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Loans

6 Months Ended

Jun. 30, 2012

Loans, Allowance for Credit Losses and Loans Held for Sale [Abstract]

6. Loans

Loans consisted of the following:


	June 30, 2012		December 31, 2011
	(in millions)
Commercial loans:
Construction and other real estate	$	7,977	$	7,860
Business banking and middle markets enterprises		11,256		10,225
Global banking⁽¹⁾		15,042		12,658
Other commercial		3,142		2,906

Total commercial		37,417		33,649

Consumer loans:
Home equity mortgages		2,455		2,563
Other residential mortgages		14,758		14,113
Credit cards		783		828
Other consumer		651		714

Total consumer		18,647		18,218

Total loans	$	56,064	$	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 $36 million and $48 million at June 30, 2012 and December 31, 2011, respectively.

At June 30, 2012 and December 31, 2011, we had net unamortized premium on our loans of $26 million and $28 million, respectively. We amortized net premiums of $9 million and $18 million on our loans for the three and six months ended June 30, 2012, respectively, compared to $15 million and $30 million on our loans for the three and six months ended June 30, 2011.

Age Analysis of Past Due Loans The following table summarizes the past due status of our loans at June 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 June 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

100

114

252

7,725

7,977

Business banking and middle market enterprises

496

584

10,672

11,256

Global banking

110

118

14,924

15,042

Other commercial

554

597

2,545

3,142

Total commercial

1,260

199

1,551

35,866

37,417

Consumer loans:

HELOC and home equity mortgages

145

262

2,193

2,455

Other residential mortgages

100

465

844

1,409

13,349

14,758

Credit cards

720

783

Other consumer

605

651

Total consumer

286

525

969

1,780

16,867

18,647

Total loans

1,546

617

1,168

3,331

52,733

56,064


	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 $1.6 billion and $1.8 billion at June 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 $26 million and $55 million for the three and six months ended June 30, 2012, respectively, compared to $32 million and $59 million for the three and six months ended June 30, 2011, respectively. Interest income (expense) that was included in finance and other interest income on these loans was $2 million and less than $1 million for the three and six months ended June 30, 2012, respectively, compared to $8 million and $9 million for the three and six months ended June 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:


	June 30, 2012		December 31, 2011
	(in millions)
Nonaccrual loans:
Commercial:
Real Estate:
Construction and land loans	$	101	$	103
Other real estate		374		512
Business banking and middle markets enterprises		46		58
Global banking		114		137
Other commercial		19		15

Total commercial		654		825

Consumer:
Residential mortgages, excluding home equity mortgages		844		815
Home equity mortgages		77		89

Total residential mortgages⁽¹⁾		921		904
Other consumer loans		5		8

Total consumer loans		926		912

Nonaccrual loans held for sale		65		91

Total nonaccruing loans		1,645		1,828

Accruing loans contractually past due 90 days or more:
Commercial:
Real Estate:
Construction and land loans		-		-
Other real estate		-		1
Business banking and middle market enterprises		2		11
Global banking		-		-
Other commercial		1		2

Total commercial		3		14

Consumer:
Credit card receivables		17		20
Other consumer		26		27

Total consumer loans		43		47

Total accruing loans contractually past due 90 days or more		46		61

Total nonperforming loans	$	1,691	$	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.

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 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.

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


	Three Months Ended June 30, 2012		Six Months Ended June 30, 2012
	(in millions)
Commercial loans:
Construction and other real estate	$	-	$	70
Business banking and middle market enterprises		-		22
Global banking		-		-
Other commercial		-		-

Total commercial		-		92

Consumer loans:
Residential mortgages		52		108
Credit cards		-		-

Total consumer		52		108

Total	$	52	$	200

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


	June 30, 2012		December 31, 2011
	(in millions)
TDR Loans⁽¹⁾⁽²⁾:
Commercial loans:
Construction and other real estate	$	353	$	342
Business banking and middle market enterprises		86		94
Global banking		-		-
Other commercial		34		37

Total commercial		473		473

Consumer loans:
Residential mortgages		677		608
Credit cards		18		21

Total consumer		695		629

Total TDR Loans⁽³⁾:	$	1,168	$	1,102


	June 30, 2012		December 31, 2011
	(in millions)
Allowance for credit losses on TDR Loans⁽⁴⁾:
Commercial loans:
Construction and other real estate	$	26	$	17
Business banking and middle market enterprises		3		3
Global banking		-		-
Other commercial		-		-

Total commercial		29		20

Consumer loans:
Residential mortgages		97		94
Credit cards		6		7

Total consumer		103		101

Total Allowance for credit losses on TDR Loans	$	132	$	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 $434 million and $614 million at June 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:


	June 30, 2012		December 31, 2011
	(in millions)
Commercial loans:
Construction and other real estate	$	374	$	393
Business banking and middle market enterprises		135		147
Global banking		-		-
Other commercial		37		40

Total commercial		546		580

Consumer loans:
Residential mortgages		770		682
Credit cards		18		20

Total consumer		788		702

Total	$	1,334	$	1,282

⁽³⁾	Includes balances of $377 million and $331 million at June 30, 2012 and December 31, 2011, respectively, which are classified as nonaccrual loans.

(4)	Included in the allowance for credit losses.

