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Loans Receivable
 9 Months Ended
Sep. 30, 2019
Receivables [Abstract]  
Loans Receivable
Note 9.
Loans Receivable
Loans receivable consists of loans held for investment that are accounted for at amortized cost net of allowance for loan losses. Interest on loans receivable is recognized over the life of the loan and is recorded on an accrual basis.
The table below presents information about loans receivable.
 
       
  
As of
 
                 
$ in millions
   
September 2019
 
    
December 2018
 
Corporate loans
   
$41,463
 
    
$37,283
 
PWM loans
   
18,331
 
    
17,518
 
Commercial real estate loans
   
12,662
 
    
11,441
 
Residential real estate loans
   
5,657
 
    
7,284
 
Consumer loans
   
5,525
 
    
4,536
 
Other loans
   
3,520
 
    
3,594
 
Total loans receivable, gross
   
87,158
 
    
81,656
 
Allowance for loan losses
   
(1,321
)
    
(1,066
 )
Total loans receivable
   
$85,837
 
    
$80,590
 
The fair value of loans receivable was $86.41 billion as of September 2019 and $80.74 billion as of December 2018. Had these loans been carried at fair value and included in the fair value hierarchy, $45.27 billion as of September 2019 and $40.64 billion as of December 2018 would have been classified in level 2, and $41.14 billion as of September 2019 and $40.10 billion as of December 2018 would have been classified in level 3.
The following is a description of the captions in the table above:
 
•
Corporate Loans.
Corporate loans includes term loans, revolving lines of credit, letter of credit facilities and bridge loans, and are principally used for operating and general corporate purposes, or in connection with acquisitions. Corporate loans may be secured or unsecured, depending on the loan purpose, the risk profile of the borrower and other factors. Loans receivable related to the firm’s relationship lending activities are reported within corporate loans.
 
•
Private Wealth Management (PWM) Loans.
PWM loans includes loans extended by the private bank. These loans are used to finance investments in both financial and nonfinancial assets, bridge cash flow timing gaps or provide liquidity for other needs. Substantially all of such loans are secured by securities, commercial real estate or other assets.
 
•
Commercial Real Estate Loans.
Commercial real estate loans includes loans extended by the firm, other than those extended by the private bank, that are directly or indirectly secured by hotels, retail stores, multifamily housing complexes and commercial and industrial properties. Commercial real estate loans also includes loans purchased by the firm.
•
Residential Real Estate Loans.
Residential real estate loans primarily includes loans extended by the firm to clients who warehouse assets that are directly or indirectly secured by residential real estate and loans purchased by the firm.
 
•
Consumer Loans.
Consumer loans are unsecured and represent consumer and credit card loans originated by the firm.
 
•
Other Loans.
Other loans primarily includes loans extended to clients who warehouse assets that are directly or indirectly secured by consumer loans, including auto loans and private student loans. Other loans also includes unsecured consumer loans purchased by the firm.
Lending Commitments
The table below presents information about lending commitments that are held for investment and accounted for on an accrual basis.
 
       
  
As of
 
                 
$ in millions
   
September 2019
     
December 2018
 
Corporate
   
$120,777
     
$113,484
 
Credit card
 
 
9,596
 
 
 
–
 
Other
   
8,687
     
7,513
 
Total
   
$139,060
     
$120,997
 
In the table above:
 
•
 Corporate lending commitments primarily relates to the firm’s relationship lending activities.
 
•
Credit card lending commitments represents credit card lines issued by the firm to consumers. These credit card lines are cancelable by the firm.
 
•
 Other lending commitments primarily relates to lending commitments extended to clients who warehouse assets backed by real estate and other assets and in connection with commercial real estate financing.
 
•
 The carrying value of lending commitments
was
 a
 
liabilit
y
 of $508 million (including allowance for losses of $354 million) as of September 2019 and $443 million (including allowance for losses of $286 million) as of December 2018.
 
•
 The estimated fair value of such lending commitments
 was
 a
 
liabilit
y
of $3.17 billion as of September 2019 and $3.78 billion as of December 2018. Had these lending commitments been carried at fair value and included in the fair value hierarchy, $1.20 
b
illion as of September 2019 and $1.12 billion as of December 2018 would have been classified in level 2, and $1.97 billion as of September 2019 and $2.66 billion as of December 2018 would have been classified in level 3.
PCI Loans
Loans receivable includes PCI loans, which represent acquired loans or pools of loans with evidence of credit deterioration subsequent to their origination and where it is probable, at acquisition, that the firm will not be able to collect all contractually required payments. Loans acquired within the same reporting period, which have at least two common risk characteristics, one of which relates to their credit risk, are eligible to be pooled together and considered a single unit of account. PCI loans are initially recorded at the acquisition price and the difference between the acquisition price and the expected cash flows (accretable yield) is recognized as interest income over the life of such loans or pools of loans on an effective yield method. Expected cash flows on PCI loans are determined using various inputs and assumptions, including default rates, loss severities, recoveries, amount and timing of prepayments and other macroeconomic indicators.
The tables below present information about PCI loans.
 
