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Allowance for Credit Losses and Reserve for Unfunded Lending Commitments
 9 Months Ended
Sep. 30, 2020
Accounts, Notes, Loans and Financing Receivable, Gross, Allowance, and Net [Abstract]  
Allowance for Credit Losses
NOTE 4—ALLOWANCE FOR CREDIT LOSSES AND RESERVE FOR UNFUNDED LENDING COMMITMENTS
In the first quarter of 2020, we adopted the CECL standard. Accordingly, our disclosures below reflect these adoption changes. Prior period presentation was not modified to conform to the current period presentation. See “Note 1—Summary of Significant Accounting Policies” for additional information. Concurrent with this adoption, we reclassified our finance charge and fee reserve to our allowance for credit losses, with a corresponding increase to credit card loans held for investment.
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. 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. 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. Significant judgment is applied in our estimation of lifetime 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.
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, 2020 and 2019. The allowance balance as of September 30, 2020 reflects the cumulative effects from adoption of the CECL standard and the change to include finance charge and fee reserve in the allowance for credit losses. The reserve for unfunded lending commitments balance as of September 30, 2020 also reflects the cumulative effects from adoption of the CECL standard, including the component of loss sharing agreements with the government-sponsored enterprises (“GSEs”) on multifamily commercial real estate loans that are within the scope of the CECL standard.
When developing an estimate of expected credit losses, we use both quantitative and qualitative methods in considering all available information relevant to assessing collectability. Management will consider and may make adjustments for qualitative factors, which represent management’s judgment of the imprecision and risks inherent in the processes and assumptions used in establishing the allowance for credit losses. Our allowance for credit losses increased by $8.9 billion to $16.1 billion as of September 30, 2020 from December 31, 2019, primarily driven by the allowance builds in the first and second quarters of 2020 from expectations of economic worsening and uncertainty as a result of the COVID-19 pandemic as well as the adoption of the CECL standard.
Table 4.1: Allowance for Credit Losses and Reserve for Unfunded Lending Commitments Activity
Three Months Ended September 30, 2020
(Dollars in millions)Credit CardConsumer BankingCommercial BankingTotal
Allowance for credit losses:
Balance as of June 30, 2020$12,091 $2,838 $1,903 $16,832 
Charge-offs
(1,296)(295)(88)(1,679)
Recoveries(1)
353 247 6 606 
Net charge-offs(943)(48)(82)(1,073)
Provision (benefit) for credit losses450 (43)(51)356 
Allowance release for credit losses(2)
(493)(91)(133)(717)
Other changes(3)
14 0 0 14 
Balance as of September 30, 202011,612 2,747 1,770 16,129 
Reserve for unfunded lending commitments:
Balance as of June 30, 20200 0 218 218 
Benefit for losses on unfunded lending commitments0 0 (23)(23)
Balance as of September 30, 20200 0 195 195 
Combined allowance and reserve as of September 30, 2020$11,612 $2,747 $1,965 $16,324 

Nine Months Ended September 30, 2020
(Dollars in millions)Credit CardConsumer BankingCommercial BankingTotal
Allowance for credit losses:
Balance as of December 31, 2019$5,395 $1,038 $775 $7,208 
Cumulative effects from adoption of the CECL standard2,241 502 102 2,845 
Finance charge and fee reserve reclassification(4)
462 0 0 462 
Balance as of January 1, 20208,098 1,540 877 10,515 
Charge-offs
(4,757)(1,207)(303)(6,267)
Recoveries(1)
1,167 721 10 1,898 
Net charge-offs(3,590)(486)(293)(4,369)
Provision for credit losses7,096 1,693 1,186 9,975 
Allowance build for credit losses(2)
3,506 1,207 893 5,606 
Other changes(3)
8 0 0 8 
Balance as of September 30, 202011,612 2,747 1,770 16,129 
Reserve for unfunded lending commitments:
Balance as of December 31, 20190 5 130 135 
Cumulative effects from adoption of the CECL standard0 (5)42 37 
Balance as of January 1, 20200 0 172 172 
Provision for losses on unfunded lending commitments0 0 23 23 
Balance as of September 30, 20200 0 195 195 
Combined allowance and reserve as of September 30, 2020$11,612 $2,747 $1,965 $16,324 
Three Months Ended September 30, 2019
(Dollars in millions)Credit CardConsumer BankingCommercial BankingTotal
Allowance for loan and lease losses:
Balance as of June 30, 2019$5,342 $1,055 $736 $7,133 
Charge-offs
(1,531)(489)(66)(2,086)
Recoveries(1)
380 238 6 624 
Net charge-offs(1,151)(251)(60)(1,462)
Provision for loan and lease losses1,087 203 84 1,374 
Allowance build (release) for loan and lease losses(64)(48)24 (88)
Other changes(3)
(8)0 0 (8)
Balance as of September 30, 20195,270 1,007 760 7,037 
Reserve for unfunded lending commitments:
Balance as of June 30, 20190 4 140 144 
Provision for losses on unfunded lending commitments0 0 9 9 
Balance as of September 30, 20190 4 149 153 
Combined allowance and reserve as of September 30, 2019$5,270 $1,011 $909 $7,190 

Nine Months Ended September 30, 2019
(Dollars in millions)Credit CardConsumer BankingCommercial BankingTotal
Allowance for loan and lease losses:
Balance as of December 31, 2018$5,535 $1,048 $637 $7,220 
Charge-offs
(5,024)(1,383)(109)(6,516)
Recoveries(1)
1,189 739 19 1,947 
Net charge-offs(3,835)(644)(90)(4,569)
Provision for loan and lease losses3,571 603 213 4,387 
Allowance build (release) for loan and lease losses(264)(41)123 (182)
Other changes(3)
(1)0 0 (1)
Balance as of September 30, 20195,270 1,007 760 7,037 
Reserve for unfunded lending commitments:
Balance as of December 31, 20180 4 118 122 
Provision for losses on unfunded lending commitments0 0 31 31 
Balance as of September 30, 20190 4 149 153 
Combined allowance and reserve as of September 30, 2019$5,270 $1,011 $909 $7,190 
__________
(1)The amount and timing of recoveries is 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)Includes an allowance release of $327 million for a partnership credit card loan portfolio transferred to held for sale in the third quarter of 2020.
(3)Represents foreign currency translation adjustments.
(4)Concurrent with our adoption of the CECL standard in the first quarter of 2020, we reclassified our finance charge and fee reserve to our allowance for credit losses, with a corresponding increase to credit card loans held for investment.
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 to net charge-offs and provision for credit losses. See “Note 1—Summary of Significant Accounting Policies” in our 2019 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, 2020 and 2019.
Table 4.2: Summary of Credit Card Partnership Loss Sharing Arrangements Impacts
Three Months Ended September 30,
(Dollars in millions)20202019
Estimated reimbursements from partners, beginning of period$2,433 $414 
Amounts due from partners which reduced net charge-offs(212)(100)
Amounts estimated to be charged to partners which reduced provision for credit losses121 86 
Estimated reimbursements from partners, end of period$2,342 $400 

Nine Months Ended September 30,
(Dollars in millions)20202019
Estimated reimbursements from partners, beginning of period(1)
$2,166 $379 
Amounts due from partners which reduced net charge-offs(807)(313)
Amounts estimated to be charged to partners which reduced provision for credit losses983 334 
Estimated reimbursements from partners, end of period$2,342 $400 
__________
(1)Includes effects from adoption of the CECL standard in the first quarter of 2020.