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Loans and Allowance for Credit Losses
 9 Months Ended
Sep. 30, 2022
Receivables [Abstract]  
Loans and Allowance for Credit Losses Loans and Allowance for Credit Losses
We segregate our loans into two segments: commercial and financial loans and commercial real estate loans. We further classify commercial and financial loans as fund finance loans, leveraged loans, overdrafts and other. These classifications reflect their risk characteristics, their initial measurement attributes and the methods we use to monitor and assess credit risk. For additional information on our loans, including our internal risk-rating system used to assess our risk of credit loss for each loan, refer to pages 149 to 154 in Note 4 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2021 Form 10-K.
The following table presents our recorded investment in loans, by segment, as of the dates indicated:
(In millions)September 30, 2022December 31, 2021
Domestic(1):
Commercial and financial:
Fund Finance(2)
$12,094 $12,396 
Leveraged loans2,346 3,106 
Overdrafts2,787 1,796 
Other(3)
2,133 2,262 
Commercial real estate2,921 2,554 
Total domestic22,281 22,114 
Foreign(1):
Commercial and financial:
Fund Finance(2)
8,454 7,778 
Leveraged loans1,006 1,328 
Overdrafts4,372 1,312 
Total foreign13,832 10,418 
Total loans(2)
36,113 32,532 
Allowance for credit losses(97)(87)
Loans, net of allowance$36,016 $32,445 
(1) Domestic and foreign categorization is based on the borrower’s country of domicile.
(2) Fund finance loans include primarily $7.69 billion private equity capital call finance loans, $6.57 billion loans to real money funds, $4.25 billion collateralized loan obligations in loan form and $1.10 billion loans to business development companies as of September 30, 2022, compared to $9.15 billion private equity capital call finance loans, $6.40 billion loans to real money funds, $2.91 billion collateralized loan obligations in loan form and $1.39 billion loans to business development companies as of December 31, 2021.
(3) Includes $1.73 billion securities finance loans, $389 million loans to municipalities and $19 million other loans as of September 30, 2022 and $1.78 billion securities finance loans, $455 million loans to municipalities and $23 million other loans as of December 31, 2021.
The commercial and financial segment is composed of primarily fund finance loans, purchased leveraged loans, overdrafts and other loans. Fund finance loans are composed of revolving credit lines providing liquidity and leverage to mutual fund and private equity fund clients, as well as collateralized loan obligations in loan form.
Certain loans are pledged as collateral for access to the Federal Reserve's discount window. As of September 30, 2022 and December 31, 2021, the loans pledged as collateral totaled $9.76 billion and $10.08 billion, respectively.
As of both September 30, 2022 and December 31, 2021, we had no loans on non-accrual status.
We sold $21 million of loans in the third quarter of 2022.
In certain circumstances, we restructure troubled loans by granting concessions to borrowers experiencing financial difficulty. Once restructured, the loans are generally considered impaired until their maturity, regardless of whether the borrowers perform under the modified terms of the loans. There were no loans modified in troubled debt restructurings during the third quarter of 2022.
Allowance for Credit Losses
We recognize an allowance for credit losses in accordance with ASC 326 for certain on-balance sheet credit exposures, including financial assets held at amortized cost and off-balance sheet commitments. The allowance for credit losses is reviewed on a regular basis, and any provision for credit losses is recorded to reflect the amount necessary to maintain the allowance for expected credit losses at a level which represents what management does not expect to recover due to expected credit losses. For additional discussion on the allowance for credit losses for investment securities, please refer to Note 3, to the consolidated financial statements in this Form 10-Q.
When the allowance is recorded, a provision for credit loss expense is recognized in net income. The allowance for credit losses for financial assets (excluding investment securities, as discussed in Note 3) represents the portion of the amortized cost basis, including accrued interest for financial assets held at amortized cost, which management does not expect to recover due to expected credit losses and is presented on the statement of condition as an offset to the amortized cost basis. The accrued interest balance is presented separately on the statement of condition within accrued interest and fees receivable. The allowance for off-balance sheet commitments is presented within other liabilities.
The allowance for credit losses may be determined using various methods, including discounted cash flow methods, loss-rate methods, probability-of-default methods, and other quantitative or qualitative methods as determined by us. The method used to estimate expected credit losses may vary depending on the type of financial asset, our ability to predict the timing of cash flows, and the information available to us.
