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Allowance for Credit Losses and Reserve for Unfunded Lending Commitments
 6 Months Ended
Jun. 30, 2023
Accounts, Notes, Loans and Financing Receivable, Gross, Allowance, and Net [Abstract]  
Allowance for Credit Losses and Reserve for Unfunded Lending Commitment
NOTE 4—ALLOWANCE FOR CREDIT LOSSES AND RESERVE FOR UNFUNDED LENDING COMMITMENTS
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. Significant judgment is applied in our estimation of lifetime credit losses. 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. Our estimate of expected credit losses includes a reasonable and supportable forecast period of one year and then reverts over a one-year period to historical losses at each relevant loss component of the estimate. 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.
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.
See “Part II—Item 8. Financial Statements and Supplementary Data—Note 1—Summary of Significant Accounting Policies” in our 2022 Form 10-K for further discussion of the methodology and policy for determining our allowance for credit losses for each of our loan portfolio segments, as well as information on our reserve for unfunded lending commitments.
Allowance for Credit Losses and Reserve for Unfunded Lending Commitments Activity
The table below summarizes changes in the allowance for credit losses and reserve for unfunded lending commitments by portfolio segment for the three and six months ended June 30, 2023 and 2022. Our allowance for credit losses increased by $1.4 billion to $14.6 billion as of June 30, 2023 from December 31, 2022.
Table 4.1: Allowance for Credit Losses and Reserve for Unfunded Lending Commitments Activity
Three Months Ended June 30, 2023
(Dollars in millions)Credit CardConsumer BankingCommercial BankingTotal
Allowance for credit losses:
Balance as of March 31, 2023$10,410 $2,205 $1,703 $14,318 
Charge-offs
(1,868)(526)(378)(2,772)
Recoveries(1)
340 247 0 587 
Net charge-offs(1,528)(279)(378)(2,185)
Provision for credit losses2,084 259 160 2,503 
Allowance build (release) for credit losses556 (20)(218)318 
Other changes(2)
10 0 0 10 
Balance as of June 30, 202310,976 2,185 1,485 14,646 
Reserve for unfunded lending commitments:
Balance as of March 31, 20230 0 211 211 
Provision (benefit) for losses on unfunded lending commitments0 0 (14)(14)
Balance as of June 30, 20230 0 197 197 
Combined allowance and reserve as of June 30, 2023$10,976 $2,185 $1,682 $14,843 
Six Months Ended June 30, 2023
(Dollars in millions)Credit CardConsumer BankingCommercial BankingTotal
Allowance for credit losses:
Balance as of December 31, 2022$9,545 $2,237 $1,458 $13,240 
Cumulative effects of accounting standards adoption(3)
(63)0 0 (63)
Balance as of January 1, 20239,482 2,237 1,458 13,177 
Charge-offs
(3,556)(1,057)(402)(5,015)
Recoveries(1)
659 471 3 1,133 
Net charge-offs(2,897)(586)(399)(3,882)
Provision for credit losses4,345 534 426 5,305 
Allowance build (release) for credit losses1,448 (52)27 1,423 
Other changes(2)
46 0 0 46 
Balance as of June 30, 202310,976 2,185 1,485 14,646 
Reserve for unfunded lending commitments:
Balance as of December 31, 20220 0 218 218 
Provision (benefit) for losses on unfunded lending commitments0 0 (21)(21)
Balance as of June 30, 20230 0 197 197 
Combined allowance and reserve as of June 30, 2023$10,976 $2,185 $1,682 $14,843 
Three Months Ended June 30, 2022
(Dollars in millions)Credit CardConsumer BankingCommercial BankingTotal
Allowance for credit losses:
Balance as of March 31, 2022$8,280 $1,902 $1,126 $11,308 
Charge-offs(1,009)(331)(43)(1,383)
Recoveries(1)
331 195 12 538 
Net charge-offs(678)(136)(31)(845)
Provision for credit losses581 281 183 1,045 
Allowance build (release) for credit losses(97)145 152 200 
Other changes(2)
(17)0 0 (17)
Balance as of June 30, 20228,166 2,047 1,278 11,491 
Reserve for unfunded lending commitments:
Balance as of March 31, 20230 0 200 200 
Provision for losses on unfunded lending commitments0 0 39 39 
Balance as of June 30, 20220 0 239 239 
Combined allowance and reserve as of June 30, 2022$8,166 $2,047 $1,517 $11,730 
Six Months Ended June 30, 2022
(Dollars in millions)Credit CardConsumer BankingCommercial BankingTotal
Allowance for credit losses:
Balance as of December 31, 2021$8,345 $1,918 $1,167 $11,430 
Charge-offs
(1,964)(680)(60)(2,704)
Recoveries(1)
679 398 15 1,092 
Net charge-offs(1,285)(282)(45)(1,612)
Provision for credit losses1,126 411 156 1,693 
Allowance build (release) for credit losses(159)129 111 81 
Other changes(2)
(20)0 0 (20)
Balance as of June 30, 20228,166 2,047 1,278 11,491 
Reserve for unfunded lending commitments:
Balance as of December 31, 20210 0 165 165 
Provision for losses on unfunded lending commitments0 0 74 74 
Balance as of June 30, 20220 0 239 239 
Combined allowance and reserve as of June 30, 2022$8,166 $2,047 $1,517 $11,730 
__________
(1)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.
