NOTE 5—ALLOWANCE FOR LOAN AND LEASE LOSSES AND RESERVE FOR UNFUNDED LENDING COMMITMENTS

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 losses on unfunded lending commitments is included in 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 “Note 1—Summary of Significant Accounting Policies” in our 2016 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, as well as information on our reserve for unfunded lending commitments.

Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments Activity

The table below summarizes changes in the allowance for loan and lease losses and reserve for unfunded lending commitments by portfolio segment for the three and six months ended June 30, 2017 and 2016.

Table 5.1: Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments Activity



	Three Months Ended June 30, 2017
(Dollars in millions)	Credit Card			Consumer Banking			Commercial Banking			Other⁽¹⁾			Total
Allowance for loan and lease losses:
Balance as of March 31, 2017	$	5,058		$	1,163		$	761		$	2		$	6,984
Charge-offs	(1,572		)	(390		)	(140		)	0			(2,102		)
Recoveries	316			158			4			6			484
Net charge-offs	(1,256		)	(232		)	(136		)	6			(1,618		)
Provision (benefit) for loan and lease losses	1,397			268			141			(5		)	1,801
Allowance build (release) for loan and lease losses	141			36			5			1			183
Other changes⁽²⁾	11			0			(8		)	0			3
Balance as of June 30, 2017	5,210			1,199			758			3			7,170
Reserve for unfunded lending commitments:
Balance as of March 31, 2017	0			7			133			0			140
Provision (benefit) for losses on unfunded lending commitments	0			0			(1		)	0			(1		)
Balance as of June 30, 2017	0			7			132			0			139
Combined allowance and reserve as of June 30, 2017	$	5,210		$	1,206		$	890		$	3		$	7,309



	Six Months Ended June 30, 2017
(Dollars in millions)	Credit Card			Consumer Banking			Commercial Banking			Other⁽¹⁾			Total
Allowance for loan and lease losses:
Balance as of December 31, 2016	$	4,606		$	1,102		$	793		$	2		$	6,503
Charge-offs	(3,173		)	(754		)	(166		)	0			(4,093		)
Recoveries	646			304			7			8			965
Net charge-offs	(2,527		)	(450		)	(159		)	8			(3,128		)
Provision (benefit) for loan and lease losses	3,114			547			135			(7		)	3,789
Allowance build (release) for loan and lease losses	587			97			(24		)	1			661
Other changes⁽²⁾	17			0			(11		)	0			6
Balance as of June 30, 2017	5,210			1,199			758			3			7,170
Reserve for unfunded lending commitments:
Balance as of December 31, 2016	0			7			129			0			136
Provision (benefit) for losses on unfunded lending commitments	0			0			3			0			3
Balance as of June 30, 2017	0			7			132			0			139
Combined allowance and reserve as of June 30, 2017	$	5,210		$	1,206		$	890		$	3		$	7,309



	Three Months Ended June 30, 2016
(Dollars in millions)	Credit Card			Consumer Banking			Commercial Banking			Other⁽¹⁾			Total
Allowance for loan and lease losses:
Balance as of March 31, 2016	$	3,785		$	914		$	714		$	3		$	5,416
Charge-offs	(1,215		)	(248		)	(64		)	(1		)	(1,528		)
Recoveries	266			102			4			1			373
Net charge-offs	(949		)	(146		)	(60		)	0			(1,155		)
Provision (benefit) for loan and lease losses	1,261			204			185			(1		)	1,649
Allowance build (release) for loan and lease losses	312			58			125			(1		)	494
Other changes⁽²⁾	(11		)	0			(18		)	0			(29		)
Balance as of June 30, 2016	4,086			972			821			2			5,881
Reserve for unfunded lending commitments:
Balance as of March 31, 2016	0			8			218			0			226
Provision (benefit) for losses on unfunded lending commitments	0			0			(57		)	0			(57		)
Balance as of June 30, 2016	0			8			161			0			169
Combined allowance and reserve as of June 30, 2016	$	4,086		$	980		$	982		$	2		$	6,050



