Loans

Loans consisted of the following:



	September 30, 2013		December 31, 2012
	(in millions)
Commercial loans:
Construction and other real estate	$	8,919	$	8,457
Business and corporate banking	13,668		12,608
Global banking⁽¹⁾⁽²⁾	23,370		20,009
Other commercial	2,552		3,076
Total commercial	48,509		44,150
Consumer loans:
Residential mortgages	15,720		15,371
Home equity mortgages	2,087		2,324
Credit cards	856		815
Other consumer	538		598
Total consumer	19,201		19,108
Total loans	$	67,710	$	63,258


⁽¹⁾	Represents large multinational firms including globally focused U.S. corporate and financial institutions and U.S. Dollar lending to multinational banking customers managed by HSBC on a global basis as well as loans to HSBC affiliates.


⁽²⁾	Includes loans to HSBC affiliates of $5.9 billion and $4.5 billion at September 30, 2013 and December 31, 2012, respectively. See Note 14, "Related Party Transactions" for additional information regarding loans to HSBC affiliates.

Net deferred origination costs (fees) totaled ($10 million) and $30 million at September 30, 2013 and December 31, 2012, respectively.

At September 30, 2013 and December 31, 2012, we had a net unamortized premium on our loans of $17 million and $25 million, respectively. We amortized net premiums of $1 million and $4 million on our loans in the three and nine months ended September 30, 2013, respectively, compared with $2 million and $20 million on our loans in the three and nine months ended September 30, 2012, respectively.

Age Analysis of Past Due Loans The following table summarizes the past due status of our loans at September 30, 2013 and December 31, 2012. The aging of past due amounts is 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, which results in the re-setting of the contractual delinquency status to current.



	Past Due				Total Past Due 30 Days or More
At September 30, 2013	30 - 89 days		90+ days		Total Past Due 30 Days or More		Current⁽¹⁾		Total Loans
	(in millions)
Commercial loans:
Construction and other real estate	$	3	$	58	$	61	$	8,858	$	8,919
Business and corporate banking	42		35		77		13,591		13,668
Global banking	—		4		4		23,366		23,370
Other commercial	28		27		55		2,497		2,552
Total commercial	73		124		197		48,312		48,509
Consumer loans:
Residential mortgages	457		1,043		1,500		14,220		15,720
Home equity mortgages	29		64		93		1,994		2,087
Credit cards	15		13		28		828		856
Other consumer	7		24		31		507		538
Total consumer	508		1,144		1,652		17,549		19,201
Total loans	$	581	$	1,268	$	1,849	$	65,861	67,710



	Past Due				Total Past Due 30 Days or More
At December 31, 2012	30 - 89 days		90+ days		Total Past Due 30 Days or More		Current⁽¹⁾		Total Loans
	(in millions)
Commercial loans:
Construction and other real estate	$	89	$	152	$	241	$	8,216	$	8,457
Business and corporate banking	73		70		143		12,465		12,608
Global banking	30		8		38		19,971		20,009
Other commercial	16		31		47		3,029		3,076
Total commercial	208		261		469		43,681		44,150
Consumer loans:
Residential mortgages	493		976		1,469		13,902		15,371
Home equity mortgages	40		82		122		2,202		2,324
Credit cards	14		15		29		786		815
Other consumer	5		33		38		560		598
Total consumer	552		1,106		1,658		17,450		19,108
Total loans	$	760	$	1,367	$	2,127	$	61,131	$	63,258


⁽¹⁾	Loans less than 30 days past due are presented as current.

Nonaccrual Loans Nonaccrual loans totaled $1.4 billion and $1.6 billion at September 30, 2013 and December 31, 2012, respectively. Interest income that would have been recorded if such nonaccrual loans had been current and in accordance with contractual terms was approximately $25 million and $86 million in the three and nine months ended September 30, 2013, respectively, compared with $37 million and $92 million in the three and nine months ended September 30, 2012, respectively. Interest income that was included in interest income on these loans was $11 million and $27 million in the three and nine months ended September 30, 2013, respectively, compared with $10 million and $14 million in the three and nine months ended September 30, 2012, respectively. For an analysis of reserves for credit losses, see Note 6, “Allowance for Credit Losses.”

