Loans and asset quality

6 Months Ended

Jun. 30, 2020

Receivables [Abstract]

Loans and asset quality

Loans and asset quality

Loans

The table below provides the details of our loan portfolio.

Loans	June 30, 2020		Dec. 31, 2019
(in millions)
Domestic:
Commercial	$	2,192	$	1,442
Commercial real estate	6,217		5,575
Financial institutions	3,804		4,852
Lease financings	439		537
Wealth management loans and mortgages	15,753		16,050
Other residential mortgages	450		494
Overdrafts	1,073		524
Other	1,489		1,167
Margin loans	11,476		11,907
Total domestic	42,893		42,548
Foreign:
Commercial	253		347
Commercial real estate	11		7
Financial institutions	6,949		7,626
Lease financings	589		576
Wealth management loans and mortgages	122		140
Other (primarily overdrafts)	3,147		2,230
Margin loans	1,433		1,479
Total foreign	12,504		12,405
Total loans (a)	$	55,397	$	54,953

(a) Net of unearned income of $292 million at June 30, 2020 and $313 million at Dec. 31, 2019 primarily related to domestic and foreign lease financings.

Our loan portfolio consists of three portfolio segments: commercial, lease financings and mortgages. We manage our portfolio at the class level, which consists 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 receivables and provide additional information about our credit risks.

Allowance for credit losses

On Jan. 1, 2020, we adopted ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments, on a prospective basis. See Note 2 for the significant accounting policy related to allowance for credit losses on loans and lending-related commitments.

Activity in the allowance for credit losses on loans and lending-related commitments is presented below.

Allowance for credit losses activity for the quarter ended June 30, 2020											Wealth management loans and mortgages			Other residential mortgages
(in millions)	Commercial		Commercial real estate		Financial institutions			Lease financings									Total
Beginning balance	$	26	$	208	$	18		$	13		$	9		$	14		$	288
Charge-offs	—		—		—			—			—			—			—
Recoveries	—		—		—			—			—			3			3
Net recoveries	—		—		—			—			—			3			3
Provision	14		164		(2		)	(10		)	2			(5		)	163
Ending balance (a)	$	40	$	372	$	16		$	3		$	11		$	12		$	454
Allowance for:
Loan losses	$	23	$	244	$	11		$	3		$	9		$	12		$	302
Lending-related commitments	17		128		5			—			2			—			152
Individually evaluated for impairment:
Loan balance	$	—	$	—	$	—		$	—		$	18	(b)	$	—		$	18
Allowance for loan losses	—		—		—			—			—			—			—

(a) Includes $11 million of allowance for credit losses related to foreign loans, primarily financial institutions.

(b) Includes collateral dependent loans of $18 million with $26 million of collateral at fair value.

Allowance for credit losses activity for the quarter ended March 31, 2020											Wealth management loans and mortgages				Other residential mortgages
(in millions)	Commercial			Commercial real estate		Financial institutions			Lease financings									Foreign			(a)	Total
Balance at Dec. 31, 2019	$	60		$	76	$	20		$	3	$	20			$	13		$	24			$	216
Impact of adopting ASU 2016-13	(43		)	14		(6		)	—		(12		)		2			(24		)		(69		)
Balance at Jan. 1, 2020	17			90		14			3		8				15			—				147
Charge-offs	—			—		—			—		—				—			—				—
Recoveries	—			—		—			—		—				—			—				—
Net (charge-offs) recoveries	—			—		—			—		—				—			—				—
Provision	9			118		4			10		1				(1		)	—				141
Ending balance (b)	$	26		$	208	$	18		$	13	$	9			$	14		$	—			$	288
Allowance for:
Loan losses	$	13		$	83	$	10		$	13	$	7			$	14		$	—			$	140
Lending-related commitments	13			125		8			—		2				—			—				148
Individually evaluated for impairment:
Loan balance	$	—		$	—	$	—		$	—	$	18		(c)	$	—		$	—			$	18
Allowance for loan losses	—			—		—			—		—				—			—				—

(a) The allowance related to foreign exposure has been reclassified to financial institutions ($10 million), commercial ($10 million) and lease financings ($4 million).

(b) Includes $12 million of allowance for credit losses related to foreign loans, primarily financial institutions.

(c) Includes collateral dependent loans of $18 million with $26 million of collateral at fair value.

