Loans

Loans consisted of the following:



	September 30, 2016		December 31, 2015
	(in millions)
Commercial loans:
Construction and other real estate	$	10,958	$	10,000
Business and corporate banking	17,665		19,116
Global banking⁽¹⁾	26,414		29,969
Other commercial	2,995		3,368
Total commercial	58,032		62,453
Consumer loans:
Residential mortgages	17,091		17,758
Home equity mortgages	1,454		1,600
Credit cards	668		699
Other consumer	380		407
Total consumer	19,593		20,464
Total loans	$	77,625	$	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 $4,463 million and $4,815 million at September 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 $54 million and $62 million at September 30, 2016 and December 31, 2015, respectively. At September 30, 2016 and December 31, 2015, we had a net unamortized premium on our loans of $2 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 September 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 September 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	$	19	$	2	$	21	$	10,937	$	10,958
Business and corporate banking	29		11		40		17,625		17,665
Global banking	—		76		76		26,338		26,414
Other commercial	—		7		7		2,988		2,995
Total commercial	48		96		144		57,888		58,032
Consumer loans:
Residential mortgages⁽²⁾	370		311		681		16,410		17,091
Home equity mortgages	11		44		55		1,399		1,454
Credit cards	9		9		18		650		668
Other consumer	6		7		13		367		380
Total consumer	396		371		767		18,826		19,593
Total loans	$	444	$	467	$	911	$	76,714	$	77,625



	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 September 30, 2016 reflects the impact of transfers of certain residential mortgage loans to held for sale during the nine months ended September 30, 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:



	September 30, 2016		December 31, 2015
	(in millions)
Nonaccrual loans:
Commercial:
Construction and other real estate	$	24	$	53
Business and corporate banking	202		167
Global banking	621		44
Other commercial	1		1
Commercial nonaccrual loans held for sale	—		26
Total commercial	848		291
Consumer:
Residential mortgages^(1)(2)(3)(4)	389		814
Home equity mortgages⁽¹⁾⁽²⁾	73		71
Consumer nonaccrual loans held for sale⁽⁴⁾	416		3
Total consumer	878		888
Total nonaccruing loans	1,726		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	$	1,743	$	1,196


⁽¹⁾	At September 30, 2016 and December 31, 2015, nonaccrual consumer mortgage loans held for investment include $318 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 transfers of certain residential mortgage loans to held for sale during the nine months ended September 30, 2016.

The following table provides additional information on our nonaccrual loans:



	Three Months Ended September 30,				Nine Months Ended September 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	$	23	$	21	$	67	$	65
Interest income that was recorded on nonaccrual loans and included in interest income during the period	5		5		14		17

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 nine months ended September 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 nine months ended September 30, 2016 and 2015 and as a result of this action became classified as TDR Loans:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
	(in millions)
Commercial loans:
Construction and other real estate	$	—	$	—	$	—	$	4
Business and corporate banking	—		87		304		137
Global banking	—		—		—		13
Total commercial	—		87		304		154
Consumer loans:
Residential mortgages	12		47		55		117
Home equity mortgages	2		1		7		2
Credit cards	1		1		3		3
Total consumer	15		49		65		122
Total	$	15	$	136	$	369	$	276

The weighted-average contractual rate reduction for consumer loans which became classified as TDR Loans during the three and nine months ended September 30, 2016 was 1.41 percent and 1.61 percent, respectively, compared with 1.62 percent and 1.76 percent during the three and nine months ended September 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:



	September 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	$	45	$	47	$	94	$	106
Business and corporate banking	404		437		227		240
Global banking	72		73		44		44
Total commercial⁽³⁾	521		557		365		390
Consumer loans:
Residential mortgages⁽⁴⁾⁽⁵⁾	701		785		1,060		1,233
Home equity mortgages⁽⁴⁾	27		58		23		50
Credit cards	5		5		5		5
Total consumer	733		848		1,088		1,288
Total TDR Loans⁽⁶⁾	$	1,254	$	1,405	$	1,453	$	1,678
Allowance for credit losses for TDR Loans⁽⁷⁾:
Commercial loans:
Construction and other real estate	$	—			$	—
Business and corporate banking	59				24
Global banking	—				—
Total commercial	59				24
Consumer loans:
Residential mortgages	10				33
Home equity mortgages	1				1
Credit cards	1				1
Total consumer	12				35
Total allowance for credit losses for TDR Loans	$	71			$	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 $614 million and $88 million at September 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 $205 million and $112 million at September 30, 2016 and December 31, 2015, respectively.


