Outstanding Loans and Leases
|3 Months Ended|
Mar. 31, 2020
|Outstanding Loans and Leases||
Outstanding Loans and Leases and Allowance for Credit Losses
The following tables present total outstanding loans and leases and an aging analysis for the Consumer Real Estate, Credit Card and Other Consumer, and Commercial portfolio segments, by class of financing receivables, at March 31, 2020 and December 31, 2019.
The Corporation categorizes consumer real estate loans as core and non-core based on loan and customer characteristics such as origination date, product type, LTV, Fair Isaac Corporation (FICO) score and delinquency status consistent with its current consumer and mortgage servicing strategy. Generally, loans that were originated after January 1, 2010, qualified under government-sponsored enterprise (GSE) underwriting guidelines, or otherwise met the Corporation’s underwriting guidelines in place in 2015 are characterized as core loans. All other loans are generally characterized as non-core loans and represent runoff portfolios.
The Corporation has entered into long-term credit protection agreements with Fannie Mae and Freddie Mac on loans totaling $8.0 billion and $7.5 billion at March 31, 2020 and December 31, 2019, providing full credit protection on residential mortgage loans that become severely delinquent. All of these loans are individually insured and therefore the Corporation does not record an allowance for credit losses related to these loans.
Nonperforming Loans and Leases
Commercial nonperforming loans increased to $1.9 billion at March 31, 2020 from $1.5 billion at December 31, 2019 with
broad-based increases across multiple industries. Weakness in consumer delinquencies and nonperforming loans was less observable in the three months ended March 31, 2020 as meaningful impacts from the COVID-19 pandemic were not experienced until late in the quarter and were mitigated to some extent by payment deferrals.
The table below presents the Corporation’s nonperforming loans and leases including nonperforming TDRs, and loans accruing past due 90 days or more at March 31, 2020 and December 31, 2019. Nonperforming loans held-for-sale (LHFS) are excluded from nonperforming loans and leases as they are recorded at either fair value or the lower of cost or fair value. For information on the Corporation's interest accrual policies and delinquency status for loan modifications related to the COVID-19 pandemic, see Note 1 – Summary of Significant Accounting Principles. For more information on the criteria for classification as nonperforming, see Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements of the Corporation’s 2019 Annual Report on Form 10-K.
n/a = not applicable
Nonperforming consumer loans now include certain loans that were previously classified as purchased credit-impaired loans and accounted for under a pool basis. Upon adoption of the new credit
loss standard, these loans are accounted for on an individual basis and, if applicable, included in nonperforming loans.As a result, an additional $130 million and $20 million of residential mortgage and home equity loans were added to nonperforming loans as of March 31, 2020.
Credit Quality Indicators
The Corporation monitors credit quality within its Consumer Real Estate, Credit Card and Other Consumer, and Commercial portfolio segments based on primary credit quality indicators. For more information on the portfolio segments, see Note 1 – Summary of Significant Accounting Principles. Within the Consumer Real Estate portfolio segment, the primary credit quality indicators are refreshed LTV and refreshed FICO score. Refreshed LTV measures the carrying value of the loan as a percentage of the value of the property securing the loan, refreshed quarterly. Home equity loans are evaluated using CLTV which measures the carrying value of the Corporation’s loan and available line of credit combined with any outstanding senior liens against the property as a percentage of the value of the property securing the loan, refreshed quarterly. FICO score measures the creditworthiness of the borrower based on the financial obligations of the borrower and the borrower’s
credit history. FICO scores are typically refreshed quarterly or more frequently. Certain borrowers (e.g., borrowers that have had debts discharged in a bankruptcy proceeding) may not have their FICO scores updated. FICO scores are also a primary credit quality indicator for the Credit Card and Other Consumer portfolio segment and the business card portfolio within U.S. small business commercial. Within the Commercial portfolio segment, loans are evaluated using the internal classifications of pass rated or reservable criticized as the primary credit quality indicators. The term reservable criticized refers to those commercial loans that are internally classified or listed by the Corporation as Special Mention, Substandard or Doubtful, which are asset quality categories defined by regulatory authorities. These assets have an elevated level of risk and may have a high probability of default or total loss. Pass rated refers to all loans not considered reservable criticized. In addition to these primary credit quality indicators, the Corporation uses other credit quality indicators for certain types of loans.
The following tables present certain credit quality indicators for the Corporation's Consumer Real Estate, Credit Card and Other Consumer, and Commercial portfolio segments, by class of financing receivables and year of origination for term loan balances at March 31, 2020, including revolving loans that converted to term loans without an additional credit decision after origination or through a troubled debt restructuring.
