Loans

Loans consisted of the following:



	September 30, 2014		December 31, 2013
	(in millions)
Commercial loans:
Construction and other real estate	$	9,661	$	9,034
Business and corporate banking	17,355		14,446
Global banking⁽¹⁾	24,001		21,625
Other commercial	3,045		3,389
Total commercial	54,062		48,494
Consumer loans:
Residential mortgages	16,402		15,826
Home equity mortgages	1,824		2,011
Credit cards	686		854
Other consumer	465		510
Total consumer	19,377		19,201
Total loans	$	73,439	$	67,695

⁽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. Also includes loans to HSBC affiliates which totaled $4,812 million and $5,328 million at September 30, 2014 and December 31, 2013, respectively. See Note 13, "Related Party Transactions" for additional information regarding loans to HSBC affiliates.

Net deferred origination fees totaled $14 million and $23 million at September 30, 2014 and December 31, 2013, respectively. At September 30, 2014 and December 31, 2013, we had a net unamortized premium on our loans of $13 million and $16 million, respectively.

Age Analysis of Past Due Loans The following table summarizes the past due status of our loans at September 30, 2014 and December 31, 2013. 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 is 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, 2014	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	$	4	$	11	$	15	$	9,646	$	9,661
Business and corporate banking	24		20		44		17,311		17,355
Global banking	—		—		—		24,001		24,001
Other commercial	25		6		31		3,014		3,045
Total commercial	53		37		90		53,972		54,062
Consumer loans:
Residential mortgages	399		913		1,312		15,090		16,402
Home equity mortgages	19		55		74		1,750		1,824
Credit cards	11		10		21		665		686
Other consumer	10		10		20		445		465
Total consumer	439		988		1,427		17,950		19,377
Total loans	$	492	$	1,025	$	1,517	$	71,922	$	73,439



	Past Due				Total Past Due 30 Days or More
At December 31, 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	$	6	$	58	$	64	$	8,970	$	9,034
Business and corporate banking	48		36		84		14,362		14,446
Global banking	8		3		11		21,614		21,625
Other commercial	27		9		36		3,353		3,389
Total commercial	89		106		195		48,299		48,494
Consumer loans:
Residential mortgages	443		1,037		1,480		14,346		15,826
Home equity mortgages	28		59		87		1,924		2,011
Credit cards	16		14		30		824		854
Other consumer	12		13		25		485		510
Total consumer	499		1,123		1,622		17,579		19,201
Total loans	$	588	$	1,229	$	1,817	$	65,878	$	67,695


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

Nonaccrual Loans Nonaccrual loans totaled $1,072 million and $1,305 million at September 30, 2014 and December 31, 2013, respectively. For an analysis of reserves for credit losses, see Note 5, "Allowance for Credit Losses." Nonaccrual loans and accruing receivables 90 days or more delinquent consisted of the following:



	September 30, 2014		December 31, 2013
	(in millions)
Nonaccrual loans:
Commercial:
Real Estate:
Construction and land loans	$	11	$	44
Other real estate	54		122
Business and corporate banking	25		21
Global banking	—		65
Other commercial	2		2
Total commercial	92		254
Consumer:
Residential mortgages	851		949
Home equity mortgages	68		77
Total residential mortgages^(1)(2)(3)	919		1,026
Total consumer loans	919		1,026
Nonaccrual loans held for sale	61		25
Total nonaccruing loans	1,072		1,305
Accruing loans contractually past due 90 days or more:
Commercial:
Business and corporate banking	3		5
Other commercial	1		1
Total commercial	4		6
Consumer:
Credit card receivables	10		14
Other consumer	11		14
Total consumer loans	21		28
Total accruing loans contractually past due 90 days or more	25		34
Total nonperforming loans	$	1,097	$	1,339


⁽¹⁾	At September 30, 2014 and December 31, 2013, residential mortgage loan nonaccrual balances include $827 million and $841 million, respectively, of loans that are carried at the lower of amortized cost or fair value of the collateral less cost to sell.


⁽²⁾	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.


⁽³⁾	Residential mortgage nonaccrual loans for all periods does not include guaranteed loans purchased from the Government National Mortgage Association ("GNMA"). Repayment of these loans are predominantly insured by the Federal Housing Administration and as such, these loans have different risk characteristics from the rest of our customer loan portfolio.

The following table provides additional information on our nonaccrual loans:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
	(in millions)
Interest income that would have been recorded if the nonaccrual loans had been current in accordance with contractual terms during the period	$	23	$	25	$	77	$	86
Interest income that was recorded on nonaccrual loans and included in interest income during the period	6		8		20		18

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 or 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 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 2012, there have been no commercial loans that met this criteria and were removed from TDR Loan classification.

