Allowance for Credit Losses

3 Months Ended

Mar. 31, 2020

Allowance for credit losses

Effective January 1, 2020, the Firm adopted the CECL accounting guidance. The adoption of this guidance established a single allowance framework for all financial assets measured at amortized cost and certain off-balance sheet credit exposures. This framework requires that management’s estimate reflects credit losses over the instrument’s remaining expected life and considers expected future changes in macroeconomic conditions. Refer to Note 1 for further information.

JPMorgan Chase’s allowance for credit losses comprises:


•	the allowance for loan losses, which covers the Firm’s retained loan portfolios (scored and risk-rated) and is presented separately on the balance sheet,


•	the allowance for lending-related commitments, which is presented on the balance sheet in accounts payable and other liabilities, and


•	the allowance for credit losses on investment securities, which covers the Firm’s HTM and AFS securities and is recognized within Investment Securities on the balance sheet.

The income statement effect of all changes in the allowance for credit losses is recognized in the provision for credit losses.

Determining the appropriateness of the allowance for credit losses is complex and requires significant judgment by management about the effect of matters that are inherently uncertain. At least quarterly, the allowance for credit losses is reviewed by the CRO, the CFO and the Controller of the Firm. Subsequent evaluations of credit exposures, considering the macroeconomic conditions, forecasts and other factors then prevailing, may result in significant changes in the allowance for credit losses in future periods.

The Firm’s policies used to determine its allowance for loan losses and its allowance for lending-related commitments are described in the following paragraphs. Refer to Note 10 for a description of the policies used to determine the allowance for credit losses on investment securities.

Methodology for allowances for loan losses and lending-related commitments

The allowance for loan losses and allowance for lending-related commitments represents expected credit losses over the remaining expected life of retained loans and lending-related commitments that are not unconditionally cancellable. The Firm does not record an allowance for future draws on unconditionally cancellable lending-related commitments (e.g., credit cards). Expected losses related to accrued interest on credit card loans are included in the Firm’s allowance for loan losses. However, the Firm does not record an allowance on other accrued interest receivables, due to its policy to write them off no later than 90 days past due by reversing interest income.

The expected life of each instrument is determined by considering its contractual term, expected prepayments, cancellation features, and certain extension and call options. The expected life of funded credit card loans is generally estimated by considering expected future payments on the

credit card account, and determining how much of those amounts should be allocated to repayments of the funded loan balance (as of the balance sheet date) versus other account activity. This allocation is made using an approach that incorporates the payment application requirements of the Credit Card Accountability Responsibility and Disclosure Act of 2009, generally paying down the highest interest rate balances first.

The estimate of expected credit losses includes expected recoveries of amounts previously charged off or expected to be charged off, even if such recoveries result in a negative allowance.

Collective and Individual Assessments

When calculating the allowance for loan losses and the allowance for lending-related commitments, the Firm assesses whether exposures share similar risk characteristics. If similar risk characteristics exist, the Firm estimates expected credit losses collectively, considering the risk associated with a particular pool and the probability that the exposures within the pool will deteriorate or default.

Relevant risk characteristics for the consumer portfolio include product type, delinquency status, current FICO scores, geographic distribution, and, for collateralized loans, current LTV ratios. Relevant risk characteristics for the wholesale portfolio include LOB, geography, risk rating, delinquency status, level and type of collateral, industry sector, credit enhancement, product type, facility purpose, tenor, and payment terms. The assessment of risk characteristics is subject to significant management judgment. Emphasizing one characteristic over another or considering additional characteristics could affect the allowance.

The majority of the Firm’s credit exposures share risk characteristics with other similar exposures, and as a result are collectively assessed for impairment (“portfolio-based component”). The portfolio-based component covers consumer loans, performing risk-rated loans and certain lending-related commitments.

If an exposure does not share risk characteristics with other exposures, the Firm generally estimates expected credit losses on an individual basis, considering expected repayment and conditions impacting that individual exposure (“asset-specific component”). The asset-specific component covers modified PCD loans, loans modified or reasonably expected to be modified in a TDR, collateral-dependent loans, as well as, risk-rated loans that have been placed on nonaccrual status.