(1) Excludes $8.5 billion and $7.7 billion of loans accounted for under the fair value option at March 31, 2020 and December 31, 2019.
As a result of the economic impact of COVID-19, commercial asset quality weakened during the three months ended March 31, 2020. Commercial reservable criticized utilized exposure increased to $17.4 billion at March 31, 2020 from $11.5 billion (to 2.84 percent from 2.09 percent of total commercial reservable utilized exposure) at December 31, 2019 with increases spread across multiple industries including the energy sector, which was also impacted by the weakness in oil prices and oil price volatility in the quarter.
Troubled Debt Restructurings
The Corporation began entering into loan modifications with borrowers in response to the COVID-19 pandemic, which have not been classified as TDRs, and therefore are not included in the discussion below. For more information on the criteria for classifying loans as TDRs, see Note 1 – Summary of Significant Accounting Principles.
Consumer Real Estate
Most modifications of consumer real estate loans meet the definition of a TDR and are classified as TDRs when a binding offer is extended to a borrower. Modifications of consumer real estate loans are done in accordance with government programs or the Corporation’s proprietary programs. Concessions may include reductions in interest rates, capitalization of past due amounts, principal and/or interest forbearance, payment extensions, principal and/or interest forgiveness, or combinations thereof. Prior to permanently modifying a loan, the Corporation may enter
into trial modifications with certain borrowers under both government and proprietary programs. Trial modifications generally represent a three- to four-month period during which the borrower makes monthly payments under the anticipated modified payment terms. Upon successful completion of the trial period, the Corporation and the borrower enter into a permanent modification. Binding trial modifications are classified as TDRs when the trial offer is made and continue to be classified as TDRs regardless of whether the borrower enters into a permanent modification.
Consumer real estate loans of $597 million that have been discharged in Chapter 7 bankruptcy with no change in repayment terms and not reaffirmed by the borrower were included in TDRs at March 31, 2020, of which $99 million were classified as nonperforming and $255 million were loans fully insured by the FHA.
Consumer real estate TDRs are measured primarily based on the net present value of the estimated cash flows discounted at the loan’s original effective interest rate. If the carrying value of a TDR exceeds this amount, a specific allowance is recorded as a component of the allowance for loan and lease losses. Alternatively, consumer real estate TDRs that are considered to be dependent solely on the collateral for repayment (e.g., due to the lack of income verification) are measured based on the estimated fair value of the collateral and a charge-off is recorded if the carrying value exceeds the fair value of the collateral. Consumer real estate loans that reach 180 days past due prior to modification are charged off to their net realizable value, less
costs to sell, before they are modified as TDRs in accordance with established policy. Subsequent declines in the fair value of the collateral after a loan has reached 180 days past due are recorded as charge-offs. Fully-insured loans are protected against principal loss, and therefore, the Corporation does not record an allowance for loan and lease losses on the outstanding principal balance, even after they have been modified in a TDR.
At March 31, 2020 and December 31, 2019, remaining commitments to lend additional funds to debtors whose terms have been modified in a consumer real estate TDR were not significant. Consumer real estate foreclosed properties totaled $226 million and $229 million at March 31, 2020 and December 31, 2019. The carrying value of consumer real estate loans, including fully-insured loans, for which formal foreclosure proceedings were in process at March 31, 2020 was $1.4 billion. During the three months ended March 31, 2020 and 2019, the
Corporation reclassified $138 million and $164 million of consumer real estate loans to foreclosed properties or, for properties acquired upon foreclosure of certain government-guaranteed loans (principally FHA-insured loans), to other assets. The reclassifications represent non-cash investing activities and, accordingly, are not reflected in the Consolidated Statement of Cash Flows.
The table below presents the March 31, 2020 and 2019 unpaid principal balance, carrying value, and average pre- and post-modification interest rates of consumer real estate loans that were modified in TDRs during the three months ended March 31, 2020 and 2019. The following Consumer Real Estate portfolio segment tables include loans that were initially classified as TDRs during the period and also loans that had previously been classified as TDRs and were modified again during the period.
The table below presents the March 31, 2020 and 2019 carrying value for consumer real estate loans that were modified in a TDR during the three months ended March 31, 2020 and 2019, by type of modification.
The table below presents the carrying value of consumer real estate loans that entered into payment default during the three months ended March 31, 2020 and 2019 that were modified in a TDR during the 12 months preceding payment default. A payment default for consumer real estate TDRs is recognized when a borrower has missed three monthly payments (not necessarily consecutively) since modification.
Includes trial modification offers to which the customer did not respond.