We measure expected credit losses of financial assets on a collective (pool) basis when similar risk characteristics exist. Each reporting period, we assess whether the assets in the pool continue to display similar risk characteristics.
For a financial asset that does not share risk characteristics with other assets, expected credit losses are measured separately using one or more of the methods noted above. As of September 30, 2022, we had 11 loans for $130 million in the commercial and financial segment that no longer met the similar risk characteristics of their collective pool. We recorded an allowance for credit losses of $8 million as of September 30, 2022 on these loans.
Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. In future periods, factors and forecasts then prevailing may result in significant changes in the allowance for credit losses in those future periods.
We estimate credit losses over the contractual life of the financial asset, while factoring in prepayment activity, where supported by data, over a 3 year reasonable and supportable forecast period. We utilize a baseline, upside and downside scenario which are applied based on a probability weighting, in order to better reflect management’s expectation of expected credit losses given existing market conditions and the changes in the economic environment. The multiple scenarios are based on a three year horizon (or less depending on contractual maturity) and then revert linearly over a two year period to a ten-year historical average thereafter. The contractual term excludes expected extensions, renewals and modifications, but includes prepayment assumptions where applicable.
As part of our allowance methodology, we establish qualitative reserves to address any risks inherent in our portfolio that are not addressed through our quantitative reserve assessment. These factors may relate to, among other things, legislation changes or new regulation, credit concentration, loan markets, scenario weighting and overall model limitations. The qualitative adjustments are applied to our portfolio of financial instruments under the
existing governance structure and are inherently judgmental.
For additional information on the allowance for credit losses, refer to pages 149 to 154 in Note 4 to the consolidated financial statements included under item 8, Financial Statements and Supplementary Data, in our 2021 Form 10-K.
Credit Quality
Credit quality for financial assets held at amortized cost is continuously monitored by management and is reflected within the allowance for credit losses.
We use an internal risk-rating system to assess our risk of credit loss for each loan. This risk-rating process incorporates the use of risk-rating tools in conjunction with management judgment. Qualitative and quantitative inputs are captured in a systematic manner, and following a formal review and approval process, an internal credit rating based on our credit scale is assigned.
When computing allowance levels, credit loss assumptions are estimated using a model that categorizes asset pools based on loss history, delinquency status and other credit trends and risk characteristics, including current conditions and reasonable and supportable forecasts about the future. Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. In future periods evaluations of the overall asset portfolio, in light of the factors and forecasts then prevailing, may result in significant changes in the allowance and credit loss expense in those future periods.
Credit quality is assessed and monitored by evaluating various attributes in order to enable the earliest possible detection of any concerns with the customer’s credit rating. The results of those evaluations are utilized in underwriting new loans and transactions with counterparties and in our process for estimation of expected credit losses.
In assessing the risk rating assigned to each individual loan, among the factors considered are the borrower's debt capacity, collateral coverage, payment history and delinquency experience, financial flexibility and earnings strength, the
expected amounts and source of repayment, the level and nature of contingencies, if any, and the industry and geography in which the borrower operates. These factors are based on an evaluation of historical and current information, and involve subjective assessment and interpretation. Credit counterparties are evaluated and risk-rated on an individual basis at least annually. Management considers the ratings to be current as of September 30, 2022.
Our internal risk rating methodology assigns risk ratings to counterparties ranging from Investment Grade, Speculative, Special Mention, Substandard, Doubtful and Loss.
•Investment Grade: Counterparties with strong credit quality and low expected credit risk and probability of default. Approximately 83% of our loans were rated as investment grade as of September 30, 2022 with external credit ratings, or equivalent, of "BBB-" or better.
•Speculative: Counterparties that have the ability to repay but face significant uncertainties, such as adverse business or financial circumstances that could affect credit risk or economic downturns. Loans to counterparties rated as speculative account for approximately 15% of our loans as of September 30, 2022, and are concentrated in leveraged loans. Approximately 97% of those leveraged loans have an external credit rating, or equivalent, of "BB" or "B" as of September 30, 2022.