Portfolio-based component

The portfolio-based component begins with a quantitative calculation that considers the likelihood of the borrower changing delinquency status or moving from one risk rating to another. The quantitative calculation covers expected credit losses over an instrument’s expected life and is estimated by applying credit loss factors to the Firm’s estimated exposure at default.

The credit loss factors incorporate the probability of borrower default as well as loss severity in the event of default. They are derived using a weighted average of five internally developed macroeconomic scenarios over an eight-quarter

forecast period, followed by a single year straight-line interpolation to revert to long run historical information for periods beyond the eight-quarter forecast period. The eight-quarter forecast incorporates hundreds of macroeconomic variables that are relevant for exposures across the Firm, with modeled credit losses being driven primarily by a subset of less than twenty variables, including U.S. real gross domestic product (“GDP”), U.S. unemployment rates and initial jobless claims, short- and long-term interest rates, U.S. equity prices, corporate credit spreads, housing prices, and oil prices. The specific variables that have the greatest effect on the modeled losses of each portfolio vary by portfolio and geography. The five macroeconomic scenarios consist of a central, relative adverse, extreme adverse, relative upside and extreme upside scenario, and are updated by the Firm’s central forecasting team. The scenarios take into consideration the Firm’s overarching economic outlook, internal perspectives from subject matter experts across the Firm, and market consensus and involve a governed process that incorporates feedback from senior management across LOBs, Corporate Finance and Risk Management.

In light of the rapidly evolving economic conditions and forecasts during March 2020, management updated its macroeconomic forecast near the end of its credit loss estimation process in early April. This macroeconomic forecast was used to generate an updated credit loss estimate that was the primary driver of the Firm’s provision for credit losses for the three months ended March 31, 2020. Subsequent changes to this forecast and related estimates will be reflected in the provision for credit losses in future periods.

The quantitative calculation is adjusted to take into consideration model imprecision, emerging risk assessments, trends and other subjective factors that are not yet reflected in the calculation; these adjustments are accomplished in part by analyzing the historical loss experience, including during stressed periods, for each major product segment. However, it is difficult to predict whether historical loss experience is indicative of future loss levels. In particular, the COVID-19 pandemic has stressed many macroeconomic variables to degrees not seen nor experienced in recent history, which creates additional challenges in the use of modeled credit loss estimates.

Management applies significant judgment in making this adjustment, taking into account uncertainties associated with various factors not already considered in the quantitative calculation, including current economic and political conditions, quality of underwriting standards, borrower behavior, credit concentrations or deterioration within an industry, product or portfolio, as well as other relevant internal and external factors affecting the credit quality of the portfolio. In certain instances, the interrelationships between these factors create further uncertainties.

The application of different inputs into the quantitative calculation, and the assumptions used by management to adjust the quantitative calculation, are subject to significant management judgment, and emphasizing one input or assumption over another, or considering other inputs or assumptions, could affect the estimate of the allowance for

loan losses and the allowance for lending-related commitments.

Asset-specific component

To determine the asset-specific component of the allowance, collateral-dependent loans (including those loans for which foreclosure is probable) and larger, nonaccrual risk-rated loans in the wholesale portfolio segment are generally evaluated individually, while smaller loans (both scored and risk-rated) are aggregated for evaluation using factors relevant for the respective class of assets.

The Firm generally measures the asset-specific allowance as the difference between the amortized cost of the loan and the present value of the cash flows expected to be collected, discounted at the loan’s original effective interest rate. Subsequent changes in impairment are generally recognized as an adjustment to the allowance for loan losses. For collateral-dependent loans, the fair value of collateral less estimated costs to sell is used to determine the charge-off amount for declines in value (to reduce the amortized cost of the loan to the fair value of collateral) or the amount of negative allowance that should be recognized (for recoveries of prior charge-offs associated with improvements in the fair value of collateral).

