Loans Held for Sale

6 Months Ended

Jun. 30, 2023

Loans held for sale consisted of the following:


	June 30, 2023		December 31, 2022
	(in millions)
Commercial loans:
Real estate, including construction	$	507	$	—
Business and corporate banking	11		—
Global banking	478		349
Total commercial	996		349
Consumer loans:
Residential mortgages	1		5



Total consumer	1		5
Total loans held for sale	$	997	$	354

Commercial Loans During the second quarter of 2023, we transferred certain commercial real estate loans to held for sale with a carrying value of $507 million as part of an effort to reduce exposure to this sector. We recorded a lower of amortized cost or fair value adjustment of $34 million upon transferring these loans to held for sale as a component of other income (loss) in the consolidated statement of income.

Also included in commercial loans held for sale are certain other loans that we no longer intend to hold for investment and were transferred to held for sale which totaled $115 million and $112 million at June 30, 2023 and December 31, 2022, respectively. During the three and six months ended June 30, 2023 and 2022, lower of amortized cost or fair value adjustments on these commercial loans held for sale were immaterial.

Commercial loans held for sale also includes certain loans that we have elected to designate under the fair value option which consists of loans that we originate in connection with our participation in a number of syndicated credit facilities with the intent of selling them to unaffiliated third parties as well as loans that we purchase from the secondary market and hold as hedges against our exposure to certain total return swaps or intend to sell. The fair value of these loans totaled $374 million and $237 million at June 30, 2023 and December 31, 2022, respectively. See Note 11, "Fair Value Option," for additional information.

In addition, during the first quarter of 2022, we completed the sale of the branch disposal group that we previously transferred to held for sale in 2021 as part of our Restructuring Plan. The sale included certain retail business banking loans with a carrying value at the time of sale of $37 million. See Note 3, "Sale of Certain Branch Assets and Liabilities," for additional information.

Consumer Loans Included in residential mortgage loans held for sale are agency-eligible conforming residential mortgage loans which are originated and held for sale to third parties, currently on a servicing retained basis. Gains and losses from the sale of these residential mortgage loans are reflected as a component of other income (loss) in the consolidated statement of income.

In addition, as discussed above, during the first quarter of 2022, we completed the sale of the branch disposal group that we previously transferred to held for sale in 2021 as part of our Restructuring Plan. The sale included certain consumer loans with a carrying value at the time of sale which collectively totaled $2,102 million, including $1,665 million of residential mortgages, $185 million of home equity mortgages, $168 million of credit cards and $84 million of other consumer loans. See Note 3, "Sale of Certain Branch Assets and Liabilities," for additional information.

During the first quarter of 2022, we also sold a portfolio of consumer loans to a third party consisting primarily of certain non-performing mortgage loans and government-backed mortgage loans that we previously transferred to held for sale in 2021 as part of our Restructuring Plan. These mortgage loans had a carrying value at the time of sale which collectively totaled $904 million, including $865 million of residential mortgages and $39 million of home equity mortgages, and we recognized a loss on sale of $35 million, largely reflecting changes in the final terms of the sale. The loss on sale is reflected as a component of other income (loss) in the consolidated statement of income. The loss on sale was increased by $10 million during the second quarter of 2023 reflecting a repricing reserve adjustment.

During the three and six months ended June 30, 2022, lower of amortized cost or fair value adjustments on mass market consumer loans held for sale were immaterial.

Loans held for sale are subject to market risk, liquidity risk and interest rate risk, in that their value will fluctuate as a result of changes in market conditions, as well as the credit environment. Interest rate risk for residential mortgage loans which are

originated and held for sale is partially mitigated through an economic hedging program to offset changes in the fair value of these mortgage loans held for sale, from the time of commitment to sale, attributable to changes in market interest rates. Revenue associated with this economic hedging program, which is reflected as a component of other income (loss) in the consolidated statement of income, was nil during both the three and six months ended June 30, 2023 compared with gains of $3 million and $7 million during the three and six months ended June 30, 2022, respectively.

Valuation Allowances Excluding the loans designated under the fair value option discussed above, loans held for sale are recorded at the lower of amortized cost or fair value, with adjustments to fair value being recorded as a valuation allowance through other revenues. The valuation allowance on commercial loans held for sale was $37 million and nil at June 30, 2023 and December 31, 2022, respectively. The valuation allowance on consumer loans held for sale was nil at both June 30, 2023 and December 31, 2022.