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Allowance for Credit Losses and Reserve for Unfunded Lending Commitments
 9 Months Ended
Sep. 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 nine months ended September 30, 2023 and 2022. Our allowance for credit losses increased by $1.7 billion to $15.0 billion as of September 30, 2023 from December 31, 2022.
Table 4.1: Allowance for Credit Losses and Reserve for Unfunded Lending Commitments Activity
Three Months Ended September 30, 2023
(Dollars in millions)Credit CardConsumer BankingCommercial BankingTotal
Allowance for credit losses:
Balance as of June 30, 2023$10,976 $2,185 $1,485 $14,646 
Charge-offs
(1,925)(596)(60)(2,581)
Recoveries(1)
333 247 2 582 
Net charge-offs(1,592)(349)(58)(1,999)
Provision for credit losses1,953 213 155 2,321 
Allowance build (release) for credit losses361 (136)97 322 
Other changes(2)
(13)0 0 (13)
Balance as of September 30, 202311,324 2,049 1,582 14,955 
Reserve for unfunded lending commitments:
Balance as of June 30, 20230 0 197 197 
Provision (benefit) for losses on unfunded lending commitments0 0 (39)(39)
Balance as of September 30, 20230 0 158 158 
Combined allowance and reserve as of September 30, 2023$11,324 $2,049 $1,740 $15,113 
Nine Months Ended September 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
(5,481)(1,653)(462)(7,596)
Recoveries(1)
992 718 5 1,715 
Net charge-offs(4,489)(935)(457)(5,881)
Provision for credit losses6,298 747 581 7,626 
Allowance build (release) for credit losses1,809 (188)124 1,745 
Other changes(2)
33 0 0 33 
Balance as of September 30, 202311,324 2,049 1,582 14,955 
Reserve for unfunded lending commitments:
Balance as of December 31, 20220 0 218 218 
Provision (benefit) for losses on unfunded lending commitments0 0 (60)(60)
Balance as of September 30, 20230 0 158 158 
Combined allowance and reserve as of September 30, 2023$11,324 $2,049 $1,740 $15,113 
Three Months Ended September 30, 2022
(Dollars in millions)Credit CardConsumer BankingCommercial BankingTotal
Allowance for credit losses:
Balance as of June 30, 2022$8,166 $2,047 $1,278 $11,491 
Charge-offs(1,047)(410)(13)(1,470)
Recoveries(1)
352 186 1 539 
Net charge-offs(695)(224)(12)(931)
Provision for credit losses
1,261 285 119 1,665 
Allowance build for credit losses
566 61 107 734 
Other changes(2)
(16)0 0 (16)
Balance as of September 30, 20228,716 2,108 1,385 12,209 
Reserve for unfunded lending commitments:
Balance as of June 30, 20220 0 239 239 
Provision for losses on unfunded lending commitments0 0 4 4 
Balance as of September 30, 20220 0 243 243 
Combined allowance and reserve as of September 30, 2022$8,716 $2,108 $1,628 $12,452 
Nine Months Ended September 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(3,011)(1,090)(73)(4,174)
Recoveries(1)
1,031 584 16 1,631 
Net charge-offs(1,980)(506)(57)(2,543)
Provision for credit losses
2,387 696 275 3,358 
Allowance build for credit losses
407 190 218 815 
Other changes(2)
(36)0 0 (36)
Balance as of September 30, 20228,716 2,108 1,385 12,209 
Reserve for unfunded lending commitments:
Balance as of December 31, 20210 0 165 165 
Provision for losses on unfunded lending commitments0 0 78 78 
Balance as of September 30, 20220 0 243 243 
Combined allowance and reserve as of September 30, 2022$8,716 $2,108 $1,628 $12,452 
__________
(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 (“PCD”) loans and foreign currency translation adjustments. The initial allowance of purchased credit-deteriorated loans was $0 million and $32 million for the three and nine months ended September 30, 2023, respectively, and $10 million for both the three and nine months ended September 30, 2022.
(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 Accounting Standards Update (“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 nine months ended September 30, 2023.
Table 4.2: Gross Charge-Offs by Vintage Year
Nine Months Ended September 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$5,100 $56 $5,156 
International card businessN/AN/AN/AN/AN/AN/AN/A315 10 325 
Total credit cardN/AN/AN/AN/AN/AN/AN/A5,415 66 5,481 
Consumer Banking
Auto$52 $551 $523 $246 $141 $89 $1,602 0 0 1,602 
Retail banking0 0 1 0 0 1 2 49 0 51 
Total consumer banking52 551 524 246 141 90 1,604 49 0 1,653 
Commercial Banking
Commercial and multifamily real estate0 29 47 22 105 201 404 0 0 404 
Commercial and industrial2 9 0 0 29 3 43 15 0 58 
Total commercial banking2 38 47 22 134 204 447 15 0 462 
Total$54 $589 $571 $268 $275 $294 $2,051 $5,479 $66 $7,596 
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 nine months ended September 30, 2023 and 2022.
Table 4.3: Summary of Credit Card Partnership Loss Sharing Arrangements Impacts
Three Months Ended September 30,
(Dollars in millions)20232022
Estimated reimbursements from partners, beginning of period$1,908 $1,302 
Amounts due from partners for charged off loans(249)(127)
Change in estimated partner reimbursements that decreased provision for credit losses319 237 
Estimated reimbursements from partners, end of period$1,978 $1,412 
Nine Months Ended September 30,
(Dollars in millions)20232022
Estimated reimbursements from partners, beginning of period$1,558 $1,450 
Amounts due from partners for charged off loans(681)(353)
Change in estimated partner reimbursements that decreased provision for credit losses(1)
1,101 315 
Estimated reimbursements from partners, end of period$1,978 $1,412 
__________
(1)Includes adjustments for purchased credit-deteriorated (“PCD”) loans acquired in the first quarter of 2023.