Loans

9 Months Ended

Sep. 30, 2012

Loans

6.    Loans

Loans consisted of the following:

	September 30, 2012		December 31, 2011
	(in millions)
Commercial loans:
Construction and other real estate	$	7,920	$	7,860
Business banking and middle markets enterprises		12,497		10,225
Global banking(1)		19,011		12,658
Other commercial		3,140		2,906
Total commercial		42,568		33,649
Consumer loans:
Home equity mortgages		2,387		2,563
Other residential mortgages		15,086		14,113
Credit cards		796		828
Other consumer		615		714
Total consumer		18,884		18,218
Total loans	$	61,452	$	51,867

⁽¹⁾  Represents large multinational firms including globally focused U.S. corporate and financial institutions and USD lending to select high quality Latin American and other multinational customers managed by HSBC on a global basis.

Net deferred origination costs totaled $30 million and $48 million at September 30, 2012 and December 31, 2011, respectively.

At September 30, 2012 and December 31, 2011, we had net unamortized premium on our loans of $29 million and $28 million, respectively. We amortized net premiums of $2 million and $20 million on our loans for the three and nine months ended September 30, 2012, respectively, compared to $10 million and $38 million on our loans for the three and nine months ended September 30, 2011.

Age Analysis of Past Due Loans  The following table summarizes the past due status of our loans at September 30, 2012 and December 31, 2011. The aging of past due amounts are determined based on the contractual delinquency status of payments under the loan. An account is generally considered to be contractually delinquent when payments have not been made in accordance with the loan terms. Delinquency status may be affected by customer account management policies and practices such as re-age or modification.

	Days Past Due
At September 30, 2012	1 - 29 days		30 - 89 days		90+ days		Total Past Due		Current		Total Loans
	(in millions)
Commercial loans:
Construction and other real estate	$	94	$	72	$	105	$	271	$	7,649	$	7,920
Business banking and middle market enterprises		486		82		52		620		11,877		12,497
Global banking		284		-		8		292		18,719		19,011
Other commercial		605		9		26		640		2,500		3,140
Total commercial		1469		163		191		1,823		40,745		42,568
Consumer loans:
HELOC and home equity mortgages		380		20		86		486		1,901		2,387
Other residential mortgages		104		460		907		1,471		13,615		15,086
Credit cards		29		15		15		59		737		796
Other consumer		7		5		32		44		571		615
Total consumer		520		500		1,040		2,060		16,824		18,884
Total loans	$	1,989	$	663	$	1,231	$	3,883	$	57,569	$	61,452

	Days Past Due
At December 31, 2011	1 - 29 days		30 - 89 days		90+ days		Total Past Due		Current		Total Loans
	(in millions)
Commercial loans:
Construction and other real estate	$	72	$	31	$	231	$	334	$	7,526	$	7,860
Business banking and middle market enterprises		615		58		71		744		9,481		10,225
Global banking		898		34		74		1,006		11,652		12,658
Other commercial		350		84		21		455		2,451		2,906
Total commercial		1,935		207		397		2,539		31,110		33,649
Consumer loans:
HELOC and home equity mortgages		181		54		89		324		2,239		2,563
Other residential mortgages		109		526		815		1,450		12,663		14,113
Credit cards		37		20		20		77		751		828
Other consumer		11		6		35		52		662		714
Total consumer		338		606		959		1,903		16,315		18,218
Total loans	$	2,273	$	813	$	1,356	$	4,442	$	47,425		51,867

Nonaccrual Loans  Nonaccrual loans totaled $1.8 billion at both September 30, 2012 and December 31, 2011, respectively. Interest income that would have been recorded if such nonaccrual loans had been current and in accordance with contractual terms was approximately $37 million and $92 million for the three and nine months ended September 30, 2012, respectively, compared to $27 million and $86 million for the three and nine months ended September 30, 2011, respectively. Interest income (expense) that was included in finance and other interest income on these loans was $10 million for both the three and nine months ended September 30, 2012, respectively, compared to $4 million and $13 million for the three and nine months ended September 30, 2011, respectively. For an analysis of reserves for credit losses, see Note 7, “Allowance for Credit Losses.”

