NOTE 5—ALLOWANCE FOR LOAN AND LEASE LOSSES

Our allowance for loan and lease losses represents management’s best estimate of incurred loan and lease losses inherent in our loans held for investment portfolio as of each balance sheet date. In addition to the allowance for loan and lease losses, we also estimate probable losses related to unfunded lending commitments, such as letters of credit, financial guarantees, and binding unfunded loan commitments. The provision for unfunded lending commitments is included in the provision for credit losses on our consolidated statements of income and the related reserve for unfunded lending commitments is included in other liabilities on our consolidated balance sheets.

See “Note 1—Summary of Significant Accounting Policies” of our 2013 Form 10-K for further discussion on the methodology and policy for determining our allowance for loan and lease losses for each of our loan portfolio segments.

Allowance for Loan and Lease Losses Activity

The allowance for loan and lease losses is increased through the provision for credit losses and reduced by net charge-offs. The provision for credit losses, which is charged to earnings, reflects credit losses we believe have been incurred and will eventually be reflected over time in our net charge-offs. Charge-offs of uncollectible amounts are deducted from the allowance for loan and lease losses and subsequent recoveries are included. The table below summarizes changes in the allowance for loan and lease losses, by portfolio segment, for the three and nine months ended September 30, 2014 and 2013:

Table 5.1: Allowance for Loan and Lease Losses



	Three Months Ended September 30, 2014
	Credit Card			Consumer Banking												Commercial Banking			Other⁽¹⁾			Total Allowance			Unfunded Lending Commitments Reserve		Combined Allowance & Unfunded Reserve
(Dollars in millions)	Credit Card			Auto			Home Loan			Retail Banking			Total Consumer Banking			Commercial Banking			Other⁽¹⁾			Total Allowance			Unfunded Lending Commitments Reserve		Combined Allowance & Unfunded Reserve
Balance as of June 30, 2014	$	2,858		$	642		$	67		$	56		$	765		$	368		$	7		$	3,998		$	102	$	4,100
Provision for credit losses	787			194			(9		)	13			198			4			(1		)	988			5		993
Charge-offs	(885		)	(245		)	(4		)	(15		)	(264		)	(4		)	(2		)	(1,155		)	0		(1,155		)
Recoveries	313			69			2			3			74			10			2			399			0		399
Net charge-offs	(572		)	(176		)	(2		)	(12		)	(190		)	6			0			(756		)	0		(756		)
Other changes⁽²⁾	(16		)	0			(1		)	0			(1		)	0			(1		)	(18		)	0		(18		)
Balance as of September 30, 2014	$	3,057		$	660		$	55		$	57		$	772		$	378		$	5		$	4,212		$	107	$	4,319



	Nine Months Ended September 30, 2014
	Credit Card			Consumer Banking												Commercial Banking			Other⁽¹⁾			Total Allowance			Unfunded Lending Commitments Reserve		Combined Allowance & Unfunded Reserve
(Dollars in millions)	Credit Card			Auto			Home Loan			Retail Banking			Total Consumer Banking			Commercial Banking			Other⁽¹⁾			Total Allowance			Unfunded Lending Commitments Reserve		Combined Allowance & Unfunded Reserve
Balance as of December 31, 2013	$	3,214		$	606		$	83		$	63		$	752		$	338		$	11		$	4,315		$	87	$	4,402
Provision for credit losses	1,894			475			(15		)	21			481			41			(4		)	2,412			20		2,432
Charge-offs	(2,975		)	(633		)	(23		)	(44		)	(700		)	(19		)	(8		)	(3,702		)	0		(3,702		)
Recoveries	938			212			11			17			240			18			7			1,203			0		1,203
Net charge-offs	(2,037		)	(421		)	(12		)	(27		)	(460		)	(1		)	(1		)	(2,499		)	0		(2,499		)
Other changes⁽²⁾	(14		)	0			(1		)	0			(1		)	0			(1		)	(16		)	0		(16		)
Balance as of September 30, 2014	$	3,057		$	660		$	55		$	57		$	772		$	378		$	5		$	4,212		$	107	$	4,319



	Three Months Ended September 30, 2013
	Credit Card			Consumer Banking												Commercial Banking			Other⁽¹⁾			Total Allowance			Unfunded Lending Commitments Reserve		Combined Allowance & Unfunded Reserve
(Dollars in millions)	Credit Card			Auto			Home Loan			Retail Banking			Total Consumer Banking			Commercial Banking			Other⁽¹⁾			Total Allowance			Unfunded Lending Commitments Reserve		Combined Allowance & Unfunded Reserve
Balance as of June 30, 2013	$	3,349		$	537		$	79		$	86		$	702		$	338		$	18		$	4,407		$	69	$	4,476
Provision for credit losses	617			200			5			(3		)	202			11			(1		)	829			20		849
Charge-offs	(1,036		)	(210		)	(6		)	(18		)	(234		)	(17		)	(7		)	(1,294		)	0		(1,294		)
Recoveries	302			58			1			5			64			9			2			377			0		377
Net charge-offs	(734		)	(152		)	(5		)	(13		)	(170		)	(8		)	(5		)	(917		)	0		(917		)
Other change⁽²⁾	13			0			(1		)	0			(1		)	0			2			14			0		14
Balance as of September 30, 2013	$	3,245		$	585		$	78		$	70		$	733		$	341		$	14		$	4,333		$	89	$	4,422