The following table presents information about receivables which were modified during the three and nine months ended September 30, 2014 and 2013 and as a result of this action became classified as TDR Loans:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
	(in millions)
Commercial loans:
Construction and other real estate	$	—	$	—	$	—	$	15
Business and corporate banking	5		29		16		34
Global banking	—		51		—		51
Other commercial	—		—		10		—
Total commercial	5		80		26		100
Consumer loans:
Residential mortgages	38		63		117		152
Home equity mortgages	1		1		3		3
Credit cards	1		—		4		1
Total consumer	40		64		124		156
Total	$	45	$	144	$	150	$	256

The weighted-average contractual rate reduction for consumer loans which became classified as TDR Loans during the three and nine months ended September 30, 2014 was 1.64 percent and 1.55 percent, respectively, compared with 1.76 percent and 1.97 percent during the three and nine months ended September 30, 2013, respectively. The weighted-average contractual rate reduction for commercial loans was not significant in either the number of loans or rate.

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



	September 30, 2014		December 31, 2013
	(in millions)
TDR Loans⁽¹⁾⁽²⁾:
Commercial loans:
Construction and other real estate	$	200	$	292
Business and corporate banking	29		21
Global banking	—		51
Other commercial	—		25
Total commercial	229		389
Consumer loans:
Residential mortgages⁽³⁾	950		953
Home equity mortgages⁽³⁾	20		20
Credit cards	7		8
Total consumer	977		981
Total TDR Loans⁽⁴⁾	$	1,206	$	1,370



	September 30, 2014		December 31, 2013
	(in millions)
Allowance for credit losses for TDR Loans⁽⁵⁾:
Commercial loans:
Construction and other real estate	$	2	$	16
Business and corporate banking	7		1
Total commercial	9		17
Consumer loans:
Residential mortgages	51		66
Home equity mortgages	2		2
Credit cards	2		2
Total consumer	55		70
Total allowance for credit losses for TDR Loans	$	64	$	87


⁽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 TDR Loans which totaled $20 million and $92 million at September 30, 2014 and December 31, 2013, 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, 2014		December 31, 2013
	(in millions)
Commercial loans:
Construction and other real estate	$	215	$	309
Business and corporate banking	60		60
Global banking	—		51
Other commercial	—		28
Total commercial	275		448
Consumer loans:
Residential mortgages	1,116		1,113
Home equity mortgages	44		40
Credit cards	7		8
Total consumer	1,167		1,161
Total	$	1,442	$	1,609


⁽³⁾	Includes $741 million and $706 million at September 30, 2014 and December 31, 2013, respectively, of loans, primarily residential mortgages, that are recorded at the lower of amortized cost or fair value of the collateral less cost to sell.


⁽⁴⁾	Includes $478 million and $528 million at September 30, 2014 and December 31, 2013, respectively, of loans which are classified as nonaccrual.


⁽⁵⁾	Included in the allowance for credit losses.

The following table presents information about average TDR Loans and interest income recognized on TDR Loans:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
	(in millions)
Average balance of TDR Loans
Commercial loans:
Construction and other real estate	$	202	$	405	$	233	$	362
Business and corporate banking	29		39		24		49
Global banking	—		25		13		13
Other commercial	—		28		9		29
Total commercial	231		497		279		453
Consumer loans:
Residential mortgages	949		884		935		889
Home equity mortgages	19		20		19		21
Credit cards	8		11		8		12
Total consumer	976		915		962		922
Total average balance of TDR Loans	$	1,207	$	1,412	$	1,241	$	1,375
Interest income recognized on TDR Loans
Commercial loans:
Construction and other real estate	$	2	$	4	$	9	$	9
Other commercial	—		1		—		3
Total commercial	2		5		9		12
Consumer loans:
Residential mortgages	9		8		26		23
Home equity mortgages	—		—		1		1
Credit cards	—		—		—		1
Total consumer	9		8		27		25
Total interest income recognized on TDR Loans	$	11	$	13	$	36	$	37

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, 2014 and 2013:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
	(in millions)
Commercial loans:
Construction and other real estate	$	—	$	28	$	12	$	28
Business and corporate banking	—		2		—		2
Total commercial	—		30		12		30
Consumer loans:
Residential mortgages	10		10		27		34
Home equity mortgages	—		—		—		1
Total consumer	10		10		27		35
Total	$	10	$	40	$	39	$	65

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⁾		Impairment Reserve
	(in millions)
At September 30, 2014
Construction and other real estate	$	12	$	190	$	202	$	2
Business and corporate banking	27		10		37		7
Global banking	—		—		—		—
Other commercial	2		8		10		1
Total	$	41	$	208	$	249	$	10
At December 31, 2013
Construction and other real estate	$	122	$	211	$	333	$	32
Business and corporate banking	28		12		40		3
Global banking	14		51		65		5
Other commercial	1		42		43		—
Total	$	165	$	316	$	481	$	40


⁽¹⁾	Includes impaired commercial loans that are also considered TDR Loans which totaled $229 million and $389 million at September 30, 2014 and December 31, 2013, respectively.


