Loans and asset quality

3 Months Ended

Mar. 31, 2020

Receivables [Abstract]

Loans and asset quality

Loans and asset quality

Loans

The table below provides the details of our loan portfolio and industry concentrations of credit risk at March 31, 2020 and Dec. 31, 2019.

Loans	March 31, 2020		Dec. 31, 2019
(in millions)
Domestic:
Commercial	$	3,010	$	1,442
Commercial real estate	6,429		5,575
Financial institutions	6,231		4,852
Lease financings	472		537
Wealth management loans and mortgages	16,128		16,050
Other residential mortgages	472		494
Overdrafts	1,851		524
Other	1,168		1,167
Margin loans	11,733		11,907
Total domestic	47,494		42,548
Foreign:
Commercial	425		347
Commercial real estate	22		7
Financial institutions	7,985		7,626
Lease financings	582		576
Wealth management loans and mortgages	131		140
Other (primarily overdrafts)	4,347		2,230
Margin loans	1,382		1,479
Total foreign	14,874		12,405
Total loans (a)	$	62,368	$	54,953

(a) Net of unearned income of $301 million at March 31, 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 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 the 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 Dec. 31, 2019												Wealth management loans and mortgages		Other residential mortgages
(in millions)	Commercial			Commercial real estate			Financial institutions			Lease financings							All other			Foreign			Total
Beginning balance	$	61		$	77		$	21		$	3	$	20	$	14		$	—		$	28		$	224
Charge-offs	—			—			—			—		—		(1		)	—			—			(1		)
Recoveries	—			—			—			—		—		1			—			—			1
Net (charge-offs) recoveries	—			—			—			—		—		—			—			—			—
Provision	(1		)	(1		)	(1		)	—		—		(1		)	—			(4		)	(8		)
Ending balance	$	60		$	76		$	20		$	3	$	20	$	13		$	—		$	24		$	216
Allowance for:
Loan losses	$	11		$	57		$	5		$	3	$	18	$	13		$	—		$	15		$	122
Lending-related commitments	49			19			15			—		2		—			—			9			94
Individually evaluated for impairment:
Loan balance	$	—		$	—		$	—		$	—	$	15	$	—		$	—		$	—		$	15
Allowance for loan losses	—			—			—			—		—		—			—			—			—
Collectively evaluated for impairment:
Loan balance	$	1,442		$	5,575		$	4,852		$	537	$	16,035	$	494		$	13,598	(a)	$	12,405		$	54,938
Allowance for loan losses	11			57			5			3		18		13			—			15			122

(a) Includes $524 million of domestic overdrafts, $11,907 million of margin loans and $1,167 million of other loans at Dec. 31, 2019.

Allowance for credit losses activity for the quarter ended March 31, 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		)	—			—		—			—		—			—			—			(11		)
Recoveries	—			—			—		—			—		—			—			—			—
Net recoveries	(11		)	—			—		—			—		—			—			—			(11		)
Provision	12			(1		)	1		(1		)	—		(1		)	—			(3		)	7
Ending balance	$	82		$	74		$	23	$	4		$	21	$	15		$	—		$	29		$	248
Allowance for:
Loan losses	$	24		$	56		$	10	$	4		$	18	$	15		$	—		$	19		$	146
Lending-related commitments	58			18			13		—			3		—			—			10			102
Individually evaluated for impairment:
Loan balance	$	96		$	—		$	—	$	—		$	4	$	—		$	—		$	—		$	100
Allowance for loan losses	10			—			—		—			—		—			—			—			10
Collectively evaluated for impairment:
Loan balance	$	1,626		$	4,921		$	4,652	$	653		$	15,724	$	574		$	13,913	(a)	$	11,324		$	53,387
Allowance for loan losses	14			56			10		4			18		15			—			19			136

(a)

Includes $654 million of domestic overdrafts, $12,107 million of margin loans and $1,152 million of other loans at March 31, 2019.

Nonperforming assets

The table below presents our nonperforming assets. 

