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Business Segments and Revenue from Contracts with Customers

12 Months Ended

Dec. 31, 2019

NOTE 17—BUSINESS SEGMENTS AND REVENUE FROM CONTRACTS WITH CUSTOMERS

Our principal operations are organized into three major business segments, which are defined primarily based on the products and services provided or the types of customers served: Credit Card, Consumer Banking and Commercial Banking. The operations of acquired businesses have been integrated into our existing business segments. Certain activities that are not part of a segment, such as management of our corporate investment portfolio, asset/liability management by our centralized Corporate Treasury group and residual tax expense or benefit to arrive at the consolidated effective tax rate that is not assessed to our primary business segments, are included in the Other category.


•	Credit Card: Consists of our domestic consumer and small business card lending, and international card businesses in Canada and the United Kingdom.


•	Consumer Banking: Consists of our deposit gathering and lending activities for consumers and small businesses, and national auto lending.


•	Commercial Banking: Consists of our lending, deposit gathering, capital markets and treasury management services to commercial real estate and commercial and industrial customers. Our commercial and industrial customers typically include companies with annual revenues between $20 million and $2 billion.

•

Other category: Includes the residual impact of the allocation of our centralized Corporate Treasury group activities, such as management of our corporate investment portfolio and asset/liability management, to our business segments. Accordingly, net gains and losses on our investment securities portfolio and certain trading activities are included in the Other category. Other category also includes foreign exchange-rate fluctuations on foreign currency-denominated transactions; unallocated corporate expenses that do not directly support the operations of the business segments or for which the business segments are not considered financially accountable in evaluating their performance, such as certain restructuring charges; certain material items that are non-recurring in nature; offsets related to certain line-item reclassifications; and residual tax expense or benefit to arrive at the consolidated effective tax rate that is not assessed to our primary business segments.

Basis of Presentation

We report the results of each of our business segments on a continuing operations basis. The results of our individual businesses reflect the manner in which management evaluates performance and makes decisions about funding our operations and allocating resources.

Business Segment Reporting Methodology

The results of our business segments are intended to present each segment as if it were a stand-alone business. Our internal management and reporting process used to derive our segment results employs various allocation methodologies, including funds transfer pricing, to assign certain balance sheet assets, deposits and other liabilities and their related revenue and expenses directly or indirectly attributable to each business segment. Our funds transfer pricing process provides a funds credit for sources of funds, such as deposits generated by our Consumer Banking and Commercial Banking businesses, and a funds charge for the use of funds by each segment. Due to the integrated nature of our business segments, estimates and judgments have been made in allocating certain revenue and expense items. Transactions between segments are based on specific criteria or approximate third-party rates. We regularly assess the assumptions, methodologies and reporting classifications used for segment reporting, which may result in the implementation of refinements or changes in future periods.

The following is additional information on the principles and methodologies used in preparing our business segment results.

•

Net interest income: Interest income from loans held for investment and interest expense from deposits and other interest-bearing liabilities are reflected within each applicable business segment. Because funding and asset/liability management are managed centrally by our Corporate Treasury group, net interest income for our business segments also includes the results of a funds transfer pricing process that is intended to allocate a cost of funds used or credit for funds provided to all business segment assets and liabilities, respectively, using a matched funding concept. The taxable-equivalent benefit of tax-exempt products is also allocated to each business unit with a corresponding increase in income tax expense.


•	Non-interest income: Non-interest fees and other revenue associated with loans or customers managed by each business segment and other direct revenues are accounted for within each business segment.


•	Provision for credit losses: The provision for credit losses is directly attributable to the business segment in accordance with the loans each business segment manages.

•

Non-interest expense: Non-interest expenses directly managed and incurred by a business segment are accounted for within each business segment. We allocate certain non-interest expenses indirectly incurred by business segments, such as corporate support functions, to each business segment based on various factors, including the actual cost of the services from the service providers, the utilization of the services, the number of employees or other relevant factors.