Nonaccrual loans and accruing receivables 90 days or more delinquent consisted of the following:



	September 30, 2013		December 31, 2012
	(in millions)
Nonaccrual loans:
Commercial:
Real Estate:
Construction and land loans	$	44	$	104
Other real estate	103		281
Business and corporate banking	47		47
Global banking	14		18
Other commercial	2		13
Total commercial	210		463
Consumer:
Residential mortgages	1,020		1,038
Home equity mortgages	85		86
Total residential mortgages⁽¹⁾	1,105		1,124
Other consumer loans	—		5
Total consumer loans	1,105		1,129
Nonaccrual loans held for sale	45		37
Total nonaccruing loans	1,360		1,629
Accruing loans contractually past due 90 days or more:
Commercial:
Real Estate:
Construction and land loans	—		—
Other real estate	—		8
Business and corporate banking	—		28
Other commercial	9		1
Total commercial	9		37
Consumer:
Credit card receivables	13		15
Other consumer	24		28
Total consumer loans	37		43
Total accruing loans contractually past due 90 days or more	46		80
Total nonperforming loans	$	1,406	$	1,709


⁽¹⁾	Nonaccrual residential mortgages includes all receivables which are 90 or more days contractually delinquent as well as loans discharged under Chapter 7 bankruptcy and not re-affirmed and 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 ("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 for 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 rates 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 restructuring. Since 2010, approximately $11 million of commercial loans have met this criteria and have been removed from TDR Loan classification.

The following table presents information about receivables which were modified during the three and nine months ended September 30, 2013 and 2012 and as a result of this action became classified as TDR Loans.



	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
	(in millions)
Commercial loans:
Construction and other real estate	$	—	$	38	$	15	$	105
Business and corporate banking	29		1		34		22
Global banking	51		—		51		—
Total commercial	80		39		100		127
Consumer loans:
Residential mortgages	64		220		155		328
Credit cards	—		1		1		3
Total consumer	64		221		156		331
Total	$	144	$	260	$	256	$	458

The weighted-average contractual rate reduction for consumer loans which became classified as TDR Loans during the three and nine months ended September 30, 2013 was 1.80 percent and 2.00 percent, respectively, compared with 1.90 percent and 1.80 percent during the three and nine months ended September 30, 2012, respectively. Weighted-average contractual rate reduction for commercial loans was not significant in both number of loans and rate.

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



	September 30, 2013		December 31, 2012
	(in millions)
TDR Loans⁽¹⁾⁽²⁾:
Commercial loans:
Construction and other real estate	$	375	$	343
Business and corporate banking	51		86
Global banking	51		—
Other commercial	27		31
Total commercial	504		460
Consumer loans:
Residential mortgages⁽³⁾	921		960
Credit cards	10		14
Total consumer	931		974
Total TDR Loans⁽⁴⁾	$	1,435	$	1,434



	September 30, 2013		December 31, 2012
	(in millions)
Allowance for credit losses for TDR Loans⁽⁵⁾:
Commercial loans:
Construction and other real estate	$	12	$	23
Business and corporate banking	30		3
Global banking	4		—
Other commercial	—		—
Total commercial	46		26
Consumer loans:
Residential mortgages	68		109
Credit cards	3		5
Total consumer	71		114
Total allowance for credit losses for TDR Loans	$	117	$	140


⁽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 $98 million and $237 million at September 30, 2013 and December 31, 2012, 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, 2013		December 31, 2012
	(in millions)
Commercial loans:
Construction and other real estate	$	393	$	398
Business and corporate banking	89		137
Global banking	51		—
Other commercial	30		34
Total commercial	563		569
Consumer loans:
Residential mortgages	1,101		1,118
Credit cards	10		14
Total consumer	1,111		1,132
Total	$	1,674	$	1,701


⁽³⁾	Includes $687 million and $608 million at September 30, 2013 and December 31, 2012, respectively, of loans that are recorded at the lower of amortized cost or fair value of the collateral less cost to sell.


⁽⁴⁾	Includes $404 million and $519 million at September 30, 2013 and December 31, 2012, respectively, which are classified as nonaccrual loans.


⁽⁵⁾	Included in the allowance for credit losses.

The following table provides additional information relating to TDR Loans.



