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Loans and Allowance for Credit Losses
 6 Months Ended
Jun. 30, 2024
Credit Loss [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, collateralized loan obligations in loan form, overdrafts and other loans. 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 146 to 151 in Note 4 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2023 Form 10-K.
The following table presents our recorded investment in loans, by segment, as of the dates indicated:
(In millions)June 30, 2024December 31, 2023
Domestic(1):
Commercial and financial:
Fund Finance(2)
$13,808 $13,697 
Leveraged loans2,357 2,412 
Overdrafts1,791 1,225 
Collateralized loan obligations in loan form190 150 
Other(3)
2,376 2,512 
Commercial real estate2,858 3,069 
Total domestic$23,380 $23,065 
Foreign(1):
Commercial and financial:
Fund Finance(2)
$5,630 $4,956 
Leveraged loans1,111 1,194 
Overdrafts1,875 1,047 
Collateralized loan obligations in loan form7,380 6,369 
Total foreign15,996 13,566 
Total loans(4)
39,376 36,631 
Allowance for credit losses(136)(135)
Loans, net of allowance$39,240 $36,496 
(1) Domestic and foreign categorization is based on the borrower’s country of domicile.
(2) Fund finance loans include primarily $10.20 billion private equity capital call finance loans, $6.73 billion loans to real money funds and $1.37 billion loans to business development companies as of June 30, 2024, compared to $9.69 billion private equity capital call finance loans, $6.63 billion loans to real money funds and $1.05 billion loans to business development companies as of December 31, 2023.
(3) Includes $2.12 billion securities finance loans, $250 million loans to municipalities and $2 million other loans as of June 30, 2024 and $2.23 billion securities finance loans, $276 million loans to municipalities and $5 million other loans as of December 31, 2023.
(4) As of June 30, 2024, excluding overdrafts, floating rate loans totaled $32.90 billion and fixed rate loans totaled $2.80 billion. We have entered into interest rate swap agreements to hedge the forecasted cash flows associated with EURIBOR indexed floating-rate loans. See Note 10 to the consolidated financial statements in our 2023 Form 10-K for additional details.
The commercial and financial segment is composed of primarily fund finance loans, purchased leveraged loans, purchased collateralized loan obligations in loan form, 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. These classifications
reflect their risk characteristics, their initial measurement attributes and the methods we use to monitor and assess credit risk.
Certain loans are pledged as collateral for access to the Federal Reserve's discount window. As of June 30, 2024 and December 31, 2023, the loans pledged as collateral totaled $12.91 billion and $13.00 billion, respectively.
As of June 30, 2024 and December 31, 2023, we had two loans totaling $193 million and three loans totaling $70 million, respectively, on non-accrual status.
In second quarter of 2024, we purchased $1.07 billion of collateralized loan obligations in loan form, which were all investment grade as of June 30, 2024.
We sold $151 million of loans in the second quarter of 2024, of which $8 million remained unsettled and was held-for-sale and carried at the lower of cost or market as of June 30, 2024. We recorded a charge-off against the allowance for these loans of $7 million in the second quarter of 2024.
Allowance for Credit Losses
We recognize an allowance for credit losses in accordance with ASC 326 for 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. Loans are charged off to the allowance for credit losses in the reporting period in which either an event occurs that confirms the existence of a loss on a loan, including a sale of a loan below its carrying value, or a portion of a loan is determined to be uncollectible.
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.
The allowance for credit losses as reported in our consolidated statement of condition is adjusted by provision for credit losses, which is reported in earnings, and reduced by the charge-off of principal amounts, net of recoveries.
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 June 30, 2024, we had two loans totaling $29 million in the commercial and financial segment and four loans totaling $325 million in the commercial real estate segment that no longer met the similar risk characteristics of their collective pool. As of June 30, 2024, $59 million of our allowance for credit losses related to these loans.
When the asset is collateral dependent, which means when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral, expected credit losses are measured as the difference between the amortized cost basis of the asset and the fair value of the collateral, adjusted for the estimated costs to sell.
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 three 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 146 to 151 in Note 4 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2023 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 models that categorize 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 timely 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 June 30, 2024.
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 89% of our loans were rated as investment grade as of June 30, 2024 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 10% of our loans as of June 30, 2024, and are concentrated in leveraged loans. Approximately 92% of those leveraged loans have an external credit rating, or equivalent, of "BB" or "B" as of June 30, 2024.
•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:
June 30, 2024Commercial and FinancialCommercial Real EstateTotal Loans
(In millions)
Investment grade$32,734 $2,116 $34,850 
Speculative3,529 355 3,884 
Special mention215 62 277 
Substandard32 132 164 
Doubtful— 193 193 
Total(1)(2)
$36,510 $2,858 $39,368 
December 31, 2023Commercial and FinancialCommercial Real EstateTotal Loans 
(In millions)
Investment grade$29,737 $2,287 $32,024 
Speculative3,546 449 3,995 
Special mention242 62 304 
Substandard14 224 238 
Doubtful23 47 70 
Total(1)
$33,562 $3,069 $36,631 
(1) Loans include $3.67 billion and $2.27 billion of overdrafts as of June 30, 2024 and December 31, 2023, respectively. Overdrafts are short-term in nature and do not present a significant credit risk to us. As of June 30, 2024, $3.52 billion overdrafts were investment grade and $0.14 billion overdrafts were speculative.
(2) Total does not include $8 million of loans classified as held-for-sale as of June 30, 2024.
For additional information about credit quality, refer to pages 146 to 151 in Note 4 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2023 Form 10-K.
