Loans

Loans consisted of the following:



	June 30, 2016		December 31, 2015
	(in millions)
Commercial loans:
Construction and other real estate	$	10,973	$	10,000
Business and corporate banking	19,075		19,116
Global banking⁽¹⁾	26,357		29,969
Other commercial	3,138		3,368
Total commercial	59,543		62,453
Consumer loans:
Residential mortgages	17,667		17,758
Home equity mortgages	1,511		1,600
Credit cards	668		699
Other consumer	421		407
Total consumer	20,267		20,464
Total loans	$	79,810	$	82,917

⁽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 $5,072 million and $4,815 million at June 30, 2016 and December 31, 2015, respectively. See Note 14, "Related Party Transactions," for additional information regarding loans to HSBC affiliates.

Net deferred origination fees totaled $57 million and $62 million at June 30, 2016 and December 31, 2015, respectively. At June 30, 2016 and December 31, 2015, we had a net unamortized premium on our loans of $15 million and $16 million, respectively.

Aging Analysis of Past Due Loans The following table summarizes the past due status of our loans, excluding loans held for sale, at June 30, 2016 and December 31, 2015. 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 June 30, 2016	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	$	51	$	29	$	80	$	10,893	$	10,973
Business and corporate banking	88		3		91		18,984		19,075
Global banking	—		—		—		26,357		26,357
Other commercial	5		6		11		3,127		3,138
Total commercial	144		38		182		59,361		59,543
Consumer loans:
Residential mortgages⁽²⁾	397		377		774		16,893		17,667
Home equity mortgages	11		44		55		1,456		1,511
Credit cards	8		9		17		651		668
Other consumer	6		6		12		409		421
Total consumer	422		436		858		19,409		20,267
Total loans	$	566	$	474	$	1,040	$	78,770	$	79,810



	Past Due				Total Past Due 30 Days or More
At December 31, 2015	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	$	31	$	33	$	64	$	9,936	$	10,000
Business and corporate banking	36		25		61		19,055		19,116
Global banking	—		—		—		29,969		29,969
Other commercial	—		6		6		3,362		3,368
Total commercial	67		64		131		62,322		62,453
Consumer loans:
Residential mortgages	397		781		1,178		16,580		17,758
Home equity mortgages	15		50		65		1,535		1,600
Credit cards	10		9		19		680		699
Other consumer	7		7		14		393		407
Total consumer	429		847		1,276		19,188		20,464
Total loans	$	496	$	911	$	1,407	$	81,510	$	82,917


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


⁽²⁾	The decrease in past due loans at June 30, 2016 reflects the impact of the transfer of certain residential mortgage loans with a carrying value of $369 million to held for sale during the first half of 2016. See Note 6, "Loans Held for Sale," for additional details.

Nonaccrual Loans Nonaccrual loans, including nonaccrual loans held for sale, and accruing loans 90 days or more delinquent consisted of the following:



	June 30, 2016		December 31, 2015
	(in millions)
Nonaccrual loans:
Commercial:
Construction and other real estate	$	47	$	53
Business and corporate banking	238		167
Global banking	643		44
Other commercial	1		1
Commercial nonaccrual loans held for sale	57		26
Total commercial	986		291
Consumer:
Residential mortgages^(1)(2)(3)(4)	437		814
Home equity mortgages⁽¹⁾⁽²⁾	73		71
Consumer nonaccrual loans held for sale⁽⁴⁾	376		3
Total consumer	886		888
Total nonaccruing loans	1,872		1,179
Accruing loans contractually past due 90 days or more:
Commercial:
Business and corporate banking	1		1
Total commercial	1		1
Consumer:
Credit cards	9		9
Other consumer	7		7
Total consumer	16		16
Total accruing loans contractually past due 90 days or more	17		17
Total nonperforming loans	$	1,889	$	1,196


⁽¹⁾	At June 30, 2016 and December 31, 2015, nonaccrual consumer mortgage loans held for investment include $428 million and $768 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 consumer mortgage loans held for investment include all loans 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⁾	Nonaccrual consumer mortgage loans for all periods does not include guaranteed loans purchased from the Government National Mortgage Association. 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 consumer loan portfolio.


