Allowance for Credit Losses and Reserve for Unfunded Lending Commitments

12 Months Ended

Dec. 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

In the first quarter of 2020, we adopted the CECL standard. 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.

For credit card loans, accrued interest is charged off simultaneously with the charge off of other components of amortized cost as a reduction of revenue. Total net revenue was reduced by $1.1 billion in 2020 for finance charges and fees charged-off as uncollectible and by $1.4 billion and $1.3 billion in 2019 and 2018, respectively, for the estimated uncollectible amount of billed finance charges and fees and related 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 years ended December 31, 2020, 2019 and 2018. The allowance balance as of December 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 December 31, 2020 also reflects the cumulative effects from adoption of the CECL standard, including the component of loss sharing agreements with the government-sponsored enterprises (“GSEs”) on multifamily commercial real estate loans that are within the scope of the CECL standard. Our allowance for credit losses increased by $8.4 billion to $15.6 billion as of December 31, 2020 from 2019, primarily driven by the allowance builds in the first and second quarters of 2020 from expectations of economic worsening as a result of the COVID-19 pandemic as well as the adoption of the CECL standard in the first quarter of 2020.

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



(Dollars in millions)	Credit Card		Consumer Banking		Commercial Banking		Other(1)		Total
Allowance for loan and lease losses:
Balance as of December 31, 2017	$	5,648	$	1,242	$	611	$	1	$	7,502
Charge-offs	(6,657)		(1,832)		(119)		(7)		(8,615)
Recoveries(2)	1,588		851		63		1		2,503
Net charge-offs	(5,069)		(981)		(56)		(6)		(6,112)
Provision (benefit) for loan and lease losses	4,984		841		82		(49)		5,858
Allowance build (release) for loan and lease losses	(85)		(140)		26		(55)		(254)
Other changes(1)(3)	(28)		(54)		0		54		(28)
Balance as of December 31, 2018	5,535		1,048		637		0		7,220
Reserve for unfunded lending commitments:
Balance as of December 31, 2017	0		7		117		0		124
Provision (benefit) for losses on unfunded lending commitments	0		(3)		1		0		(2)
Balance as of December 31, 2018	0		4		118		0		122
Combined allowance and reserve as of December 31, 2018	$	5,535	$	1,052	$	755	$	0	$	7,342



(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	(6,711)		(1,917)		(181)		(8,809)
Recoveries(2)	1,562		970		25		2,557
Net charge-offs	(5,149)		(947)		(156)		(6,252)
Provision for loan and lease losses	4,992		937		294		6,223
Allowance build (release) for loan and lease losses	(157)		(10)		138		(29)
Other changes(3)	17		0		0		17
Balance as of December 31, 2019	5,395		1,038		775		7,208
Reserve for unfunded lending commitments:
Balance as of December 31, 2018	0		4		118		122
Provision for losses on unfunded lending commitments	0		1		12		13
Balance as of December 31, 2019	0		5		130		135
Combined allowance and reserve as of December 31, 2019	$	5,395	$	1,043	$	905	$	7,343
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(4)	462		0		0		462
Balance as of January 1, 2020	8,098		1,540		877		10,515
Charge-offs	(5,749)		(1,534)		(394)		(7,677)
Recoveries(2)	1,479		956		17		2,452
Net charge-offs	(4,270)		(578)		(377)		(5,225)
Provision for credit losses	7,327		1,753		1,158		10,238
Allowance build for credit losses(5)	3,057		1,175		781		5,013
Other changes(3)	36		0		0		36
Balance as of December 31, 2020	11,191		2,715		1,658		15,564
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		23		23
Balance as of December 31, 2020	0		0		195		195
Combined allowance and reserve as of December 31, 2020	$	11,191	$	2,715	$	1,853	$	15,759

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(1)In 2018, we sold all of our consumer home loan portfolio and recognized a gain of approximately $499 million in the Other category, including a benefit for credit losses of $46 million.

(2)The amount and timing of recoveries are 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.

(4)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.

(5)Includes an allowance release of $327 million for a partnership credit card loan portfolio transferred to held for sale in the third quarter of 2020.

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 the provision for credit losses. See “Note 1—Summary of Significant Accounting Policies” for further discussion of our credit card partnership agreements.

The table below summarizes the changes in the estimated reimbursements from these partners for the years ended December 31, 2020, 2019 and 2018. Beginning in 2019, amounts below include the impacts of our loss sharing arrangement on the acquired Walmart portfolio.

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


	Year Ended December 31,
(Dollars in millions)	2020		2019		2018
Estimated reimbursements from partners, beginning of period(1)	$	2,166	$	379	$	380
Amounts due from partners which reduced net charge-offs	(959)		(600)		(382)
Amounts estimated to be charged to partners which reduced provision for credit losses	952		1,383		381
Estimated reimbursements from partners, end of period	$	2,159	$	1,162	$	379

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