Allowance for Credit Losses and Reserve for Unfunded Lending Commitments

6 Months Ended

Jun. 30, 2020

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

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

In the first quarter of 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 and 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 and six months ended June 30, 2020 and 2019. The allowance balance as of June 30, 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 June 30, 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 $9.6 billion to $16.8 billion as of June 30, 2020 from December 31, 2019, primarily driven by the allowance build from expectations of economic worsening and uncertainty as a result of the COVID-19 pandemic as well as the adoption of the CECL standard.

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



	Three Months Ended June 30, 2020
(Dollars in millions)	Credit Card			Consumer Banking			Commercial Banking			Total
Allowance for credit losses:
Balance as of March 31, 2020	$	10,346		$	2,154		$	1,573		$	14,073
Charge-offs	(1,612		)	(416		)	(103		)	(2,131		)
Recoveries⁽¹⁾	401			224			1			626
Net charge-offs	(1,211		)	(192		)	(102		)	(1,505		)
Provision for credit losses	2,944			876			432			4,252
Allowance build for credit losses	1,733			684			330			2,747
Other changes⁽²⁾	12			0			0			12
Balance as of June 30, 2020	12,091			2,838			1,903			16,832
Reserve for unfunded lending commitments:
Balance as of March 31, 2020	0			0			223			223
Benefit for losses on unfunded lending commitments	0			0			(5		)	(5		)
Balance as of June 30, 2020	0			0			218			218
Combined allowance and reserve as of June 30, 2020	$	12,091		$	2,838		$	2,121		$	17,050



	Six Months Ended June 30, 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⁽³⁾	462			0			0			462
Balance as of January 1, 2020	8,098			1,540			877			10,515
Charge-offs	(3,461		)	(912		)	(215		)	(4,588		)
Recoveries⁽¹⁾	814			474			4			1,292
Net charge-offs	(2,647		)	(438		)	(211		)	(3,296		)
Provision for credit losses	6,646			1,736			1,237			9,619
Allowance build for credit losses	3,999			1,298			1,026			6,323
Other changes⁽²⁾	(6		)	0			0			(6		)
Balance as of June 30, 2020	12,091			2,838			1,903			16,832
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			46			46
Balance as of June 30, 2020	0			0			218			218
Combined allowance and reserve as of June 30, 2020	$	12,091		$	2,838		$	2,121		$	17,050



	Three Months Ended June 30, 2019
(Dollars in millions)	Credit Card			Consumer Banking			Commercial Banking			Total
Allowance for loan and lease losses:
Balance as of March 31, 2019	$	5,568		$	1,062		$	683		$	7,313
Charge-offs	(1,711		)	(423		)	(23		)	(2,157		)
Recoveries⁽¹⁾	391			251			7			649
Net charge-offs	(1,320		)	(172		)	(16		)	(1,508		)
Provision for loan and lease losses	1,095			165			69			1,329
Allowance build (release) for loan and lease losses	(225		)	(7		)	53			(179		)
Other changes⁽²⁾	(1		)	0			0			(1		)
Balance as of June 30, 2019	5,342			1,055			736			7,133
Reserve for unfunded lending commitments:
Balance as of March 31, 2019	0			4			127			131
Provision for losses on unfunded lending commitments	0			0			13			13
Balance as of June 30, 2019	0			4			140			144
Combined allowance and reserve as of June 30, 2019	$	5,342		$	1,059		$	876		$	7,277



	Six Months Ended June 30, 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	(3,493		)	(894		)	(43		)	(4,430		)
Recoveries⁽¹⁾	809			501			13			1,323
Net charge-offs	(2,684		)	(393		)	(30		)	(3,107		)
Provision for loan and lease losses	2,484			400			129			3,013
Allowance build (release) for loan and lease losses	(200		)	7			99			(94		)
Other changes⁽²⁾	7			0			0			7
Balance as of June 30, 2019	5,342			1,055			736			7,133
Reserve for unfunded lending commitments:
Balance as of December 31, 2018	0			4			118			122
Provision for losses on unfunded lending commitments	0			0			22			22
Balance as of June 30, 2019	0			4			140			144
Combined allowance and reserve as of June 30, 2019	$	5,342		$	1,059		$	876		$	7,277

________


⁽¹⁾	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.


⁽²⁾	Represents foreign currency translation adjustments.


⁽³⁾	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.

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 and six months ended June 30, 2020 and 2019.

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



	Three Months Ended June 30,
(Dollars in millions)	2020			2019
Estimated reimbursements from partners, beginning of period	$	2,653		$	442
Amounts due from partners which reduced net charge-offs	(293		)	(105		)
Amounts estimated to be charged to partners which reduced provision for credit losses	73			77
Estimated reimbursements from partners, end of period	$	2,433		$	414



	Six Months Ended June 30,
(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	(595		)	(213		)
Amounts estimated to be charged to partners which reduced provision for credit losses	862			248
Estimated reimbursements from partners, end of period	$	2,433		$	414

_________

⁽¹⁾

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