Nonaccrual loans and accruing receivables 90 days or more delinquent are summarized in the following table:

	September 30, 2012		December 31, 2011
	(in millions)
Nonaccrual loans:
Commercial:
Real Estate:
Construction and land loans	$	98	$	103
Other real estate		353		512
Business banking and middle markets enterprises		46		58
Global banking		142		137
Other commercial		19		15
Total commercial		658		825
Consumer:
Residential mortgages, excluding home equity mortgages		979		815
Home equity mortgages		97		89
Total residential mortgages(1)(2)		1,076		904
Other consumer loans		5		8
Total consumer loans		1,081		912
Nonaccrual loans held for sale		51		91
Total nonaccruing loans		1,790		1,828
Accruing loans contractually past due 90 days or more:
Commercial:
Real Estate:
Construction and land loans		-		-
Other real estate		1		1
Business banking and middle market enterprises		7		11
Other commercial		1		2
Total commercial		9		14
Consumer:
Credit card receivables		15		20
Other consumer		27		27
Total consumer loans		42		47
Total accruing loans contractually past due 90 days or more		51		61
Total nonperforming loans	$	1,841	$	1,889

⁽¹⁾  Nonaccrual residential mortgages includes all receivables which are 90 or more days contractually delinquent as well as second lien loans where the first lien loan that we own or service is 90 or more days contractually delinquent.

⁽²⁾  In the third quarter of 2012, we reclassified $83 million of residential mortgage loans discharged under Chapter 7 bankruptcy and not re-affirmed to nonaccrual, consistent with recently issued regulatory guidance. Interest income reversed on these loans was not material.

Impaired Loans  A loan is considered to be impaired when it is deemed probable that not all principal and interest amounts due according to the contractual terms of the loan agreement will be collected. Probable losses from impaired loans are quantified and recorded as a component of the overall allowance for credit losses. Commercial and consumer loans for which we have modified the loan terms as part of a troubled debt restructuring are considered to be impaired loans. Additionally, commercial loans in nonaccrual status, or that have been partially charged-off or assigned a specific allowance for credit losses are also considered impaired loans.

Troubled debt restructurings  Troubled debt restructurings (“TDR Loans”) represent loans for which the original contractual terms have been modified to provide for terms that are less than what we would be willing to accept for new loans with comparable risk because of deterioration in the borrower’s financial condition.

Modifications to consumer and commercial loans may include changes to one or more terms of the loan, including, but not limited to, a change in interest rate, extension of the amortization period, reduction in payment amount and partial forgiveness or deferment of principal. A substantial amount of our modifications involve interest rate reductions which lower the amount of interest income we are contractually entitled to receive in future periods. Through lowering the interest rate and other loan term changes, we believe we are able to increase the amount of cash flow that will ultimately be collected from the loan, given the borrower’s financial condition. TDR Loans are reserved for either based on the present value of expected future cash flows discounted at the loans’ original effective interest rate which generally results in a higher reserve requirement for these loans or in the case of certain secured commercial loans, the estimated fair value of the underlying collateral. Once a consumer loan is classified as a TDR Loan, it continues to be reported as such until it is paid off or charged-off. For commercial loans, if subsequent performance is in accordance with the new terms and such terms reflect current market rates at the time of restructure, they will no longer be reported as a TDR loan beginning in the year after restructure.

The following table presents information about receivables which were modified during the three and nine months ended September 30, 2012 and as a result of this action became classified as TDR Loans.

	Three Months  Ended September 30,				Nine Months  Ended September 30,
	2012		2011		2012		2011
	(in millions)
Commercial loans:
Construction and other real estate	$	38	$	27	$	105	$	40
Business banking and middle market enterprises		1		-		22		6
Total commercial		39		27		127		46
Consumer loans:
Residential mortgages		220		56		328		189
Credit cards		1		2		3		5
Total consumer		221		58		331		194
Total	$	260	$	85	$	458	$	240

The following tables present information about our TDR Loans and the related credit loss reserves for TDR Loans:

	September 30, 2012		December 31, 2011
	(in millions)
TDR Loans(1)(2):
Commercial loans:
Construction and other real estate	$	375	$	342
Business banking and middle market enterprises		84		94
Other commercial		33		37
Total commercial		492		473
Consumer loans:
Residential mortgages		883		608
Credit cards		16		21
Total consumer		899		629
Total TDR Loans(3):	$	1,391	$	1,102

	September 30, 2012		December 31, 2011
	(in millions)
Allowance for credit losses on TDR Loans(4):
Commercial loans:
Construction and other real estate	$	30	$	17
Business banking and middle market enterprises		3		3
Total commercial		33		20
Consumer loans:
Residential mortgages		113		94
Credit cards		5		7
Total consumer		118		101
Total Allowance for credit losses on TDR Loans	$	151	$	121

⁽¹⁾  TDR Loans are considered to be impaired loans. For consumer loans, all such loans are considered impaired loans regardless of accrual status. For commercial loans, impaired loans include other loans in addition to TDRs which totaled $378 million and $614 million at September 30, 2012 and December 31, 2011, respectively.