The asset-specific component of the allowance for loan losses that have been or are expected to be modified in TDRs incorporates the effect of the modification on the loan’s expected cash flows (including forgone interest, principal forgiveness, as well as other concessions), and also the potential for redefault. For residential real estate loans modified in or expected to be modified in TDRs, the Firm develops product-specific probability of default estimates, which are applied at a loan level to compute expected losses. In developing these probabilities of default, the Firm considers the relationship between the credit quality characteristics of the underlying loans and certain assumptions about housing prices and unemployment, based upon industry-wide data. The Firm also considers its own historical loss experience to-date based on actual redefaulted modified loans. For credit card loans modified in or expected to be modified in TDRs, expected losses incorporate projected redefaults based on the Firm’s historical experience by type of modification program. For wholesale loans modified or expected to be modified in TDRs, expected losses incorporate management’s expectation of the borrower’s ability to repay under the modified terms.

Estimating the timing and amounts of future cash flows is highly judgmental as these cash flow projections rely upon estimates such as loss severities, asset valuations, default rates (including redefault rates on modified loans), the amounts and timing of interest or principal payments (including any expected prepayments) or other factors that are reflective of current and expected market conditions. These estimates are, in turn, dependent on factors such as the duration of current overall economic conditions, industry-, portfolio-, or borrower-specific factors, the expected outcome of insolvency proceedings as well as, in certain circumstances, other economic factors. All of these estimates and assumptions require significant management judgment and certain assumptions are highly subjective.

Allowance for credit losses and related information

The table below summarizes information about the allowances for loan losses and lending-related commitments, and includes a breakdown of loans and lending-related commitments by impairment methodology. Refer to Note 10 for further information on the allowance for credit losses on investment securities.

The adoption of the CECL accounting guidance resulted in a change in the accounting for PCI loans, which are considered PCD loans. In conjunction with the adoption of CECL, the Firm reclassified risk-rated loans and lending-related commitments from the consumer, excluding credit card portfolio segment to the wholesale portfolio segment, to align with the methodology applied in determining the allowance. Prior-period amounts have been revised to conform with the current presentation. Refer to Note 1 for further information.



	2020^(e)												2019
Three months ended March 31, (in millions)	Consumer, excluding credit card			Credit card			Wholesale			Total			Consumer, excluding credit card			Credit card			Wholesale			Total
Allowance for loan losses
Beginning balance at January 1,	$	2,538		$	5,683		$	4,902		$	13,123		$	3,434		$	5,184		$	4,827		$	13,445
Cumulative effect of a change in accounting principle	297			5,517			(1,642		)	4,172			NA			NA			NA			NA
Gross charge-offs	233			1,488			181			1,902			234			1,344			64			1,642
Gross recoveries collected	(239		)	(175		)	(19		)	(433		)	(127		)	(142		)	(12		)	(281		)
Net charge-offs	(6		)	1,313			162			1,469			107			1,202			52			1,361
Write-offs of PCI loans^(a)	NA			NA			NA			NA			50			—			—			50
Provision for loan losses	613			5,063			1,742			7,418			120			1,202			170			1,492
Other	—			—			—			—			2			(1		)	6			7
Ending balance at March 31,	$	3,454		$	14,950		$	4,840		$	23,244		$	3,399		$	5,183		$	4,951		$	13,533

Allowance for lending-related commitments
Beginning balance at January 1,	$	12		$	—		$	1,179		$	1,191		$	12		$	—		$	1,043		$	1,055
Cumulative effect of a change in accounting principle	133			—			(35		)	98			NA			NA			NA			NA
Provision for lending-related commitments	6			—			852			858			—			—			3			3
Other	—			—			—			—			—			—			—			—
Ending balance at March 31,	$	151		$	—		$	1,996		$	2,147		$	12		$	—		$	1,046		$	1,058