Credit Card and Other Consumer
The Corporation seeks to assist customers that are experiencing financial difficulty by modifying loans while ensuring compliance with federal and local laws and guidelines. Credit card and other consumer loan modifications generally involve reducing the interest rate on the account, placing the customer on a fixed payment plan not exceeding 60 months and canceling the customer’s available line of credit, all of which are considered TDRs. The Corporation makes loan modifications directly with borrowers for debt held only by the Corporation (internal programs). Additionally, the Corporation makes loan modifications for borrowers working with third-party renegotiation agencies that
provide solutions to customers’ entire unsecured debt structures (external programs). The Corporation classifies other secured consumer loans that have been discharged in Chapter 7 bankruptcy as TDRs which are written down to collateral value and placed on nonaccrual status no later than the time of discharge.
The table below provides information on the Corporation’s Credit Card and Other Consumer TDR portfolio including the March 31, 2020 and 2019 unpaid principal balance, carrying value, and average pre- and post-modification interest rates of loans that were modified in TDRs during the three months ended March 31, 2020 and 2019.
The table below presents the March 31, 2020 and 2019 carrying value for Credit Card and Other Consumer loans that were modified in a TDR during the three months ended March 31, 2020 and 2019, by program type.
Modifications of loans to commercial borrowers that are experiencing financial difficulty are designed to reduce the Corporation’s loss exposure while providing the borrower with an opportunity to work through financial difficulties, often to avoid foreclosure or bankruptcy. Each modification is unique and reflects the individual circumstances of the borrower. Modifications that result in a TDR may include extensions of maturity at a concessionary (below market) rate of interest, payment forbearances or other actions designed to benefit the borrower while mitigating the Corporation’s risk exposure. Reductions in
interest rates are rare. Instead, the interest rates are typically increased, although the increased rate may not represent a market rate of interest. Infrequently, concessions may also include principal forgiveness in connection with foreclosure, short sale or other settlement agreements leading to termination or sale of the loan.
At the time of restructuring, the loans are remeasured to reflect the impact, if any, on projected cash flows resulting from the modified terms. If a portion of the loan is deemed to be uncollectible, a charge-off may be recorded at the time of restructuring. Alternatively, a charge-off may have already been recorded in a previous period such that no charge-off is required at the time of modification. For more information on modifications for the U.S. small business commercial portfolio, see Credit Card and Other Consumer in this Note.
At March 31, 2020 and December 31, 2019, remaining commitments to lend additional funds to debtors whose terms have been modified in a commercial loan TDR were $486 million and $445 million. The balance of commercial TDRs in payment default was not significant at March 31, 2020 and December 31, 2019.
The Corporation had LHFS of $7.9 billion and $9.2 billion at March 31, 2020 and December 31, 2019. Cash and non-cash proceeds from sales and paydowns of loans originally classified as LHFS were $7.5 billion and $7.9 billion for the three months ended March 31, 2020 and 2019. Cash used for originations and purchases of LHFS totaled $6.1 billion and $3.6 billion for the three months ended March 31, 2020 and 2019.
Accrued Interest Receivable
Accrued interest receivable for loans and leases and loans held-for-sale at March 31, 2020 and December 31, 2019 was $2.5 billion and $2.6 billion and is reported in customer and other receivables on the Consolidated Balance Sheet.
Outstanding credit card loan balances include unpaid principal, interest and fees. Credit card loans are not classified as nonperforming but are charged-off no later than the end of the month in which the account becomes 180 days past due, within 60 days after receipt of notification of death or bankruptcy, or upon confirmation of fraud. During the three months ended March 31, 2020, the Corporation reversed $165 million of interest and fee income against the income statement line item in which it was originally recorded upon charge-off of the principal balance of the loan.
For the outstanding residential mortgage, home equity, direct/indirect consumer and commercial loan balances classified as nonperforming during the three months ended March 31, 2020, the Corporation reversed $10 million of interest and fee income at the time the loans were classified as nonperforming against the income statement line item in which it was originally recorded. For more information on the Corporation's nonperforming loan policies, see Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements of the Corporation’s 2019 Annual Report on Form 10-K.
Allowance for Credit Losses
On January 1, 2020, the Corporation adopted the new accounting standard that requires the measurement of the allowance for credit losses to be based on management’s best estimate of lifetime expected credit losses inherent in the Corporation’s relevant financial assets. Upon adoption of the new accounting standard, the Corporation recorded a $3.3 billion, or 32 percent, increase in the allowance for credit losses on January 1, 2020, which was comprised of a net increase of $2.9 billion in the allowance for loan and lease losses and a $310 million increase in the reserve for unfunded lending commitments. The net increase in the allowance for loan and lease losses was primarily driven by a $3.1 billion increase in credit card as the Corporation now reserves for the life of these receivables.
