NOTE 5—ALLOWANCE FOR LOAN AND LEASE LOSSES

We maintain an allowance for loan and lease losses that represents management’s best estimate of incurred loan and lease losses inherent in our held-for-investment portfolio as of each balance sheet date. We do not maintain an allowance for held-for-sale loans or acquired loans that are performing, in accordance with or better than our expectations, as of the date of acquisition, as the fair value of these loans already reflect a credit component.

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.

In the first quarter of 2013, we changed our process for estimating the allowance and reserve for unfunded lending commitments for our commercial loan portfolio. First, we extended our internal historical credit loss experience period back to at least 2008 and incorporated external industry loss data over a longer horizon to derive our loss estimates. We previously had generally used the most recent three-year period of internal historical loss experience to derive our loss estimates. Second, we incorporated more borrower-specific and loan-specific risk factors into our analysis and established a statistically-based internal risk rating system. Based on this statistically-based risk rating system, we now apply an estimated probability of default and loss given default for nearly each loan in our portfolio to derive the total loss estimate for our commercial loan portfolio. These changes, which were supplemented by management judgment, resulted in a net increase in the combined allowance and reserve for unfunded lending commitments of $37 million as of March 31, 2013 and a corresponding increase in the provision for credit losses of $37 million in the first quarter of 2013. The gross impact of these changes resulted in a decrease in the allowance of $2 million and an increase in the reserve for unfunded lending commitments of $39 million as of March 31, 2013. We do not expect these changes to have a material impact on our future allowance and reserve for unfunded lending commitments for our commercial loan portfolio.

See “Note 1—Summary of Significant Accounting Policies” of our 2012 Form 10-K for further discussion on the methodologies and policies 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 charge-offs. Charge-offs of uncollectible amounts are deducted from the allowance and subsequent recoveries are included. The table below summarizes changes in the allowance for loan and lease losses, by portfolio segment, for the three months ended June 30, 2013 and 2012:


(Dollars in millions)	Three Months Ended June 30, 2013
	Credit Card			Consumer												Commercial			Other⁽¹⁾			Total Allowance			Unfunded Lending Commitments Reserve			Combined Allowance & Unfunded Reserve
	Credit Card			Auto			Home Loan			Retail Banking			Total Consumer			Commercial			Other⁽¹⁾			Total Allowance			Unfunded Lending Commitments Reserve			Combined Allowance & Unfunded Reserve
Balance as of March 31, 2013	$	3,494		$	528		$	103		$	112		$	743		$	342		$	27		$	4,606		$	85		$	4,691
Provision for credit losses		713			101			(20	)		(12	)		69			1			(5	)		778			(16	)		762
Charge-offs		(1,181	)		(153	)		(5	)		(19	)		(177	)		(14	)		(7	)		(1,379	)		0			(1,379	)
Recoveries		331			61			1			5			67			10			2			410			0			410

Net charge-offs		(850	)		(92	)		(4	)		(14	)		(110	)		(4	)		(5	)		(969	)		0			(969	)
Other changes		(8	)		0			0			0			0			(1	)		1			(8	)		0			(8	)

Balance as of June 30, 2013	$	3,349		$	537		$	79		$	86		$	702		$	338		$	18		$	4,407		$	69		$	4,476


(Dollars in millions)	Six Months Ended June 30, 2013
	Credit Card			Consumer												Commercial			Other⁽¹⁾			Total Allowance			Unfunded Lending Commitments Reserve		Combined Allowance & Unfunded Reserve
	Credit Card			Auto			Home Loan			Retail Banking			Total Consumer			Commercial			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		1,456			265			(26	)		5			244			(84	)		(3	)		1,613			34		1,647
Charge-offs		(2,443	)		(335	)		(12	)		(44	)		(391	)		(26	)		(15	)		(2,875	)		0		(2,875	)
Recoveries		671			121			4			13			138			15			3			827			0		827

Net charge-offs		(1,772	)		(214	)		(8	)		(31	)		(253	)		(11	)		(12	)		(2,048	)		0		(2,048	)
Other changes		(314	)		0			0			0			0			0			0			(314	)		0		(314	)

Balance as of June 30, 2013	$	3,349		$	537		$	79		$	86		$	702		$	338		$	18		$	4,407		$	69	$	4,476


(Dollars in millions)	Three Months Ended June 30, 2012
	Credit Card			Consumer												Commercial			Other⁽¹⁾			Total Allowance			Unfunded Lending Commitments Reserve			Combined Allowance & Unfunded Reserve
	Credit Card			Auto			Home Loan			Retail Banking			Total Consumer			Commercial			Other⁽¹⁾			Total Allowance			Unfunded Lending Commitments Reserve			Combined Allowance & Unfunded Reserve
Balance as of March 31, 2012	$	2,671		$	459		$	102		$	157		$	718		$	636		$	35		$	4,060		$	60		$	4,120
Provision for credit losses		1,711			56			(3	)		(9	)		44			(84	)		15			1,686			(9	)		1,677
Charge-offs.		(908	)		(122	)		(19	)		(20	)		(161	)		(24	)		(7	)		(1,100	)		0			(1,100	)
Recoveries		286			54			7			7			68			7			1			362			0			362

