Occupancy Expense and Information Systems and Communications Expense

6 Months Ended

Jun. 30, 2019

Leases [Abstract]

Occupancy Expense and Information Systems and Communications Expense

Occupancy Expense and Information Systems and Communications Expense

Upon adoption of Topic 842 on January 1, 2019, we recognized right-of-use assets of approximately $0.91 billion and lease liabilities of approximately $1.06 billion.

Occupancy expense and information systems and communications expense include depreciation of buildings, leasehold improvements, computer hardware and software, equipment, furniture and fixtures, and amortization of lease right-of-use assets. Total depreciation and amortization was $206 million and $411 million in the three and six months ended June 30, 2019, respectively.

We use our incremental borrowing rate to determine the present value of the lease payments for finance and operating leases described below. Additionally, we do not separate nonlease components such as real estate taxes and common area maintenance from base lease payments.

As of June 30, 2019, an aggregate net book value of $88 million for the finance lease related to our One Lincoln Street Boston headquarters is recorded in premises and equipment, with the related lease liability of $152 million recorded in long-term debt, in our consolidated statement of condition.

Finance lease right-of-use asset amortization is recorded in occupancy expense on a straight-line basis in our consolidated statement of income over the respective lease term. Lease payments are recorded as a reduction of the liability, with a portion recorded as imputed interest expense. In the three and six months ended June 30, 2019, interest expense related to the finance lease obligation reflected in NII was $3 million and $6 million, respectively. As of June 30, 2019, accumulated amortization of the finance lease right-of-use asset was $46 million.

As of June 30, 2019, an aggregate net book value of $876 million for the operating lease right-of-use assets is recorded in other assets, with the related lease liability of $1.02 billion recorded in accrued expenses and other liabilities in our consolidated statement of condition.

We have entered into non-cancellable operating leases for premises and equipment. Nearly all of these leases include renewal options, and only those reasonably certain of being exercised are included in the term of the lease. Costs for operating leases are recorded on a straight-line basis which includes both interest expense and right-of-use asset amortization. Operating lease costs for office space are recorded in occupancy expense. Costs related to operating leases for equipment are recorded in information systems and communications expense.

As of June 30, 2019, we have additional operating leases, primarily for office space, that have not yet commenced of approximately $497 million of undiscounted future minimum lease payments. These leases will commence between fiscal year 2019 and fiscal year 2023 with lease terms of 11 to 15 years. The majority of these future payments relate to the new Boston headquarters lease executed in the first quarter of 2019, replacing the One Lincoln Street Boston property.

None of our leases contain residual value guarantees.

The following table presents lease costs, sublease rental income, cash flows and new leases arising from lease transactions for the three and six months ended June 30, 2019:

(In millions)	Three Months Ended June 30, 2019			Six Months Ended June 30, 2019
Finance lease:
Amortization of right-of-use assets	$	6		$	11
Interest on lease liabilities	3			6
Total finance lease expense	9			17
Sublease income	(3		)	(5		)
Net finance lease expense	6			12
Operating lease:
Operating lease expense	45			89
Sublease income	(2		)	(3		)
Net operating lease expense	43			86
Net lease expense	$	49		$	98
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from finance leases	$	3		$	6
Operating cash flows from operating leases	48			99
Financing cash flows from finance leases	8			39
Right-of-use assets obtained in exchange for new lease obligations:
Operating leases	$	4		$	33
Finance leases	—			—

The following table presents future minimum lease payments under non-cancellable leases as of June 30, 2019:

(In millions)	Operating Leases			Finance Leases			Total
2019 (excluding the first six months ended 2019)	$	96		$	21		$	117
2020	186			42			228
2021	175			42			217
2022	151			42			193
2023	131			30			161
Thereafter	401			—			401
Total future minimum lease payments	1,140			177			1,317
Less imputed interest	(116		)	(25		)	(141		)
Total	$	1,024		$	152		$	1,176

The following table presents details related to remaining lease terms and discount rate as of June 30, 2019:

	June 30, 2019
Weighted-average remaining lease term (in years):
Finance leases	4.2
Operating leases	7.6
Weighted-average discount rate:
Finance leases	7	%
Operating leases	3

Occupancy Expense and Information Systems and Communications Expense

Occupancy Expense and Information Systems and Communications Expense

Upon adoption of Topic 842 on January 1, 2019, we recognized right-of-use assets of approximately $0.91 billion and lease liabilities of approximately $1.06 billion.

