shall mean stock (or such equivalent) of any class or classes, however designated, having ordinary voting power for the election of a majority of the directors of such corporation, other than stock (or such equivalent) having such power only by reason of the happening of a contingency.
5. Class Voting. Except as otherwise required by law or by the provisions of the Certificate of Incorporation, the vote of the holders of all or any portion of any class of stock, as a class, shall not be required for any action whatsoever to be taken or authorized by the stockholders of the corporation, including any amendment of the Certificate of Incorporation.
6. Preferred Stock. The Preferred Stock may be issued from time to time in one or more series and with such designation for each such series as shall be stated and expressed in the resolution or resolutions providing for the issue of each such series adopted by the Board of Directors. The Board of Directors in any such resolution or resolutions is expressly authorized to state and express for each such series:
(i) the voting powers, if any, of the holders of stock of such series;
(ii) the rate per annum and the times at and conditions upon which the holders of stock of such series shall be entitled to receive dividends, and whether such dividends shall be cumulative or non- cumulative and if cumulative the terms upon which such dividends shall be cumulative;
(iii) the price or prices and the time or times at and the manner in which the stock of such series shall be redeemable;
(iv) the terms, if any, upon which shares of stock of such series shall be convertible into, or exchangeable for, shares of stock of any other class or classes or of any other series of the same or any other class or classes; including the price or prices or the rate or rates of conversion or exchange and the terms of adjustment, if any;
(v) the rights to which the holders of the shares of stock of such series shall be entitled upon any voluntary or involuntary liquidation, dissolution or winding up of the corporation, provided, however, that in no event shall they be entitled to receive upon any such liquidation, dissolution or winding up more than $120 per share, plus in respect of each such share a sum computed at the annual dividend rate for such series from and after the date on which dividends on such shares become cumulative to and including the date fixed for such payment, less the aggregate of dividends theretofore paid thereon; and
(vi) any other designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof so far as they are not inconsistent with the provisions of the certificate of incorporation, as amended, and to the full extent now or hereafter permitted by the laws of Delaware, provided, however, that in no event shall any series of Preferred Stock rank prior to the Cumulative Preferred Stock.
7. Adjustable Rate Cumulative Preferred Stock, Series A. Pursuant to authority conferred by this Article Fourth on the Board of Directors of the corporation, the Board of Directors, pursuant to a Certificate of Designations filed in the Office of the Secretary of State of the State of Delaware on March 7, 1983, established a series of Preferred Stock of the corporation ("Preferred Stock") to consist of 2,000,000 shares. Such series has the voting powers, designation, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions, in addition to those set forth in this Article Fourth in respect of the Preferred Stock of all series as follows:
(a) Designation. The designation of this series of Preferred Stock shall be "Adjustable Rate Cumulative Preferred Stock, Series A" (hereinafter called this "Series") and the number of shares constituting this Series is Two Million (2,000,000). The number of authorized shares of this Series may be reduced by further resolution duly adopted by the Board of Directors of the corporation and by the filing of a certificate pursuant to the provisions of the General Corporation Law of the State of Delaware stating that such reduction has been so authorized, but the number of authorized shares of this Series shall not be increased.
(b) Dividend Rate.
(1) Dividend rates on the shares of this Series shall be: (i) for the periods (the "Initial Dividend Periods") (A) from the date of their original issue to and including March 31, 1983, (B) from April 1, 1983 to and including June 30, 1983, and (C) from July 1, 1983 to and including September 30, 1983, at a rate per annum of 10% on the liquidation preference thereof, and (ii) for each quarterly dividend period (hereinafter referred to as a "Quarterly Dividend Period"; and any Initial Dividend Period or any Quarterly Dividend Period being hereinafter individually referred to as a "Dividend Period" and collectively referred to as "Dividend Periods") thereafter, which quarterly dividend periods shall commence on January 1, April 1, July 1 and October 1 in each year and shall end on and include the day next preceding the first day of the next Quarterly Dividend Period, at a rate per annum on the liquidation preference thereof equal to the Applicable Rate (as defined in paragraph (2) of this Section (b)) in respect of such Quarterly Dividend Period. Such dividends shall be cumulative from the date of original issue of such shares and shall be payable, when and as declared by the Board of Directors or by a committee of said Board duly authorized by said Board to declare such dividends, on January 1, April 1, July 1, and October 1 of each year, commencing April 1, 1983. Each such dividend shall be paid to the holders of record of shares of this Series as they appear on the stock register of the corporation on such record date, not exceeding 30 days preceding the payment date thereof, as shall be fixed by the Board of Directors of the corporation or by a committee of said Board of Directors duly authorized to fix such date. Dividends on account of arrears for any past Dividend Periods may be declared and paid at any time, without reference to any regular dividend payment date, to holders of record on such date, not exceeding 30 days preceding the payment date thereof, as may be fixed by the Board of Directors of the corporation or by a committee of said Board of Directors duly authorized to fix such date.
(2) Except as provided below in this paragraph, the "Applicable Rate" for any Quarterly Dividend Period shall be (a) 2% less than (b) the highest of the Treasury Bill Rate, the Ten Year Constant Maturity Rate and the Twenty Year Constant Maturity Rate (each as hereinafter defined) for such Dividend Period. In the event that the corporation determines in good faith that for any reason
(i) any one of the Treasury Bill Rate, the Ten Year Constant Maturity Rate and the Twenty Year Constant Maturity Rate cannot be determined for any Quarterly Dividend Period, then the Applicable Rate for such Dividend Period shall be 2% less than the higher of whichever two of such Rates can be so determined;
(ii) only one of the Treasury Bill Rate, the Ten Year Constant Maturity Rate and the Twenty Year Constant Maturity Rate can be determined for any Quarterly Dividend Period, then the Applicable Rate for such Dividend Period shall be 2% less than whichever such Rate can be so determined; or
(iii) None of the Treasury Bill Rate, the Ten Year Constant Maturity Rate and the Twenty Year Constant Maturity Rate can be determined for any Quarterly Dividend Period, then the Applicable Rate in effect for the preceding Dividend Period shall be continued for such Dividend Period.
Anything herein to the contrary notwithstanding, the Applicable Rate for any Quarterly Dividend Period shall in no event be less than 6% per annum or greater than 12% per annum.