Net charge-offs. .		(622	)		(68	)		(12	)		(13	)		(93	)		(17	)		(6	)		(738	)		0			(738	)
Other changes.		(10	)		0			0			0			0			0			0			(10	)		0			(10	)

Balance as of June 30, 2012	$	3,750		$	447		$	87		$	135		$	669		$	535		$	44		$	4,998		$	51		$	5,049


(Dollars in millions)	Six Months Ended June 30, 2012
	Credit Card			Consumer												Commercial			Other⁽¹⁾			Total Allowance			Unfunded Lending Commitments Reserve			Combined Allowance & Unfunded Reserve
	Credit Card			Auto			Home Loan			Retail Banking			Total Consumer			Commercial			Other⁽¹⁾			Total Allowance			Unfunded Lending Commitments Reserve			Combined Allowance & Unfunded Reserve
Balance as of December 31, 2011	$	2,847		$	391		$	98		$	163		$	652		$	715		$	36		$	4,250		$	66		$	4,316
Provision for credit losses		2,170			203			16			(1	)		218			(147	)		24			2,265			(15	)		2,250
Charge-offs		(1,863	)		(262	)		(43	)		(40	)		(345	)		(60	)		(18	)		(2,286	)		0			(2,286	)
Recoveries		595			115			16			13			144			27			2			768			0			768

Net charge-offs		(1,268	)		(147	)		(27	)		(27	)		(201	)		(33	)		(16	)		(1,518	)		0			(1,518	)
Other changes		1			0			0			0			0			0			0			1			0			1

Balance as of June 30, 2012	$	3,750		$	447		$	87		$	135		$	669		$	535		$	44		$	4,998		$	51		$	5,049

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

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 loan category and impairment methodology, and the recorded investment of the related loans as of June 30, 2013 and December 31, 2012:


(Dollars in millions)	June 30, 2013
	Credit Card			Consumer									Total Consumer			Commercial			Other			Total
	Credit Card			Auto			Home Loan			Retail Banking			Total Consumer			Commercial			Other			Total
Allowance for loan and lease losses by impairment methodology:
Collectively evaluated⁽¹⁾	$	3,091		$	521		$	26		$	74		$	621		$	300		$	18		$	4,030
Asset-specific⁽²⁾		258			16			14			12			42			36			0			336
Acquired loans⁽³⁾		0			0			39			0			39			2			0			41

Total allowance for loan and lease losses	$	3,349		$	537		$	79		$	86		$	702		$	338		$	18		$	4,407

Held-for-investment loans by impairment methodology:
Collectively evaluated⁽¹⁾	$	77,422		$	29,034		$	7,162		$	3,554		$	39,750		$	40,045		$	142		$	157,359
Asset-specific⁽²⁾		799			326			205			94			625			454			0			1,878
Acquired loans⁽³⁾		89			9			31,796			38			31,843			306			37			32,275

Total held-for-investment loans	$	78,310		$	29,369		$	39,163		$	3,686		$	72,218		$	40,805		$	179		$	191,512

Allowance as a percentage of period-end held-for-investment loans		4.28	%		1.83	%		0.20	%		2.33	%		0.97	%		0.83	%		10.06	%		2.30	%


(Dollars in millions)	December 31, 2012
	Credit Card			Consumer									Total Consumer			Commercial			Other			Total
	Credit Card			Auto			Home Loan			Retail Banking			Total Consumer			Commercial			Other			Total
Allowance for loan and lease losses by impairment methodology:
Collectively evaluated⁽¹⁾	$	3,648		$	466		$	47		$	104		$	617		$	376		$	32		$	4,673
Asset-specific⁽²⁾		331			20			13			7			40			54			1			426
Acquired loans⁽³⁾		0			0			53			1			54			3			0			57

Total allowance for loan and lease losses	$	3,979		$	486		$	113		$	112		$	711		$	433		$	33		$	5,156

Held-for-investment loans by impairment methodology:
Collectively evaluated⁽¹⁾	$	90,594		$	26,778		$	7,552		$	3,774		$	38,104		$	37,923		$	154		$	166,775
Asset-specific⁽²⁾		873			328			145			96			569			538			0			1,980
Acquired loans⁽³⁾		288			17			36,403			34			36,454			359			33			37,134

Total held-for-investment loans	$	91,755		$	27,123		$	44,100		$	3,904		$	75,127		$	38,820		$	187		$	205,889

Allowance as a percentage of period-end held-for-investment loans		4.34	%		1.79	%		0.26	%		2.87	%		0.95	%		1.12	%		17.65	%		2.50	%

⁽¹⁾

The component of the allowance for credit card and other consumer loans that we collectively evaluate for impairment is based on a statistical calculation. The component of the allowance 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 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 larger-balance commercial loans is individually calculated for each loan.

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