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 2017 Form 10-K for further discussion of 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, 2018 and 2017.

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



	Three Months Ended June 30, 2018
(Dollars in millions)	Credit Card			Consumer Banking⁽¹⁾			Commercial Banking			Other⁽¹⁾			Total
Allowance for loan and lease losses:
Balance as of March 31, 2018	$	5,726		$	1,253		$	587		$	1		$	7,567
Charge-offs	(1,679		)	(414		)	(7		)	(9		)	(2,109		)
Recoveries	419			216			14			1			650
Net charge-offs	(1,260		)	(198		)	7			(8		)	(1,459		)
Provision (benefit) for loan and lease losses	1,171			119			30			(47		)	1,273
Allowance build (release) for loan and lease losses	(89		)	(79		)	37			(55		)	(186		)
Other changes⁽¹⁾⁽²⁾	(13		)	(54		)	0			54			(13		)
Balance as of June 30, 2018	5,624			1,120			624			0			7,368
Reserve for unfunded lending commitments:
Balance as of March 31, 2018	0			6			108			0			114
Provision (benefit) for losses on unfunded lending commitments	0			(1		)	4			0			3
Balance as of June 30, 2018	0			5			112			0			117
Combined allowance and reserve as of June 30, 2018	$	5,624		$	1,125		$	736		$	0		$	7,485



	Six Months Ended June 30, 2018
(Dollars in millions)	Credit Card			Consumer Banking⁽¹⁾			Commercial Banking			Other⁽¹⁾			Total
Allowance for loan and lease losses:
Balance as of December 31, 2017	$	5,648		$	1,242		$	611		$	1		$	7,502
Charge-offs	(3,504		)	(845		)	(28		)	(8		)	(4,385		)
Recoveries	867			424			16			1			1,308
Net charge-offs	(2,637		)	(421		)	(12		)	(7		)	(3,077		)
Provision (benefit) for loan and lease losses	2,627			353			25			(48		)	2,957
Allowance build (release) for loan and lease losses	(10		)	(68		)	13			(55		)	(120		)
Other changes⁽¹⁾⁽²⁾	(14		)	(54		)	0			54			(14		)
Balance as of June 30, 2018	5,624			1,120			624			0			7,368
Reserve for unfunded lending commitments:
Balance as of December 31, 2017	0			7			117			0			124
Benefit for losses on unfunded lending commitments	0			(2		)	(5		)	0			(7		)
Balance as of June 30, 2018	0			5			112			0			117
Combined allowance and reserve as of June 30, 2018	$	5,624		$	1,125		$	736		$	0		$	7,485



	Three Months Ended June 30, 2017
(Dollars in millions)	Credit Card			Consumer Banking			Commercial Banking			Other⁽³⁾			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⁽³⁾			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

__________


⁽¹⁾	In the second quarter of 2018, we sold the substantial majority of our consumer home loan portfolio and the related servicing. We also transferred the remaining portfolio to loans held for sale as of June 30, 2018. The impact of these actions included a benefit for credit losses of $46 million which is reflected in the Other category.

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

⁽³⁾ Includes the legacy loan portfolio of our discontinued GreenPoint mortgage operations.

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 as of June 30, 2018 and December 31, 2017. See “Note 1—Summary of Significant Accounting Policies” in our 2017 Form 10-K for further discussion of allowance methodologies for each of the loan portfolios.

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



	June 30, 2018
(Dollars in millions)	Credit Card			Consumer Banking			Commercial Banking			Other			Total
Allowance for loan and lease losses:
Collectively evaluated	$	5,335		$	1,084		$	532		$	0		$	6,951
Asset-specific	289			36			92			0			417
Total allowance for loan and lease losses	$	5,624		$	1,120		$	624		$	0		$	7,368
Loans held for investment:
Collectively evaluated	$	108,942		$	58,303		$	66,585		$	11		$	233,841
Asset-specific	835			419			655			0			1,909
PCI loans	0			5			369			0			374
Total loans held for investment	$	109,777		$	58,727		$	67,609		$	11		$	236,124
Allowance coverage ratio⁽¹⁾	5.12		%	1.91		%	0.92		%	0.00		%	3.12		%



	December 31, 2017
(Dollars in millions)	Credit Card			Consumer Banking			Commercial Banking			Other			Total
Allowance for loan and lease losses:
Collectively evaluated	$	5,356		$	1,158		$	529		$	1		$	7,044
Asset-specific	292			53			76			0			421
PCI loans	0			31			6			0			37
Total allowance for loan and lease losses	$	5,648		$	1,242		$	611		$	1		$	7,502
Loans held for investment:
Collectively evaluated	$	113,948		$	64,080		$	63,237		$	58		$	241,323
Asset-specific	812			705			858			0			2,375
PCI loans	2			10,293			480			0			10,775
Total loans held for investment	$	114,762		$	75,078		$	64,575		$	58		$	254,473
Allowance coverage ratio⁽¹⁾	4.92		%	1.65		%	0.95		%	1.72		%	2.95		%

__________


⁽¹⁾	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, that qualify for net accounting treatment, in which our partner agrees to share a portion of the credit losses. The expected reimbursements from these partners, which are netted against our allowance for loan and lease losses, result in reductions to net charge-offs and provision for credit losses. See “Note 1—Summary of Significant Accounting Policies” in our 2017 Form 10-K for further discussion of 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, 2018 and 2017.

Table 5.3: Summary of Loss Sharing Arrangements Impacts



(Dollars in millions)	Estimated Reimbursements from Loss Sharing Partners
Balance as of March 31, 2018	$	388
Amounts due from partners which reduced net charge-offs	(92		)
Amounts estimated to be charged to partners which reduced provision for credit losses	96
Balance as of June 30, 2018	$	392

Balance as of March 31, 2017	$	235
Amounts due from partners which reduced net charge-offs	(67		)
Amounts estimated to be charged to partners which reduced provision for credit losses	95
Balance as of June 30, 2017	$	263



(Dollars in millions)	Estimated Reimbursements from Loss Sharing Partners
Balance as of December 31, 2017	$	380
Amounts due from partners which reduced net charge-offs	(189		)
Amounts estimated to be charged to partners which reduced provision for credit losses	201
Balance as of June 30, 2018	$	392

Balance as of December 31, 2016	$	228
Amounts due from partners which reduced net charge-offs	(132		)
Amounts estimated to be charged to partners which reduced provision for credit losses	167
Balance as of June 30, 2017	$	263