Loans and asset quality

9 Months Ended

Sep. 30, 2020

Loans

The table below provides the details of our loan portfolio.


Loans	Sept. 30, 2020		Dec. 31, 2019
(in millions)
Domestic:
Commercial	$	1,839	$	1,442
Commercial real estate	5,987		5,575
Financial institutions	4,915		4,852
Lease financings	482		537
Wealth management loans and mortgages	15,805		16,050
Other residential mortgages	423		494
Overdrafts	899		524
Other	1,616		1,167
Margin loans	11,220		11,907
Total domestic	43,186		42,548
Foreign:
Commercial	102		347
Commercial real estate	5		7
Financial institutions	6,097		7,626
Lease financings	596		576
Wealth management loans and mortgages	121		140
Other (primarily overdrafts)	3,106		2,230
Margin loans	2,278		1,479
Total foreign	12,305		12,405
Total loans (a)	$	55,491	$	54,953

(a) Net of unearned income of $285 million at Sept. 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. This does not include activity in the allowance for credit losses related to other financial instruments, including cash and due from banks, interest-bearing deposits with banks, federal funds sold and securities purchased under resale agreements, held-to-maturity securities, available-for-sale securities and accounts receivable.


Allowance for credit losses activity for the quarter ended Sept. 30, 2020									Wealth management loans and mortgages			Other residential mortgages
(in millions)	Commercial		Commercial real estate		Financial institutions		Lease financings							Total
Beginning balance	$	40	$	372	$	16	$	3	$	11		$	12	$	454


Charge-offs	—		—		—		—		—			—		—
Recoveries	—		—		—		—		—			1		1
Net recoveries	—		—		—		—		—			1		1
Provision (a)	(13)		14		(5)		—		4			5		5
Ending balance (b)	$	27	$	386	$	11	$	3	$	15		$	18	$	460
Allowance for:
Loan losses	$	14	$	270	$	7	$	3	$	13		$	18	$	325
Lending-related commitments	13		116		4		—		2			—		135
Individually evaluated for impairment:
Loan balance	$	—	$	—	$	—	$	—	$	17	(c)	$	—	$	17
Allowance for loan losses	—		—		—		—		—			—		—

(a) Does not include provision for credit losses related to other financial instruments of $4 million for the third quarter 2020.

(b) Includes $8 million of allowance for credit losses related to foreign loans, primarily financial institutions.


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 (a)	14		164		(2)		(10)		2			(5)		163
Ending balance (b)	$	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	(c)	$	—	$	18
Allowance for loan losses	—		—		—		—		—			—		—

(a) Does not include provision for credit losses related to other financial instruments of $(20) million for the second quarter 2020.

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


Allowance for credit losses activity for the quarter ended Sept. 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	$	77	$	72	$	21	$	4	$	20	$	14	$	—		$	33	$	241


Charge-offs	(1)		—		—		—		—		—		—			—		(1)
Recoveries	—		—		—		—		—		—		—			—		—
Net (charge-offs)	(1)		—		—		—		—		—		—			—		(1)
Provision	(15)		5		—		(1)		—		—		—			(5)		(16)
Ending balance	$	61	$	77	$	21	$	3	$	20	$	14	$	—		$	28	$	224
Allowance for:
Loan losses	$	10	$	57	$	7	$	3	$	17	$	14	$	—		$	19	$	127
Lending-related commitments	51		20		14		—		3		—		—			9		97
Individually evaluated for impairment:
Loan balance	$	—	$	—	$	—	$	—	$	16	$	—	$	—		$	—	$	16
Allowance for loan losses	—		—		—		—		—		—		—			—		—
Collectively evaluated for impairment:
Loan balance	$	1,335	$	5,292	$	4,973	$	559	$	15,748	$	520	$	12,567	(a)	$	13,871	$	54,865
Allowance for loan losses	10		57		7		3		17		14		—			19		127

(a) Includes $1,247 million of domestic overdrafts, $10,177 million of margin loans and $1,143 million of other loans at Sept. 30, 2019.


Allowance for credit losses activity for the nine months ended Sept. 30, 2020									Wealth management loans and mortgages		Other residential mortgages		Foreign			Total
(in millions)	Commercial		Commercial real estate		Financial institutions		Lease financings								(a)
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	—		—		—		—		—		4		—			4
Net recoveries	—		—		—		—		—		4		—			4
Provision (b)	10		296		(3)		—		7		(1)		—			309
Ending balance	$	27	$	386	$	11	$	3	$	15	$	18	$	—		$	460

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

(b) Does not include provision for credit losses related to other financial instruments of $12 million for the nine months ended Sept. 30, 2020.