(3) Except as provided below in this paragraph, the "Treasury Bill Rate" for each Quarterly Dividend Period shall be the arithmetic average of the two most recent weekly per annum market discount rates (or the one weekly per annum market discount rate, if only one such rate shall be published during the relevant Calendar Period (as defined below)) for three-month U.S. Treasury bills, as published weekly by the Federal Reserve Board during the Calendar Period immediately prior to the last ten calendar days of March, June, September or December, as the case may be, prior to the Quarterly Dividend Period for which the dividend rate on this Series is being determined. In the event that the Federal Reserve Board does not publish such a weekly per annum market discount rate during such Calendar Period, then the Treasury Bill Rate for such Dividend Period shall be the arithmetic average of the two most recent weekly per annum market discount rates (or the one weekly per annum market discount rate, if only one such rate shall be published during the relevant Calendar Period) for three- month U.S. Treasury bills, as published weekly during such Calendar Period by any Federal Reserve Bank or by any U.S. Government department or agency selected by the corporation. In the event that a per annum market discount rate for three-month U.S. Treasury bills shall not be published by the Federal Reserve Board or by any Federal Reserve Bank or by any U.S. Government department or agency during such Calendar Period, then the Treasury Bill Rate for such Dividend Period shall be the arithmetic average of the two most recent weekly per annum market discount rates (or the one weekly per annum market discount rate, if only one such rate shall be published during the relevant Calendar Period as provided below) for all of the U.S. Treasury bills then having maturities of not less than 80 nor more than 100 days, as published during such Calendar Period by the Federal Reserve Board or, if the Federal Reserve Board shall not publish such rates, by any Federal Reserve Bank or by any U.S. Government department or agency selected by the corporation. In the event that the corporation determines in good faith that for any reason no such U.S. Treasury bill rates are published as provided above during such Calendar Period, then the Treasury Bill Rate for such Dividend Period shall be the arithmetic average of the per annum market discount rates based upon the closing bids during such Calendar Period for each of the issues of marketable noninterest bearing U.S. Treasury securities with a maturity of not less than 80 nor more than 100 days from the date of each such quotation, as chosen and quoted daily for each business day in New York City (or less frequently if daily quotations shall not be generally available) to the corporation by at least three recognized dealers in U.S. Government securities selected by the corporation. In the event that the corporation determines in good faith that for any reason the corporation cannot determine the Treasury Bill Rate for any Quarterly Dividend Period as provided above in this paragraph, the Treasury Bill Rate for such Dividend Period shall be the arithmetic average of the per annum market discount rates based upon the closing bids during such Calendar Period for each of the issues of marketable interest-bearing U.S. Treasury securities with a maturity of not less than 80 nor more than 100 days, as chosen and quoted daily for each business day in New York City (or less frequently if daily quotations shall not be generally available) to the corporation by at least three recognized dealers in U.S. Government securities selected by the corporation.
(4) Except as provided below in this paragraph, the "Ten Year Constant Maturity Rate" for each Quarterly Dividend Period shall be the arithmetic average of the two most recent weekly per annum Ten Year Average Yields (or the one weekly per annum Ten Year Average Yield, if only one such Yield shall be published during the relevant Calendar Period as provided below), as published weekly by the Federal Reserve Board during the Calendar Period immediately prior to the last ten calendar days of March, June, September or December, as the case may be, prior to the Quarterly Dividend Period for which the dividend rate on this Series is being determined. In the event that the Federal Reserve Board does not publish such a weekly per annum Ten Year Average Yield during such Calendar Period, then the Ten Year Constant Maturity Rate for such Dividend Period shall be the arithmetic average of the two most recent weekly per annum Ten Year Average Yields (or the one weekly per annum Ten Year Average Yield, if only one such Yield shall be published during the relevant Calendar Period as provided below), as published weekly during such Calendar Period by any Federal Reserve Bank or by any U.S. Government department or agency selected by the corporation. In the event that a per annum Ten Year Average Yield shall not be published by the Federal Reserve Board or by any Federal Reserve Bank or by any U.S. Government department or agency during such Calendar Period, then the Ten Year Constant Maturity Rate for such Dividend Period shall be the arithmetic average of the two most recent weekly per annum average yields to maturity (or the one weekly average yield to maturity, if only one such yield shall be published during the relevant Calendar Period as provided below) for all of the actively traded marketable U.S. Treasury fixed interest rate securities (other than Special Securities) then having maturities of not less than eight nor more than twelve years, as published during such Calendar Period by the Federal Reserve Board or, if the Federal Reserve Board shall not publish such yields, by any Federal Reserve Bank or by any U.S. Government department or agency selected by the corporation. In the event that the corporation determines in good faith that for any reason the corporation cannot determine the Ten Year Constant Maturity Rate for any Quarterly Dividend Period as provided above in this paragraph, then the Ten Year Constant Maturity Rate for such Dividend Period shall be the arithmetic average of the per annum average yields to maturity based upon the closing bids during such Calendar Period for each of the issues of actively traded marketable U.S. Treasury fixed interest rate securities (other than Special Securities) with a final maturity date not less than eight nor more than twelve years from the date of each such quotation, as chosen and quoted daily for each business day in New York City (or less frequently if daily quotations shall not be generally available) to the corporation by at least three recognized dealers in U.S. Government securities selected by the corporation.
(5) Except as provided below in this paragraph, the "Twenty Year Constant Maturity Rate" for each Quarterly Dividend Period shall be the arithmetic average of the two most recent weekly per annum Twenty Year Average Yields (or the one weekly per annum Twenty Year Average Yield, if only one such Yield shall be published during the relevant Calendar Period as provided below), as published weekly by the Federal Reserve Board during the Calendar Period immediately prior to the last ten calendar days of March, June, September or December, as the case may be, prior to the Quarterly Dividend Period for which the dividend rate on this Series is being determined. In the event that the Federal Reserve Board does not publish such a weekly per annum Twenty Year Average Yield during such Calendar Period, then the Twenty Year Constant Maturity Rate for such Dividend Period shall be the arithmetic average of the two most recent weekly per annum Twenty Year Average Yields (or the one weekly per annum Twenty Year Average Yield, if only one such Yield shall be published during the relevant Calendar Period as provided below), as published weekly during such Calendar Period by any Federal Reserve Bank or by any U.S. Government department or agency selected by the corporation. In the event that a per annum Twenty Year Average Yield shall not be published by the Federal Reserve Board or by any Federal Reserve Bank or by any U.S. Government department or agency during such Calendar Period, then the Twenty Year Constant Maturity Rate for such Dividend Period shall be the arithmetic average of the two most recent weekly per annum average yields to maturity (or the one weekly average yield to maturity, if only one such yield shall be published during the relevant Calendar Period as provided below) for all of the actively traded marketable U.S. Treasury fixed interest rate securities (other than Special Securities) then having maturities of not less than eighteen nor more than twenty-two years, as published during such Calendar Period by the Federal Reserve Board or, if the Federal Reserve Board shall not publish such yields, by any Federal Reserve Bank or by any U.S. Government department or agency selected by the corporation. In the event that the corporation determines in good faith that for any reason the corporation cannot determine the Twenty Year Constant Maturity Rate for any Quarterly Dividend Period as provided above in this paragraph, then the Twenty Year Constant Maturity Rate for such Dividend Period shall be the arithmetic average of the per annum average yields to maturity based upon the closing bids during such Calendar Period for each of the issues of actively traded marketable U.S. Treasury fixed interest rate securities (other than Special Securities) with a final maturity date not less than eighteen nor more than twenty-two years from the date of each such quotation, as chosen and quoted daily for each business day in New York City (or less frequently if daily quotations shall not be generally available) to the corporation by at least three recognized dealers in U.S. Government securities selected by the corporation.
