Loans and asset quality

6 Months Ended

Jun. 30, 2012

Loans and asset quality

Note 5 – Loans and asset quality

Loans

The table below provides the details of our loan distribution and industry concentrations of credit risk at June 30, 2012 and Dec. 31, 2011.

Loans (in millions)	June 30, 2012		Dec. 31, 2011
Domestic:
Financial institutions	$	4,835	$	4,606
Commercial		814		752
Wealth management loans and mortgages		7,916		7,342
Commercial real estate		1,595		1,449
Lease financings (a)		1,505		1,558
Other residential mortgages		1,773		1,923
Overdrafts		2,750		2,958
Other		599		623
Margin loans		13,462		12,760
Total domestic		35,249		33,971
Foreign:
Financial institutions		5,681		6,538
Commercial		573		528
Lease financings (a)		1,023		1,051
Other (primarily overdrafts)		2,905		1,891
Total foreign		10,182		10,008
Total loans	$	45,431	$	43,979

(a) Net of unearned income on domestic and foreign lease financings of $1,225 million at June 30, 2012 and $1,343 million at Dec. 31, 2011.

Our loan portfolio is comprised of three portfolio segments: commercial, lease financings and mortgages. We manage our portfolio at the class level which is comprised of six classes of financing receivables: commercial, commercial real estate, financial institutions, lease financings, wealth management loans and mortgages, and other residential mortgages. The following tables are presented for each class of financing receivable, and provide additional information about our credit risks and the adequacy of our allowance for credit losses.

Allowance for credit losses

Transactions in the allowance for credit losses are summarized as follows:

Allowance for credit losses activity for the quarter ended June 30, 2012											Wealth
(in millions)	Commercial		Commercial real estate		Financial institutions			Lease financing			management loans and mortgages			Other residential mortgages			All Other (a)			Foreign		Total
Beginning balance	$	97	$	33	$	53		$	62		$	34		$	165		$	-		$	50	$	494
Charge-offs		-		-		(4	)		-			-			(7	)		-			-		(11	)
Recoveries		1		-		-			-			-			2			-			-		3
Net (charge-offs) recoveries		1		-		(4	)		-			-			(5	)		-			-		(8	)
Provision		5		-		(10	)		(6	)		(8	)		(7	)		-			7		(19	)
Ending balance	$	103	$	33	$	39		$	56		$	26		$	153		$	-		$	57	$	467
Allowance for:
Loans losses	$	42	$	23	$	18		$	56		$	21		$	153		$	-		$	49	$	362
Unfunded commitments		61		10		21			-			5			-			-			8		105
Individually evaluated for impairment:
Loan balance	$	62	$	29	$	3		$	-		$	31		$	-		$	-		$	9	$	134
Allowance for loan losses		16		6		-			-			7			-			-			5		34
Collectively evaluated for impairment:
Loan balance	$	752	$	1,566	$	4,832		$	1,505		$	7,885		$	1,773		$	16,811	(a)	$	10,173	$	45,297
Allowance for loan losses		26		17		18			56			14			153			-			44		328

(a) Includes $2,750 million of domestic overdrafts, $13,462 million of margin loans and $599 million of other loans at June 30, 2012.

Allowance for credit losses activity for the quarter ended March 31, 2012												Wealth
(in millions)	Commercial		Commercial real estate			Financial institutions			Lease financing			management loans and mortgages		Other residential mortgages			All Other (a)			Foreign			Total
Beginning balance	$	91	$	34		$	63		$	66		$	29	$	156		$	-		$	58		$	497
Charge-offs		-		-			-			-			-		(10	)		-			-			(10	)
Recoveries		-		-			-			-			-		2			-			-			2
Net (charge-offs) recoveries		-		-			-			-			-		(8	)		-			-			(8	)
Provision		6		(1	)		(10	)		(4	)		5		17			-			(8	)		5
Ending balance	$	97	$	33		$	53		$	62		$	34	$	165		$	-		$	50		$	494
Allowance for:
Loans losses	$	36	$	22		$	30		$	62		$	29	$	165		$	-		$	42		$	386
Unfunded commitments		61		11			23			-			5		-			-			8			108
Individually evaluated for impairment:
Loan balance	$	66	$	38		$	14		$	-		$	31	$	-		$	-		$	10		$	159
Allowance for loan losses		17		6			5			-			7		-			-			3			38
Collectively evaluated for impairment:
Loan balance	$	697	$	1,403		$	4,881		$	1,518		$	7,281	$	1,854		$	15,964	(a)	$	9,271		$	42,869
Allowance for loan losses		19		16			25			62			22		165			-			39			348