Occupancy expense and information systems and communications expense include depreciation of buildings, leasehold improvements, computer hardware and software, equipment, furniture and fixtures, and amortization of lease right-of-use assets. Total depreciation and amortization was $206 million and $411 million in the three and six months ended June 30, 2019, respectively.

We use our incremental borrowing rate to determine the present value of the lease payments for finance and operating leases described below. Additionally, we do not separate nonlease components such as real estate taxes and common area maintenance from base lease payments.

As of June 30, 2019, an aggregate net book value of $88 million for the finance lease related to our One Lincoln Street Boston headquarters is recorded in premises and equipment, with the related lease liability of $152 million recorded in long-term debt, in our consolidated statement of condition.

Finance lease right-of-use asset amortization is recorded in occupancy expense on a straight-line basis in our consolidated statement of income over the respective lease term. Lease payments are recorded as a reduction of the liability, with a portion recorded as imputed interest expense. In the three and six months ended June 30, 2019, interest expense related to the finance lease obligation reflected in NII was $3 million and $6 million, respectively. As of June 30, 2019, accumulated amortization of the finance lease right-of-use asset was $46 million.

As of June 30, 2019, an aggregate net book value of $876 million for the operating lease right-of-use assets is recorded in other assets, with the related lease liability of $1.02 billion recorded in accrued expenses and other liabilities in our consolidated statement of condition.

We have entered into non-cancellable operating leases for premises and equipment. Nearly all of these leases include renewal options, and only those reasonably certain of being exercised are included in the term of the lease. Costs for operating leases are recorded on a straight-line basis which includes both interest expense and right-of-use asset amortization. Operating lease costs for office space are recorded in occupancy expense. Costs related to operating leases for equipment are recorded in information systems and communications expense.

As of June 30, 2019, we have additional operating leases, primarily for office space, that have not yet commenced of approximately $497 million of undiscounted future minimum lease payments. These leases will commence between fiscal year 2019 and fiscal year 2023 with lease terms of 11 to 15 years. The majority of these future payments relate to the new Boston headquarters lease executed in the first quarter of 2019, replacing the One Lincoln Street Boston property.

None of our leases contain residual value guarantees.

The following table presents lease costs, sublease rental income, cash flows and new leases arising from lease transactions for the three and six months ended June 30, 2019:

(In millions)	Three Months Ended June 30, 2019			Six Months Ended June 30, 2019
Finance lease:
Amortization of right-of-use assets	$	6		$	11
Interest on lease liabilities	3			6
Total finance lease expense	9			17
Sublease income	(3		)	(5		)
Net finance lease expense	6			12
Operating lease:
Operating lease expense	45			89
Sublease income	(2		)	(3		)
Net operating lease expense	43			86
Net lease expense	$	49		$	98
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from finance leases	$	3		$	6
Operating cash flows from operating leases	48			99
Financing cash flows from finance leases	8			39
Right-of-use assets obtained in exchange for new lease obligations:
Operating leases	$	4		$	33
Finance leases	—			—

The following table presents future minimum lease payments under non-cancellable leases as of June 30, 2019:

(In millions)	Operating Leases			Finance Leases			Total
2019 (excluding the first six months ended 2019)	$	96		$	21		$	117
2020	186			42			228
2021	175			42			217
2022	151			42			193
2023	131			30			161
Thereafter	401			—			401
Total future minimum lease payments	1,140			177			1,317
Less imputed interest	(116		)	(25		)	(141		)
Total	$	1,024		$	152		$	1,176

The following table presents details related to remaining lease terms and discount rate as of June 30, 2019:

	June 30, 2019
Weighted-average remaining lease term (in years):
Finance leases	4.2
Operating leases	7.6
Weighted-average discount rate:
Finance leases	7	%
Operating leases	3