Allowance for Credit Losses and Reserve for Unfunded Lending Commitments

3 Months Ended

Mar. 31, 2020

Accounts, Notes, Loans and Financing Receivable, Gross, Allowance, and Net [Abstract]

NOTE 4—ALLOWANCE FOR CREDIT LOSSES AND RESERVE FOR UNFUNDED LENDING COMMITMENTS

Effective January 1, 2020, we adopted the CECL standard. Concurrent with our adoption of the CECL standard in the first quarter of 2020, we reclassified our finance charge and fee reserve to our allowance for credit losses, with a corresponding increase to credit card loans held for investment. Accordingly, our disclosures below reflect these adoption changes. Prior period presentation was not modified to conform to the current period presentation. See “Note 1—Summary of Significant Accounting Policies” for additional information.

Our allowance for credit losses represents management’s current estimate of expected credit losses over the contractual terms of our loans held for investment as of each balance sheet date. Expected recoveries of amounts previously charged off or expected to be charged off are recognized within the allowance. When developing an estimate of expected credit losses, we use both quantitative and qualitative methods in considering all available information relevant to assessing collectability. This may include internal information, external information, or a combination of both relating to past events, current conditions, and reasonable and supportable forecasts. Management will consider and may qualitatively adjust for conditions, changes, and trends in loan portfolios that may not be captured in modeled results. These adjustments are referred to as qualitative factors and represent management’s judgment of the imprecision and risks inherent in the processes and assumptions used in establishing the allowance for credit losses. Significant judgment is applied in our estimation of lifetime credit losses.

We have unfunded lending commitments in our Commercial Banking business that are not unconditionally cancellable by us, for which we estimate expected credit losses in establishing a reserve. This reserve is measured using the same measurement objectives as the allowance for loans held for investment. We build or release the reserve for unfunded lending commitments through the provision for credit losses in our consolidated statements of income and the related reserve for unfunded lending commitments is included in other liabilities on our consolidated balance sheets.

Allowance for Credit Losses and Reserve for Unfunded Lending Commitments Activity

The table below summarizes changes in the allowance for credit losses and reserve for unfunded lending commitments by portfolio segment for the three months ended March 31, 2020 and 2019. The allowance balance as of March 31, 2020 reflects the cumulative effects from adoption of the CECL standard and the change to include finance charge and fee reserve in the allowance for credit losses. The reserve for unfunded lending commitments balance as of March 31, 2020 also reflects the cumulative effects from adoption of the CECL standard, including the component of loss sharing agreements with the GSEs on multifamily commercial real estate loans that are within the scope of the CECL standard.

When developing an estimate of expected credit losses, we use both quantitative and qualitative methods in considering all available information relevant to assessing collectability. Management will consider and may make adjustments for qualitative factors, which represent management’s judgment of the imprecision and risks inherent in the processes and assumptions used in establishing the allowance for credit losses. Our allowance for credit losses increased by $6.9 billion to $14.1 billion as of March 31, 2020 from December 31, 2019, driven by adoption of the CECL standard and the allowance build due to the COVID-19 pandemic. Our allowance build reflects our expectation of economic worsening, including an increase in unemployment, and significant uncertainty in financial markets.

Table 4.1: Allowance for Credit Losses and Reserve for Unfunded Lending Commitments Activity



	Three Months Ended March 31, 2020
(Dollars in millions)	Credit Card			Consumer Banking			Commercial Banking			Total
Allowance for credit losses:
Balance as of December 31, 2019	$	5,395		$	1,038		$	775		$	7,208
Cumulative effects from adoption of the CECL standard	2,241			502			102			2,845
Finance charge and fee reserve reclassification⁽¹⁾	462			0			0			462
Balance as of January 1, 2020	8,098			1,540			877			10,515
Charge-offs	(1,849		)	(496		)	(112		)	(2,457		)
Recoveries⁽²⁾	413			250			3			666
Net charge-offs	(1,436		)	(246		)	(109		)	(1,791		)
Provision for credit losses	3,702			860			805			5,367
Allowance build for credit losses	2,266			614			696			3,576
Other changes⁽³⁾	(18		)	0			0			(18		)
Balance as of March 31, 2020	10,346			2,154			1,573			14,073
Reserve for unfunded lending commitments:
Balance as of December 31, 2019	0			5			130			135
Cumulative effects from adoption of the CECL standard	0			(5		)	42			37
Balance as of January 1, 2020	0			0			172			172
Provision for losses on unfunded lending commitments	0			0			51			51
Balance as of March 31, 2020	0			0			223			223
Combined allowance and reserve as of March 31, 2020	$	10,346		$	2,154		$	1,796		$	14,296



	Three Months Ended March 31, 2019
(Dollars in millions)	Credit Card			Consumer Banking			Commercial Banking			Total
Allowance for loan and lease losses:
Balance as of December 31, 2018	$	5,535		$	1,048		$	637		$	7,220
Charge-offs	(1,782		)	(471		)	(20		)	(2,273		)
Recoveries⁽²⁾	418			250			6			674
Net charge-offs	(1,364		)	(221		)	(14		)	(1,599		)
Provision for loan and lease losses	1,389			235			60			1,684
Allowance build for loan and lease losses	25			14			46			85
Other changes⁽³⁾	8			0			0			8
Balance as of March 31, 2019	5,568			1,062			683			7,313
Reserve for unfunded lending commitments:
Balance as of December 31, 2018	0			4			118			122
Provision for losses on unfunded lending commitments	0			0			9			9
Balance as of March 31, 2019	0			4			127			131
Combined allowance and reserve as of March 31, 2019	$	5,568		$	1,066		$	810		$	7,444

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⁽¹⁾	Concurrent with our adoption of the CECL standard in the first quarter of 2020, we reclassified our finance charge and fee reserve to our allowance for credit losses, with a corresponding increase to credit card loans held for investment.


⁽²⁾	The amount and timing of recoveries is impacted by our collection strategies, which are based on customer behavior and risk profile and include direct customer communications, repossession of collateral, the periodic sale of charged off loans as well as additional strategies, such as litigation.


⁽³⁾	Represents foreign currency translation adjustments.

Credit Card Partnership Loss Sharing Arrangements

We have certain credit card partnership agreements that are presented within our consolidated financial statements on a net basis, in which our partner agrees to share a portion of the credit losses on the underlying loan portfolio. The expected reimbursements from these partners are netted against our allowance for credit losses. Our methodology for estimating reimbursements is consistent with the methodology we use to estimate the allowance for credit losses on our credit card loan receivables. These expected reimbursements result in reductions to net charge-offs and provision for credit losses. See “Note 1—Summary of Significant Accounting Policies” in our 2019 Form 10-K for further discussion of our credit card partnership agreements.

The table below summarizes the changes in the estimated reimbursements from these partners for the three months ended March 31, 2020 and 2019.

Table 4.2: Summary of Credit Card Partnership Loss Sharing Arrangements Impacts



	Three Months Ended March 31,
(Dollars in millions)	2020			2019
Estimated reimbursements from partners, beginning of period⁽¹⁾	$	2,166		$	379
Amounts due from partners which reduced net charge-offs	(302		)	(108		)
Amounts estimated to be charged to partners which reduced provision for credit losses	789			171
Estimated reimbursements from partners, end of period	$	2,653		$	442

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⁽¹⁾

Includes effects from adoption of the CECL standard in the first quarter of 2020.