XML 28 R16.htm IDEA: XBRL DOCUMENT

Loans

9 Months Ended

Sep. 30, 2020

Note 9.

Loans

Loans include (i) loans held for investment that are accounted for at amortized cost net of allowance for loan losses or at fair value under the fair value option and (ii) loans held for sale that are accounted for at the lower of cost or fair value. Interest on loans is recognized over the life of the loan and is recorded on an accrual basis.

The table below presents information about loans.



$ in millions	Amortized Cost		Fair Value	Held For Sale	Total
As of September 2020
Loan Type
Corporate	$47,583		$ 2,856	$1,026	$ 51,465
Wealth management	21,799		8,037	–	29,836
Commercial real estate	15,421		1,980	976	18,377
Residential real estate	4,236		446	23	4,705
Consumer:
Installment	4,112		–	–	4,112
Credit cards	2,908		–	–	2,908
Other	3,111		562	481	4,154
Total loans, gross	99,170		13,881	2,506	115,557
Allowance for loan losses	(3,714	)	–	–	(3,714	)
Total loans	$95,456		$13,881	$2,506	$111,843
As of December 2019
Loan Type
Corporate	$41,129		$ 3,224	$1,954	$ 46,307
Wealth management	20,116		7,824	–	27,940
Commercial real estate	13,258		1,876	2,609	17,743
Residential real estate	6,132		792	34	6,958
Consumer:
Installment	4,747		–	–	4,747
Credit cards	1,858		–	–	1,858
Other	3,396		670	726	4,792
Total loans, gross	90,636		14,386	5,323	110,345
Allowance for loan losses	(1,441	)	–	–	(1,441	)
Total loans	$89,195		$14,386	$5,323	$108,904

The following is a description of the loan types in the table above:

•

Corporate.

Corporate loans includes term loans, revolving lines of credit, letter of credit facilities and bridge loans, and are principally used for operating and general corporate purposes, or in connection with acquisitions. Corporate loans may be secured or unsecured, depending on the loan purpose, the risk profile of the borrower and other factors.

•

Wealth Management.

Wealth management loans includes loans extended to private bank clients, including wealth management and other clients. These loans are used to finance investments in both financial and nonfinancial assets, bridge cash flow timing gaps or provide liquidity for other needs. Substantially all of such loans are secured by securities, residential real estate, commercial real estate or other assets.

•

Commercial Real Estate.

Commercial real estate loans includes loans extended by the firm (other than to private bank clients) that are directly or indirectly secured by hotels, retail stores, multifamily housing complexes and commercial and industrial properties. Commercial real estate loans also includes loans extended to clients who warehouse assets that are directly or indirectly backed by commercial real estate. In addition, commercial real estate includes loans purchased by the firm.

•

Residential Real Estate.

Residential real estate loans primarily includes loans extended by the firm to clients (other than private bank clients) who warehouse assets that are directly or indirectly secured by residential real estate and loans purchased by the firm.

•

Installment.

Installment loans are unsecured and are originated by the firm.

•

Credit Cards.

Credit card loans are loans made pursuant to revolving lines of credit issued to consumers by the firm.

•

Other.

Other loans primarily includes loans extended to clients who warehouse assets that are directly or indirectly secured by consumer loans, including auto loans and private student loans. Other loans also includes unsecured consumer and credit card loans purchased by the firm.

Loans accounted for at amortized cost included PCI loans with a carrying value of $1.62 billion (outstanding principal balance of $3.23 billion and accretable yield of $220 million) as of December 2019, which were secured by commercial and residential real estate. In January 2020, the firm elected the fair value option for these PCI loans in accordance with ASU

No. 2016-13.

These loans were primarily transferred to trading assets. See Note 3 for further information about adoption of this ASU.

Credit Quality

Risk Assessment.

The firm’s risk assessment process includes evaluating the credit quality of its loans. For corporate loans and a majority of wealth management, real estate and other loans, the firm performs credit reviews which include initial and ongoing analyses of its borrowers, resulting in an internal credit rating. A credit review is an independent analysis of the capacity and willingness of a borrower to meet its financial obligations and is performed on an annual basis or more frequently if circumstances change that indicate that a review may be necessary. The determination of internal credit ratings also incorporates assumptions with respect to the nature of and outlook for the borrower’s industry and the economic environment.

The table below presents gross loans by an internally determined public rating agency equivalent or other credit metrics and the concentration of secured and unsecured loans.