(2)Primarily represents the initial allowance for purchased credit-deteriorated loans and foreign currency translation adjustments. The initial allowance of purchased credit-deteriorated loans was $32 million for the six months ended June 30, 2023. There were no purchased credit-deteriorated loans acquired in the three months ended June 30, 2023.
(3)Impact from the adoption of ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures as of January 1, 2023.
On January 1, 2023, we adopted ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures using the modified retrospective approach, which consists of implementing disclosure requirements prospectively as of the adoption date. The ASU requires public entities to disclose current-period gross charge-offs by year of origination for financing receivables and net investments in leases.
We charge off loans when we determine that the loan is uncollectible. The amortized cost basis, excluding accrued interest, is charged off as a reduction to the allowance for credit losses in accordance with our accounting policies. For more information, see “Note 1—Summary of Significant Accounting Policies.”
Expected recoveries of amounts previously charged off or expected to be charged off are recognized within the allowance, with a corresponding reduction to our provision for credit losses.
The table below presents gross charge-offs for loans held for investment by vintage year during the six months ended June 30, 2023.
Table 4.2: Gross Charge-Offs by Vintage Year
Six Months Ended June 30, 2023
Term Loans by Vintage Year
(Dollars in millions)20232022202120202019PriorTotal Term LoansRevolving LoansRevolving Loans Converted to TermTotal
Credit Card
Domestic credit cardN/AN/AN/AN/AN/AN/AN/A$3,310 $35 $3,345 
International card businessN/AN/AN/AN/AN/AN/AN/A205 6 211 
Total credit cardN/AN/AN/AN/AN/AN/AN/A3,515 41 3,556 
Consumer Banking
Auto$13 $344 $341 $167 $96 $63 $1,024 0 0 1,024 
Retail banking0 0 1 0 0 0 1 32 0 33 
Total consumer banking13 344 342 167 96 63 1,025 32 0 1,057 
Commercial Banking
Commercial and multifamily real estate0 29 46 22 98 185 380 0 0 380 
Commercial and industrial2 2 0 0 0 3 7 15 0 22 
Total commercial banking2 31 46 22 98 188 387 15 0 402 
Total$15 $375 $388 $189 $194 $251 $1,412 $3,562 $41 $5,015 
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 in net charge-offs and the provision for credit losses. See “Part II—Item 8. Financial Statements and Supplementary Data—Note 1—Summary of Significant Accounting Policies” in our 2022 Form 10-K for further discussion of our credit card partnership agreements.
The table below summarizes the changes in the estimated reimbursements from these partners for the three and six months ended June 30, 2023 and 2022.
Table 4.3: Summary of Credit Card Partnership Loss Sharing Arrangements Impacts
Three Months Ended June 30,
(Dollars in millions)20232022
Estimated reimbursements from partners, beginning of period$1,841 $1,366 
Amounts due from partners for charged off loans(231)(119)
Change in estimated partner reimbursements that decreased provision for credit losses298 55 
Estimated reimbursements from partners, end of period$1,908 $1,302 
Six Months Ended June 30,
(Dollars in millions)20232022
Estimated reimbursements from partners, beginning of period$1,558 $1,450 
Amounts due from partners for charged off loans(432)(226)
Change in estimated partner reimbursements that decreased provision for credit losses(1)
782 78 
Estimated reimbursements from partners, end of period$1,908 $1,302 
__________
(1)Includes adjustments for purchased credit-deteriorated (“PCD”) loans acquired in the first quarter of 2023.