⁽⁴⁾	The trend in nonaccrual loans reflects the impact of the transfer of certain residential mortgage loans with a carrying value of $369 million to held for sale during the first half of 2016.

The following table provides additional information on our nonaccrual loans:



	Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016		2015
	(in millions)
Interest income that would have been recorded if the nonaccrual loans had been current in accordance with contractual terms during the period	$	19	$	23	$	40	$	44
Interest income that was recorded on nonaccrual loans and included in interest income during the period	3		6		9		12

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 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, accrued interest or other loan covenants. 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. During the three and six months ended June 30, 2016 and 2015 there were no commercial loans that met this criteria and were removed from TDR Loan classification.

The following table presents information about loans which were modified during the three and six months ended June 30, 2016 and 2015 and as a result of this action became classified as TDR Loans:



	Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016		2015
	(in millions)
Commercial loans:
Construction and other real estate	$	—	$	4	$	—	$	4
Business and corporate banking	190		24		304		50
Global banking	—		—		—		13
Total commercial	190		28		304		67
Consumer loans:
Residential mortgages	16		35		43		70
Home equity mortgages	3		1		5		1
Credit cards	1		1		2		2
Total consumer	20		37		50		73
Total	$	210	$	65	$	354	$	140

The weighted-average contractual rate reduction for consumer loans which became classified as TDR Loans during the three and six months ended June 30, 2016 was 1.54 percent and 1.68 percent, respectively, compared with 1.90 percent and 1.84 percent during the three and six months ended June 30, 2015, respectively. The weighted-average contractual rate reduction for commercial loans was not significant in either the number of loans or rate.

The following table presents information about our TDR Loans and the related allowance for credit losses for TDR Loans:



	June 30, 2016				December 31, 2015
	Carrying Value		Unpaid Principal Balance		Carrying Value		Unpaid Principal Balance
	(in millions)
TDR Loans⁽¹⁾⁽²⁾:
Commercial loans:
Construction and other real estate	$	82	$	94	$	94	$	106
Business and corporate banking	449		470		227		240
Global banking	65		66		44		44
Total commercial⁽³⁾	596		630		365		390
Consumer loans:
Residential mortgages⁽⁴⁾⁽⁵⁾	928		1,044		1,060		1,233
Home equity mortgages⁽⁴⁾	27		59		23		50
Credit cards	5		5		5		5
Total consumer	960		1,108		1,088		1,288
Total TDR Loans⁽⁶⁾	$	1,556	$	1,738	$	1,453	$	1,678
Allowance for credit losses for TDR Loans⁽⁷⁾:
Commercial loans:
Construction and other real estate	$	—			$	—
Business and corporate banking	84				24
Global banking	—				—
Total commercial	84				24
Consumer loans:
Residential mortgages	28				33
Home equity mortgages	1				1
Credit cards	1				1
Total consumer	30				35
Total allowance for credit losses for TDR Loans	$	114			$	59


⁽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 $654 million and $88 million at June 30, 2016 and December 31, 2015, respectively.


⁽²⁾	The carrying value of TDR Loans includes basis adjustments on the loans, such as unearned income, unamortized deferred fees and costs on originated loans, partial charge-offs and premiums or discounts on purchased loans.


⁽³⁾	Additional commitments to lend to commercial borrowers whose loans have been modified in TDRs totaled $221 million and $112 million at June 30, 2016 and December 31, 2015, respectively.


⁽⁴⁾	At June 30, 2016 and December 31, 2015, the carrying value of consumer mortgage TDR Loans held for investment includes $763 million and $881 million, respectively, of loans that are recorded at the lower of amortized cost or fair value of the collateral less cost to sell.


⁽⁵⁾	The decrease in TDR Loans at June 30, 2016 reflects the impact of the transfer of certain residential mortgage TDR Loans with a carrying value of $141 million to held for sale during the first half of 2016. There is no allowance for credit losses associated with loans classified as held for sale as they are carried at the lower of amortized cost or fair value less cost to sell.


⁽⁶⁾	At June 30, 2016 and December 31, 2015, the carrying value of TDR Loans includes $660 million and $676 million, respectively, of loans which are classified as nonaccrual.