$ in millions	Investment- Grade	Non-Investment- Grade	Other/ Unrated	Total
As of September 2020
Accounting Method
Amortized cost	$31,487	$57,168	$10,515	$ 99,170
Fair value	2,068	5,863	5,950	13,881
Held for sale	466	1,564	476	2,506
Total	$34,021	$64,595	$16,941	$115,557
Loan Type
Corporate	$10,880	$39,972	$ 613	$ 51,465
Wealth management	19,333	4,923	5,580	29,836
Real estate:
Commercial	1,468	15,922	987	18,377
Residential	689	2,796	1,220	4,705
Consumer:
Installment	–	–	4,112	4,112
Credit cards	–	–	2,908	2,908
Other	1,651	982	1,521	4,154
Total	$34,021	$64,595	$16,941	$115,557
Secured	79%	91%	48%	81%
Unsecured	21%	9%	52%	19%
Total	100%	100%	100%	100%
As of December 2019
Accounting Method
Amortized cost	$30,266	$51,222	$ 9,148	$ 90,636
Fair value	2,844	5,174	6,368	14,386
Held for sale	323	4,368	632	5,323
Total	$33,433	$60,764	$16,148	$110,345
Loan Type
Corporate	$10,507	$35,509	$ 291	$ 46,307
Wealth management	20,001	3,576	4,363	27,940
Real estate:
Commercial	306	15,997	1,440	17,743
Residential	244	4,600	2,114	6,958
Consumer:
Installment	–	–	4,747	4,747
Credit cards	–	–	1,858	1,858
Other	2,375	1,082	1,335	4,792
Total	$33,433	$60,764	$16,148	$110,345
Secured	83%	91%	54%	83%
Unsecured	17%	9%	46%	17%
Total	100%	100%	100%	100%

In the table above, other/unrated loans include installment and credit card loans of $7.02 billion as of September 2020 and $6.61 billion as of December 2019 for which an important credit-quality indicator is the Fair Isaac Corporation (FICO) credit score (which measures a borrower’s creditworthiness by considering factors such as payment and credit history). FICO credit scores are periodically refreshed by the firm to assess the updated creditworthiness of the borrower. See “Vintage” below for information about installment and credit card loans by FICO credit scores. The vast majority of the remaining loans of $9.92 billion as of September 2020 and $9.54 billion as of December 2019 included in the other/unrated category are secured. These loans primarily consist of wealth management loans backed by residential real estate and securities, and purchased real estate-backed loans. The firm’s risk assessment process for such loans includes reviewing certain key metrics, such as

loan-to-value

ratio, delinquency status, collateral values, expected cash flows and other risk factors.

The firm also assigns a regulatory risk rating to its loans based on the definitions provided by the U.S. federal bank regulatory agencies. Total loans included 86% of loans as of September 2020 and 91% as of December 2019 that were rated

pass/non-criticized.

Vintage.

The table below presents gross loans accounted for at amortized cost (excluding installment and credit card loans) by an internally determined public rating agency equivalent or other credit metrics and origination year for term loans.



	As of September 2020

$ in millions		Investment- Grade	Non-Investment- Grade	Other/ Unrated	Total
2020		$ 2,355	$ 5,465	$ 146	$ 7,966
2019		995	7,005	–	8,000
2018		2,155	3,797	–	5,952
2017		891	3,276	–	4,167
2016		271	1,495	–	1,766
2015 or earlier		376	2,296	–	2,672
Revolving		3,541	13,428	91	17,060
Corporate		10,584	36,762	237	47,583
2020		372	239	–	611
2019		683	403	–	1,086
2018		413	76	–	489
2017		380	76	–	456
2016		22	21	–	43
2015 or earlier		519	265	–	784
Revolving		15,338	1,851	1,141	18,330
Wealth management		17,727	2,931	1,141	21,799
2020		538	2,217	45	2,800
2019		24	2,096	–	2,120
2018		213	2,170	16	2,399
2017		18	1,779	12	1,809
2016		–	186	9	195
2015 or earlier		–	819	491	1,310
Revolving		127	4,661	–	4,788
Commercial real estate		920	13,928	573	15,421
2020		530	1,063	90	1,683
2019		–	227	256	483
2018		–	143	369	512
2017		8	62	75	145
2016		–	2	–	2
2015 or earlier		–	–	84	84
Revolving		150	1,177	–	1,327
Residential real estate		688	2,674	874	4,236
2020		260	18	502	780
2019		–	76	64	140
2018		–	52	–	52
2017		–	9	–	9
Revolving		1,308	718	104	2,130
Other		1,568	873	670	3,111
Total		$31,487	$57,168	$3,495	$92,150
Percentage of total		34%	62%	4%	100%

In the table above, revolving loans which converted to term loans were not material as of September 2020.

The table below presents gross installment loans by refreshed FICO credit scores and origination year and gross credit card loans by refreshed FICO credit scores.