•Special Mention: Counterparties with potential weaknesses that, if uncorrected, may result in deterioration of repayment prospects.
•Substandard: Counterparties with well-defined weakness that jeopardizes repayment with the possibility we will sustain some loss.
•Doubtful: Counterparties with well-defined weakness which make collection or liquidation in full highly questionable and improbable.
•Loss: Counterparties which are uncollectible or have little value.
The following tables present our recorded loans to counterparties by risk rating, as noted above, as of the dates indicated:
September 30, 2022Commercial and FinancialCommercial Real EstateTotal Loans
(In millions)
Investment grade$27,617 $2,447 $30,064 
Speculative5,128 385 5,513 
Special mention317 89 406 
Substandard130 — 130 
Total(1)
$33,192 $2,921 $36,113 
December 31, 2021Commercial and FinancialCommercial Real EstateTotal Loans 
(In millions)
Investment grade$24,974 $2,222 $27,196 
Speculative4,714 270 4,984 
Special mention118 62 180 
Substandard164 — 164 
Total(1)(2)
$29,970 $2,554 $32,524 
(1) Loans Include $7.16 billion and $3.11 billion of overdrafts as of September 30, 2022 and December 31, 2021, respectively. Overdrafts are short-term in nature and do not present a significant credit risk to us. As of September 30, 2022, $5.78 billion overdrafts were investment grade and $1.37 billion overdrafts were speculative.
(2) Total does not include $8 million of loans classified as held-for-sale as of December 31, 2021.
For additional information about credit quality, refer to pages 151 to 154 in Note 4 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2021 Form 10-K.
The following table presents the amortized cost basis, by year of origination and credit quality indicator, as of September 30, 2022. For origination years before the fifth annual period, we present the aggregate amortized cost basis of loans. For purchased loans, the date of issuance is used to determine the year of origination, not the date of acquisition. For modified, extended or renewed lending arrangements, we evaluate whether a credit event has occurred which would consider the loan to be a new arrangement.
(In millions)20222021202020192018PriorRevolving Loans
Total(1)
Domestic loans:
Commercial and financial:
Risk Rating:
Investment grade$2,818 $184 $88 $328 $— $10 $13,165 $16,593 
Speculative251 797 176 433 289 147 287 2,380 
Special mention— 93 — 155 29 19 — 296 
Substandard7 — 5 41 31 7 — 91 
Total commercial and financing$3,076 $1,074 $269 $957 $349 $183 $13,452 $19,360 
Commercial real estate:
Risk Rating:
Investment grade$365 $612 $100 331 $566 $473 $— $2,447 
Speculative— — 49 197 111 28 — 385 
Special mention— — — 49 40 — — 89 
Total commercial real estate$365 $612 $149 $577 $717 $501 $— $2,921 
Non-U.S. loans:
Commercial and financial:
Risk Rating:
Investment grade$4,661 $2,729 $— $— $— $— $3,634 $11,024 
Speculative1,291 486 95 166 96 61 553 2,748 
Special mention— — 16 5 — — — 21 
Substandard1 — — — 38 — — 39 
Total commercial and financing$5,953 $3,215 $111 $171 $134 $61 $4,187 $13,832 
Total loans$9,394 $4,901 $529 $1,705 $1,200 $745 $17,639 $36,113 
(1) Any reserve associated with accrued interest is not material. As of September 30, 2022, accrued interest receivable of $137 million included in the amortized cost basis of loans has been excluded from the amortized cost basis within this table.
The following table presents the amortized cost basis, by year of origination and credit quality indicator as of December 31, 2021:
(In millions)20212020201920182017PriorRevolving Loans
Total(1)
Domestic loans:
Commercial and financial:
Risk Rating:
Investment grade$1,988 $59 $347 $2 $37 $— $13,591 $16,024 
Speculative1,096 351 706 425 350 7 343 3,278 
Special mention— — 70 29 19 — — 118 
Substandard— 5 71 56 8 — — 140 
Total commercial and financing$3,084 $415 $1,194 $512 $414 $7 $13,934 $19,560 
Commercial real estate:
Risk Rating:
Investment grade$580 $129 $383 $657 $276 $197 $— $2,222 
Speculative24 49 149 20 — 28 — 270 
Special mention— — 22 40 — — — 62 
Total commercial real estate$604 $178 $554 $717 $276 $225 $— $2,554 
Non-U.S. loans:
Commercial and financial:
Risk Rating:
Investment grade$4,087 $— $— $— $— $— $4,863 $8,950 
Speculative561 201 264 204 120 31 55 1,436 
Substandard— — — 24 — — — 24 
Total commercial and financing$4,648 $201 $264 $228 $120 $31 $4,918 $10,410 
Total loans(2)
$8,336 $794 $2,012 $1,457 $810 $263 $18,852 $32,524 
(1) Any reserve associated with accrued interest is not material. As of December 31, 2021, accrued interest receivable of $86 million included in the amortized cost basis of loans has been excluded from the amortized cost basis within this table.