	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
	(in millions)
Average balance of TDR Loans
Commercial loans:
Construction and other real estate	$	405	$	364	$	362	$	361
Business and corporate banking	39		85		49		92
Global banking	25		—		13		—
Other commercial	28		34		29		34
Total commercial	497		483		453		487
Consumer loans:
Residential mortgages⁽¹⁾	904		745		910		676
Credit cards	11		17		12		16
Total consumer	915		762		922		692
Total average balance of TDR Loans	$	1,412	$	1,245	$	1,375	$	1,179
Interest income recognized on TDR Loans
Commercial loans:
Construction and other real estate	$	4	$	2	$	9	$	6
Business and corporate banking	—		—		—		—
Other commercial	1		3		3		6
Total commercial	5		5		12		12
Consumer loans:
Residential mortgages	8		8		24		22
Credit cards	—		—		1		—
Total consumer	8		8		25		22
Total interest income recognized on TDR Loans	$	13	$	13	$	37	$	34


⁽¹⁾	Beginning in the third quarter of 2012, average balances for residential mortgages include loans discharged under Chapter 7 bankruptcy and not re-affirmed.

The following table presents loans which were classified as TDR Loans during the previous 12 months which for commercial loans became 90 days or greater contractually delinquent or for consumer loans became 60 days or greater contractually delinquent during the three and nine months ended September 30, 2013 and 2012:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
	(in millions)
Commercial loans:
Construction and other real estate	$	28	$	—	$	28	$	—
Business and corporate banking	2		—		2		—
Other commercial	—		—		—		—
Total commercial	30		—		30		—
Consumer loans:
Residential mortgages	10		57		35		159
Credit cards	—		—		—		—
Total consumer	10		57		35		159
Total	$	40	$	57	$	65	$	159

Impaired commercial loans The following table summarizes impaired commercial loan statistics:



	Amount with Impairment Reserves		Amount without Impairment Reserves		Total Impaired Commercial Loans^(1)(2)(3)		Impairment Reserve
	(in millions)
At September 30, 2013
Construction and other real estate	$	71	$	349	$	420	$	17
Business and corporate banking	39		17		56		32
Global banking	65		—		65		9
Other commercial	—		61		61		—
Total	$	175	$	427	$	602	$	58
At December 31, 2012
Construction and other real estate	$	192	$	305	$	497	$	86
Business and corporate banking	57		49		106		10
Global banking	—		18		18		—
Other commercial	1		75		76		—
Total	$	250	$	447	$	697	$	96

⁽¹⁾

The decrease in construction and other real estate impaired loans with impairment allowances since December 31, 2012 largely reflects the partial charge-off of a loan with a balance of $71 million and other decreases in previously impaired loans which was partially offset by the addition of currently performing TDR loans added in the second quarter of 2013 totaling $152 million, for which an insignificant amount of impairment reserves were required.


⁽²⁾	Includes impaired commercial loans which are also considered TDR Loans as follows:



	September 30, 2013		December 31, 2012
	(in millions)
Construction and other real estate	$	375	$	343
Business and corporate banking	51		86
Global banking	51
Other commercial	27		31
Total	$	504	$	460


⁽³⁾	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 partial charge-offs, unamortized deferred fees and costs on originated loans and any premiums or discounts. The following table reflects the unpaid principal balance of impaired commercial loans included in the table above:



	September 30, 2013		December 31, 2012
	(in millions)
Construction and other real estate	$	438	$	552
Business and corporate banking	94		157
Global banking	65		18
Other commercial	64		79
Total	$	661	$	806

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,
	2013		2012		2013		2012
					(in millions)
Average balance of impaired commercial loans:
Construction and other real estate	$	443	$	562	$	444	$	628
Business and corporate banking	62		112		69		122
Global banking	42		129		30		103
Other commercial	63		87		69		88
Total average balance of impaired commercial loans	$	610	$	890	$	612	$	941
Interest income recognized on impaired commercial loans:
Construction and other real estate	$	4	$	5	$	10	$	8
Business and corporate banking	—		2		—		4
Global banking	—		—		—		—
Other commercial	1		1		4		2
Total interest income recognized on impaired commercial loans	$	5	$	8	$	14	$	14