	As of September 2020

$ in millions		Greater than or equal to 660	Less than 660	Total
2020		$1,116	$ 28	$1,144
2019		1,434	145	1,579
2018		984	185	1,169
2017		170	40	210
2016		8	2	10
Installment		3,712	400	4,112
Credit cards		2,175	733	2,908
Total consumer		$5,887	$1,133	$7,020
Percentage of total:
Installment		90%	10%	100%
Credit cards		75%	25%	100%

In the table above, credit card loans consist of revolving lines of credit.

Credit Concentrations.

The table below presents the concentration of gross loans by region.



$ in millions	Carrying Value	Americas	EMEA	Asia	Total
As of September 2020
Corporate	$ 51,465	61%	31%	8%	100%
Wealth management	29,836	90%	8%	2%	100%
Commercial real estate	18,377	68%	20%	12%	100%
Residential real estate	4,705	87%	11%	2%	100%
Consumer:
Installment	4,112	100%	–	–	100%
Credit cards	2,908	100%	–	–	100%
Other	4,154	82%	17%	1%	100%
Total	$115,557	74%	20%	6%	100%
As of December 2019
Corporate	$ 46,307	60%	31%	9%	100%
Wealth management	27,940	88%	9%	3%	100%
Commercial real estate	17,743	69%	21%	10%	100%
Residential real estate	6,958	90%	9%	1%	100%
Consumer:
Installment	4,747	100%	–	–	100%
Credit cards	1,858	100%	–	–	100%
Other	4,792	87%	12%	1%	100%
Total	$110,345	73%	21%	6%	100%

In the table above, EMEA represents Europe, Middle East and Africa.

The table below presents the concentration of gross corporate loans by industry.



	As of

$ in millions		September 2020	December 2019
Corporate, gross		$51,465	$46,307
Industry
Consumer & Retail		7%	7%
Diversified Industrials		22%	17%
Financial Institutions		10%	10%
Funds		9%	9%
Healthcare		7%	8%
Natural Resources & Utilities		12%	12%
Real Estate		7%	7%
Technology, Media & Telecommunications		17%	17%
Other (including Special Purpose Vehicles)		9%	13%
Total		100%	100%

The table below presents the firm’s credit exposure from originated installment and credit card loans and the concentration by the five most concentrated U.S. states.



	As of

$ in millions		September 2020	December 2019
Installment		$4,112	$4,747
California		12%	12%
Texas		9%	9%
New York		7%	7%
Florida		7%	7%
Illinois		4%	4%
Other		61%	61%
Total		100%	100%
Credit Cards		$2,908	$1,858
California		19%	21%
Texas		9%	9%
New York		8%	8%
Florida		8%	8%
Illinois		4%	4%
Other		52%	50%
Total		100%	100%

Nonaccrual and Past Due Loans.

Loans accounted for at amortized cost (other than credit card loans) are placed on nonaccrual status when it is probable that the firm will not collect all principal and interest due under the contractual terms, regardless of the delinquency status or if a loan is past due for 90 days or more, unless the loan is both well collateralized and in the process of collection. At that time, all accrued but uncollected interest is reversed against interest income and interest subsequently collected is recognized on a cash basis to the extent the loan balance is deemed collectible. Otherwise, all cash received is used to reduce the outstanding loan balance. A loan is considered past due when a principal or interest payment has not been made according to its contractual terms. Credit card loans are not placed on nonaccrual status and accrue interest until the loan is paid in full or is

charged-off.

In certain circumstances, the firm may modify the original terms of a loan agreement by granting a concession to a borrower experiencing financial difficulty, typically in the form of a modification of loan covenants, but may also include forbearance of interest or principal, payment extensions or interest rate reductions. These modifications, to the extent significant, are considered troubled debt restructurings (TDRs). Loan modifications that extend payment terms for a period of less than 90 days are generally considered insignificant and therefore not reported as TDRs.

In response to the global outbreak of the coronavirus

(COVID-19)

pandemic, the firm adopted the relief issued under the Coronavirus Aid, Relief, and Economic Security (CARES) Act and certain interpretive guidance issued by the U.S. banking agencies that provides for certain modified loans that would otherwise meet the definition of a TDR to not be classified as such. As of September 2020, the firm had $222 million of loans accounted for at amortized cost that were not classified as TDRs as a result of this relief and interpretive guidance.

The table below presents information about past due loans.