       
  
As of
 
                 
$ in millions
   
September
2019
     
December
2018
 
Commercial real estate loans
   
$
 
 
 
433
     
$   581
 
Residential real estate loans
   
1,516
     
2,457
 
Other loans
   
–
     
4
 
Total gross carrying value
   
$1,949
     
$3,042
 
 
Total outstanding principal balance
   
$3,603
     
$5,576
 
Total accretable yield
   
$
 
 
 
244
     
$   459
 
 
                 
  
Three Months
Ended September
   
        
  
Nine Months
Ended September
 
                                     
$ in millions
   
2019
     
2018
   
   
2019
     
2018
 
Acquired during the period
   
     
   
   
     
 
Fair value
   
$
 
 
–
     
$287
   
   
$
 
 
–
     
$   585
 
Expected cash flows
   
$
 
 
–
     
$327
   
   
$
 
 
–
     
$  
  
655
  
Contractually required cash flows
   
$
 
 
–
     
$583
   
   
$
 
 
–
     
$1,287
 
In the table above:
 
•
 Fair value, expected cash flows and contractually required cash flows were as of the acquisition date.
 
•
 Expected cash flows represents the cash flows expected to be received over the life of the loan or as a result of liquidation of the underlying collateral.
 
•
 Contractually required cash flows represents cash flows required to be repaid by the borrower over the life of the loan.
Credit Quality
Risk Assessment.
The firm’s risk assessment process includes evaluating the credit quality of its loans receivable. For loans receivable (excluding PCI and consumer loans) and lending commitments (excluding credit card commitments), the firm performs credit reviews which include initial and ongoing analyses of its borrowers. A credit review is an independent analysis of the capacity and willingness of a borrower to meet its financial obligations, resulting in an internal credit rating. The determination of internal credit ratings also incorporates assumptions with respect to the nature of and outlook for the borrower’s industry and the economic environment. The firm also assigns a regulatory risk rating to such loans based on the definitions provided by the U.S. federal bank regulatory agencies.
The firm enters into economic hedges to mitigate credit risk on certain loans receivable and corporate lending commitments (both of which are held for investment) related to relationship lending activities. Such hedges are accounted for at fair value. See Note 18 for further information about these lending commitments and associated hedges.
The table below presents gross loans receivable (excluding PCI and consumer loans of $7.47 billion as of September 2019 and $7.58 billion as of
 
December 2018) and lending commitments (excluding credit card commitments of $9.60 billion as of September 2019) by an internally determined public rating agency equivalent and by regulatory risk rating. 
 
                         
$ in millions
   
Loans
     
Lending
Commitments
     
Total
 
Credit Rating Equivalent
   
     
     
 
As of September 2019
    
     
     
 
Investment-grade
   
$28,846
     
$
 
85,152
     
$113,998
 
Non-investment-grade
   
50,838
     
44,312
     
95,150
 
Total
   
$79,684
     
$129,464
     
$209,148
 
 
As of December 2018
    
     
     
 
Investment-grade
   
$28,290
     
$  81,959
     
$110,249
 
Non-investment-grade
   
45,788
     
39,038
     
84,826
 
Total
   
$74,078
     
$120,997
     
$195,075
 
 
Regulatory Risk Rating
   
     
     
 
As of September 2019
    
     
     
 
Non-criticized/pass
   
$72,830
     
$125,988
     
$198,818
 
Criticized
   
6,854
     
3,476
     
10,330
 
Total
   
$79,684
     
$129,464
     
$209,148
 
 
As of December 2018
    
     
     
 
Non-criticized/pass
   
$70,153
     
$117,923
     
$188,076
 
Criticized
   
3,925
     
3,074
     
6,999
 
Total
   
$74,078
     
$120,997
     
$195,075
 
In the table above,
non-criticized/pass
loans and lending commitments represent loans and lending commitments that are performing and/or do not demonstrate adverse characteristics that are likely to result in a credit loss.
For consumer loans, an important credit-quality indicator is the Fair Isaac Corporation (FICO) credit score, which measures a borrower’s creditworthiness by considering factors such as payment and credit history. FICO credit scores are refreshed periodically by the firm to assess the updated creditworthiness of the borrower.
The table below presents gross consumer loans receivable and the concentration by refreshed FICO credit score.
 