(6) The Treasury Bill Rate, the Ten Year Constant Maturity Rate and the Twenty Year Constant Maturity Rate shall each be rounded to the nearest five one-hundredths of a percentage point.
(7) The Applicable Rate with respect to each Quarterly Dividend Period will be calculated as promptly as practicable by the corporation according to the appropriate method described herein. The corporation will cause each Applicable Rate to be published in a newspaper of general circulation in New York City prior to the commencement of the Quarterly Dividend Period to which it applies and will cause notice of such Applicable Rate to be enclosed with the dividend payment checks next mailed to the holders of shares of this Series.
(8) For purposes of this Section (b), the term
(i) "Calendar Period" shall mean 14 calendar days;
(ii) "Special Securities" shall mean securities which can, at the option of the holder, be surrendered at face value in payment of any Federal estate tax or which provide tax benefits to the holder and are priced to reflect such tax benefits or which were originally issued at a deep or substantial discount;
(iii) "Ten Year Average Yield" shall mean the average yield to maturity for actively traded marketable U.S. Treasury fixed interest rate securities (adjusted to constant maturities of ten years); and
(iv) "Twenty Year Average Yield" shall mean the average yield to maturity for actively traded marketable U.S. Treasury fixed interest rate securities (adjusted to constant maturities of 20 years).
(9) So long as any shares of this Series are outstanding, the corporation shall not (a) declare or pay or set apart for payment any dividend or other distribution (other than dividends or distributions payable in shares of stock of the corporation ranking junior to this Series as to dividends and upon liquidation) for any period upon any stock of the corporation ranking on a parity with, or any stock of the corporation ranking junior to, this Series as to dividends or upon liquidation or (b) redeem, purchase or otherwise acquire for any consideration any stock of the corporation ranking on a parity with, or any stock of the corporation ranking junior to, this Series as to dividends or upon liquidation, unless, in either case, all dividends payable to holders of shares of this Series and of any stock of the corporation ranking on a parity therewith as to dividends for its current dividend period and all past dividend periods have been paid, are contemporaneously being paid or have been declared and a sum sufficient for the payment thereof set aside for such payment, except that notwithstanding clause (a) above the corporation may pay dividends on the shares of this Series and shares of stock of the corporation ranking on a parity therewith as to dividends ratably in accordance with the sums which would be payable on such shares if all dividends, including accumulations, if any, were declared and paid in full. Holders of shares of this Series shall not be entitled to any dividends, whether payable in cash, property or stock, in excess of full cumulative dividends, as herein provided, on this Series. No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment or payments on this Series which may be in arrears.
(10) Dividends payable on this Series for each full Quarterly Dividend Period shall be computed by analyzing the Applicable Rate and dividing by four. Dividends payable on this Series for any period less than a full Dividend Period shall be computed on the basis of a 360-day year of 30-day months and the actual number of days elapsed in the period for which payable.
(c) Redemption.
(1) The shares of this Series shall not be redeemable prior to April 1, 1988. On and after April 1, 1988, the corporation, at its option, may redeem shares of this Series, as a whole or in part, at any time or from time to time, at a redemption price (i) in the case of any redemption on a redemption date occurring on or after April 1, 1988, and prior to April 1, 1993, of $51.50 per share and (ii) in the case of any redemption on a redemption date occurring on or after April 1, 1993, of $50 per share, plus, in each case, accrued and unpaid dividends thereon to the date fixed for redemption.
(2) In the event that fewer than all the outstanding shares of this Series are to be redeemed, the number of shares to be redeemed shall be determined by the Board of Directors and the shares to be redeemed shall be determined by lot or pro rata as may be determined by the Board of Directors or by any other method as may be determined by the Board of Directors in its sole discretion to be equitable.
(3) In the event the corporation shall redeem shares of this Series, notice of such redemption shall be given by first class mail, postage prepaid, mailed not less than 30 nor more than 60 days prior to the redemption date, to each holder of record of the shares to be redeemed, at such holder's address as the same appears on the stock register of the corporation. Each such notice shall state: (i) the redemption date; (ii) the number of shares of this Series to be redeemed and, if fewer than all the shares held by such holder are to be redeemed, the number of such shares to be redeemed from such holder; (iii) the redemption price; (iv) the place or places where certificates for such shares are to be surrendered for payment of the redemption price; and (v) that dividends on the shares to be redeemed will cease to accrue on such redemption date.
(4) Notice having been mailed as aforesaid, from and after the redemption date (unless default shall be made by the corporation in providing money for the payment of the redemption price) dividends on the shares of this Series so called for redemption shall cease to accrue, and said shares shall no longer be deemed to be outstanding, and all rights of the holders thereof as stockholders of the corporation (except the right to receive from the corporation the redemption price) shall cease. Upon surrender in accordance with said notice of the certificates for any shares so redeemed (properly endorsed or assigned for transfer, if the Board of Directors of the corporation shall so require and the notice shall so state), such shares shall be redeemed by the corporation at the redemption price aforesaid. In case fewer than all the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares without cost to the holder thereof.
(5) Any shares of this Series which shall at any time have been redeemed shall, after such redemption, have the status of authorized but unissued shares of Preferred Stock, without designation as to series until such shares are once more designated as part of a particular series by the Board of Directors.
(6) Notwithstanding the foregoing provisions of this Section (c), if any dividends on this Series are in arrears, no shares of Preferred Stock shall be redeemed, and the corporation shall not purchase or otherwise acquire any shares of this Series; provided, however, that the foregoing shall not prevent the purchase or acquisition of shares of this Series pursuant to a purchase or exchange offer made on the same terms to all holders of Preferred Stock and any other shares of stock of the Company ranking on a parity therewith as to dividends.
(d) Conversion or Exchange. The holders of shares of this Series shall not have any rights herein to convert such shares into or exchange such shares for shares of any other class or classes or of any other series of any class or classes of capital stock of the corporation.