$ in millions	30-89 days	90 days or more	Total
As of September 2020
Corporate	$ –	$295	$295
Wealth management	1	34	35
Commercial real estate	17	205	222
Residential real estate	4	16	20
Consumer:
Installment	44	14	58
Credit cards	27	24	51
Other	20	3	23
Total	$113	$591	$704
Total divided by gross loans at amortized cost			0.7%
As of December 2019
Corporate	$197	$ 42	$239
Wealth management	13	15	28
Commercial real estate	54	123	177
Residential real estate	19	18	37
Consumer:
Installment	71	29	100
Credit cards	35	4	39
Other	6	1	7
Total	$395	$232	$627
Total divided by gross loans at amortized cost			0.7%

The table below presents information about nonaccrual loans.



	As of

$ in millions		September 2020	December 2019
Corporate		$2,804	$1,122
Wealth management		47	52
Commercial real estate		446	175
Residential real estate		27	143
Installment		32	38
Other		187	–
Total		$3,543	$1,530
Total divided by gross loans at amortized cost		3.6%	1.7%

In the table above:

•

Nonaccrual loans included $496 million as of September 2020 and $429 million as of December 2019 of loans that were 30 days or more past due.

•

Loans that were 90 days or more past due and still accruing were not material as of both September 2020 and December 2019.

•

Nonaccrual loans included $382 million as of September 2020 and $251 million as of December 2019 of corporate and commercial real estate loans that were modified in a troubled debt restructuring. The firm’s lending commitments related to these loans were not material as of both September 2020 and December 2019. Installment loans that were modified in a troubled debt restructuring were not material as of both September 2020 and December 2019.

Allowance for Credit Losses

The firm’s allowance for credit losses consists of the allowance for losses on loans and lending commitments accounted for at amortized cost. Loans and lending commitments accounted for at fair value or accounted for at the lower of cost or fair value are not subject to an allowance for credit losses.

The firm adopted ASU

No. 2016-13

in January 2020, which replaced the incurred credit loss model for recognizing credit losses with the CECL model. As a result, the firm’s allowance for credit losses effective January 2020 reflects management’s estimate of credit losses over the remaining expected life of such loans and also considers forecasts of future economic conditions. Prior to January 2020, the allowance for credit losses reflected probable incurred credit losses. See Note 3 for further information about the adoption of CECL.

To determine the allowance for credit losses, the firm classifies its loans and lending commitments accounted for at amortized cost into wholesale and consumer portfolios. Prior to January 2020, the firm also had PCI loans which were classified as a separate portfolio. These portfolios represent the level at which the firm has developed and documented its methodology to determine the allowance for credit losses. The allowance for credit losses is measured on a collective basis for loans that exhibit similar risk characteristics using a modeled approach and asset-specific basis for loans that do not share similar risk characteristics.

Under CECL, the allowance for credit losses takes into account the weighted average of a range of forecasts of future economic conditions over the expected life of the loan and lending commitments. The expected life of each loan or lending commitment is determined based on the contractual term adjusted for extension options or demand features. The forecasts include baseline, favorable and adverse economic scenarios over a three-year period. For loans with expected lives beyond three years, the model reverts to historical loss information based on a

non-linear

modeled approach. The forecasted economic scenarios consider a number of factors relevant to the wholesale and consumer portfolios described below. The firm applies judgment in weighing individual scenarios each quarter based on a variety of factors, including the firm’s internally derived economic outlook, market consensus, recent macroeconomic conditions and industry trends.

The allowance for credit losses also includes qualitative components which allow management to reflect the uncertain nature of economic forecasting and account for model imprecision and concentration risk.

Management’s estimate of credit losses entails judgment about loan collectability at the reporting dates, and there are uncertainties inherent in those judgments. The allowance for credit losses is subject to a governance process that involves review and approval by senior management within the firm’s independent risk oversight and control functions. Personnel within the firm’s independent risk oversight and control functions are responsible for forecasting the economic variables that underlie the economic scenarios that are used in the modeling of expected credit losses. While management uses the best information available to determine this estimate, future adjustments to the allowance may be necessary based on, among other things, changes in the economic environment or variances between actual results and the original assumptions used.

The table below presents gross loans and lending commitments accounted for at amortized cost by portfolio.



	As of

	September 2020			December 2019

$ in millions		Loans	Lending Commitments		Loans	Lending Commitments
Wholesale
Corporate		$47,583	$116,362		$41,129	$127,226
Wealth management		21,799	2,278		20,116	2,198
Commercial real estate		15,421	3,089		12,803	3,207
Residential real estate		4,236	1,373		4,965	759
Other		3,111	4,057		3,396	3,029
Consumer
Installment		4,112	4		4,747	12
Credit cards		2,908	18,880		1,858	13,669
PCI		–	–		1,622	–
Total		$99,170	$146,043		$90,636	$150,100

In the table above, wholesale loans included $3.51 billion as of September 2020 and $1.49 billion as of December 2019 of nonaccrual loans for which the allowance for credit losses was measured on an asset-specific basis. The allowance for credit losses on these loans was $570 million as of September 2020 and $207 million as of December 2019. These loans included $838 million as of September 2020 and $754 million as of December 2019 of loans which did not require a reserve as the loan was deemed to be recoverable.