(a) Includes $1,971 million of domestic overdrafts, $13,144 million of margin loans and $849 million of other loans at March 31, 2012.

Allowance for credit losses activity for the quarter ended June 30, 2011													Wealth
(in millions)	Commercial			Commercial real estate			Financial institutions			Lease financing			management loans and mortgages		Other residential mortgages			All Other (a)			Foreign			Total
Beginning balance	$	100		$	34		$	17		$	93		$	29	$	213		$	2		$	66		$	554
Charge-offs		(4	)		(1	)		(1	)		-			-		(9	)		-			(6	)		(21	)
Recoveries		1			-			1			-			-		-			-			-			2
Net (charge-offs) recoveries		(3	)		(1	)		-			-			-		(9	)		-			(6	)		(19	)
Provision		(1	)		(6	)		7			(2	)		2		(4	)		(2	)		6			-
Ending balance	$	96		$	27		$	24		$	91		$	31	$	200		$	-		$	66		$	535
Allowance for:
Loans losses	$	42		$	21		$	4		$	91		$	25	$	200		$	-		$	58		$	441
Unfunded commitments		54			6			20			-			6		-			-			8			94
Individually evaluated for impairment:
Loan balance	$	31		$	28		$	3		$	-		$	28	$	-		$	-		$	13		$	103
Allowance for loan losses		13			3			-			-			5		-			-			6			27
Collectively evaluated for impairment:
Loan balance	$	823		$	1,443		$	5,506		$	1,562		$	6,790	$	2,080		$	14,746	(a)	$	9,094		$	42,044
Allowance for loan losses		29			18			4			91			20		200			-			52			414

(a) Includes $4,629 million of domestic overdrafts, $9,520 million of margin loans and $597 million of other loans at June 30, 2011.

Allowance for credit losses activity for the six months ended June 30, 2012												Wealth
(in millions)	Commercial		Commercial real estate			Financial institutions			Lease financing			management loans and mortgages			Other residential mortgages			All Other		Foreign			Total
Beginning balance	$	91	$	34		$	63		$	66		$	29		$	156		$	-	$	58		$	497
Charge-offs		-		-			(4	)		-			-			(16	)		-		-			(20	)
Recoveries		1		-			-			-			-			3			-		-			4
Net (charge-offs) recoveries		1		-			(4	)		-			-			(13	)		-		-			(16	)
Provision		11		(1	)		(20	)		(10	)		(3	)		10			-		(1	)		(14	)
Ending balance	$	103	$	33		$	39		$	56		$	26		$	153		$	-	$	57		$	467

Allowance for credit losses activity for the six months ended June 30, 2011												Wealth
(in millions)	Commercial			Commercial real estate			Financial institutions			Lease financing		management loans and mortgages			Other residential mortgages			All Other			Foreign			Total
Beginning balance	$	93		$	40		$	11		$	90	$	41		$	235		$	1		$	60		$	571
Charge-offs		(4	)		(4	)		(1	)		-		-			(25	)		-			(6	)		(40	)
Recoveries		2			-			2			-		-			-			-			-			4
Net (charge-offs) recoveries		(2	)		(4	)		1			-		-			(25	)		-			(6	)		(36	)
Provision		5			(9	)		12			1		(10	)		(10	)		(1	)		12			-
Ending balance	$	96		$	27		$	24		$	91	$	31		$	200		$	-		$	66		$	535

Nonperforming assets

The table below sets forth information about our nonperforming assets.