⁽⁷⁾	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 June 30,				Six Months Ended June 30,
	2016		2015		2016		2015
	(in millions)
Average balance of TDR Loans:
Commercial loans:
Construction and other real estate	$	87	$	149	$	89	$	161
Business and corporate banking	371		56		323		45
Global banking	62		13		56		9
Total commercial	520		218		468		215
Consumer loans:
Residential mortgages	934		999		990		988
Home equity mortgages	25		20		24		20
Credit cards	5		6		5		6
Total consumer	964		1,025		1,019		1,014
Total average balance of TDR Loans	$	1,484	$	1,243	$	1,487	$	1,229
Interest income recognized on TDR Loans:
Commercial loans:
Construction and other real estate	$	—	$	1	$	1	$	2
Business and corporate banking	3		—		4		1
Total commercial	3		1		5		3
Consumer loans:
Residential mortgages	9		9		19		18
Home equity mortgages	1		1		1		1
Total consumer	10		10		20		19
Total interest income recognized on TDR Loans	$	13	$	11	$	25	$	22

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 six months ended June 30, 2016 and 2015:



	Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016		2015
	(in millions)
Commercial loans:
Construction and other real estate	$	—	$	—	$	—	$	2
Business and corporate banking	2		2		4		3
Total commercial	2		2		4		5
Consumer loans:
Residential mortgages	4		8		15		17
Total consumer	4		8		15		17
Total	$	6	$	10	$	19	$	22

Impaired commercial loans The following table presents information about impaired commercial loans and the related impairment reserve for impaired commercial loans:



	Amount with Impairment Reserves⁽¹⁾		Amount without Impairment Reserves⁽¹⁾		Total Impaired Commercial Loans⁽¹⁾⁽²⁾		Impairment Reserve		Unpaid Principal Balance
	(in millions)
At June 30, 2016
Construction and other real estate	$	6	$	92	$	98	$	2	$	110
Business and corporate banking	267		234		501		103		519
Global banking	578		65		643		247		652
Other commercial	1		7		8		1		8
Total commercial	$	852	$	398	$	1,250	$	353	$	1,289
At December 31, 2015
Construction and other real estate	$	2	$	108	$	110	$	1	$	125
Business and corporate banking	168		124		292		52		342
Global banking	—		44		44		—		44
Other commercial	1		6		7		1		8
Total commercial	$	171	$	282	$	453	$	54	$	519


⁽¹⁾	Reflects the carrying value of impaired commercial loans and includes basis adjustments on the loans, such as partial charge-offs, unamortized deferred fees and costs on originated loans and any premiums or discounts on purchased loans.


⁽²⁾	Includes impaired commercial loans that are also considered TDR Loans which totaled $596 million and $365 million at June 30, 2016 and December 31, 2015, respectively.

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



	Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016		2015
	(in millions)
Average balance of impaired commercial loans:
Construction and other real estate	$	101	$	166	$	104	$	176
Business and corporate banking	427		92		382		91
Global banking	296		13		212		9
Other commercial	8		7		7		7
Total average balance of impaired commercial loans	$	832	$	278	$	705	$	283
Interest income recognized on impaired commercial loans:
Construction and other real estate	$	—	$	1	$	1	$	2
Business and corporate banking	3		—		5		1
Global banking	2		—		2		—
Total interest income recognized on impaired commercial loans	$	5	$	1	$	8	$	3

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

Criticized loans Criticized loan classifications presented in the table below are determined by the assignment of various criticized facility grades based on the risk rating standards of our regulator. These criticized facility grades, however, are not used for determining our allowance for credit losses. Under our methodology for determining the allowance for credit losses, loans are assigned obligor grades which reflect our internal assessment of the credit risk of the loans. While the regulatory criticized facility grades are directionally aligned with our internal obligor grades, each changes based on its respective underlying criteria. As a result, changes in regulatory classifications will not necessarily result in corresponding changes to our allowance for credit losses. 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.