See Note 18 for further information about lending commitments.

The following is a description of the methodology used to calculate the allowance for credit losses:

Wholesale.

The allowance for credit losses for wholesale loans and lending commitments that exhibit similar risk characteristics is measured using a modeled approach. These models determine the probability of default and loss given default based on various risk factors, including internal credit ratings, industry default and loss data, expected life, macroeconomic indicators, the borrower’s capacity to meet its financial obligations, the borrower’s country of risk and industry, loan seniority and collateral type. For lending commitments, the methodology also considers probability of drawdowns or funding. In addition, for loans backed by real estate, risk factors include the

loan-to-value

ratio, debt service ratio and home price index. The most significant inputs to the forecast model for wholesale loans and lending commitments include unemployment rates, GDP, credit spreads, commercial and industrial delinquency rates, short- and long-term interest rates, and oil prices.

The allowance for loan losses for wholesale loans that do not share similar risk characteristics, such as nonaccrual loans or loans in a troubled debt restructuring, is calculated using the present value of expected future cash flows discounted at the loan’s original effective rate, the observable market price of the loan or the fair value of the collateral.

Wholesale loans are

charged-off

against the allowance for loan losses when deemed to be uncollectible.

Consumer.

The allowance for credit losses for consumer loans that exhibit similar risk characteristics is calculated using a modeled approach which classifies consumer loans into pools based on borrower-related and exposure-related characteristics that differentiate a pool’s risk characteristics from other pools. The factors considered in determining a pool are generally consistent with the risk characteristics used for internal credit risk measurement and management and include key metrics, such as FICO credit scores, delinquency status, loan vintage and macroeconomic indicators. The most significant inputs to the forecast model for consumer loans include unemployment rates and delinquency rates. The expected life of revolving credit card loans is determined by modeling expected future draws and the timing and amount of repayments allocated to the funded balance. The firm does not recognize an allowance for credit losses on credit card lending commitments as they are cancellable by the firm.

The allowance for credit losses for consumer loans that do not share similar risk characteristics, such as loans in a troubled debt restructuring, is calculated using the present value of expected future cash flows discounted at the loan’s original effective rate.

Installment loans are

charged-off

when they are 120 days past due. Credit card loans are

charged-off

when they are 180 days past due.

Allowance for Credit Losses Rollforward

The table below presents information about the allowance for credit losses.



$ in millions	Wholesale		Consumer		PCI		Total
Nine Months Ended September 2020
Allowance for loan losses
Beginning balance, reported	$ 879		$ 393		$ 169		$1,441
Impact of CECL adoption	452		444		(169	)	727
Beginning balance, adjusted	1,331		837		–		2,168
Net charge-offs	(501	)	(230	)	–		(731	)
Provision	1,977		525		–		2,502
Other	(225	)	–		–		(225	)
Ending balance	$2,582		$1,132		$ –		$3,714
Allowance ratio	2.8%		16.1%		–		3.7%
Net charge-off ratio	0.7%		4.5%		–		1.0%
Allowance for losses on lending commitments
Beginning balance, reported	$ 361		$ –		$ –		$ 361
Impact of CECL adoption	(48	)	–		–		(48	)
Beginning balance, adjusted	313		–		–		313
Provision	302		–		–		302
Ending balance	$ 615		$ –		$ –		$ 615
Year Ended December 2019
Allowance for loan losses
Beginning balance	$ 658		$ 292		$ 116		$1,066
Net charge-offs	(121	)	(317	)	(52	)	(490	)
Provision	469		418		103		990
Other	(127	)	–		2		(125	)
Ending balance	$ 879		$ 393		$ 169		$1,441
Allowance ratio	1.1%		6.0%		10.4%		1.6%
Net charge-off ratio	0.2%		6.2%		3.2%		0.6%
Allowance for losses on lending commitments
Beginning balance	$ 286		$ –		$ –		$ 286
Provision	75		–		–		75
Ending balance	$ 361		$ –		$ –		$ 361

In the table above:

•

Other represents the reduction to the allowance related to loans and lending commitments transferred to held for sale.

•

The allowance ratio is calculated by dividing the allowance for loan losses by gross loans accounted for at amortized cost.

•

The net

charge-off

ratio is calculated by dividing net charge-offs (annualized for interim periods) by average gross loans accounted for at amortized cost.

Allowance for Credit Losses Rollforward Commentary

Nine Months Ended September 2020.