Nonperforming assets (in millions)	June 30, 2012		March 31, 2012		Dec. 31, 2011
Loans:
Other residential mortgages	$	177	$	188	$	203
Wealth management		35		35		32
Commercial		31		32		21
Commercial real estate		30		39		40
Foreign		9		10		10
Financial institutions		3		14		23
Total nonperforming loans	$	285	$	318	$	329
Other assets owned		9		13		12
Total nonperforming assets (a)	$	294	$	331	$	341

(a) Loans of consolidated investment management funds are not part of BNY Mellon’s loan portfolio. Included in these loans are nonperforming loans of $155 million at June 30, 2012, $180 million at March 31, 2012 and $101 million at Dec. 31, 2011. These loans are recorded at fair value and therefore do not impact the provision for credit losses and allowance for loan losses, and accordingly are excluded from the nonperforming assets table above.

At June 30, 2012, undrawn commitments to borrowers whose loans were classified as nonaccrual or reduced rate were not material.

Lost interest

Lost interest (in millions)	2Q12		1Q12		2Q11		YTD12		YTD11
Amount by which interest income recognized on nonperforming loans exceeded reversals	$	1	$	-	$	1	$	2	$	1
Amount by which interest income would have increased if nonperforming loans at period-end had been performing for the entire year	$	5	$	5	$	5	$	10	$	10

Impaired loans

The table below sets forth information about our impaired loans. We use the discounted cash flow method as the primary method for valuing impaired loans.

Impaired loans	Quarter ended
	June 30, 2012				March 31, 2012				June 30, 2011
(in millions)	Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized
Impaired loans with an allowance:
Commercial	$	64	$	1	$	46	$	1	$	28	$	-
Commercial real estate		31		-		35		-		18		-
Financial institutions		6		-		16		-		4		-
Wealth management loans and mortgages		28		-		28		-		39		1
Foreign		10		-		10		-		10		-
Total impaired loans with an allowance		139		1		135		1		99		1
Impaired loans without an allowance:
Commercial		-		-		-		-		2		-
Commercial real estate		3		-		3		-		14		-
Financial institutions		2		-		3		-		-		-
Wealth management loans and mortgages		3		-		3		-		2		-
Total impaired loans without an allowance (a)		8		-		9		-		18		-
Total impaired loans	$	147	$	1	$	144	$	1	$	117	$	1

(a) When the discounted cash flows, collateral value or market price equals or exceeds the carrying value of the loan, then the loan does not require an allowance under the accounting standard related to impaired loans.

Impaired loans	Year-to-date
	June 30, 2012				June 30, 2011
(in millions)	Average recorded investment		Interest income recognized		Average recorded Investment		Interest income recognized
Impaired loans with an allowance:
Commercial	$	51	$	2	$	28	$	-
Commercial real estate		32		-		21		-
Financial institutions		11		-		4		-
Wealth management loans and mortgages		28		-		43		1
Foreign		10		-		9		-
Total impaired loans with an allowance		132		2		105		1
Impaired loans without an allowance:
Commercial		-		-		2		-
Commercial real estate		3		-		16		-
Financial institutions		2		-		-		-
Wealth management loans and mortgages		3		-		1		-
Total impaired loans without an allowance (a)		8		-		19		-
Total impaired loans	$	140	$	2	$	124	$	1

(a) When the discounted cash flows, collateral value or market price equals or exceeds the carrying value of the loan, then the loan does not require an allowance under the accounting standard related to impaired loans.