•	Goodwill and intangible assets: Goodwill and intangible assets that are not directly attributable to business segments are assigned to business segments based on the relative fair value of each segment. Intangible amortization is included in the results of the applicable segment.


•	Income taxes: Income taxes are assessed for each business segment based on a standard tax rate with the residual tax expense or benefit to arrive at the consolidated effective tax rate included in the Other category.


•	Loans held for investment: Loans are reported within each business segment based on product or customer type served by that business segment.


•	Deposits: Deposits are reported within each business segment based on product or customer type served by that business segment.

Segment Results and Reconciliation

We may periodically change our business segments or reclassify business segment results based on modifications to our management reporting methodologies or changes in organizational alignment. In the first quarter of 2019, we made a change in how revenue is measured in our Commercial Banking business by revising the allocation of tax benefits on certain tax-advantaged investments. As such, 2018 results have been recast to conform with the current period presentation. The result of this measurement change reduced the previously reported total net revenue in our Commercial Banking business by $108 million for the year ended December 31, 2018, with an offsetting increase in the Other category. This change in measurement of our Commercial Banking revenue did not have any impact to the consolidated financial statements.

The following table presents our business segment results for the years ended December 31, 2019, 2018 and 2017, selected balance sheet data as of December 31, 2019, 2018 and 2017, and a reconciliation of our total business segment results to our reported consolidated income from continuing operations, loans held for investment and deposits.

Table 17.1: Segment Results and Reconciliation



	Year Ended December 31, 2019
(Dollars in millions)	Credit Card		Consumer Banking		Commercial Banking⁽¹⁾		Other⁽¹⁾			Consolidated Total
Net interest income	$	14,461	$	6,732	$	1,983	$	164		$	23,340
Non-interest income (loss)	3,888		643		831		(109		)	5,253
Total net revenue	18,349		7,375		2,814		55			28,593
Provision for credit losses	4,992		938		306		0			6,236
Non-interest expense	9,271		4,091		1,699		422			15,483
Income (loss) from continuing operations before income taxes	4,086		2,346		809		(367		)	6,874
Income tax provision (benefit)	959		547		188		(353		)	1,341
Income (loss) from continuing operations, net of tax	$	3,127	$	1,799	$	621	$	(14	)	$	5,533
Loans held for investment	$	128,236	$	63,065	$	74,508	$	0		$	265,809
Deposits	0		213,099		32,134		17,464			262,697



	Year Ended December 31, 2018
(Dollars in millions)	Credit Card		Consumer Banking		Commercial Banking⁽¹⁾⁽²⁾		Other⁽¹⁾⁽²⁾			Consolidated Total
Net interest income	$	14,167	$	6,549	$	2,044	$	115		$	22,875
Non-interest income	3,520		663		744		274			5,201
Total net revenue	17,687		7,212		2,788		389			28,076
Provision (benefit) for credit losses	4,984		838		83		(49		)	5,856
Non-interest expense	8,542		4,027		1,654		679			14,902
Income (loss) from continuing operations before income taxes	4,161		2,347		1,051		(241		)	7,318
Income tax provision (benefit)	970		547		245		(469		)	1,293
Income from continuing operations, net of tax	$	3,191	$	1,800	$	806	$	228		$	6,025
Loans held for investment	$	116,361	$	59,205	$	70,333	$	0		$	245,899
Deposits	0		198,607		29,480		21,677			249,764



	Year Ended December 31, 2017
(Dollars in millions)	Credit Card		Consumer Banking		Commercial Banking⁽¹⁾		Other⁽¹⁾			Consolidated Total
Net interest income	$	13,648	$	6,380	$	2,261	$	171		$	22,460
Non-interest income (loss)	3,325		749		708		(5		)	4,777
Total net revenue	16,973		7,129		2,969		166			27,237
Provision for credit losses	6,066		1,180		301		4			7,551
Non-interest expense	7,916		4,233		1,603		442			14,194
Income (loss) from continuing operations before income taxes	2,991		1,716		1,065		(280		)	5,492
Income tax provision	1,071		626		389		1,289			3,375
Income (loss) from continuing operations, net of tax	$	1,920	$	1,090	$	676	$	(1,569	)	$	2,117
Loans held for investment	$	114,762	$	75,078	$	64,575	$	58		$	254,473
Deposits	0		185,842		33,938		23,922			243,702