The allowance for credit losses increased by $2.53 billion during the nine months ended September 2020.

The impact of CECL adoption for wholesale and consumer loans was driven by the fact that the allowance under CECL covers expected credit losses over the full expected life of the loan portfolios and also considers forecasts of expected future economic conditions. The impact of CECL adoption for PCI loans was as a result of the firm electing to apply the fair value option for such loans.

The provision for credit losses for wholesale and consumer loans reflected the continued impact of the

COVID-19

pandemic on economic conditions, which resulted in higher modeled expected losses and lower recoveries. The allowance for loan losses ratio for wholesale loans increased to 2.8% as of September 2020 compared with 1.1% as of December 2019, while the allowance for loan losses ratio for consumer loans increased to 16.1% as of September 2020 compared with 6.0% as of December 2019. The increase in the allowance for loan losses ratios reflected both the impact of adopting the CECL standard, as well as higher provision for credit losses.

When modeling expected credit losses, the firm employs a weighted, multivariate forecast, which includes baseline, adverse and favorable economic scenarios. As of September 2020, the forecasted economic scenarios were most heavily weighted towards the baseline and adverse scenarios. The forecast model incorporated adjustments to reflect the impact of

COVID-19-related

concession programs on delinquency rates and also considered the impact of the CARES Act and other economic support programs provided by national governments.

The table below presents the forecasted range (across the baseline, adverse and favorable scenarios) of the U.S. unemployment and U.S. GDP growth rates used in the forecast model as of September 2020.



	U.S. Unemployment Rate	Growth/(Decline) in U.S. GDP
Forecast for the quarter ended:
December 2020	7.0% to 11.8%	(0.3)% to (8.2)%
June 2021	5.5% to 11.6%	3.5% to (8.0)%
December 2021	4.6% to 8.6%	6.3% to (2.6)%

In the table above:

•

U.S. unemployment rate represents the rate forecasted as of the respective quarter-end.

•

Growth/(decline) in U.S. GDP represents the change in quarterly U.S. GDP relative to the U.S. GDP for the fourth quarter of 2019 (pre-pandemic levels).

•

Recovery of quarterly U.S. GDP to its pre-pandemic levels in the three scenarios ranges from the quarters ending March 2021 to September 2022.

•

While the U.S. unemployment and U.S. GDP growth rates are significant inputs to the forecast model, the model contemplates a variety of other inputs across a range of scenarios to provide a forecast of future economic conditions. Given the complex nature of the forecasting process, no single economic variable can be viewed in isolation and independently of other inputs.

In addition, the provision for credit losses for wholesale loans was impacted by asset-specific provisions and ratings downgrades primarily related to borrowers in the technology, media & communications, diversified industrials, and natural resources industries. Besides the weaker economic outlook related to the

COVID-19

pandemic, the provision for credit losses for consumer loans for the nine months ended September 2020 was also impacted by the continued seasoning of the credit card portfolio.

Net charge-offs for the nine months ended September 2020 for wholesale loans were substantially all related to corporate loans and net charge-offs for consumer loans were primarily related to installment loans.

Year Ended December 2019.

The allowance for credit losses increased by $450 million during the year ended December 2019.

The provision for credit losses for wholesale loans was substantially all related to corporate loans for the year ended December 2019. The provision for credit losses related to consumer loans was primarily related to installment loans for the year ended December 2019.

Net charge-offs for wholesale loans were primarily related to corporate loans for the year ended December 2019. Net charge-offs for consumer loans were substantially all related to installment loans for the year ended December 2019.

Fair Value of Loans by Level

The table below presents loans held for investment accounted for at fair value under the fair value option by level within the fair value hierarchy.



$ in millions	Level 1	Level 2	Level 3	Total
As of September 2020
Loan Type
Corporate	$ –	$ 1,853	$1,003	$ 2,856
Wealth management	–	7,977	60	8,037
Commercial real estate	–	814	1,166	1,980
Residential real estate	–	177	269	446
Other	–	233	329	562
Total	$ –	$11,054	$2,827	$13,881
As of December 2019
Loan Type
Corporate	$ –	$ 2,472	$ 752	$ 3,224
Wealth management	–	7,764	60	7,824
Commercial real estate	–	1,285	591	1,876
Residential real estate	–	571	221	792
Other	–	404	266	670
Total	$ –	$12,496	$1,890	$14,386

The gains as a result of changes in the fair value of loans held for investment for which the fair value option was elected were $64 million for the three months ended September 2020, $102 million for the three months ended September 2019, $49 million for the nine months ended September 2020, and $404 million for the nine months ended September 2019. These gains were included in other principal transactions.