Impaired loans	June 30, 2012						Dec. 31, 2011
(in millions)	Recorded investment		Unpaid principal balance		Related allowance (a)		Recorded investment		Unpaid principal balance		Related allowance (a)
Impaired loans with an allowance:
Commercial (a)	$	62	$	66	$	16	$	26	$	31	$	9
Commercial real estate		27		28		6		35		41		7
Financial institutions		1		1		-		21		21		7
Wealth management loans and mortgages		28		28		7		27		27		5
Foreign		9		17		5		10		18		4
Total impaired loans with an allowance		127		140		34		119		138		32
Impaired loans without an allowance:
Commercial		-		-		N/A		-		-		N/A
Commercial real estate		2		2		N/A		3		3		N/A
Financial institutions		2		9		N/A		3		9		N/A
Wealth management loans and mortgages		3		3		N/A		3		3		N/A
Total impaired loans without an allowance (b)		7		14		N/A		9		15		N/A
Total impaired loans (c)	$	134	$	154	$	34	$	128	$	153	$	32

(a) The allowance for impaired loans is included in the allowance for loan losses.

(b) When the discounted cash flows, collateral value or market price equals or exceeds the carrying value of the loan, then the loan does not require an allowance under the accounting standard related to impaired loans.

(c) Excludes an aggregate of $2 million of impaired loans in amounts individually less than $1 million at both June 30, 2012 and Dec. 31, 2011. The allowance for loan loss associated with these loans totaled less than $1 million at both June 30, 2012 and Dec. 31, 2011.

N/A –  Not applicable.

Past due loans

The table below sets forth information about our past due loans.

Past due loans and still accruing	June 30, 2012								Dec. 31, 2011
	Days past due						Total		Days past due						Total
(in millions)	30-59		60-89		>90		past due		30-59		60-89		>90		past due
Domestic:
Wealth management loans and mortgages	$	49	$	21	$	-	$	70	$	89	$	3	$	-	$	92
Other residential mortgages		31		6		11		48		36		10		13		59
Financial institutions		19		-		-		19		36		-		-		36
Commercial		-		-		-		-		60		7		-		67
Commercial real estate		7		1		-		8		47		9		-		56
Total domestic		106		28		11		145		268		29		13		310
Foreign		-		-		-		-		-		-		-		-
Total past due loans	$	106	$	28	$	11	$	145	$	268	$	29	$	13	$	310

 

Troubled debt restructurings (“TDRs”)

A modified loan is considered a TDR if the debtor is experiencing financial difficulties and the creditor grants a concession to the debtor that would not otherwise be considered. A TDR may include a transfer of real estate or other assets from the debtor to the creditor, or a modification of the term of the loan. Not all modified loans are considered TDRs.

The following table presents TDRs that occurred during the second quarter of 2012.

TDRs during the second quarter of 2012
			Outstanding recorded investment
(dollars in millions)	Number of contracts		Pre- modification		Post- modification
Other residential mortgages		52	$	15	$	16
Commercial		1		4		4
Total TDRs		53	$	19	$	20

Other residential mortgages

The modifications of the other residential mortgage loans consisted of reducing the stated interest rate and in certain cases, extending the maturity date. The value of modified loans is based on the fair value of the collateral. Probable loss factors are applied to the value of the modified loans to determine the allowance for credit losses.

Commercial

The modification of the commercial loan and unfunded lending-related commitment consisted of changing the maturity date of the loan. The difference between the book value and the market price of the loan is included in the allowance for credit losses.

TDRs that subsequently defaulted

There were six residential mortgage loans and one wealth management loan that had been restructured in a TDR during the previous 12 months and have subsequently defaulted during the second quarter of 2012. The total recorded investment of these loans was $2 million.

Credit quality indicators

Our credit strategy is to focus on investment grade names to support cross-selling opportunities, avoid single name/industry concentrations and exit high risk portfolios. Each customer is assigned an internal rating grade which is mapped to an external rating agency grade equivalent based upon a number of dimensions which are continually evaluated and may change over time.

The following tables set forth information about credit quality indicators.