(e) Voting. The shares of this Series shall not have any voting powers either general or special, except as expressly required by applicable law and except that
(1) The consent of the holders of at least 66-2/3% of all of the shares of this Series at the time outstanding, given in person or by proxy, either in writing or by a vote at a meeting called for the purpose at which the holders of shares of this Series shall vote together as a separate class, shall be necessary for authorizing, effecting or validating the amendment, alteration or repeal of any of the provisions of the Certificate of Incorporation or of any certificate amendatory thereof or supplemental thereto (including any Certificate of Designation and Terms or any similar document relating to any series of Preferred Stock) so as to materially adversely affect the powers, preferences, privileges or rights of this Series;
(2) The consent of the holders of at least 66-2/3% of all of the shares of this Series and all other series of Preferred Stock ranking on a parity with shares of this Series, either as to dividends or upon liquidation, at the time outstanding, given in person or by proxy, either in writing or by a vote at a meeting called for the purpose at which the holders of shares of this Series and such other series of Preferred Stock shall vote together as a single class without regard to series, shall be necessary for authorizing, effecting or validating the creation, authorization, increase in the authorized amount of or issue of any shares of any class or series of stock of the corporation ranking prior to the shares of this Series as to dividends or upon liquidation, or the reclassification of any authorized stock of the corporation into any such prior shares, or the creation, authorization or issue of any obligation or security convertible into or evidencing the right to purchase any such prior shares;
(3) The consent of the holders of at least a majority of all of the shares of this Series and all other series of Preferred Stock ranking on a parity with this Series, either as to dividends or upon liquidation, at the time outstanding, given in person or by proxy, either in writing or by a vote at a meeting called for the purpose at which the holders of shares of this Series and such other series of Preferred Stock shall vote together as a single class without regard to series, shall be necessary for authorizing, effecting or validating the sale, lease or conveyance of all or substantially all the property or business of the corporation or the merger or consolidation of the corporation into or with any other corporation; provided, however, that no such vote or consent of the holders of shares of this Series and such other series of Preferred Stock, voting as a class without regard to series, shall be required for the merger or consolidation of another corporation into or with the corporation if none of the preferences, rights, powers or privileges of this Series or such other series of Preferred Stock or the holders thereof will be adversely affected thereby and there shall not be authorized or outstanding after such merger or consolidation any class of stock or other securities (except such stock or securities of the corporation as may have been authorized or outstanding immediately preceding such merger or consolidation) ranking prior to the shares of this Series and such other series of Preferred Stock as to dividends or upon liquidation; and provided further, however, that there shall not be authorized or outstanding after such merger or consolidation more than 10,000,000 shares of Preferred Stock or any class of stock or other securities (except such stock or securities of the corporation as may have been authorized or outstanding immediately preceding such merger or consolidation) ranking on a parity with the shares of this Series as to dividends or upon liquidation, in which case the vote specified by this paragraph (3) shall be required;
(4) If at the time of any annual meeting of stockholders for the election of directors a default in preference dividends on the Preferred Stock shall exist, the number of directors constituting the Board of Directors of the corporation shall be increased by two, and the holders of the Preferred Stock of all series (whether or not the holders of such series of Preferred Stock would be entitled to vote for the election of directors if such default in preference dividends did not exist), shall have the right at such meeting, voting together as a single class without regard to series, to the exclusion of the holders of Common Stock, to elect two directors of the corporation to fill such newly created directorships. Such right shall continue until there are no dividends in arrears upon the Preferred Stock. Each director elected by the holders of shares of Preferred Stock (herein called a "Preferred Director"), shall continue to serve as such director for the full term for which he shall have been elected, notwithstanding that prior to the end of such term a default in preference dividends shall cease to exist. Any Preferred Director may be removed by, and shall not be removed except by, the vote of the holders of record of the outstanding shares of Preferred Stock, voting together as a single class without regard to series, at a meeting of the stockholders, or of the holders of shares of Preferred Stock, called for the purpose. So long as a default in any preference dividends on the Preferred Stock shall exist (A) any vacancy in the office of a Preferred Director may be filled (except as provided in the following clause (B)) by an instrument in writing signed by the remaining Preferred Director and filed with the corporation and (B) in the case of the removal of any Preferred Director, the vacancy may be filled by the vote of the holders of the outstanding shares of Preferred Stock, voting together as a single class without regard to series, at the same meeting at which such removal shall be voted. Each director appointed as aforesaid by the remaining Preferred Director shall be deemed, for all purposes hereof, to be a Preferred Director. Whenever the term of office of the Preferred Directors shall end and a default in preference dividends shall no longer exist, the number of directors constituting the Board of Directors of the corporation shall be reduced by two. For the purposes hereof, a "default in preference dividends" on the Preferred Stock shall be deemed to have occurred whenever the amount of accrued dividends upon any series of the Preferred Stock shall be equivalent to six full quarter-yearly dividends or more, and, having so occurred, such default shall be deemed to exist thereafter until, but only until, all accrued dividends on all shares of Preferred Stock of each and every series then outstanding shall have been paid to the end of the last preceding Quarterly Dividend Period;
(f) Liquidation Rights.
(1) Upon the dissolution, voluntary or involuntary liquidation or winding up of the corporation, the holders of the shares of this Series shall be entitled to receive out of the assets of the corporation, before any payment or distribution shall be made on the Common Stock or on any other class of stock of the corporation ranking junior to the Preferred Stock upon liquidation, the amount of $50 per share, plus a sum equal to all dividends (whether or not earned or declared) on such shares accrued and unpaid thereon to the date of final distribution.
(2) For the purposes of this Section (f), a voluntary or involuntary liquidation, dissolution or winding up of the corporation shall include neither the consolidation or merger of the corporation with or into any other corporation, nor any sale, lease or conveyance of all or any part of the property or business of the corporation.
(3) After the payment to the holders of the shares of this Series of the full preferential amounts provided for in this Section (f), the holders of this Series as such shall have no right or claim to any of the remaining assets of the corporation.
(4) In the event the assets of the corporation available for distribution to the holders of shares of this Series upon any dissolution, liquidation or winding up of the corporation, whether voluntary or involuntary, shall be insufficient to pay in full all amounts to which such holders are entitled pursuant to paragraph (1) of this Section (f), no such distribution shall be made on account of any shares of stock of the corporation ranking on a parity with the shares of this Series upon such dissolution, liquidation or winding up unless proportionate distributive amounts shall be paid on account of the shares of this Series, ratably, in proportion to the full distributable amounts for which holders of all such parity shares are respectively entitled upon such dissolution, liquidation or winding up.
(5) Upon the dissolution, liquidation or winding up of the corporation, the holders of shares of this Series then outstanding shall be entitled to be paid out of the assets of the corporation available for distribution to its stockholders all amounts to which such holders are entitled pursuant to paragraph (1) of this Section (f) before any payment shall be made to the holders of any class of capital stock of the corporation ranking junior upon liquidation to this Series.