⁽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 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, 2014		December 31, 2013
	(in millions)
Construction and other real estate	$	220	$	380
Business and corporate banking	78		91
Global banking	—		123
Other commercial	10		47
Total	$	308	$	641

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,
	2014		2013		2014		2013
					(in millions)
Average balance of impaired commercial loans:
Construction and other real estate	$	208	$	443	$	252	$	444
Business and corporate banking	40		62		37		69
Global banking	—		42		16		30
Other commercial	10		63		21		69
Total average balance of impaired commercial loans	$	258	$	610	$	326	$	612
Interest income recognized on impaired commercial loans:
Construction and other real estate	$	2	$	4	$	9	$	10
Other commercial	—		1		—		4
Total interest income recognized on impaired commercial loans	$	2	$	5	$	9	$	14

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

Criticized asset classifications Criticized loan 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 facility grades are deemed to be criticized:


•	Special Mention – generally includes loans that are protected by collateral and/or the credit worthiness of the customer, but are potentially weak based upon economic or market circumstances which, if not checked or corrected, could weaken our credit position at some future date.


•	Substandard – includes loans that are inadequately protected by the underlying collateral and/or general credit worthiness of the customer. These loans present a distinct possibility that we will sustain some loss if the deficiencies are not corrected. This category also includes certain non-investment grade securities, as required by our principal regulator.

•

Doubtful – includes loans that have all the weaknesses exhibited by substandard loans, with the added characteristic that the weaknesses make collection or liquidation in full of the recorded loan highly improbable. However, although the possibility of loss is extremely high, certain factors exist which may strengthen the credit at some future date, and therefore the decision to charge off the loan is deferred. Loans graded as doubtful are required to be placed in nonaccruing status.

The following table summarizes criticized assets for commercial loans:



	Special Mention		Substandard		Doubtful		Total
	(in millions)
At September 30, 2014
Construction and other real estate	$	292	$	247	$	6	$	545
Business and corporate banking	933		121		1		1,055
Global banking	96		142		—		238
Other commercial	24		9		2		35
Total	$	1,345	$	519	$	9	$	1,873
At December 31, 2013
Construction and other real estate	$	351	$	346	$	30	$	727
Business and corporate banking	557		156		2		715
Global banking	367		112		5		484
Other commercial	79		33		—		112
Total	$	1,354	$	647	$	37	$	2,038

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, 2014
Commercial:
Construction and other real estate	$	9,596	$	65	$	—	$	9,661
Business and corporate banking	17,327		25		3		17,355
Global banking	24,001		—		—		24,001
Other commercial	3,042		2		1		3,045
Total commercial	$	53,966	$	92	$	4	$	54,062
At December 31, 2013
Commercial:
Construction and other real estate	$	8,868	$	166	$	—	$	9,034
Business and corporate banking	14,420		21		5		14,446
Global banking	21,560		65		—		21,625
Other commercial	3,386		2		1		3,389
Total commercial	$	48,234	$	254	$	6	$	48,494

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, 2014
Construction and other real estate	$	7,193	$	2,468	$	9,661
Business and corporate banking	8,635		8,720		17,355
Global banking	21,199		2,802		24,001
Other commercial	1,567		1,478		3,045
Total commercial	$	38,594	$	15,468	$	54,062
At December 31, 2013
Construction and other real estate	$	6,069	$	2,965	$	9,034
Business and corporate banking	7,279		7,167		14,446
Global banking	18,636		2,989		21,625
Other commercial	1,583		1,806		3,389
Total commercial	$	33,567	$	14,927	$	48,494


⁽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, 2014				December 31, 2013
	Delinquent Loans		Delinquency Ratio		Delinquent Loans		Delinquency Ratio
	(dollars are in millions)
Consumer:
Residential mortgages	$	1,055	6.42	%	$	1,208	7.59	%
Home equity mortgages	60		3.29		68		3.38
Total residential mortgages⁽¹⁾	1,115		6.10		1,276		7.11
Credit cards	14		2.04		21		2.46
Other consumer	14		2.64		19		3.32
Total consumer	$	1,143	5.87	%	$	1,316	6.80	%


⁽¹⁾	At September 30, 2014 and December 31, 2013, residential mortgage loan delinquency includes $967 million and $1,074 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 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, 2014
Consumer:
Residential mortgages	$	15,551	$	851	$	—	$	16,402
Home equity mortgages	1,756		68		—		1,824
Total residential mortgages	17,307		919		—		18,226
Credit cards	676		—		10		686
Other consumer	454		—		11		465
Total consumer	$	18,437	$	919	$	21	$	19,377
At December 31, 2013
Consumer:
Residential mortgages	$	14,877	$	949	$	—	$	15,826
Home equity mortgages	1,934		77		—		2,011
Total residential mortgages	16,811		1,026		—		17,837
Credit cards	840		—		14		854
Other consumer	496		—		14		510
Total consumer	$	18,147	$	1,026	$	28	$	19,201

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

Concentration of Credit Risk At September 30, 2014 and December 31, 2013, our loan portfolio included interest-only residential mortgage loans totaling $3,585 million and $3,643 million, 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.