Commercial loan portfolio

Commercial loan portfolio—Credit risk profile by creditworthiness category
	Commercial				Commercial real estate				Financial institutions
(in millions)	June 30, 2012		Dec. 31, 2011		June 30, 2012		Dec. 31, 2011		June 30, 2012		Dec. 31, 2011
Investment grade	$	1,018	$	906	$	1,113	$	1,062	$	8,899	$	9,643
Non investment grade		369		374		482		387		1,617		1,501
Total	$	1,387	$	1,280	$	1,595	$	1,449	$	10,516	$	11,144

The commercial loan portfolio is divided into investment grade and noninvestment grade categories based on rating criteria largely consistent with those of the public rating agencies. Each customer in the portfolio is assigned an internal rating grade. These internal rating grades are generally consistent with the ratings categories of the public rating agencies. Customers with ratings consistent with BBB- (S&P)/Baa3 (Moody’s) or better are considered to be investment grade. Those clients with ratings lower than this threshold are considered to be noninvestment grade.

Wealth management loans and mortgages

Wealth management loans and mortgages – Credit risk profile by internally assigned grade
(in millions)	June 30, 2012		Dec. 31, 2011
Wealth management loans:
Investment grade	$	3,905	$	3,450
Noninvestment grade		109		111
Wealth management mortgages		3,902		3,781
Total	$	7,916	$	7,342

Wealth management non-mortgage loans are not typically rated by external rating agencies. A majority of the wealth management loans are secured by the customers’ investment management accounts or custody accounts. Eligible assets pledged for these loans are typically investment grade, fixed income securities, equities and/or mutual funds. Internal ratings for this portion of the wealth management portfolio, therefore, would equate to investment-grade external ratings. Wealth management loans are provided to select customers based on the pledge of other types of assets, including business assets, fixed assets, or a modest amount of commercial real estate. For the loans collateralized by other assets, the credit quality of the obligor is carefully analyzed, but we do not consider this portfolio of loans to be investment grade.

Credit quality indicators for wealth management mortgages are not correlated to external ratings. Wealth management mortgages are typically loans to high-net-worth individuals, which are secured primarily by residential property. These loans are primarily interest-only adjustable rate mortgages with an average loan to value ratio of 63% at origination. In the wealth management portfolio, 1% of the mortgages were past due at June 30, 2012.

At June 30, 2012, the private wealth mortgage portfolio was comprised of the following geographic concentrations: New York – 23%; California – 18%; Massachusetts – 17%; Florida – 8%; and other – 34%.

Other residential mortgages

The other residential mortgage portfolio primarily consists of 1-4 family residential mortgage loans and totaled $1,773 million at June 30, 2012 and $1,923 million at Dec. 31, 2011. These loans are not typically correlated to external ratings. Included in this portfolio at June 30, 2012 are $542 million of mortgage loans purchased in 2005, 2006 and the first quarter of 2007 that are predominantly prime mortgage loans, with a small portion of Alt-A loans. As of June 30, 2012, the purchased loans in this portfolio had a weighted-average original loan-to-value ratio of 75% and 29% of these loans were at least 60 days delinquent. The properties securing the prime and Alt-A mortgage loans were located (in order of concentration) in California, Florida, Virginia, Maryland and the tri-state area (New York, New Jersey and Connecticut).

Overdrafts

Overdrafts primarily relate to custody and securities clearance clients and totaled $5,655 million at June 30, 2012 and $4,849 million at Dec. 31, 2011. Overdrafts occur on a daily basis in the custody and securities clearance business and are generally repaid within two business days.

Margin loans

We had $13,462 million of secured margin loans on our balance sheet at June 30, 2012 compared with $12,760 million at Dec. 31, 2011. Margin loans are collateralized with marketable securities and borrowers are required to maintain a daily collateral margin in excess of 100% of the value of the loan. We have rarely suffered a loss on these types of loans and do not allocate any of our allowance for credit losses to them.

Other loans

Other loans primarily include loans to consumers that are fully collateralized with equities, mutual funds and fixed income securities, as well as bankers’ acceptances.

Reverse repurchase agreements

Reverse repurchase agreements are transactions fully collateralized with high-quality liquid securities. These transactions carry minimal credit risk and therefore are not allocated an allowance for credit losses.