Allowance for credit losses activity for the quarter ended June 30, 2019												Wealth management loans and mortgages			Other residential mortgages			All other			Foreign		Total
(in millions)	Commercial			Commercial real estate			Financial institutions			Lease financings
Beginning balance	$	82		$	74		$	23		$	4	$	21		$	15		$	—		$	29	$	248
Charge-offs	—			—			—			—		(1		)	—			—			—		(1		)
Recoveries	—			—			—			—		—			2			—			—		2
Net (charge-offs) recoveries	—			—			—			—		(1		)	2			—			—		1
Provision	(5		)	(2		)	(2		)	—		—			(3		)	—			4		(8		)
Ending balance	$	77		$	72		$	21		$	4	$	20		$	14		$	—		$	33	$	241
Allowance for:
Loan losses	$	23		$	57		$	8		$	4	$	17		$	14		$	—		$	23	$	146
Lending-related commitments	54			15			13			—		3			—			—			10		95
Individually evaluated for impairment:
Loan balance	$	96		$	—		$	—		$	—	$	16		$	—		$	—		$	—	$	112
Allowance for loan losses	10			—			—			—		—			—			—			—		10
Collectively evaluated for impairment:
Loan balance	$	1,356		$	5,192		$	4,574		$	662	$	15,563		$	549		$	12,849	(a)	$	11,539	$	52,284
Allowance for loan losses	13			57			8			4		17			14			—			23		136

(a) Includes $1,575 million of domestic overdrafts, $10,152 million of margin loans and $1,122 million of other loans at June 30, 2019.

Allowance for credit losses activity for the six months ended June 30, 2020											Wealth management loans and mortgages			Other residential mortgages			Foreign			Total
(in millions)	Commercial			Commercial real estate		Financial institutions			Lease financings
Balance at Dec. 31, 2019	$	60		$	76	$	20		$	3	$	20		$	13		$	24		$	216
Impact of adopting ASU 2016-13	(43		)	14		(6		)	—		(12		)	2			(24		)	(69		)
Balance at Jan. 1, 2020	17			90		14			3		8			15			—			147
Charge-offs	—			—		—			—		—			—			—			—
Recoveries	—			—		—			—		—			3			—			3
Net recoveries	—			—		—			—		—			3			—			3
Provision	23			282		2			—		3			(6		)	—			304
Ending balance	$	40		$	372	$	16		$	3	$	11		$	12		$	—		$	454

Allowance for credit losses activity for the six months ended June 30, 2019													Wealth management loans and mortgages			Other residential mortgages			All other		Foreign		Total
(in millions)	Commercial			Commercial real estate			Financial institutions			Lease financings
Beginning balance	$	81		$	75		$	22		$	5		$	21		$	16		$	—	$	32	$	252
Charge-offs	(11		)	—			—			—			(1		)	—			—		—		(12		)
Recoveries	—			—			—			—			—			2			—		—		2
Net (charge-offs) recoveries	(11		)	—			—			—			(1		)	2			—		—		(10		)
Provision	7			(3		)	(1		)	(1		)	—			(4		)	—		1		(1		)
Ending balance	$	77		$	72		$	21		$	4		$	20		$	14		$	—	$	33	$	241

Nonperforming assets

The table below presents our nonperforming assets. 

Nonperforming assets	June 30, 2020						Dec. 31, 2019
	Recorded investment
	With an allowance		Without an allowance
(in millions)					Total
Nonperforming loans:
Other residential mortgages	$	58	$	—	$	58	$	62
Wealth management loans and mortgages	10		18		28		24
Total nonperforming loans	68		18		86		86
Other assets owned	—		2		2		3
Total nonperforming assets	$	68	$	20	$	88	$	89

At June 30, 2020, undrawn commitments to borrowers whose loans were classified as nonaccrual or reduced rate were not material.

Past due loans

The table below presents our past due loans. 

Past due loans and still accruing interest	June 30, 2020								Dec. 31, 2019
	Days past due						Total past due		Days past due						Total past due
(in millions)	30-59		60-89		≥90				30-59		60-89		≥90
Wealth management loans and mortgages	$	31	$	6	$	—	$	37	$	22	$	5	$	—	$	27
Other residential mortgages	5		1		—		6		8		3		—		11
Financial institutions	—		—		—		—		1		30		—		31
Commercial real estate	—		—		—		—		6		12		—		18
Total past due loans	$	36	$	7	$	—	$	43	$	37	$	50	$	—	$	87

Loan modifications

Due to the coronavirus pandemic, there have been two forms of relief provided for classifying loans as TDRs: The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and the Interagency Guidance. See Note 2 for additional details on the CARES Act and Interagency Guidance. Financial institutions may account for eligible loan modifications either under the CARES Act or the Interagency Guidance. The Company has elected to apply both the CARES Act and the Interagency Guidance, as applicable, in providing borrowers with loan modification relief in response to the coronavirus pandemic. We modified loans totaling $282 million in the second quarter of 2020 by providing short-term loan payment forbearances or modified principal and/or interest payments. We did

not identify these modifications as troubled debt restructurings (“TDRs”). These loans were primarily residential mortgage and commercial real estate loans. During the loan modification period, these loans are not reported as nonperforming or past due. We modified other residential mortgage loans totaling $1 million in both the second quarter of 2019 and first quarter of 2020.

Credit quality indicators

Our credit strategy is to focus on investment-grade clients that are active users of our non-credit services. Each customer is assigned an internal credit rating, which is mapped to an external rating agency grade equivalent, if possible, based upon a number of dimensions, which are continually evaluated and may change over time.