⁽²⁾  The TDR Loan balances included in the table above reflect the current carrying amount of TDR Loans and includes all basis adjustments on the loan, such as unearned income, unamortized deferred fees and costs on originated loans, partial charge-offs and premiums or discounts on purchased loans. The following table reflects the unpaid principal balance of TDR Loans:

	September 30, 2012		December 31, 2011
	(in millions)
Commercial loans:
Construction and other real estate	$	407	$	393
Business banking and middle market enterprises		124		147
Other commercial		36		40
Total commercial		567		580
Consumer loans:
Residential mortgages		1,018		682
Credit cards		16		20
Total consumer		1,034		702
Total	$	1,601	$	1,282

⁽³⁾  Includes balances of $525 million and $331 million at September 30, 2012 and December 31, 2011, respectively, which are classified as nonaccrual loans.

⁽⁴⁾  Included in the allowance for credit losses.

In the third quarter of 2012, we added $186 million of loans discharged under Chapter 7 bankruptcy and not re-affirmed to our residential mortgage TDR Loan balances, consistent with recently issued regulatory guidance. The impact on the allowance for credit losses was insignificant. These loans will be written down to the lower of amortized cost or fair value of the collateral less cost to sell during the fourth quarter of 2012.

Additional information relating to TDR Loans is presented in the table below.

	Three Months  Ended September 30,				Nine Months  Ended September 30,
	2012		2011		2012		2011
	(in millions)
Average balance of TDR Loans:
Commercial loans:
Construction and other real estate	$	364	$	330	$	361	$	360
Business banking and middle market enterprises		85		87		92		88
Other commercial		34		44		34		47
Total commercial		483		461		487		495
Consumer loans:
Residential mortgages		745		550		676		529
Credit cards		17		23		16		24
Total consumer		762		573		692		553
Total average balance of TDR Loans	$	1,245	$	1,034	$	1,179	$	1,048
Interest income recognized on TDR Loans:
Commercial loans:
Construction and other real estate	$	2	$	2	$	6	$	7
Other commercial		3		1		6		4
Total commercial		5		3		12		11
Consumer loans:
Residential mortgages		8		5		22		15
Credit cards		-		-		-		1
Total consumer		8		5		22		16
Total interest income recognized on TDR Loans	$	13	$	8	$	34	$	27

The following table presents loans which were classified as TDR Loans during the previous 12 months which became 90 days or greater contractually delinquent (for consumer loans 60 days or greater contractually delinquent) during the three and nine months ended September 30, 2012:

	Three Months  Ended September 30,				Nine Months  Ended September 30,
	2012		2011		2012		2011
	(in millions)
Commercial loans:
Construction and other real estate	$	-	$	-	$	-	$	48
Business banking and middle market enterprises		-		-		-		-
Total commercial		-		-		-		48
Consumer loans:
Residential mortgages		57		4		159		9
Credit cards		-		1		-		3
Total consumer		57		5		159		12
Total	$	57	$	5	$	159	$	60

Impaired commercial loans  Impaired commercial loan statistics are summarized in the following table:

	Amount with Impairment Reserves		Amount without Impairment Reserves		Total Impaired Commercial Loans(1)(2)		Impairment Reserve
	(in millions)
At September 30, 2012:
Construction and other real estate	$	235	$	298	$	533	$	102
Business banking and middle market enterprises		58		50		108		10
Global banking		125		18		143		15
Other commercial		3		83		86		1
Total	$	421	$	449	$	870	$	128
At December 31, 2011:
Construction and other real estate	$	391	$	342	$	733	$	114
Business banking and middle market enterprises		68		59		127		12
Global banking		137		-		137		90
Other commercial		1		89		90		-
Total	$	597	$	490	$	1,087	$	216

⁽¹⁾  Includes impaired commercial loans which are also considered TDR Loans as follows:

	September 30, 2012		December 31, 2011
	(in millions)
Construction and other real estate	$	375	$	342
Business banking and middle market enterprises		84		94
Other commercial		33		37
Total	$	492	$	473