__________


⁽¹⁾	Some of our commercial investments generate tax-exempt income, tax credits or other tax benefits. Accordingly, we present our Commercial Banking revenue and yields on a taxable-equivalent basis, calculated using the federal statutory tax rate (21% for 2019 and 2018 and 35% for 2017) and state taxes where applicable, with offsetting reductions to the Other category.

⁽²⁾

In the first quarter of 2019, we made a change in how revenue is measured in our Commercial Banking business by revising the allocation of tax benefits on certain tax-advantaged investments. As such, 2018 results have been recast to conform with the current period presentation. The result of this measurement change reduced the previously reported total net revenue in our Commercial Banking business by $108 million for the year ended December 31, 2018, with an offsetting increase in the Other category.

Revenue from Contracts with Customers

The majority of our revenue from contracts with customers consists of interchange fees, service charges and other customer-related fees, and other contract revenue. Interchange fees are primarily from our Credit Card business and are recognized upon settlement with the interchange networks, net of rewards earned by customers. Service charges and other customer-related fees within our Consumer Banking business are primarily related to fees earned on consumer deposit accounts for account maintenance and various transaction-based services such as overdrafts and ATM usage. Service charges and other customer-related fees within our Commercial Banking business are mostly related to fees earned on treasury management and capital markets services. Other contract revenue in our Credit Card business consists primarily of revenue from our partnership arrangements. Other contract revenue in our Consumer Banking business consists primarily of revenue earned on certain marketing and promotional events from our auto dealers. Revenue from contracts with customers is included in non-interest income in our consolidated statements of income.

The following table presents revenue from contracts with customers and a reconciliation to non-interest income by business segment for the years ended December 31, 2019 and 2018.

Table 17.2: Revenue from Contracts with Customers and Reconciliation to Segments Result



	Year Ended December 31, 2019
(Dollars in millions)	Credit Card		Consumer Banking		Commercial Banking⁽¹⁾		Other⁽¹⁾			Consolidated Total
Contract revenue:
Interchange fees, net⁽²⁾	$	2,925	$	205	$	55	$	(6	)	$	3,179
Service charges and other customer-related fees	0		298		120		(1		)	417
Other	120		101		3		0			224
Total contract revenue	3,045		604		178		(7		)	3,820
Revenue from other sources	843		39		653		(102		)	1,433
Total non-interest income	$	3,888	$	643	$	831	$	(109	)	$	5,253



	Year Ended December 31, 2018
(Dollars in millions)	Credit Card		Consumer Banking		Commercial Banking⁽¹⁾		Other⁽¹⁾			Consolidated Total
Contract revenue:
Interchange fees, net⁽²⁾	$	2,609	$	185	$	33	$	(4	)	$	2,823
Service charges and other customer-related fees	0		367		123		(1		)	489
Other	8		109		2		0			119
Total contract revenue	2,617		661		158		(5		)	3,431
Revenue from other sources	903		2		586		279			1,770
Total non-interest income	$	3,520	$	663	$	744	$	274		$	5,201

__________


⁽¹⁾	Some of our commercial investments generate tax-exempt income, tax credits or other tax benefits. Accordingly, we present our Commercial Banking revenue and yields on a taxable-equivalent basis, calculated using the federal statutory tax rate of 21% and state taxes where applicable, with offsetting reclassifications to the Other category.

⁽²⁾

Interchange fees are presented net of customer reward expenses of $4.9 billion and $4.4 billion for the years ended December 31, 2019 and 2018, respectively.