The reserve for unfunded lending commitments increased $310 million to $1.1 billion compared to $813 million at December 31, 2019. The increase included $119 million in the consumer portfolio for the undrawn portion of home equity lines of credit and $191 million in the commercial portfolio.
The allowance for loan and lease losses at March 31, 2020 was $15.8 billion, an increase of $3.4 billion compared to January 1, 2020. The increase in the allowance for loan and lease losses was primarily driven by deterioration in the economic outlook resulting from the impact of COVID-19. The increase in the allowance for loan and lease losses was $368 million in the consumer real estate portfolio, $828 million in the credit card and other consumer portfolio, and $2.2 billion in the commercial portfolio. The reserve for unfunded lending commitments
increased $237 million from January 1, 2020 to $1.4 billion at March 31, 2020.
The allowance for credit losses is estimated using quantitative methods that consider a variety of factors such as historical loss experience, the current credit quality of the portfolio as well as an economic outlook over the life of the loan. Also included in the allowance for loan and lease losses are qualitative reserves to cover losses that are expected but, in the Corporation's assessment, may not be adequately represented in the quantitative methods or the economic assumptions. In its loss forecasting framework, the Corporation incorporates forward-looking information through the use of macroeconomic scenarios applied over the forecasted life of the assets. The scenarios that are chosen each quarter and the amount of weighting given to each scenario depend on a variety of factors including recent economic events, leading economic indicators, views of internal as well as third-party economists and industry trends. For more information on the Corporation's credit loss accounting policies, including the allowance for credit losses, see Note 1 – Summary of Significant Accounting Principles.
The lifetime estimate considers several traditional protracted recessionary scenarios that include deterioration in key economic variables such as gross domestic product, unemployment rate and home price index over longer time horizons. As of January 1, 2020, the Corporation's economic outlook was weighted to include a moderate potential of a recession with some expectation of tail risk similar to the severely adverse scenario used in stress testing. For the three months ended March 31, 2020, there was a significant change in the economic outlook impacting the allowance for credit losses, with key economic factors such as the unemployment rate and gross domestic product projected to deteriorate sharply in the second quarter of 2020 driven by the impact of COVID-19. In response to these changes, the Corporation reassessed the selection and probability weightings of the traditional protracted recessionary scenarios as well as analyzed various scenarios with immediate deterioration in economic variables followed by different recovery assumptions as part of the process for setting the allowance for credit loss reserve. Based on these analyses, the Corporation is now effectively fully weighted to a recessionary environment with an increased weighting for the expectation of a tail risk event. In addition, the allowance for credit losses at March 31, 2020 included qualitative reserves for certain segments that the Corporation views as higher risk that may not be fully recognized through its quantitative models such as leveraged loans and the energy portfolio. There are still many unknowns including the duration of the impact of COVID-19 on the economy and the results of the government fiscal and monetary actions along with recently implemented payment deferral programs, and the Corporation will continue to evaluate the allowance for credit losses and the related economic outlook each quarter.
Outstanding loans and leases excluding loans accounted for under the fair value option increased $66.7 billion in the three months ended March 31, 2020, primarily driven by a significant increase in commercial draws from existing unfunded commitments, as many business operations were economically impacted by COVID-19. The draws were primarily domestic and well diversified across industries with approximately 90 percent either investment grade or collateralized. As these were draws on committed facilities, a portion of the expected loss content was already provided for as part of the Corporation's January 1, 2020 reserve for unfunded lending commitments and did not result in
a significant increase in the allowance for credit losses as of March 31, 2020. Outstanding consumer loans and leases excluding loans accounted for under the fair value option increased slightly as growth in residential mortgage was partially offset by a decline in credit card. The growth in the residential mortgage portfolio was
well collateralized and therefore did not result in a meaningful increase in the allowance for credit losses as of March 31, 2020.
The table below summarizes the changes in the allowance for credit losses by portfolio segment for the three months ended March 31, 2020 and 2019.
The provision for credit losses, including unfunded lending commitments, increased $3.7 billion to $4.8 billion for the three months ended March 31, 2020 compared to the same period in 2019 driven by deterioration in the economic outlook resulting from the impact of COVID-19. At March 31, 2020, the allowance for credit losses for the Corporation’s other relevant assets was insignificant.
The entire disclosure for claims held for amounts due a company, excluding disclosure for allowance for credit losses. Examples include, but are not limited to, trade accounts receivables, notes receivables, loans receivables. Also excludes disclosure for financing receivables.
Reference 1: http://www.xbrl.org/2009/role/commonPracticeRef