See Note 4 for an overview of the firm’s fair value measurement policies and the valuation techniques and significant inputs used to determine the fair value of loans.

Significant Unobservable Inputs

The table below presents the amount of level 3 loans, and ranges and weighted averages of significant unobservable inputs used to value such loans.



	Level 3 Assets and Range of Significant Unobservable Inputs (Weighted Average) as of

$ in millions		September 2020		December 2019
Corporate
Level 3 assets		$1,003		$752
Yield		2.1% to 24.4% (8.9%	)	1.9% to 26.3% (9.5%	)
Recovery rate		15.0% to 70.0% (37.5%	)	13.5% to 78.0% (44.4%	)
Duration (years)		3.0 to 5.5 (4.2	)	3.7 to 5.8 (3.9	)
Commercial real estate
Level 3 assets		$1,166		$591
Yield		4.5% to 26.3% (11.1%	)	7.0% to 16.0% (9.3%	)
Recovery rate		3.3% to 98.3% (69.0%	)	5.9% to 85.2% (48.6%	)
Duration (years)		0.1 to 4.3 (2.8	)	0.2 to 5.3 (3.5	)
Residential real estate
Level 3 assets		$269		$221
Yield		1.5% to 14.0% (11.9%	)	1.1% to 14.0% (11.5%	)
Duration (years)		0.7 to 3.1 (1.7	)	1.1 to 4.8 (4.0	)
Wealth management and other
Level 3 assets		$389		$326
Yield		9.0% to 18.7% (9.7%	)	3.9% to 16.0% (9.9%	)
Duration (years)		1.0 to 5.2 (3.0	)	1.6 to 6.7 (3.7	)

In the table above:

•

Ranges represent the significant unobservable inputs that were used in the valuation of each type of loan.

•

Weighted averages are calculated by weighting each input by the relative fair value of the loan.

•

The ranges and weighted averages of these inputs are not representative of the appropriate inputs to use when calculating the fair value of any one loan. For example, the highest yield for residential real estate loans is appropriate for valuing a specific residential real estate loan but may not be appropriate for valuing any other residential real estate loan. Accordingly, the ranges of inputs do not represent uncertainty in, or possible ranges of, fair value measurements of level 3 loans.

•

Increases in yield or duration used in the valuation of level 3 loans would have resulted in a lower fair value measurement, while increases in recovery rate would have resulted in a higher fair value measurement as of both September 2020 and December 2019. Due to the distinctive nature of each level 3 loan, the interrelationship of inputs is not necessarily uniform within each product type.

•

Loans are valued using discounted cash flows.

Level 3 Rollforward

The table below presents a summary of the changes in fair value for level 3 loans.



	Three Months Ended September					Nine Months Ended September

$ in millions		2020		2019			2020		2019
Beginning balance		$2,659		$2,107			$1,890		$1,990
Net realized gains/(losses)		23		19			60		55
Net unrealized gains/(losses)		76		(10	)		34		34
Purchases		181		55			557		134
Sales		(17	)	(71	)		(31	)	(24	)
Settlements		(221	)	(242	)		(567	)	(600	)
Transfers into level 3		166		126			928		477
Transfers out of level 3		(40	)	(46	)		(44	)	(128	)
Ending balance		$2,827		$1,938			$2,827		$1,938

In the table above:

•

Changes in fair value are presented for loans that are classified in level 3 as of the end of the period.

•

Net unrealized gains/(losses) relates to loans that were still held at

period-end.

•

Purchases includes originations and secondary purchases.

•

Transfers between levels of the fair value hierarchy are reported at the beginning of the reporting period in which they occur. If a loan was transferred to level 3 during a reporting period, its entire gain or loss for the period is classified in level 3.

The table below presents information, by loan type, for loans included in the summary table above.