•

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 commercial loans:



	Special Mention		Substandard		Doubtful		Total
	(in millions)
At June 30, 2016
Construction and other real estate	$	286	$	192	$	4	$	482
Business and corporate banking	782		752		102		1,636
Global banking	1,085		3,053		415		4,553
Other commercial	—		7		1		8
Total commercial	$	2,153	$	4,004	$	522	$	6,679
At December 31, 2015
Construction and other real estate	$	239	$	187	$	—	$	426
Business and corporate banking	941		690		52		1,683
Global banking	1,069		2,300		12		3,381
Other commercial	1		37		1		39
Total commercial	$	2,250	$	3,214	$	65	$	5,529

The increase in criticized commercial loans at June 30, 2016 was driven by downgrades, predominantly emerging markets related.

Nonperforming The following table summarizes the status of our commercial loan portfolio, excluding loans held for sale:



	Performing Loans		Nonaccrual Loans		Accruing Loans Contractually Past Due 90 days or More		Total
	(in millions)
At June 30, 2016
Construction and other real estate	$	10,926	$	47	$	—	$	10,973
Business and corporate banking	18,836		238		1		19,075
Global banking	25,714		643		—		26,357
Other commercial	3,137		1		—		3,138
Total commercial	$	58,613	$	929	$	1	$	59,543
At December 31, 2015
Construction and other real estate	$	9,947	$	53	$	—	$	10,000
Business and corporate banking	18,948		167		1		19,116
Global banking	29,925		44		—		29,969
Other commercial	3,367		1		—		3,368
Total commercial	$	62,187	$	265	$	1	$	62,453

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 June 30, 2016
Construction and other real estate	$	8,564	$	2,409	$	10,973
Business and corporate banking	9,801		9,274		19,075
Global banking	18,209		8,148		26,357
Other commercial	1,781		1,357		3,138
Total commercial	$	38,355	$	21,188	$	59,543
At December 31, 2015
Construction and other real estate	$	8,487	$	1,513	$	10,000
Business and corporate banking	10,373		8,743		19,116
Global banking	23,111		6,858		29,969
Other commercial	1,883		1,485		3,368
Total commercial	$	43,854	$	18,599	$	62,453


⁽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:



	June 30, 2016				December 31, 2015
	Delinquent Loans		Delinquency Ratio		Delinquent Loans		Delinquency Ratio
	(dollars are in millions)
Residential mortgages⁽¹⁾⁽²⁾	$	801	4.44	%	$	858	4.83	%
Home equity mortgages⁽¹⁾⁽²⁾	49		3.24		56		3.50
Credit cards	12		1.80		13		1.86
Other consumer	9		1.81		11		2.26
Total consumer	$	871	4.20	%	$	938	4.56	%


⁽¹⁾	At June 30, 2016 and December 31, 2015, consumer mortgage loan delinquency includes $735 million and $793 million, respectively, of loans that are carried at the lower of amortized cost or fair value of the collateral less cost to sell, including $361 million and $3 million, respectively, relating to loans held for sale.


⁽²⁾	At June 30, 2016 and December 31, 2015, consumer mortgage loans and loans held for sale include $523 million and $567 million, respectively, of loans that were in the process of foreclosure.

Nonperforming The following table summarizes the status of our consumer loan portfolio, excluding loans held for sale:



	Performing Loans		Nonaccrual Loans		Accruing Loans Contractually Past Due 90 days or More		Total
	(in millions)
At June 30, 2016
Residential mortgages⁽¹⁾	$	17,230	$	437	$	—	$	17,667
Home equity mortgages	1,438		73		—		1,511
Credit cards	659		—		9		668
Other consumer	414		—		7		421
Total consumer	$	19,741	$	510	$	16	$	20,267
At December 31, 2015
Residential mortgages	$	16,944	$	814	$	—	$	17,758
Home equity mortgages	1,529		71		—		1,600
Credit cards	690		—		9		699
Other consumer	400		—		7		407
Total consumer	$	19,563	$	885	$	16	$	20,464


⁽¹⁾	The decrease in nonaccrual loans at June 30, 2016 reflects the impact of the transfer of certain residential mortgage loans with a carrying value of $369 million to held for sale during the first half of 2016.

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

Concentration of Credit Risk At June 30, 2016 and December 31, 2015, our loan portfolios included interest-only residential mortgage loans totaling $3,669 million and $3,645 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.