Allowance for credit losses activity for the nine months ended Sept. 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	(12)		—		—		—		(1)		—		—		—		(13)
Recoveries	—		—		—		—		—		2		—		—		2
Net (charge-offs) recoveries	(12)		—		—		—		(1)		2		—		—		(11)
Provision	(8)		2		(1)		(2)		—		(4)		—		(4)		(17)
Ending balance	$	61	$	77	$	21	$	3	$	20	$	14	$	—	$	28	$	224

Nonperforming assets

The table below presents our nonperforming assets.


Nonperforming assets	Sept. 30, 2020						Dec. 31, 2019
	Recorded investment
	With an allowance		Without an allowance
(in millions)					Total
Nonperforming loans:

Other residential mortgages	$	56	$	—	$	56	$	62
Wealth management loans and mortgages	10		17		27		24
Total nonperforming loans	66		17		83		86
Other assets owned	—		1		1		3
Total nonperforming assets	$	66	$	18	$	84	$	89

At Sept. 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	Sept. 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	$	20	$	1	$	—	$	21	$	22	$	5	$	—	$	27
Other residential mortgages	7		—		—		7		8		3		—		11
Financial institutions	—		—		—		—		1		30		—		31
Commercial real estate	9		—		—		9		6		12		—		18
Total past due loans	$	36	$	1	$	—	$	37	$	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 of $106 million in the third quarter of 2020 and $282 million in the second quarter of 2020. Nearly all of the modifications were

short-term loan payment forbearances or modified principal and/or interest payments. These loans were primarily residential mortgage and commercial real estate loans. We also modified loans of $56 million in the third quarter of 2020, a majority of which were commercial real estate loans, by providing long-term loan payment modifications and an extension of maturity. We did not identify any of the modifications as troubled debt restructurings (“TDRs”). None of these loans were reported as past due or nonperforming at Sept. 30, 2020. At Sept. 30, 2020, the unpaid principal balance of the loans modified under the CARES Act or Interagency Guidance was $174 million. We modified other residential mortgage loans of $4 million in the third quarter of 2019.

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													Sept. 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	$	153	$	73	$	96	$	450	$	57	$	—	$	893	$	—	$	1,722
Non-investment grade	85		61		7		—		—		—		66		—		219
Total commercial	238		134		103		450		57		—		959		—		1,941		$	1
Commercial real estate:
Investment grade	611		1,065		542		543		385		430		175		—		3,751
Non-investment grade	160		526		604		159		367		152		244		29		2,241
Total commercial real estate	771		1,591		1,146		702		752		582		419		29		5,992		8
Financial institutions:
Investment grade	60		238		47		125		14		165		8,471		—		9,120
Non-investment grade	98		36		—		—		—		—		1,758		—		1,892
Total financial institutions	158		274		47		125		14		165		10,229		—		11,012		13
Wealth management loans and mortgages:
Investment grade	31		80		11		149		56		85		7,235		—		7,647
Non-investment grade	—		—		—		—		—		—		63		—		63
Wealth management mortgages	781		1,082		682		1,267		1,622		2,748		34		—		8,216
Total wealth management loans and mortgages	812		1,162		693		1,416		1,678		2,833		7,332		—		15,926		29
Lease financings	126		19		17		10		25		881		—		—		1,078		—
Other residential mortgages	—		—		—		—		—		423		—		—		423		2
Other loans	—		—		—		—		—		—		1,658		—		1,658		1
Margin loans	3,553		—		—		—		—		—		9,945		—		13,498		7
Total loans	$	5,658	$	3,180	$	2,006	$	2,703	$	2,526	$	4,884	$	30,542	$	29	$	51,528	$	61

(a) Excludes overdrafts of $3,963 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 Sept. 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 89% 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 Sept. 30, 2020, less than 1% of the mortgages were past due.

At Sept. 30, 2020, the wealth management mortgage portfolio consisted of the following geographic concentrations: California - 22%; New York - 17%; Massachusetts - 10%; Florida - 8%; and other - 43%.

Lease financing

At Sept. 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 $423 million at Sept. 30, 2020 and $494 million at Dec. 31, 2019. These loans are not typically correlated to external ratings. Included in this portfolio at Sept. 30, 2020 were $76 million of mortgage loans purchased in 2005, 2006 and the first quarter of 2007, of which 19% of the serviced loan balance was at least 60 days delinquent.

Overdrafts

Overdrafts primarily relate to custody and securities clearance clients and totaled $4.0 billion at Sept. 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 $13.5 billion of secured margin loans at Sept. 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 Sept. 30, 2020 were fully secured with high quality collateral. As a result, there was no allowance for credit losses related to these assets at Sept. 30, 2020.