The following table presents the amortized cost basis, by year of origination and credit quality indicator, as of June 30, 2024. 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)20242023202220212020PriorRevolving Loans
Total(1)
Domestic loans:
Commercial and financial:
Risk Rating:
Investment grade$1,731 $223 $100 $163 $6 $234 $15,529 $17,986 
Speculative1,199 214 131 473 51 242 79 2,389 
Special mention20 25 — 76 — — — 121 
Substandard3 — — 15 — — — 18 
Doubtful— — — — — — — — 
Total commercial and financing$2,953 $462 $231 $727 $57 $476 $15,608 $20,514 
Commercial real estate:
Risk Rating:
Investment grade$41 $196 $500 $278 $128 $972 $— $2,115 
Speculative— 20 20 69 100 146 — 355 
Special mention— — — — — 62 — 62 
Substandard— — — — — 132 — 132 
Doubtful— — — — — 193 — 193 
Total commercial real estate$41 $216 $520 $347 $228 $1,505 $— $2,857 
Non-U.S. loans:
Commercial and financial:
Risk Rating:
Investment grade$3,243 $1,907 $1,572 $2,493 $— $— $5,534 $14,749 
Speculative400 203 83 309 48 45 52 1,140 
Special mention— — — 94 — — — 94 
Substandard— — — — — 14 — 14 
Total commercial and financing$3,643 $2,110 $1,655 $2,896 $48 $59 $5,586 $15,997 
Total loans(2)
$6,637 $2,788 $2,406 $3,970 $333 $2,040 $21,194 $39,368 
(1) Any reserve associated with accrued interest is not material. As of June 30, 2024, accrued interest receivable of $297 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 June 30, 2024.
The following table presents the amortized cost basis, by year of origination and credit quality indicator as of December 31, 2023:
(In millions)20232022202120202019PriorRevolving Loans
Total(1)
Domestic loans:
Commercial and financial:
Risk Rating:
Investment grade$1,399 $120 $199 $8 $272 $5 $15,476 $17,479 
Speculative615 285 747 149 291 141 81 2,309 
Special mention— 4 164 — 16 — — 184 
Substandard5 — 18 — — — — 23 
Total commercial and financing$2,019 $409 $1,128 $157 $579 $146 $15,557 $19,995 
Commercial real estate:
Risk Rating:
Investment grade$216 $500 $498 $100 $375 $598 $— $2,287 
Speculative— 20 31 50 49 299 — 449 
Special mention— — — — 22 40 — 62 
Substandard— — — — 95 129 — 224 
Doubtful— — — — — 47 — 47 
Total commercial real estate$216 $520 $529 $150 $541 $1,113 $— $3,069 
Non-U.S. loans:
Commercial and financial:
Risk Rating:
Investment grade$2,943 $1,956 $2,518 $— $— $— $4,841 $12,258 
Speculative394 135 481 88 109 18 12 1,237 
Special mention— — 29 29 — — — 58 
Substandard— — — — — 14 — 14 
Total commercial and financing$3,337 $2,091 $3,028 $117 $109 $32 $4,853 $13,567 
Total loans$5,572 $3,020 $4,685 $424 $1,229 $1,291 $20,410 $36,631 
(1) Any reserve associated with accrued interest is not material. As of December 31, 2023, accrued interest receivable of $318 million included in the amortized cost basis of loans has been excluded from the amortized cost basis within this table.
The following tables present the activity in the allowance for credit losses by portfolio and class for the periods indicated:
Three Months Ended June 30, 2024
Commercial and Financial
(In millions)Leveraged Loans
Other Loans(1)
Commercial Real EstateHeld-to-Maturity SecuritiesOff-Balance Sheet CommitmentsTotal
Allowance for credit losses:
Beginning balance$71 $4 $60 $1 $10 $146 
Charge-offs(11)— — — — (11)
Provision(4)— 16 — (2)10 
Ending balance$56 $4 $76 $1 $8 $145 
(1) Includes $3 million allowance for credit losses on Fund Finance loans and $1 million on other loans.
Six Months Ended June 30, 2024
Commercial and Financial
(In millions)Leveraged Loans
Other Loans(1)
Commercial Real EstateHeld-to-Maturity SecuritiesOff-Balance Sheet CommitmentsTotal
Allowance for credit losses:
Beginning balance$72 $3 $60 $1 $14 $150 
Charge-offs(17)— (25)— — (42)
Provision1 1 41 — (6)37 
Ending balance$56 $4 $76 $1 $8 $145 
(1) Includes $3 million allowance for credit losses on Fund Finance loans and $1 million on other loans.
Three Months Ended June 30, 2023
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$82 $4 $29 $2 $16 $29 $162 
Charge-offs(8)— — — — — (8)
Provision6 (1)8 (2)(1)(28)(18)
Ending balance$80 $3 $37 $— $15 $1 $136 
(1) Includes $2 million allowance for credit losses on Fund Finance loans and $1 million on other loans.
Six Months Ended June 30, 2023
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$73 $5 $19 $2 $23 $(1)$121 
Charge-offs(11)— — — — — (11)
Provision18 (2)18 (2)(8)2 26 
Ending balance$80 $3 $37 $— $15 $1 $136 
(1) Includes $2 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 expected credit losses in the loan portfolio. In the second quarter of 2024, we recorded a $10 million provision for credit losses, primarily reflecting an increase in loan loss reserves associated with certain commercial real estate loans, which was partially offset by an improved economic outlook. This compared with an $18 million reserve release recorded in the same period of 2023.
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 June 30, 2024, 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.