       
  
As of
 
                 
$ in millions
   
September
2019
     
December
2018
 
Consumer loans, gross
   
$5,525
     
$4,536
 
 
Refreshed FICO credit score
   
     
 
Greater than or equal to 660
   
87%
     
88%
 
Less than 660
   
13%
     
12%
 
Total
   
100%
     
100%
 
For PCI loans, the firm’s risk assessment process includes reviewing certain key metrics, such as delinquency status, collateral values, expected cash flows and other risk factors.
Impaired Loans.
Loans receivable (excluding PCI loans) are determined to be impaired when it is probable that the firm will not collect all principal and interest due under the contractual terms. At that time, loans are generally placed on nonaccrual status and all accrued but uncollected interest is reversed against interest income and interest subsequently collected is recognized on a cash basis to the extent the loan balance is deemed collectible. Otherwise, all cash received is used to reduce the outstanding loan balance. A loan is considered past due when a principal or interest payment has not been made according to its contractual terms.
In certain circumstances, the firm may also modify the original terms of a loan agreement by granting a concession to a borrower experiencing financial difficulty. Such modifications are considered troubled debt restructurings and typically include interest rate reductions, payment extensions, and modification of loan covenants. Loans modified in a troubled debt restructuring are considered impaired and are subject to specific loan-level reserves. 
The gross carrying value of impaired loans receivable (excluding PCI loans) on nonaccrual status was $1.39
b
illion as of September 2019 and $838 million as of December 2018. Such loans included $319 million as of September 2019 and $27 million as of December 2018 of corporate loans that were modified in a troubled debt restructuring. The firm’s lending commitments related to these loans wer
e not material
as of September 2019 and December 2018. The amount of loans 30 days or
more past due was $225 million as of September 2019 and $208 million as of December 2018.
When it is determined that the firm cannot reasonably estimate expected cash flows on PCI loans or pools of loans, such loans are placed on nonaccrual status.
Allowance for Credit Losses
The firm’s allowance for credit losses consists of the allowance for losses on loans and lending commitments.
The firm’s allowance for loan losses consists of specific loan-level reserves, portfolio level reserves and reserves on PCI loans, as described below:
 
•
 Specific loan-level reserves are determined on loans (excluding PCI loans) that exhibit credit quality weakness and are therefore individually evaluated for impairment.
 
•
 Portfolio level reserves are determined on loans (excluding PCI loans) not evaluated for specific loan-level reserves by aggregating groups of loans with similar risk characteristics and estimating the probable loss inherent in the portfolio.
 
•
 Reserves on PCI loans are recorded when it is determined that the expected cash flows, which are reassessed on a quarterly basis, will be lower than those used to establish the current effective yield for such loans or pools of loans. If the expected cash flows are determined to be significantly higher than those used to establish the current effective yield, such increases are initially recognized as a reduction to any previously recorded allowances for loan losses and any remaining increases are recognized as interest income prospectively over the life of the loan or pools of loans as an increase to the effective yield.
The allowance for loan losses is determined using various risk factors, including industry default and loss data, current macroeconomic indicators, borrower’s capacity to meet its financial obligations, borrower’s country of risk, loan seniority and collateral type. In addition, for loans backed by real estate, risk factors include loan to value ratio, debt service ratio and home price index. Risk factors for consumer loans include FICO credit scores and delinquency status.
Management’s estimate of loan losses entails judgment about loan collectability at the reporting dates, and there are uncertainties inherent in those judgments. While management uses the best information available to determine this estimate, future adjustments to the allowance may be necessary based on, among other things, changes in the economic environment or variances between actual results and the original assumptions used. Loans are charged off against the allowance for loan losses when deemed to be uncollectible.
The firm also records an allowance for losses on lending commitments that are held for investment and accounted for on an accrual basis. Such allowance is determined using the same methodology as the allowance for loan losses, while also taking into consideration the probability of drawdowns or funding, and is included in other liabilities.
The table below presents gross loans receivable and lending commitments by impairment methodology.
 