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. The following table summarizes criticized assets for commercial loans:



	Special Mention		Substandard		Doubtful		Total
	(in millions)
At September 30, 2013
Construction and other real estate	$	358	$	511	$	16	$	885
Business and corporate banking	529		161		31		721
Global banking	396		101		5		502
Other commercial	12		50		—		62
Total	$	1,295	$	823	$	52	$	2,170
At December 31, 2012
Construction and other real estate	$	627	$	677	$	105	$	1,409
Business and corporate banking	369		115		10		494
Global banking	93		50		—		143
Other commercial	36		74		2		112
Total	$	1,125	$	916	$	117	$	2,158

Nonperforming The following table summarizes the status of our commercial loan portfolio:



	Performing Loans		Nonaccrual Loans		Accruing Loans Contractually Past Due 90 days or More		Total
	(in millions)
At September 30, 2013
Commercial:
Construction and other real estate	$	8,772	$	147	$	—	$	8,919
Business and corporate banking	13,621		47		—		13,668
Global banking	23,356		14		—		23,370
Other commercial	2,541		2		9		2,552
Total commercial	$	48,290	$	210	$	9	$	48,509
At December 31, 2012
Commercial:
Construction and other real estate	$	8,064	$	385	$	8	$	8,457
Business and corporate banking	12,533		47		28		12,608
Global banking	19,991		18		—		20,009
Other commercial	3,062		13		1		3,076
Total commercial	$	43,650	$	463	$	37	$	44,150

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



	Investment Grade⁽¹⁾		Non-Investment Grade		Total
	(in millions)
At September 30, 2013
Construction and other real estate	$	5,583	$	3,336	$	8,919
Business and corporate banking	6,953		6,715		13,668
Global banking	19,518		3,852		23,370
Other commercial	1,188		1,364		2,552
Total commercial	$	33,242	$	15,267	$	48,509
At December 31, 2012
Construction and other real estate	$	4,727	$	3,730	$	8,457
Business and corporate banking	6,012		6,596		12,608
Global banking	16,206		3,803		20,009
Other commercial	1,253		1,823		3,076
Total commercial	$	28,198	$	15,952	$	44,150


⁽¹⁾	Investment grade includes commercial loans with 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 utilized 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 portfolio:



	September 30, 2013				December 31, 2012
	Delinquent Loans		Delinquency Ratio		Delinquent Loans		Delinquency Ratio
	(dollars are in millions)
Consumer:
Residential mortgages⁽¹⁾	$	1,221	7.70	%	$	1,233	7.78	%
Home equity mortgages	75		3.61		75		3.23
Total residential mortgages	1,296		7.23		1,308		7.20
Credit cards	18		2.10		21		2.58
Other consumer	28		4.65		30		4.52
Total consumer	$	1,342	6.92	%	$	1,359	6.92	%


⁽¹⁾	At September 30, 2013 and December 31, 2012, residential mortgage loan delinquency includes $1.1 billion and $1.0 billion, respectively, of loans that are carried at the lower of amortized cost or fair value of the collateral less cost to sell.

Nonperforming The following table summarizes the status of our consumer loan portfolio:



	Performing Loans		Nonaccrual Loans		Accruing Loans Contractually Past Due 90 days or More		Total
	(in millions)
At September 30, 2013
Consumer:
Residential mortgages	$	14,700	$	1,020	$	—	$	15,720
Home equity mortgages	2,002		85		—		2,087
Total residential mortgages	16,702		1,105		—		17,807
Credit cards	843		—		13		856
Other consumer	514		—		24		538
Total consumer	$	18,059	$	1,105	$	37	$	19,201
At December 31, 2012
Consumer:
Residential mortgages	$	14,333	$	1,038	$	—	$	15,371
Home equity mortgages	2,238		86		—		2,324
Total residential mortgages	16,571		1,124		—		17,695
Credit cards	800		—		15		815
Other consumer	565		5		28		598
Total consumer	$	17,936	$	1,129	$	43	$	19,108

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

Concentration of Credit Risk At September 30, 2013 and December 31, 2012, our loan portfolio included interest-only residential mortgage loans totaling $3.7 billion and $4.0 billion, respectively. An interest-only residential mortgage loan 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 which increases the credit risk of this loan type.