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


	Three Months Ended June 30,				Six Months Ended June 30,
	2012		2011		2012		2011
	(in millions)
Average balance of TDR Loans:
Commercial loans:
Construction and other real estate	$	360	$	357	$	358	$	373
Business banking and middle market enterprises		96		84		98		87
Large corporate		-		-		-		-
Other commercial		35		50		36		49

Total commercial		491		491		492		509

Consumer loans:
Residential mortgages		669		477		653		456
Credit cards		18		24		19		25

Total consumer		687		501		672		481

Total average balance of TDR Loans	$	1,178	$	992	$	1,164	$	990

Interest income recognized on TDR Loans:
Commercial loans:
Construction and other real estate	$	2	$	2	$	4	$	3
Business banking and middle market enterprises		-		-		-		-
Large corporate		-		-		-		-
Other commercial		2		1		3		3

Total commercial		4		3		7		6

Consumer loans:
Residential mortgages		7		5		13		8
Credit cards		-		-		-		1

Total consumer		7		5		13		9

Total interest income recognized on TDR Loans	$	11	$	8	$	20	$	15

The following table presents commercial 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 six months ended June 30, 2012:


	Three Months Ended June 30, 2012		Six Months Ended June 30, 2012
	(in millions)
Commercial loans:
Construction and other real estate	$	-	$	-
Business banking and middle market enterprises		-		-
Global banking		-		-
Other commercial		-		-

Total commercial		-		-

Consumer loans:
Residential mortgages		7		13
Credit cards		-		-

Total consumer		7		13

Total	$	7	$	13

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 June 30, 2012:
Construction and other real estate	$	267	$	324	$	591	$	111
Business banking and middle market enterprises		55		60		115		7
Global banking		96		18		114		13
Other commercial		3		84		87		1

Total	$	421	$	486	$	907	$	132

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:


	June 30, 2012		December 31, 2011
	(in millions)
Construction and other real estate	$	353	$	342
Business banking and middle market enterprises		86		94
Global banking		-		-
Other commercial		34		37

Total	$	473	$	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:


	June 30, 2012		December 31, 2011
	(in millions)
Construction and other real estate	$	613	$	784
Business banking and middle market enterprises		164		180
Global banking		114		137
Other commercial		90		93

Total	$	981	$	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 June 30,				Six Months Ended June 30,
	2012		2011		2012		2011
	(in millions)
Average balance of impaired commercial loans:
Construction and other real estate	$	624	$	759	$	660	$	757
Business banking and middle market enterprises		127		161		127		158
Large corporate		66		74		90		84
Other commercial		88		103		89		107

Total average balance of impaired commercial loans	$	905	$	1,097	$	966	$	1,106

Interest income recognized on impaired commercial loans:
Construction and other real estate	$	1	$	2	$	3	$	3
Business banking and middle market enterprises		1		1		2		2
Large corporate		-		-		-		-
Other commercial		1		-		1		1

Total interest income recognized on impaired commercial loans	$	3	$	3	$	6	$	6

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 June 30, 2012:
Construction and other real estate	$	805	$	969	$	132	$	1,906
Business banking and middle market enterprises		447		155		8		610
Global banking		64		97		96		257
Other commercial		46		74		1		121

Total commercial	$	1,362	$	1,295	$	237	$	2,894

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 June 30, 2012:
Construction and other real estate	$	7,502	$	475	$	-	$	7,977
Business banking and middle market enterprise		11,208		46		2		11,256
Global banking		14,928		114		-		15,042
Other commercial		3,122		19		1		3,142

Total commercial	$	36,760	$	654	$	3	$	37,417

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 June 30, 2012:
Construction and other real estate	$	3,343	$	4,634	$	7,977
Business banking and middle market enterprises		5,608		5,648		11,256
Global banking		13,333		1,709		15,042
Other commercial		1,212		1,930		3,142

Total commercial	$	23,496	$	13,921	$	37,417

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:


	June 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⁾	$	1,107		7.16	%	$	1,101		7.19	%
Home equity mortgages		62		2.33			99		2.89

Total residential mortgages		1,169		6.45			1,200		6.41
Credit card receivables		23		2.62			28		2.25
Other consumer		28		3.68			30		3.17

Total consumer	$	1,220		6.18	%	$	1,258		6.01	%

⁽¹⁾	At June 30, 2012 and December 31, 2011, residential mortgage loan delinquency includes $938 million and $803 million, respectively, of loans that are carried at the lower of amortized cost or fair value 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 June 30, 2012:
Consumer:
Residential mortgage, excluding home equity mortgages	$	13,914	$	844	$	-	$	14,758
Home equity mortgages		2,378		77		-		2,455

Total residential mortgages		16,292		921		-		17,213
Credit card receivables		766		-		17		783
Other consumer		620		5		26		651

Total consumer	$	17,678	$	926	$	43	$	18,647

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

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 June 30, 2012 and December 31, 2011, respectively. Loans may appear in more than one category.


	June 30, 2012		December 31, 2011
	(in billions)
Residential mortgage loans with high LTV and no mortgage insurance⁽¹⁾	$	1.0	$	1.1
Interest-only residential mortgage loans		4.0		3.9
ARM loans⁽²⁾		10.0		9.9

⁽¹⁾	Residential mortgage loans with high LTV and no mortgage insurance includes both fixed rate and adjustable rate mortgages. Excludes $61 million and $68 million of sub-prime residential mortgage loans held for sale at June 30, 2012 and December 31, 2011, respectively.

⁽²⁾

ARM loan balances above exclude $26 million and $28 million of sub-prime residential mortgage loans held for sale at June 30, 2012 and December 31, 2011, respectively. During the remainder of 2012 and during 2013, approximately $104 million and $350 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 $0.9 billion and $2.0 billion at June 30, 2012 and December 31, 2011, respectively.


	June 30, 2012		December 31, 2011
	(in millions)
Closed end:
First lien	$	14,758	$	14,113
Second lien		210		237
Revolving:
Second lien		2,245		2,326

Total	$	17,213	$	16,676