                                 
                                 
$ in millions
   
Specific
     
Portfolio
     
PCI
     
Total
 
As of September 2019
    
     
     
     
 
Loans Receivable
   
     
     
     
 
Corporate loans
   
$1,055
     
$  
40,408
     
$       
–
     
$  
41,463
 
PWM loans
   
35
     
18,296
     
–
     
18,331
 
Commercial real estate loans
   
128
     
12,101
     
433
     
12,662
 
Residential real estate loans
   
168
     
3,973
     
1,516
     
5,657
 
Consumer loans
   
–
     
5,525
     
–
     
5,525
 
Other loans
   
–
     
3,520
     
–
     
3,520
 
Total
   
$1,386
     
$  
83,823
     
$1,949
     
$  
87,158
 
Lending Commitments
   
     
     
     
 
Corporate
   
$    
 
74
     
$120,703
     
$       
–
     
$
120,777
 
Credit card
 
 
–
 
 
 
9,596
 
 
 
–
 
 
 
9,596
 
Other
   
13
     
8,674
     
–
     
8,687
 
Total
   
$    
 
87
     
$138,973
     
$       
–
     
$139,060
 
 
As of December 2018
    
     
     
     
 
Loans Receivable
   
     
     
     
 
Corporate loans
   
$   
358
     
$  36,925
     
$
 
       –
      
$  37,283
 
PWM loans
   
46
     
17,472
     
–
     
17,518
 
Commercial real estate loans
   
9
     
10,851
     
581
     
11,441
 
Residential real estate loans
   
425
     
4,402
     
2,457
     
7,284
 
Consumer loans
   
–
     
4,536
     
–
     
4,536
 
Other loans
   
–
     
3,590
     
4
     
3,594
 
Total
   
$   
838
     
$  77,776
     
$3,042
     
$  81,656
 
Lending Commitments
   
     
     
     
 
Corporate
   
$     
31
     
$113,453
     
$
 
       –
      
$113,484
 
Other
   
–
     
7,513
     
–
     
7,513
 
Total
   
$     
31
     
$120,966
     
$
 
       –
      
$120,997
 
 
 
 
 
 
 
 
 
In the table above:
 
•
 Gross loans receivable and lending commitments, subject to specific loan-level reserves, included $705 million as of September 2019 and $484 million as of December 2018 of impaired loans and lending commitments, which did not require a reserve as the loan was deemed to be recoverable.
 
 
 
 
 
 
 
 
 
 
 
 
•
 Gross loans receivable deemed impaired and subject to specific loan-level reserves as a percentage of total gross loans receivable was 1.6% as of September 2019 and 1.0% as of December 2018.
 
 
 
 
 
 
 
 
The table below presents information about the allowance for credit losses.
 
                                     
                 
 
Nine Months Ended
September 2019
   
    
  
Year Ended
December 2018
 
                                     
$ in millions
   
Loans
Receivable
     
Lending
Commitments
   
   
Loans
Receivable
     
Lending
Commitments
 
Changes in the allowance for credit losses
   
 
Beginning balance
   
$1,066
 
    
$286
   
   
$   803
     
$274
 
Net charge-offs
   
(329
)
    
–
   
   
(337
)
    
–
 
Provision
   
661
 
    
68
   
   
654
 
    
20
 
Other
   
(77
)
    
–
   
   
(54
)
    
(8
 )
Ending balance
   
$1,321
 
    
$354
   
   
$
1,066
      
$286
 
Allowance for losses by impairment methodology
 
Specific
   
$  
 
187
     
$  
14
   
   
$   102
     
$    3
 
Portfolio
   
1,016
     
340
   
   
848
     
283
 
PCI
   
118
     
–
   
   
116
     
–
 
Total
   
$1,321
     
$354
   
   
$1,066
     
$286
 
 
 
 
 
 
 
 
 
In the table above:
 
•
 Net charge-offs were primarily related to consumer loans for the nine months ended September 2019 and consumer loans and commercial real estate PCI loans for the year ended December 2018.
 
 
 
 
 
 
 
 
 
 
 
 
•
 The provision for credit losses was primarily related to consumer loans and corporate loans for both the nine months ended September 2019 and the year ended December 2018.
 
 
 
 
 
 
 
 
 
 
 
 
•
 Other represents the reduction to the allowance related to loans and lending commitments transferred to held for sale.
 
 
 
 
 
 
 
 
 
 
 
 
•
 Portfolio level reserves were primarily related to corporate loans and lending commitments. Specific loan-level reserves were substantially all related to corporate loans. Reserves on PCI loans were related to real estate loans.
 
 
 
 
 
 
 
 
 
 
 
 
•
 Substantially all of the allowance for losses on lending commitments was related to corporate lending commitments.
 
 
 
 
 
 
 
 
 
 
 
 
•
 Allowance for loan losses as a percentage of total gross loans receivable was 1.5% as of September 2019 and 1.3% as of December 2018.
 
 
 
 
 
 
 
 
 
 
 
 
•
 Net charge-offs as a percentage of average total gross loans receivable were 0.5% on an annualized basis for the nine months ended September 2019 and 0.5% for the year ended December 2018.