⁽²⁾  The impaired commercial loan balances included in the table above reflect the current carrying amount of the loan and includes all basis adjustments, such as unamortized deferred fees and costs on originated loans, any premiums or discounts and any principal write-downs. The unpaid principal balance of impaired commercial loans included in the table above are as follows:

	September 30, 2012		December 31, 2011
	(in millions)
Construction and other real estate	$	565	$	784
Business banking and middle market enterprises		148		180
Global banking		143		137
Other commercial		89		93
Total	$	945	$	1,194

The following table presents information about average impaired commercial loan balances and interest income recognized on the impaired commercial loans:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
	(in millions)
Average balance of impaired commercial loans:
Construction and other real estate	$	562	$	703	$	628	$	745
Business banking and middle market enterprises		112		156		122		157
Global banking		129		111		103		100
Other commercial		87		123		88		116
Total average balance of impaired commercial loans	$	890	$	1,093	$	941	$	1,118
Interest income recognized on impaired commercial loans:
Construction and other real estate	$	5	$	1	$	8	$	5
Business banking and middle market enterprises		2		1		4		3
Other commercial		1		1		2		2
Total interest income recognized on impaired commercial loans	$	8	$	3	$	14	$	10

Commercial Loan Credit Quality Indicators  The following credit quality indicators are monitored for our commercial loan portfolio:

Criticized asset classifications  These classifications are based on the risk rating standards of our primary regulator. Problem loans are assigned various criticized facility grades. We also assign obligor grades which are used under our allowance for credit losses methodology. Criticized assets for commercial loans are summarized in the following table:

	Special Mention		Substandard		Doubtful		Total
	(in millions)
At September 30, 2012:
Construction and other real estate	$	680	$	782	$	116	$	1,578
Business banking and middle market enterprises		383		155		9		547
Global banking		99		83		124		306
Other commercial		38		75		8		121
Total commercial	$	1,200	$	1,095	$	257	$	2,552
At December 31, 2011:
Construction and other real estate	$	1,009	$	990	$	186	$	2,185
Business banking and middle market enterprises		445		241		12		698
Global banking		45		397		109		551
Other commercial		99		131		-		230
Total commercial	$	1,598	$	1,759	$	307	$	3,664

Nonperforming  The status of our commercial loan portfolio is summarized in the following table:

	Performing Loans		Nonaccrual Loans		Accruing Loans Contractually Past Due 90 days or More		Total
	(in millions)
At September 30, 2012:
Construction and other real estate	$	7,468	$	451	$	1	$	7,920
Business banking and middle market enterprise		12,444		46		7		12,497
Global banking		18,869		142		-		19,011
Other commercial		3,120		19		1		3,140
Total commercial	$	41,901	$	658	$	9	$	42,568
At December 31, 2011:
Construction and other real estate	$	7,244	$	615	$	1	$	7,860
Business banking and middle market enterprise		10,156		58		11		10,225
Global banking		12,521		137		-		12,658
Other commercial		2,889		15		2		2,906
Total commercial	$	32,810	$	825	$	14	$	33,649

Credit risk profile  The following table shows the credit risk profile of our commercial loan:

	Investment  Grade(1)		Non-Investment Grade		Total
	(in millions)
At September 30, 2012:
Construction and other real estate	$	3,851	$	4,069	$	7,920
Business banking and middle market enterprises		6,271		6,226		12,497
Global banking		15,967		3,044		19,011
Other commercial		1,203		1,937		3,140
Total commercial	$	27,292	$	15,276	$	42,568
At December 31, 2011:
Construction and other real estate	$	3,133	$	4,727	$	7,860
Business banking and middle market enterprises		4,612		5,613		10,225
Global banking		9,712		2,946		12,658
Other commercial		843		2,063		2,906
Total commercial	$	18,300	$	15,349	$	33,649

⁽¹⁾  Investment grade includes commercial loans with borrowers that have credit ratings of at least BBB- or above or the equivalent based on our internal credit rating system.