	Nine Months Ended September 30, 2013
	Credit Card			Consumer Banking												Commercial Banking			Other⁽¹⁾			Total Allowance			Unfunded Lending Commitments Reserve		Combined Allowance & Unfunded Reserve
(Dollars in millions)	Credit Card			Auto			Home Loan			Retail Banking			Total Consumer Banking			Commercial Banking			Other⁽¹⁾			Total Allowance			Unfunded Lending Commitments Reserve		Combined Allowance & Unfunded Reserve
Balance as of December 31, 2012	$	3,979		$	486		$	113		$	112		$	711		$	433		$	33		$	5,156		$	35	$	5,191
Provision for credit losses	2,073			464			(22		)	2			444			(73		)	(2		)	2,442			54		2,496
Charge-offs	(3,479		)	(545		)	(18		)	(62		)	(625		)	(43		)	(22		)	(4,169		)	0		(4,169		)
Recoveries	973			179			5			18			202			24			5			1,204			0		1,204
Net charge-offs	(2,506		)	(366		)	(13		)	(44		)	(423		)	(19		)	(17		)	(2,965		)	0		(2,965		)
Other changes⁽²⁾	(301		)	1			0			0			1			0			0			(300		)	0		(300		)
Balance as of September 30, 2013	$	3,245		$	585		$	78		$	70		$	733		$	341		$	14		$	4,333		$	89	$	4,422

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⁽¹⁾	Other consists of our discontinued GreenPoint mortgage operations loan portfolio and our community redevelopment loan portfolio.


⁽²⁾	Primarily represents foreign currency translation adjustments and the net impact of loan transfers and sales. In the first quarter of 2013, the allowance for loan and lease losses was reduced by $289 million attributable to the transfer of the Best Buy loan portfolio from loans held for investment to loans held for sale, which was subsequently sold in the third quarter of 2013.

Components of Allowance for Loan and Lease Losses by Impairment Methodology

The table below presents the components of our allowance for loan and lease losses, by portfolio segment and impairment methodology, and the recorded investment of the related loans as of September 30, 2014 and December 31, 2013:

Table 5.2: Components of Allowance for Loan and Lease Losses by Impairment Methodology



	September 30, 2014
				Consumer Banking
(Dollars in millions)	Credit Card			Auto			Home Loan			Retail Banking			Total Consumer Banking			Commercial Banking			Other			Total
Allowance for loan and lease losses by impairment methodology:
Collectively evaluated⁽¹⁾	$	2,835		$	642		$	17		$	50		$	709		$	346		$	5		$	3,895
Asset-specific⁽²⁾	222			18			16			6			40			32			0			294
Acquired Loans⁽³⁾	0			0			22			1			23			0			0			23
Total allowance for loan and lease losses	$	3,057		$	660		$	55		$	57		$	772		$	378		$	5		$	4,212
Loans held for investment by impairment methodology:
Collectively evaluated⁽¹⁾	$	79,897		$	36,049		$	6,444		$	3,506		$	45,999		$	49,213		$	112		$	175,221
Asset-specific⁽²⁾	706			204			360			51			615			365			0			1,686
Acquired Loans⁽³⁾	28			1			24,399			47			24,447			210			0			24,685
Total loans held for investment	$	80,631		$	36,254		$	31,203		$	3,604		$	71,061		$	49,788		$	112		$	201,592
Allowance as a percentage of period-end loans held for investment	3.79		%	1.82		%	0.18		%	1.57		%	1.09		%	0.76		%	5.00		%	2.09		%



	December 31, 2013
				Consumer Banking
(Dollars in millions)	Credit Card			Auto			Home Loan			Retail Banking			Total Consumer Banking			Commercial Banking			Other			Total
Allowance for loan and lease losses by impairment methodology:
Collectively evaluated⁽¹⁾	$	2,953		$	590		$	27		$	53		$	670		$	313		$	11		$	3,947
Asset-specific⁽²⁾	261			16			18			10			44			25			0			330
Acquired Loans⁽³⁾	0			0			38			0			38			0			0			38
Total allowance for loan and lease losses	$	3,214		$	606		$	83		$	63		$	752		$	338		$	11		$	4,315
Loans held for investment by impairment methodology:
Collectively evaluated⁽¹⁾	$	80,462		$	31,683		$	6,704		$	3,501		$	41,888		$	44,420		$	121		$	166,891
Asset-specific⁽²⁾	780			169			394			86			649			329			0			1,758
Acquired Loans⁽³⁾	63			5			28,184			36			28,225			262			0			28,550
Total loans held for investment	$	81,305		$	31,857		$	35,282		$	3,623		$	70,762		$	45,011		$	121		$	197,199
Allowance as a percentage of period-end loans held for investment	3.95		%	1.90		%	0.24		%	1.74		%	1.06		%	0.75		%	9.09		%	2.19		%

__________

⁽¹⁾

The component of the allowance for loan and lease losses for credit card and other consumer loans that we collectively evaluate for impairment is based on a statistical calculation supplemented by management judgment and interpretation. The component of the allowance for loan and lease losses for commercial loans, which we collectively evaluate for impairment, is based on historical loss experience for loans with similar characteristics and consideration of credit quality supplemented by management judgment and interpretation.


⁽²⁾	The asset-specific component of the allowance for loan and lease losses for smaller-balance impaired loans is calculated on a pool basis using historical loss experience for the respective class of assets. The asset-specific component of the allowance for loan and lease losses for larger-balance commercial loans is individually calculated for each loan.


⁽³⁾	The Acquired Loans component of the allowance for loan and lease losses is accounted for based on expected cash flows. See “Note 4—Loans” for details on these loans.