The table below provides information about the credit profile of the loan portfolio by the period of origination.

Credit profile of the loan portfolio													June 30, 2020
													Revolving loans
	Originated, at amortized cost												Amortized cost		Converted to term loans - Amortized cost				Accrued interest receivable
(in millions)	YTD20		2019		2018		2017		2016		Prior to 2016						Total (a)
Commercial:
Investment grade	$	107	$	213	$	106	$	554	$	57	$	—	$	1,054	$	—	$	2,091
Non-investment grade	40		69		12		—		3		—		230		—		354
Total commercial	147		282		118		554		60		—		1,284		—		2,445		$	3
Commercial real estate:
Investment grade	500		1,212		806		550		431		422		292		—		4,213
Non-investment grade	77		410		459		179		421		212		228		29		2,015
Total commercial real estate	577		1,622		1,265		729		852		634		520		29		6,228		8
Financial institutions:
Investment grade	27		247		133		125		14		181		7,934		—		8,661
Non-investment grade	53		29		—		—		—		—		2,010		—		2,092
Total financial institutions	80		276		133		125		14		181		9,944		—		10,753		25
Wealth management loans and mortgages:
Investment grade	34		81		12		171		56		85		6,877		—		7,316
Non-investment grade	—		—		—		—		—		35		79		—		114
Wealth management mortgages	491		1,126		719		1,360		1,736		2,976		37		—		8,445
Total wealth management loans and mortgages	525		1,207		731		1,531		1,792		3,096		6,993		—		15,875		27
Lease financings	45		20		20		12		29		902		—		—		1,028		—
Other residential mortgages	—		—		—		—		—		450		—		—		450		2
Other loans	—		—		—		—		—		—		1,530		—		1,530		1
Margin loans	2,552		1,000		—		—		—		—		9,357		—		12,909		11
Total loans	$	3,926	$	4,407	$	2,267	$	2,951	$	2,747	$	5,263	$	29,628	$	29	$	51,218	$	77

(a) Excludes overdrafts of $4,179 million. Overdrafts occur on a daily basis primarily in the custody and securities clearance business and are generally repaid within two business days.

Commercial loans

The commercial loan portfolio is divided into investment grade and non-investment grade categories based on the assigned internal credit ratings, which are generally consistent with those 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 non-investment grade.

Commercial real estate

Our income-producing commercial real estate facilities are focused on experienced owners and are structured with moderate leverage based on existing cash flows. Our commercial real estate lending activities also include construction and renovation facilities.

Financial institutions

Financial institution exposures are high quality, with 95% of the exposures meeting the investment grade equivalent criteria of our internal credit rating classification at June 30, 2020. In addition, 75% of the financial institutions exposure is secured. For example, securities industry clients and asset managers often borrow against marketable securities held in custody. The exposure to financial institutions is generally short-term with 90% expiring within one year.

Wealth management loans and mortgages

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 a weighted-average loan-to-value ratio of 62% at origination. Delinquency rate is a key indicator of credit quality in the wealth management portfolio. At June 30, 2020, less than 1% of the mortgages were past due.

At June 30, 2020, the wealth management mortgage portfolio consisted of the following geographic concentrations: California - 23%; New York - 17%; Massachusetts - 10%; Florida - 8%; and other - 42%.

Lease financing

At June 30, 2020, the lease financings portfolio consisted of exposures backed by well-diversified assets, primarily large-ticket transportation equipment and real estate. The largest component of our lease residual value exposure is freight-related rail. Assets are both domestic and foreign-based, with primary concentrations in the U.S. and Germany.

Other residential mortgages

The other residential mortgage portfolio primarily consists of 1-4 family residential mortgage loans and totaled $450 million at June 30, 2020 and $494 million at Dec. 31, 2019. These loans are not

typically correlated to external ratings. Included in this portfolio at June 30, 2020 were $81 million of mortgage loans purchased in 2005, 2006 and the first quarter of 2007, of which 25% of the serviced loan balance was at least 60 days delinquent.

Overdrafts

Overdrafts primarily relate to custody and securities clearance clients and totaled $4.2 billion at June 30, 2020 and $2.7 billion at Dec. 31, 2019. Overdrafts occur on a daily basis and are generally repaid within two business days.

Other loans

Other loans primarily include loans to consumers that are fully collateralized with equities, mutual funds and fixed-income securities.

Margin loans

We had $12.9 billion of secured margin loans at June 30, 2020, compared with $13.4 billion at Dec. 31, 2019. 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.

Reverse repurchase agreements

Reverse repurchase agreements at June 30, 2020 were fully secured with high quality collateral. As a result, there was no allowance for credit losses related to these assets at June 30, 2020. This compares to an $18 million allowance at March 31, 2020.  The decrease is driven by a reduction in exposure and improvement in collateral liquidity and values related to reverse repurchase agreements collateralized by non-agency debt securities.