	Six Months Ended June 30, 2016
(Dollars in millions)	Credit Card			Consumer Banking			Commercial Banking			Other⁽¹⁾			Total
Allowance for loan and lease losses:
Balance as of December 31, 2015	$	3,654		$	868		$	604		$	4		$	5,130
Charge-offs	(2,437		)	(539		)	(112		)	(2		)	(3,090		)
Recoveries	538			210			6			3			757
Net charge-offs	(1,899		)	(329		)	(106		)	1			(2,333		)
Provision (benefit) for loan and lease losses	2,332			433			356			(3		)	3,118
Allowance build (release) for loan and lease losses	433			104			250			(2		)	785
Other changes⁽²⁾	(1		)	0			(33		)	0			(34		)
Balance as of June 30, 2016	4,086			972			821			2			5,881
Reserve for unfunded lending commitments:
Balance as of December 31, 2015	0			7			161			0			168
Provision (benefit) for losses on unfunded lending commitments	0			1			0			0			1
Balance as of June 30, 2016	0			8			161			0			169
Combined allowance and reserve as of June 30, 2016	$	4,086		$	980		$	982		$	2		$	6,050

__________


⁽¹⁾	Primarily consists of the legacy loan portfolio of our discontinued GreenPoint mortgage operations.


⁽²⁾	Represents foreign currency translation adjustments and the net impact of loan transfers and sales.

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 with the recorded investment of the related loans as of June 30, 2017 and December 31, 2016.

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



	June 30, 2017
(Dollars in millions)	Credit Card		Consumer Banking		Commercial Banking		Other		Total
Allowance for loan and lease losses:
Collectively evaluated⁽¹⁾	$	4,945	$	1,113	$	616	$	3	$	6,677
Asset-specific⁽²⁾	265		56		141		0		462
PCI loans⁽³⁾	0		30		1		0		31
Total allowance for loan and lease losses	$	5,210	$	1,199	$	758	$	3	$	7,170
Loans held for investment:
Collectively evaluated⁽¹⁾	$	100,845	$	61,859	$	65,883	$	67	$	228,654
Asset-specific⁽²⁾	745		743		1,265		0		2,753
PCI loans⁽³⁾	0		12,371		524		0		12,895
Total loans held for investment	$	101,590	$	74,973	$	67,672	$	67	$	244,302
Allowance coverage ratio⁽⁴⁾	5.13%		1.60%		1.12%		4.48%		2.93%



	December 31, 2016
(Dollars in millions)	Credit Card		Consumer Banking		Commercial Banking		Other		Total
Allowance for loan and lease losses:
Collectively evaluated⁽¹⁾	$	4,367	$	1,016	$	622	$	2	$	6,007
Asset-specific⁽²⁾	239		57		169		0		465
PCI loans⁽³⁾	0		29		2		0		31
Total allowance for loan and lease losses	$	4,606	$	1,102	$	793	$	2	$	6,503
Loans held for investment:
Collectively evaluated⁽¹⁾	$	104,835	$	57,862	$	64,794	$	64	$	227,555
Asset-specific⁽²⁾	715		736		1,509		0		2,960
PCI loans⁽³⁾	2		14,456		613		0		15,071
Total loans held for investment	$	105,552	$	73,054	$	66,916	$	64	$	245,586
Allowance coverage ratio⁽⁴⁾	4.36%		1.51%		1.19%		3.13%		2.65%

__________

⁽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 that 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 PCI loans component of the allowance for loan and lease losses is accounted for based on expected cash flows. See “Note 1—Summary of Significant Accounting Policies” in our 2016 Form 10-K for details on these loans.


⁽⁴⁾	Allowance coverage ratio is calculated by dividing the period-end allowance for loan and lease losses by period-end loans held for investment within the specified loan category.

We have certain credit card partnership arrangements in which our partner agrees to share a portion of the credit losses associated with the partnership that qualify for net accounting treatment. The expected reimbursements from these partners, which are netted against our allowance for loan and lease losses, result in reductions to reported net charge-offs and provision for credit losses. See “Note 1—Summary of Significant Accounting Policies” in our 2016 Form 10-K for further discussion on our 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, 2017 and 2016.

Table 5.3: Summary of Loss Sharing Arrangements Impacts



	Three Months Ended June 30,						Six Months Ended June 30,
(Dollars in millions)	2017			2016			2017			2016
Estimated reimbursements from loss sharing partners:
Balance as of beginning of the period	$	235		$	197		$	228		$	194
Impact to net charge-offs	(67		)	(53		)	(132		)	(105		)
Impact to provision for credit losses	95			75			167			130
Balance as of end of the period	$	263		$	219		$	263		$	219