(g) For purposes of this Series, any stock of any class or classes of the corporation shall be deemed to rank:
(1) prior to the shares of this Series, either as to dividends or upon liquidation, if the holders of such class or classes shall be entitled to the receipt of dividends or of amounts distributable upon dissolution, liquidation or winding up of the corporation, as the case may be, in preference or priority to the holders of shares of this Series;
(2) on a parity with shares of this Series, either as to dividends or upon liquidation, whether or not the dividend rates, dividend payment dates or redemption or liquidation prices per share or sinking fund provisions, if any, be different from those of this Series, if the holders of such stock shall be entitled to the receipt of dividends or of amounts distributable upon dissolution, liquidation or winding up of the corporation, as the case may be, in proportion to their respective dividend rates or liquidation prices, without preference or priority, one over the other, as between the holders of such stock and the holders of shares of this Series; and
(3) junior to shares of this Series, either as to dividends or upon liquidation, if such class shall be Common Stock or if the holders of shares of this Series shall be entitled to receipt of dividends or of amounts distributable upon dissolution, liquidation or winding up of the corporation, as the case may be, in preference or priority to the holders of shares of such class or classes.
(4) The Series shall rank on a parity as to dividends and upon liquidation with the Cumulative Preferred Stock of the corporation.
Fifth: The minimum amount of capital with which the corporation will commence business is One Thousand Dollars ($1,000.00).
Sixth: This corporation is to have perpetual existence.
Seventh: The private property of the stockholders shall not be subject to payment of corporate debts to any extent whatsoever.
Eighth: No holder of shares of stock of the corporation of any class, now or hereafter authorized, shall have any preemptive right to subscribe for, purchase or receive any shares of stock of the corporation of any class, now or hereafter authorized, or any options or warrants for such shares, or any rights to subscribe to or purchase such shares, or any securities convertible into or exchangeable for such shares, which may at any time be issued, sold or offered for sale by the corporation.
Ninth: Subject to the provisions of law and in furtherance and not in limitation of the powers conferred by law, the Board of Directors of the corporation is hereby empowered by resolution or resolutions:
1. To provide for the issuance from time to time of its shares of stock of any class, whether now or hereafter authorized, and securities convertible into shares of its stock of any class, and/or securities whether now or hereafter authorized carrying a privilege to subscribe for or receive shares of its stock of any class, for such considerations and upon such terms and conditions as the Board of Directors may fix from time to time.
2. To determine that only a part of the consideration which shall be received by the corporation in excess of the par value of its shares of capital stock or any thereof, which it shall issue from time to time, shall be capital.
3. Without the consent of the stockholders of any class, to authorize the issuance and sale from time to time of evidences of indebtedness (as defined in Article Third hereof) of the corporation for such considerations as it may deem advisable, to provide that such evidences of indebtedness be issued in such series, in such denomination or denominations, and with such interest rate or rates, redemption price or prices, and maturing at such time or times and otherwise varying as it may determine; and likewise without such consent to mortgage, pledge and/or hypothecate all or any part of the corporation's property, real, personal or mixed (except its corporate franchises), and its rents, revenues and income, whether now owned or hereafter acquired, and to authorize the execution, delivery, filing and recording of all mortgages, deeds of trust or other indentures, in such form as shall be determined by it, to secure the payment of all or any of such evidences of indebtedness, the principal and interest thereof, the premium, if any, thereon, and any and all amounts or sums payable in respect thereof or in connection therewith.
4. To make, alter, amend, change, add to or repeal the by-laws of this corporation, without any action on the part of the stockholders.
5. By resolution passed by a majority of the whole board, to designate two or more of its number to constitute an executive committee, which committee, so far as is provided in said resolution or in the by-laws of this corporation, shall have and may exercise the powers of the Board of Directors in the management of the business and affairs of this corporation, and have power to authorize the seal of this corporation to be affixed to all papers which may require it.
6. When and as authorized by the affirmative vote of the holders of a majority of the stock issued and outstanding having voting power given at a stockholders' meeting duly called for that purpose, or when authorized by the written consent of the holders of a majority of the voting stock issued and outstanding, to sell, lease or exchange all of the property and assets of the corporation, including its good will and its corporate franchises, upon such terms and conditions and for such consideration, which may be in whole or in part evidences of indebtedness and/or certificates of interest (as defined in Article Third hereof), as its Board of Directors shall deem expedient and for the best interests of the corporation.
7. From time to time, to determine whether and to what extent and at what times and places and under what conditions and regulations the accounts and books of this corporation (other than the stock ledger) or any of them shall be open to the inspection of stockholders; and no stockholder shall have any right of inspecting any account, book or document of this corporation, except as conferred by statute, unless authorized by resolution of stockholders or directors.
8. To set apart out of any of the funds or assets of this corporation, available for dividends, a reserve or reserves for any proper purpose, and to abolish any such reserve or reserves. Against any such reserve or reserves and/or surplus so established, there may be charged losses at any time incurred by this corporation, also dividends or other distribution upon stock. Such reserve or reserves and/or surplus may be reduced from time to time by the Board of Directors by transfer from such reserve or reserves and/or surplus to capital account.
9. At any time or from time to time to create and issue (without any action by the stockholders of the corporation), whether or not in connection with the issue and sale of any shares of stock or other securities of the corporation, rights or options entitling the holders thereof to purchase from the corporation shares of its capital stock, such rights or options to be evidenced by or in such instrument or instruments as shall be approved by the Board of Directors. The terms upon which, the time or times, which may be limited or unlimited in duration, at or within which, and the price or prices at which any such shares may be purchased from the corporation upon the exercise of any such right or option shall be such as shall be fixed and stated in a resolution or resolutions adopted by the Board of Directors providing for the creation and issue of such rights or options, and set forth or incorporated by reference in the instrument or instruments evidencing such rights or options.
Tenth: The number of Directors which shall constitute the whole Board shall be such from time to time as shall be fixed by the by-laws, but in no case shall the Board be less than three (3). In case of any increase in the number of Directors, such additional Directors shall be chosen by the Directors or stockholders at the time entitled to vote, as may be prescribed in the by-laws of this corporation. Directors need not be stockholders. This corporation may in its by-laws confer powers upon its directors in addition to those conferred in this certificate of incorporation and in addition to the powers and authorities expressly conferred upon them by statute.
Eleventh: The corporation shall be entitled to treat the person in whose name any share is registered as the owner thereof for all purposes, and shall not be bound to recognize any equitable or other claim to or interest in such share on the part of any other person, whether or not the corporation shall have notice thereof, save as expressly provided by the laws of the State of Delaware.
Twelfth: Both stockholders and directors shall have power, if the by-laws so provide, to hold their meetings and to have one or more offices within or without the State of Delaware and to keep the books of this corporation (subject to the provisions of the General Corporation Law of said State) outside the State of Delaware, at such places as may be from time to time designated by the Board of Directors.