(2) Total does not include $8 million of loans classified as held-for-sale as of December 31, 2021.

The following tables present the activity in the allowance for credit losses by portfolio and class for the periods indicated:
Three Months Ended September 30, 2022
Commercial and Financial
(In millions)Leveraged Loans
Other Loans(1)
Commercial Real EstateAvailable-for-sale SecuritiesOff-Balance Sheet CommitmentsAll Other Total
Allowance for credit losses:
Beginning balance$69 $10 $16 $2 $17 $— $114 
Charge-offs— — — — — — — 
Provision6 (5)2 (1)(2)— — 
Ending balance$75 $5 $18 $1 $15 $— $114 
(1) Includes $4 million allowance for credit losses on Fund Finance loans and $1 million on other loans.

Nine Months Ended September 30, 2022
Commercial and Financial
(In millions)Leveraged Loans
Other Loans(1)
Commercial Real EstateAvailable-for-sale SecuritiesOff-Balance Sheet CommitmentsAll Other Total
Allowance for credit losses:
Beginning balance$61 $12 $14 $2 $19 $— $108 
Charge-offs(4)— — — — — (4)
Provision18 (7)4 (1)(4)— 10 
Ending balance$75 $5 $18 $1 $15 $— $114 
(1) Includes $4 million allowance for credit losses on Fund Finance loans and $1 million on other loans.
Three Months Ended September 30, 2021
Commercial and Financial
(In millions)Leveraged Loans
Other Loans(1)
Commercial Real EstateHeld-to-Maturity SecuritiesOff-Balance Sheet CommitmentsAll Other Total
Allowance for credit losses:
Beginning balance$74 $12 $14 $2 $19 $— $121 
Charge-offs(1)— — — — — (1)
Provision(4)— 1 — 1 — (2)
Foreign currency translation(1)— — — — — (1)
Ending balance$68 $12 $15 $2 $20 $— $117 
(1) Includes $11 million allowance for credit losses on Fund Finance loans and $1 million on other loans.
Nine Months Ended September 30, 2021
Commercial and Financial
(In millions)Leveraged LoansOther LoansCommercial Real EstateHeld-to-Maturity SecuritiesOff-Balance Sheet CommitmentsAll Other Total
Allowance for credit losses:
Beginning balance$97 $17 $8 $3 $22 $1 $148 
Charge-offs(1)
(2)— — — — — (2)
Provision(24)(5)7 (1)(2)(1)(26)
Foreign currency translation(3)— — — — — (3)
Ending balance$68 $12 $15 $2 $20 $— $117 
(1) Includes $11 million allowance for credit losses on Fund Finance loans and $1 million on other loans.
Loans are reviewed on a regular basis, and any provisions for credit losses that are recorded reflect management's estimate of the amount necessary to maintain the allowance for loan losses at a level considered appropriate to absorb estimated credit losses in the loan portfolio. In the third quarter of 2022, we recorded no provision for credit losses, as a downward shift in management's economic outlook was offset by a reduction in loan portfolio risk. In the third quarter of 2021, we reduced the allowance for credit losses by $4 million, principally through a $2 million reserve release in the provision for credit losses. Allowance estimates remain subject to continued model and economic uncertainty and management may use qualitative adjustments in the allowance estimates. If future data and forecasts deviate relative to the forecasts utilized to determine our allowance for credit losses as of September 30, 2022, or if credit risk migration is higher or lower than forecasted for reasons independent of the economic forecast, our allowance for credit losses will also change.