Nonperforming assets	March 31, 2020						Dec. 31, 2019
	Recorded investment
	With an allowance		Without an allowance
(in millions)					Total
Nonperforming loans:
Other residential mortgages	$	60	$	—	$	60	$	62
Wealth management loans and mortgages	9		18		27		24
Total nonperforming loans	69		18		87		86
Other assets owned	1		—		1		3
Total nonperforming assets	$	70	$	18	$	88	$	89

At March 31, 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	March 31, 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
Financial institutions	$	—	$	—	$	—	$	—	$	1	$	30	$	—	$	31
Wealth management loans and mortgages	77		1		—		78		22		5		—		27
Commercial real estate	—		—		—		—		6		12		—		18
Other residential mortgages	9		1		—		10		8		3		—		11
Total past due loans	$	86	$	2	$	—	$	88	$	37	$	50	$	—	$	87

Loan modifications

The CARES Act, which became law on March 27, 2020, provides that financial institutions may, subject to certain conditions, elect to temporarily suspend the U.S. GAAP requirements with respect to loan modifications related to the coronavirus pandemic that would otherwise be treated as troubled debt restructurings (“TDRs”) and the determination that such a loan modification is a TDR. We modified loans of less than $1 million in the first quarter of 2020, first quarter of 2019 and fourth quarter of 2019. The loans were primarily other residential loans.

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													March 31, 2020
													Revolving loans
	Originated, at amortized cost												Amortized cost		Converted to term loans - Amortized cost				Accrued interest receivable
(in millions)	1Q20		2019		2018		2017		2016		Prior to 2016						Total (a)
Commercial:
Investment grade	$	20	$	286	$	107	$	600	$	57	$	—	$	1,994	$	—	$	3,064
Non-investment grade	41		72		12		—		6		—		240		—		371
Total commercial	61		358		119		600		63		—		2,234		—		3,435		$	4
Commercial real estate:
Investment grade	414		1,412		1,047		624		636		640		586		—		$	5,359
Non-investment grade	15		136		213		106		313		48		232		29		1,092
Total commercial real estate	429		1,548		1,260		730		949		688		818		29		6,451		11
Financial institutions:
Investment grade	49		270		133		125		14		189		11,429		—		$	12,209
Non-investment grade	15		8		—		—		—		—		1,984		—		2,007
Total financial institutions	64		278		133		125		14		189		13,413		—		14,216		26
Wealth management loans and mortgages:
Investment grade	3		83		12		178		58		94		7,049		—		$	7,477
Non-investment grade	—		—		—		—		—		—		132		—		132
Wealth management mortgages	208		1,139		752		1,438		1,833		3,239		41		—		8,650
Total wealth management loans and mortgages	211		1,222		764		1,616		1,891		3,333		7,222		—		16,259		38
Lease financings	—		21		23		72		34		904		—		—		1,054		—
Other residential mortgages	—		—		—		—		—		472		—		—		472		2
Other loans	5		—		—		—		—		—		1,214		—		1,219		1
Margin loans	2,260		1,300		—		—		—		—		9,555		—		13,115		12
Total loans	$	3,030	$	4,727	$	2,299	$	3,143	$	2,951	$	5,586	$	34,456	$	29	$	56,221	$	94

(a) Excludes overdrafts of $6,147 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 96% of the exposures meeting the investment grade equivalent criteria of our internal credit rating classification at March 31, 2020. In addition, 79% 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 March 31, 2020, less than 1% of the mortgages were past due.

At March 31, 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 March 31, 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 $472 million at March 31, 2020 and $494 million at Dec. 31, 2019. These loans are not typically correlated to external ratings. Included in this portfolio at March 31, 2020 were $87 million of mortgage loans purchased in 2005, 2006 and the first quarter of 2007, of which 9% of the serviced loan balance was at least 60 days delinquent.

Overdrafts

Overdrafts primarily relate to custody and securities clearance clients and totaled $6.1 billion at March 31, 2020 and $2.7 billion at Dec. 31, 2019. Overdrafts occur on a daily basis primarily in the custody and securities clearance business 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 $13.1 billion of secured margin loans at March 31, 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 are fully collateralized transactions. Substantially all of the collateral was high quality. At March 31, 2020, we had $1.2 billion of reverse repos fully secured by

non-agency debt securities that have experienced decreased liquidity during March 2020. The

allowance for credit losses related to these assets at March 31, 2020 is $18 million.