Thirteenth: All the powers of this corporation in so far as the same may be lawfully vested by this certificate of incorporation in the Board of Directors, are hereby conferred upon the Board of Directors of this corporation, provided, however, that by resolution of the Board of Directors adopted either by a quorum disinterested in the subject matter of the resolution or interested therein, as the case may be, any matter concerning the management of the corporation or its affairs may be referred to the stockholders of the corporation for decision and in such cases such matters may be authorized by vote adopted by the majority of a quorum of the stockholders entitled to vote at a meeting thereof duly held. Fourteenth: A Director of the corporation shall not in the absence of fraud be disqualified by his office from dealing or contracting with the corporation either as a vendor, purchaser or otherwise, nor in the absence of fraud shall any transaction or contract of the corporation be void or voidable or affected by reason of the fact that any director, or any firm of which any director is a member, or any corporation or association of which any director is an officer, director or stockholder, is in any way interested in such transaction or contract; provided that at the meeting of the Board of Directors or of a committee thereof having authority in the premises, authorizing or confirming said contract or transaction, the existence of an interest of such director, firm, corporation or association is disclosed or made known (or shall have been disclosed and spread upon the records at a previous meeting at which a quorum was present) and there shall be present a quorum of the Board of Directors or of the directors constituting such committee, and such contract or transaction shall be approved by a majority of such quorum, which majority shall consist of directors not so interested or connected. Nor shall any director be liable to account to the corporation for any profit realized by him from or through any such transaction or contract of the corporation ratified or approved as aforesaid, by reason of the fact that he or any firm of which he is a member, or any corporation or association of which he is an officer, director or stockholder, was interested in such transaction or contract. Anything herein contained to the contrary notwithstanding, all or any of the Directors of the corporation, in connection with the organization of this corporation and the issuance of its stock for cash and/or properties, may vote to approve and authorize Plans and Agreements for the acquisition by this corporation, through the issuance of its own stock in exchange therefor, of stock in banks and/or trust companies of which said Directors, or any of them, may be stockholders, directors, or officers, and to approve and authorize an underwriting agreement or agreements for the sale of stock of this corporation, in which they or any of them may be interested, with the same force and effect as though not so interested. Directors so interested may be counted when present at meetings of the Board of Directors or of such committee for the purpose of determining the existence of a quorum. Any contract, transaction or act of the corporation or of the Board of Directors or of any committee thereof (whether or not approved or ratified as hereinabove provided) which shall be ratified by a majority in interest of a quorum of the stockholders entitled to vote at any annual meeting or any special meeting called for such purpose or approved in writing by a majority in interest of the stockholders entitled to vote without a meeting, shall be as valid and as binding as though ratified by every stockholder of the corporation.
Fifteenth: To the fullest extent that the General Corporation Law of the State of Delaware, as the same exists or may hereafter be amended, permits, elimination or limitation of the liability of directors, no director of the corporation shall be liable to the corporation or its shareholders for monetary damages for breach of his fiduciary duty as a director. Any repeal or modification of this Article by the shareholders of the corporation shall be prospective only and shall not adversely affect any limitation on the personal liability of a director of the corporation for acts or omissions occurring prior to the effective date of such repeal or modification.
Sixteenth: This corporation reserves the right to amend, alter, change or repeal any provision contained in this certificate of incorporation in the manner now or hereafter prescribed by statute, and all rights conferred on officers, directors and stockholders herein are granted subject to this reservation.
IN WITNESS WHEREOF, said HSBC Americas, Inc., has caused this certificate to be signed by James H. Cleave, its President, and attested by Philip S. Toohey, its secretary this 17th day of August, 1995.
HSBC AMERICAS, INC.
By /s/ James H. Cleave President (SEAL)
ATTEST:
By /s/ Philip S. Toohey Secretary
IDwt 218307.01
(Restated as amended as of February 29, 1996)
BY-LAWS
of
HSBC AMERICAS, INC.
ARTICLE I
SHAREHOLDERS' MEETINGS
Section 1.1 Annual Meeting. The Annual Meeting of the shareholders for the election of directors and the transaction of such other business as may properly come before the meeting, shall be held in April each year at the Office of the Corporation, One Marine Midland Center, City of Buffalo, State of New York, or at such other place and at such time and on such day as may be designated from time to time by the Board of Directors.
Section 1.2 Special Meeting. Except as otherwise specifically provided by statute, special meetings of the shareholders may be called for any purpose at any time by the Board, the Chairman of the Board, the President, the Chief Executive Officer or the Secretary. Business transacted at all special meetings of shareholders shall be confined to the purposes stated in the Notice of Meeting.
Section 1.3 Quorum. The holders of a majority of the stock issued and outstanding, and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of shareholders unless otherwise provided by law.
Section 1.4 Voting. At any meeting of the shareholders each shareholder may vote in person or by proxy duly authorized in writing. Each shareholder shall at every meeting of shareholders be entitled to one vote for each share of stock held by such shareholder. A majority of the votes cast shall decide every question or matter submitted to the shareholders at any meeting, unless otherwise provided by law or by the Certificate of Incorporation.
Any action required to be taken at an annual or special meeting of shareholders may be taken without a meeting by written consent setting forth the action and signed by the holders of outstanding shares having not less than the minimum number of shares necessary to authorize or to take such action at a meeting at which all shares entitled to vote thereon were present and voted.
Section 1.5 Notice of Meeting. Written notice of each meeting of shareholders stating the place, date, and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered personally or shall be mailed postage prepaid to each shareholder entitled to vote at such meeting, directed to the shareholder at his address as it appears on the records of the Corporation, not less than ten days before the date of the meeting.
ARTICLE II
DIRECTORS
Section 2.1 Board of Directors. The Board of Directors (hereinafter referred to as the "Board"), shall have the power to manage and administer the business and affairs of the Corporation, and, except as expressly limited by law, all corporate powers of the Corporation shall be vested in an may be exercised by said Board unless such powers are required by statute, by the Certificate of Incorporation, or by these By-laws to be done by the shareholders.
Section 2.2 Number and Term. The Board shall consist of not less than three nor more than twenty-five directors, the exact number within such minimum and maximum limits to be fixed and determined from time to time by resolution of a majority of the full Board or by resolution of the shareholders at any meeting of shareholders. Unless sooner removed or disqualified, each director shall hold office until the next annual meeting of the shareholders and until his successor has been elected and qualified.
Section 2.3 Organization Meeting. At its first meeting after each annual meeting of shareholders, the Board shall choose a Chairman of the Board, a President and a Chief Executive Officer from its own members and otherwise organize the new Board and appoint officers of the Corporation for the succeeding year.
Section 2.4 Chairman of the Board. The Chairman of the Board shall preside at all meetings of the Board and of shareholders and perform such duties as shall be assigned to him from time to time by the Board. Except as may be otherwise provided by the By-Laws or the Board, he shall be a member ex officio of all committees authorized by these By-Laws or the Board. He shall be kept informed by the executive officers about the affairs of the Corporation.