⁽⁴⁾	At September 30, 2016 and December 31, 2015, the carrying value of consumer mortgage TDR Loans held for investment includes $662 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 September 30, 2016 reflects the impact of transfers of certain residential mortgage loans to held for sale during the nine months ended September 30, 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 September 30, 2016 and December 31, 2015, the carrying value of TDR Loans includes $610 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 September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
	(in millions)
Average balance of TDR Loans:
Commercial loans:
Construction and other real estate	$	63	$	112	$	78	$	147
Business and corporate banking	427		106		343		70
Global banking	69		17		60		12
Total commercial	559		235		481		229
Consumer loans:
Residential mortgages	917		1,037		966		1,004
Home equity mortgages	27		22		25		20
Credit cards	5		6		5		6
Total consumer	949		1,065		996		1,030
Total average balance of TDR Loans	$	1,508	$	1,300	$	1,477	$	1,259
Interest income recognized on TDR Loans:
Commercial loans:
Construction and other real estate	$	2	$	1	$	3	$	3
Business and corporate banking	3		1		7		2
Total commercial	5		2		10		5
Consumer loans:
Residential mortgages	10		9		29		27
Home equity mortgages	—		—		1		1
Total consumer	10		9		30		28
Total interest income recognized on TDR Loans	$	15	$	11	$	40	$	33

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, 2016 and 2015:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
	(in millions)
Commercial loans:
Construction and other real estate	$	—	$	—	$	—	$	2
Business and corporate banking	—		7		4		10
Total commercial	—		7		4		12
Consumer loans:
Residential mortgages	6		6		21		23
Home equity mortgages	—		1		—		1
Total consumer	6		7		21		24
Total	$	6	$	14	$	25	$	36

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 September 30, 2016
Construction and other real estate	$	6	$	53	$	59	$	2	$	62
Business and corporate banking	204		243		447		68		482
Global banking	550		72		622		271		636
Other commercial	1		6		7		1		8
Total commercial	$	761	$	374	$	1,135	$	342	$	1,188
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 $521 million and $365 million at September 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 September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
	(in millions)
Average balance of impaired commercial loans:
Construction and other real estate	$	79	$	124	$	93	$	161
Business and corporate banking	474		139		398		116
Global banking	633		17		390		12
Other commercial	8		7		7		7
Total average balance of impaired commercial loans	$	1,194	$	287	$	888	$	296
Interest income recognized on impaired commercial loans:
Construction and other real estate	$	2	$	1	$	3	$	3
Business and corporate banking	3		2		8		3
Total interest income recognized on impaired commercial loans	$	5	$	3	$	11	$	6

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. 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 September 30, 2016
Construction and other real estate	$	445	$	159	$	5	$	609
Business and corporate banking	803		839		53		1,695
Global banking	1,040		2,427		445		3,912
Other commercial	—		6		1		7
Total commercial	$	2,288	$	3,431	$	504	$	6,223
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 September 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 September 30, 2016
Construction and other real estate	$	10,934	$	24	$	—	$	10,958
Business and corporate banking	17,462		202		1		17,665
Global banking	25,793		621		—		26,414
Other commercial	2,994		1		—		2,995
Total commercial	$	57,183	$	848	$	1	$	58,032
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 September 30, 2016
Construction and other real estate	$	8,273	$	2,685	$	10,958
Business and corporate banking	8,561		9,104		17,665
Global banking	17,904		8,510		26,414
Other commercial	1,965		1,030		2,995
Total commercial	$	36,703	$	21,329	$	58,032
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:



	September 30, 2016				December 31, 2015
	Delinquent Loans		Delinquency Ratio		Delinquent Loans		Delinquency Ratio
	(dollars are in millions)
Residential mortgages⁽¹⁾⁽²⁾	$	774	4.28	%	$	858	4.83	%
Home equity mortgages⁽¹⁾⁽²⁾	47		3.22		56		3.50
Credit cards	13		1.95		13		1.86
Other consumer	10		2.20		11		2.26
Total consumer	$	844	4.09	%	$	938	4.56	%


⁽¹⁾	At September 30, 2016 and December 31, 2015, consumer mortgage loan delinquency includes $699 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 $391 million and $3 million, respectively, relating to loans held for sale.


⁽²⁾	At September 30, 2016 and December 31, 2015, consumer mortgage loans and loans held for sale include $495 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 September 30, 2016
Residential mortgages⁽¹⁾	$	16,702	$	389	$	—	$	17,091
Home equity mortgages	1,381		73		—		1,454
Credit cards	659		—		9		668
Other consumer	373		—		7		380
Total consumer	$	19,115	$	462	$	16	$	19,593
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 September 30, 2016 reflects the impact of transfers of certain residential mortgage loans to held for sale during the nine months ended September 30, 2016.

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

Concentration of Credit Risk At September 30, 2016 and December 31, 2015, our loan portfolios included interest-only residential mortgage loans totaling $3,623 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.