Allowance for loan losses by impairment methodology
Asset-specific^(b)	$	223		$	530		$	556		$	1,309		$	89		$	461		$	479		$	1,029
Portfolio-based	3,231			14,420			4,284			21,935			1,572			4,722			4,472			10,766
PCI	NA			NA			NA			NA			1,738			—			—			1,738
Total allowance for loan losses	$	3,454		$	14,950		$	4,840		$	23,244		$	3,399		$	5,183		$	4,951		$	13,533

Loans by impairment methodology
Asset-specific^(b)	$	17,036		$	1,505		$	2,021		$	20,562		$	6,536		$	1,365		$	1,860		$	9,761
Portfolio-based	276,743			152,516			553,268			982,527			292,465			149,150			469,258			910,873
PCI	NA			NA			NA			NA			23,207			—			—			23,207
Total retained loans	$	293,779		$	154,021		$	555,289		$	1,003,089		$	322,208		$	150,515		$	471,118		$	943,841

Collateral-dependent loans
Net charge-offs	$	29		$	—		$	17		$	46		$	9		$	—		$	11		$	20
Loans measured at fair value of collateral less cost to sell	2,941			—			94			3,035			2,098			—			154			2,252

Allowance for lending-related commitments by impairment methodology
Asset-specific	$	—		$	—		$	187		$	187		$	—		$	—		$	114		$	114
Portfolio-based	151			—			1,809			1,960			12			—			932			944
Total allowance for lending-related commitments^(c)	$	151		$	—		$	1,996		$	2,147		$	12		$	—		$	1,046		$	1,058

Lending-related commitments by impairment methodology
Asset-specific	$	—		$	—		$	619		$	619		$	—		$	—		$	455		$	455
Portfolio-based^(d)	33,498			—			357,866			391,364			28,666			—			393,555			422,221
Total lending-related commitments	$	33,498		$	—		$	358,485		$	391,983		$	28,666		$	—		$	394,010		$	422,676


(a)	Prior to the adoption of CECL, write-offs of PCI loans were recorded against the allowance for loan losses when actual losses for a pool exceeded estimated losses that were recorded as purchase accounting adjustments at the time of acquisition. A write-off of a PCI loan was recognized when the underlying loan was removed from a pool.

(b)

Includes modified PCD loans and loans that have been modified or are reasonably expected to be modified in a TDR. Also includes risk-rated loans that have been placed on nonaccrual status for the wholesale portfolio segment. The asset-specific credit card allowance for loans modified, or reasonably expected to be modified, in a TDR is calculated based on the loans’ original contractual interest rates and does not consider any incremental penalty rates.


(c)	The allowance for lending-related commitments is reported in accounts payable and other liabilities on the Consolidated balance sheets.


(d)	At March 31, 2020 and 2019, lending-related commitments excluded $8.0 billion and $9.3 billion, respectively, for the consumer, excluding credit card portfolio segment; and $681.4 billion and $626.9 billion, respectively, for the credit card portfolio segment, which were not subject to the allowance for lending-related commitments.


(e)	Excludes HTM securities, which had an allowance for credit losses of $19 million and a provision for credit losses of $9 million as of and for the three months ended March 31, 2020.

Discussion of current period changes

The increase in the allowances for loan losses and lending-related commitments in the first quarter of 2020 was primarily

driven by an increase in the provision for credit losses, reflecting deterioration in the macroeconomic environment as a result

of the impact of the COVID-19 pandemic and continued pressure on oil prices. In light of the rapidly evolving economic conditions and forecasts during March 2020, management updated its macroeconomic forecast near the end of its credit loss estimation process in early April. This macroeconomic forecast included a decline in the U.S. real GDP of approximately 25% and an increase in the U.S. unemployment rate to above 10%, both in the second quarter, followed by a solid recovery in the second half of 2020. In addition, the allowances for loan losses and lending-related commitments reflect the estimated impact of the Firm’s payment relief actions as well as the federal government’s stimulus programs related to the COVID-19 pandemic. Subsequent changes to this forecast and related estimates will be reflected in the provision for credit losses in future periods.