Section 2.5 Regular Meetings. The Regular Meetings of the Board shall be held at such time and place as designated by the Board. No notice of a Regular Meeting shall be required if the meeting is held according to a Schedule of Regular Meetings approved by the Board.
Section 2.6 Special Meetings. Special meetings of the Board may be called by the Chairman of the Board, the President, the Chief Executive Officer or the Secretary or at the written request of any three or more directors. Each member of the Board shall be given notice stating the time and place of each such special meeting by telegram, telephone, or similar electronic means, or in person, at lease one day prior to such meeting, or by mail at least three days prior.
Section 2.7 Quorum. Three directors shall constitute a quorum at any meeting, except when otherwise provided by law. If a quorum is not present at any meeting, the directors present may adjourn the meeting, and the meeting may be held, as adjourned, without further notice provided that a quorum is then present. The act of a majority of the directors present at any meeting at which there is a quorum, shall be the act the Board, unless otherwise specifically provided by statute, by the Certificate of Incorporation, or by these By-laws.
Section 2.8 Vacancies. When any vacancy occurs among the directors, the remaining members of the Board may appoint a director to fill each such vacancy at any regular meeting of the Board, or at a special meeting called for that purpose. Any director so appointed shall hold office until the next annual meeting or the shareholders and until his successor has been elected and qualified, unless sooner displaced.
Section 2.9 Removal of Directors. Any director may be removed either with or without cause, at any time, by a vote of the holders of a majority of the shares of the Corporation at any meeting of shareholders called for that purpose. A director may be removed for cause by a vote of a majority of the full Board.
Section 2.10 Compensation of Directors. The Board shall fix the amounts to be paid directors for their services as directors and for their attendance at the meetings of the Board or of committees or otherwise. No director who receives a salary from the Corporation shall receive any fee for attending meetings of the Board or of any of its committees.
Section 2.11 Action of the Board. Except as otherwise provided by law, corporate action to be taken by the Board shall mean such action at a meeting of the Board. Any action required or permitted to be taken by the Board or any committee of the Board may be taken without a meeting if all members of the Board or the committee consent in writing to a resolution authorizing the action. The resolution and the written consents thereto shall be filed with the minutes of the proceedings of the Board or committee. Any one or more members of the Board or any committee may participate in a meeting of the Board or committee by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time. Participation by such means shall constitute presence in person at a meeting.
Section 2.12 Waiver of Notice. Notice of the Meeting need not be given to any director who submits a signed Waiver of Notice whether before or after the meeting, or who attends the meeting without protesting, prior thereto or at its commencement, a lack of such notice.
ARTICLE III
COMMITTEES OF THE BOARD
Section 3.1 Committees. The Board, by a resolution or resolutions adopted by a majority of the members of the whole Board, may appoint an Executive Committee, an Audit Committee, and any other committees as it may deem appropriate. Each committee shall have and may exercise any and all powers as are conferred or authorized by the resolution appointing it. A majority of each committee may determine its action and may fix the time and place of its meetings, unless provided otherwise by the Board. The Board shall have the power at any time to fill vacancies in, to change the size of membership of, and to discharge any committee.
ARTICLE IV
OFFICERS
Section 4.1 President. The Board shall appoint one of its members to be President. In the absence of the Chairman of the Board, the President shall preside at all meetings of the Board and of shareholders. Except as may be otherwise provided by the By-Laws or the Board, he shall be a member ex officio of all committees authorized by these By-Laws or the Board. The President shall have general executive powers, shall participate actively in all major policy decisions and shall have and may exercise any and all other powers and duties pertaining by law, regulation, or practice, to the Office of President, or imposed by these By-Laws. The President shall also have and may exercise such further powers and duties as from time to time may be conferred, or assigned by the Board or the Chief Executive Officer.
Section 4.2 Chief Executive Officer. The Board shall appoint one of its members to be Chief Executive Officer of the Corporation. The Chairman of the Board or the President may at the same time be appointed Chief Executive Officer. The Chief Executive Officer shall exercise general supervision over the policies and business affairs of the Corporation and the carrying out of the policies adopted or approved by the Board. Except as otherwise provided by these By-Laws, he shall have power to determine the duties to be performed by the officers appointed as provided in Section 4.5 of these By-Laws, and to employ and discharge officers and employees. Except as otherwise provided by the By-Laws or the Board, he shall be a member ex officio of all committees authorized by these By-Laws or created by the Board. In the absence of the Chairman of the Board and the President, he shall preside at all meetings of the Board and of shareholders.
Section 4.3 Executive and Other Senior Officers. The Board shall by resolution determine from time to time those officers whose appointment shall require approval by the Board or a committee of the Board. Each such officer shall have such powers and duties as may be assigned by the Board, a committee of the Board, the President or the Chief Executive Officer.
Section 4.4 Secretary. The Board shall appoint a Secretary who shall be the Secretary of the Board and of the Corporation and shall keep accurate minutes of all the meetings of shareholders and of the Board. The Secretary shall attend to the giving of all notices required to be given by these By- Laws; shall be custodian of the corporate seal, records, documents, and papers of the Corporation; shall provide for the keeping of proper records of all transactions of the Corporation; shall have and may exercise any and all other powers and duties pertaining by law, regulation or practice, to the Office of Secretary, or imposed by these By-Laws; and shall also perform such other duties as may be assigned from time to time by the Board, the President or the Chief Executive Officer.
Section 4.5 Other Officers. The President or the Chief Executive Officer or his designee may appoint all officers whose appointment does not require approval by the Board or a committee of the Board, and assign to them such titles, as from time to time may appear to be required or desirable to transact the business of the Corporation. Each such officer shall have such powers and duties as may be assigned by the Board, the President or the Chief Executive Officer.
Section 4.6 Tenure of Office. The Chairman of the Board, the President and the Chief Executive Officer shall hold office for the current year for which the Board was elected, unless they shall resign, become disqualified, or be removed. All other officers shall hold office until their successors have been appointed and qualify unless they shall resign, become disqualified or be removed. The Board shall have the power to remove the Chairman of the Board, the President and the Chief Executive Officer. The Board or the Chief Executive Officer or his designee shall have the power to remove all other officers and employees. Any vacancy occurring in the offices of Chairman of the Board, President or Chief Executive Officer shall be filled promptly by the Board.
Section 4.7 Compensation. The Board shall by resolution determine from time to time the officers whose compensation will require approval by the Board or a committee of the Board. The Chief Executive Officer shall fix the compensation of all officers and employees whose compensation does not require approval by the Board.