	Three Months Ended September					Nine Months Ended September

$ in millions		2020		2019			2020		2019
Corporate
Beginning balance		$ 939		$ 873			$ 752		$ 659
Net realized gains/(losses)		7		6			14		7
Net unrealized gains/(losses)		1		(23	)		(5	)	(29	)
Purchases		132		48			184		111
Sales		(9	)	(67	)		(18	)	(14	)
Settlements		(58	)	(124	)		(110	)	(220	)
Transfers into level 3		23		51			230		248
Transfers out of level 3		(32	)	(42	)		(44	)	(40	)
Ending balance		$1,003		$ 722			$1,003		$ 722
Commercial real estate
Beginning balance		$1,084		$ 642			$ 591		$ 677
Net realized gains/(losses)		11		7			38		18
Net unrealized gains/(losses)		43		(15	)		4		(2	)
Purchases		40		2			323		12
Sales		(5	)	(3	)		(10	)	(6	)
Settlements		(120	)	(68	)		(278	)	(200	)
Transfers into level 3		121		34			498		100
Transfers out of level 3		(8	)	(1	)		–		(1	)
Ending balance		$1,166		$ 598			$1,166		$ 598
Residential real estate
Beginning balance		$ 268		$ 174			$ 221		$ 290
Net realized gains/(losses)		3		2			7		11
Net unrealized gains/(losses)		11		8			8		21
Purchases		1		5			43		11
Sales		(2	)	(1	)		(2	)	(4	)
Settlements		(22	)	(19	)		(57	)	(76	)
Transfers into level 3		10		41			49		41
Transfers out of level 3		–		(3	)		–		(87	)
Ending balance		$ 269		$ 207			$ 269		$ 207
Wealth management and other
Beginning balance		$ 368		$ 418			$ 326		$ 364
Net realized gains/(losses)		2		4			1		19
Net unrealized gains/(losses)		21		20			27		44
Purchases		8		–			7		–
Sales		(1	)	–			(1	)	–
Settlements		(21	)	(31	)		(122	)	(104	)
Transfers into level 3		12		–			151		88
Ending balance		$ 389		$ 411			$ 389		$ 411

Level 3 Rollforward Commentary

Three Months Ended September 2020.

The net realized and unrealized gains on level 3 loans of $99 million (reflecting $23 million of net realized gains and $76 million of net unrealized gains) for the three months ended September 2020 included gains of $86 million reported in other principal transactions and $13 million reported in interest income.

The drivers of the net unrealized gains on level 3 loans for the three months ended September 2020 were not material.

Transfers into level 3 loans during the three months ended September 2020 primarily reflected transfers of certain loans backed by commercial real estate from level 2, principally due to certain unobservable inputs becoming significant to the valuation of these instruments

and transfers of certain other loans backed by commercial real estate from level 2, principally due to reduced price transparency as a result of a lack of market evidence, including fewer market transactions in these instruments.

The drivers of transfers out of level 3 loans during the three months ended September 2020 were not material.

Nine Months Ended September 2020.

The net realized and unrealized gains on level 3 loans of $94 million (reflecting $60 million of net realized gains and $34 million of net unrealized gains) for the nine months ended September 2020 included gains of $70 million reported in other principal transactions and $24 million reported in interest income.

The drivers of the net unrealized gains on level 3 loans for the nine months ended September 2020 were not material.

Transfers into level 3 loans during the nine months ended September 2020 primarily reflected transfers of certain loans backed by commercial real estate, corporate loans and wealth management and other loans from level 2, principally due to reduced price transparency as a result of a lack of market evidence, including fewer market transactions in these instruments.

The drivers of transfers out of level 3 loans during the nine months ended September 2020 were not material.

Three Months Ended September 2019.

The net realized and unrealized gains on level 3 loans of $9 million (reflecting $19 million of net realized gains and $10 million of net unrealized losses) for the three months ended September 2019 included gains/(losses) of $(7) million reported in other principal transactions and $16 million reported in interest income.

The drivers of the net unrealized gains on level 3 loans for the three months ended September 2019 were not material.

The drivers of both transfers into level 3 loans and transfers out of level 3 loans during the three months ended September 2019 were not material.

Nine Months Ended September 2019.

The net realized and unrealized gains on level 3 loans of $89 million (reflecting $55 million of net realized gains and $34 million of net unrealized gains) for the nine months ended September 2019 included gains of $56 million reported in other principal transactions and $33 million reported in interest income.

The drivers of the net unrealized gains on level 3 loans for the nine months ended September 2019 were not material.

Transfers into level 3 loans during the nine months ended September 2019 primarily reflected transfers of certain corporate, commercial real estate, and wealth management and other loans from level 2, principally due to reduced price transparency as a result of a lack of market evidence, including fewer market transactions in these instruments.

Transfers out of level 3 loans during the nine months ended September 2019 primarily reflected transfers of certain loans backed by residential real estate to level 2, principally due to increased price transparency as a result of market evidence, including market transactions in these instruments.

Estimated Fair Value

The table below presents the estimated fair value of loans that are not accounted for at fair value and in what level of the fair value hierarchy they would have been classified if they had been included in the firm’s fair value hierarchy.



	Carrying Value		Estimated Fair Value
$ in millions	Carrying Value			Level 2	Level 3	Total
As of September 2020
Amortized cost		$95,456		$43,823	$52,792	$96,615
Held for sale		$ 2,506		$ 1,438	$ 1,075	$ 2,513
As of December 2019
Amortized cost		$89,195		$52,091	$37,095	$89,186
Held for sale		$ 5,323		$ 4,157	$ 1,252	$ 5,409