Consumer Loan Credit Quality Indicators  The following credit quality indicators are monitored for our consumer loan portfolio:

Delinquency  The following table summarizes dollars of two-months-and-over contractual delinquency and as a percent of total loans and loans held for sale (“delinquency ratio”) for our consumer loan:

	September 30, 2012					December 31, 2011
	Dollars of Delinquency		Delinquency Ratio			Dollars of Delinquency		Delinquency Ratio
	(dollars are in millions)
Consumer:
Residential mortgage, excluding home equity mortgages(1)	$	1,100		7.04	%	$	1,101		7.19	%
Home equity mortgages		67		2.81			99		2.89
Total residential mortgages		1,167		6.48			1,200		6.41
Credit card receivables		22		2.76			28		2.25
Other consumer		29		4.26			30		3.17
Total consumer	$	1,218		6.25	%	$	1,258		6.01	%

⁽¹⁾  At September 30, 2012 and December 31, 2011, residential mortgage loan delinquency includes $970 million and $803 million, respectively, of loans that are carried at the lower of amortized cost or fair value of the collateral less cost to sell.

Nonperforming  The status of our consumer loan portfolio is summarized in the following table:

	Performing Loans		Nonaccrual Loans		Accruing Loans Contractually Past Due 90 days or More		Total
	(in millions)
At September 30, 2012:
Consumer:
Residential mortgage, excluding home equity mortgages(1)	$	14,107	$	979	$	-	$	15,086
Home equity mortgages		2,290		97		-		2,387
Total residential mortgages		16,397		1,076		-		17,473
Credit card receivables		781		-		15		796
Other consumer		583		5		27		615
Total consumer	$	17,761	$	1,081	$	42	$	18,884
At December 31, 2011:
Consumer:
Residential mortgage, excluding home equity mortgages	$	13,298	$	815	$	-	$	14,113
Home equity mortgages		2,474		89		-		2,563
Total residential mortgages		15,772		904		-		16,676
Credit card receivables		808		-		20		828
Other consumer		679		8		27		714
Total consumer	$	17,259	$	912	$	47	$	18,218

⁽¹⁾  In the third quarter of 2012, we reclassified $83 million of residential mortgage loans discharged under Chapter 7 bankruptcy and not re-affirmed to nonaccrual, consistent with recently issued regulatory guidance. Interest income reversed on these loans was not material.

Troubled debt restructurings  See discussion of impaired loans above for further details on this credit quality indicator.

Concentrations of Credit Risk  Our loan portfolio includes the following types of loans:

• High loan-to-value (“LTV”) loans – Certain residential mortgages on primary residences with LTV ratios equal to or exceeding 90 percent at the time of origination and no mortgage insurance, which could result in the potential inability to recover the entire investment in loans involving foreclosed or damaged properties.

• Interest-only loans – A loan which allows a customer to pay the interest-only portion of the monthly payment for a period of time which results in lower payments during the initial loan period. However, subsequent events affecting a customer’s financial position could affect the ability of customers to repay the loan in the future when the principal payments are required.

• Adjustable rate mortgage (“ARM”) loans – A loan which allows us to adjust pricing on the loan in line with market movements. A customer’s financial situation and the general interest rate environment at the time of the interest rate reset could affect the customer’s ability to repay or refinance the loan after the adjustment.

The following table summarizes the balances of high LTV, interest-only and ARM loans in our loan portfolios, including certain loans held for sale, at September 30, 2012 and December 31, 2011, respectively. Loans may appear in more than one category.

	September 30, 2012		December 31, 2011
	(in billions)
Residential mortgage loans with high LTV and no mortgage insurance(1)	$	.9	$	1.1
Interest-only residential mortgage loans		4.0		3.9
ARM loans(2)		10.2		9.9

⁽¹⁾  Residential mortgage loans with high LTV and no mortgage insurance includes both fixed rate and adjustable rate mortgages. Excludes $34 million and $68 million of sub-prime residential mortgage loans held for sale at September 30, 2012 and December 31, 2011, respectively.

⁽²⁾  ARM loan balances above exclude $23 million and $28 million of sub-prime residential mortgage loans held for sale at September 30, 2012 and December 31, 2011, respectively. During the remainder of 2012 and during 2013, approximately $43 million and $334 million, respectively, of these ARM loans will experience their first interest rate reset.

Concentrations of first and second liens within the outstanding residential mortgage loan portfolio are summarized in the following table. Amounts in the table exclude closed end first lien loans held for sale of $0.5 billion and $2.0 billion at September 30, 2012 and December 31, 2011, respectively.

	September 30, 2012		December 31, 2011
	(in millions)
Closed end:
First lien	$	15,086	$	14,113
Second lien		197		237
Revolving:
Second lien		2,190		2,326
Total	$	17,473	$	16,676