ARTICLE V
STOCK AND STOCK CERTIFICATES
Section 5.1 Transfers. Shares of stock shall be transferable on the books of the Corporation only by the person named in the certificate or by an attorney, lawfully constituted in writing, and upon surrender of the certificate therefor. Every person becoming a shareholder by such transfer shall, in proportion to his shares, succeed to all rights of the prior holder of such shares.
Section 5.2 Stock Certificates. The certificates of stock of the Corporation shall be numbered and shall be entered in the books of the Corporation as they are issued. They shall exhibit the holder's name and number of shares and shall be signed by the Chairman of the Board, the President, the Chief Executive Officer, a Vice President or any other officer appointed by the Board for this purpose, and the Secretary or an Assistant Secretary.
ARTICLE VI
CORPORATE SEAL
Section 6.1 Corporate Seal. The Chairman of the Board, the President the Chief Executive Officer, the Secretary, any Assistant Secretary, Vice President, Assistant Vice President, or other officer thereunto designated by the Board or the Chief Executive Officer or his designee, shall have authority to affix the corporate seal to any document requiring such seal, and to attest the same. Such seal shall be substantially in the following form:
(impression ) ( of ) ( Seal )
ARTICLE VII
MISCELLANEOUS PROVISIONS
Section 7.1 Fiscal Year. The Fiscal Year of the Corporation shall be the calendar year.
Section 7.2 Execution of Instruments. All agreements, indentures, mortgages, deeds, conveyances, transfers, certificates, declarations, receipts, discharges, releases, satisfactions, settlements, petitions, schedules, accounts, affidavits, bonds, undertakings, proxies and other instruments or documents may be signed, executed, acknowledged, verified, delivered or accepted on behalf of the Corporation by the Chairman of the Board, or the President, or the Chief Executive Officer, or the Secretary, or any Vice President, or any other officer or employee designated by the Board or the Chief Executive Officer of his designee. Any such instruments may also be executed, acknowledged, verified, delivered or accepted in behalf of the Corporation in such other manner and by such other officers as the Board may from time to time direct. The provisions of this Section 7.2 are supplementary to any other provisions of these By- Laws. Each of the foregoing authorizations shall be at the pleasure of the Board, and each such authorization by the Chief Executive Officer or his designee also shall be at the pleasure of the Chief Executive Officer.
Section 7.3 Records. The By-Laws and the proceedings of all meeting of the shareholders, the Board, and standing committees of the Board, shall be recorded in appropriate minute books provided for the purpose. The minutes of each meeting shall be signed by the Secretary or other officer appointed to act as Secretary of the meeting.
Section 7.4 Emergency Operations. In the event of war or warlike damage or disaster of sufficient severity to prevent the conduct and management of the affairs, business, and property of the Corporation by its directors and officers as contemplated by these By-Laws, any two or more available members of the then incumbent Board shall constitute a quorum for the full conduct and management of the affairs, business, and property of the Corporation. This By-Law shall be subject to implementation by resolutions of the Board passed from time to time for that purpose, and any provisions of these By-Laws (other than this Section) and any resolutions which are contrary to the provisions of this Section or to the provisions of any such implementary resolutions shall be suspended until it shall be determined by any interim Board acting under this Section that it shall be to the advantage of the Corporation to resume the conduct and management of its affairs, business, and property under all of the other provisions of these By-Laws.
Section 7.5 (a) Right to Indemnification. Each person who was or is made a party or is threatened to be made a party to or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was a director or officer of the Corporation or, while a director or officer of the Corporation is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to an employee benefit plan (an "Indemnitee"), whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director or officer, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended, against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid in settlement) reasonably incurred or suffered by such Indemnitee in connection therewith and such indemnification shall continue as to an Indemnitee who has ceased to be a director or officer and shall inure to the benefit of the Indemnitee's heirs, executors and administrators; provided, however, that, except as provided in Section 7.5(b) hereof with respect to proceedings to enforce rights to indemnification, the Corporation shall indemnify any such Indemnitee in connection with a proceeding (or party thereof) initiated by such Indemnitee only if such proceeding (or part thereof) was authorized by the Board. The right to indemnification conferred in this Section 7.5 shall be a contract right and shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that, if the Delaware General Corporation Law so requires, an advancement of expenses incurred by an Indemnitee shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such Indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal that such Indemnitee is not entitled to be indemnified for such expenses under this Section or otherwise.
(b) Right of Indemnitee to Bring Suit. If a claim under paragraph (a) of this Section 7.5 is not paid in full by the Corporation within sixty days after a written claim has been received by the Corporation, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be twenty days, the Indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of such Indemnittee's undertaking the Indemnitee shall be entitled to be paid the expense of prosecuting or defending such suit. In any suit brought by the Indemnitee to enforce a right to indemnification hereunder it shall be a defense that, and in any suit by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking the Corporation shall be entitled to recover such expenses upon a final adjudication that, the Indemnitee has not met the applicable standard of conduct set forth in the Delaware General Corporation Law. Neither the failure of the Corporation to have made a determination prior to the commencement of such suit that indemnification of the Indemnitee is proper in the circumstances because the Indemnitee has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the Corporation that the Indemnitee has not met such applicable standard of conduct, shall create a presumption that the Indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the Indemnitee, be a defense to such suit. In any suit brought by the Indemnitee to enforce a right to indemnification or to an advancement of expenses hereunder, or by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking by the Indemnitee, the Corporation shall have the burden of proving that the Indemnitee is not entitled to be indemnified, or to such advancement of expenses, under this Section 7.5 or otherwise.
(c) Non-Exclusivity of Rights. The rights to indemnification and to the advancement of expenses conferred in this Section 7.5 shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, the Corporation's Certificate of Incorporation, By-Law, agreement, vote of shareholders or disinterested directors or otherwise.
(d) Indemnification of Employees and Agents of the Corporation. The Corporation may, to the extent authorized from time to time by the Board, grant rights to indemnification, and to the advancement of expenses to any employee or agent of the Corporation to the fullest extent of the provisions of this Section 7.5 with respect to the indemnification and advancement of expenses of directors and officers of the Corporation.
(e) Insurance. The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law, as the same exists or may hereafter be amended.
Section 7.6 Amendments. The By-Laws may be added to, amended, altered or repealed at any regular meeting of the Board, by a vote of a majority of the total number of the directors, or at any meeting of shareholders, duly called and held, by a majority of the stock represented at such meeting.
I, Gea Tung, CERTIFY that: (1) I am the duly constituted Assistant Secretary of HSBC Americas, Inc. and as such officer have access to its official records; (2) the foregoing By-Laws are the By-Laws of said Corporation, and all of them are now lawfully in force and effect.
IN TESTIMONY WHEREOF, I have hereunto affixed my official signature and the seal of the said Corporation, in the city of Buffalo, New York, on this 22nd day of March, 1996.
/s/ Gea Tung
dl/HAIBYLAW.mis