Discover 2011 Annual Report Download - page 121

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As part of credit risk management activities, on an ongoing basis the Company reviews information related to the
performance of a customer’s account with the Company as well as information from credit bureaus, such as a FICO or other
credit scores, relating to the customer’s broader credit performance. FICO scores are generally obtained at origination of the
account and monthly or quarterly thereafter. The following table provides the most recent FICO scores available for the
Company’s customers as of November 30, 2011, as a percentage of each class of loan receivables:
Discover card(1)
Discover business card(1)
Private student loans (excluding PCI) (2)
Personal loans
Credit Risk Profile by FICO
Score
660 and Above
81%
89%
95%
97%
Less than 660
or No Score
19%
11%
5%
3%
(1) During September 2011, the Company began using FICO scores derived from a more current credit scoring model as one factor to assess the credit and
default risk of our card portfolio. As a result of this change, the FICO scores generally increased.
(2) PCI loans are discussed under the heading "Purchased Credit-Impaired Loans".
For private student loans, additional credit risk management activities include monitoring the amount of loans in
forbearance. Forbearance allows borrowers experiencing temporary financial difficulties and willing to make payments the
ability to temporarily suspend payments. Eligible borrowers have a lifetime cap on forbearance of 12 months. At November
30, 2011 and 2010, there were $75.9 million and $4.3 million of loans in forbearance, respectively. In addition, at November
30, 2011 and 2010, there were 1.5% and 2.2%% of private student loans in forbearance as a percentage of student loans in
repayment and forbearance.
Allowance for Loan Losses. The Company maintains an allowance for loan losses at an appropriate level to absorb
probable losses inherent in the loan portfolio. The Company considers the collectibility of all amounts contractually due on its
loan receivables, including those components representing interest and fees. Accordingly, the allowance for loan losses
represents the estimated uncollectible principal, interest and fee components of loan receivables. The allowance is evaluated
monthly and is maintained through an adjustment to the provision for loan losses. Charge-offs of principal amounts of loans
outstanding are deducted from the allowance and subsequent recoveries of such amounts increase the allowance. Charge-offs of
loan balances representing unpaid interest and fees result in a reversal of interest and fee income, respectively, which is
effectively a reclassification of provision for loan losses.
The Company bases its allowance for loan losses on several analyses that help estimate incurred losses as of the balance
sheet date. While the Company’s estimation process includes historical data and analysis, there is a significant amount of
judgment applied in selecting inputs and analyzing the results produced by the models to determine the allowance. The
Company uses a migration analysis to estimate the likelihood that a loan will progress through the various stages of
delinquency. The loan balances used in the migration analysis represent all amounts contractually due and, as a result, the
migration analysis captures principal, interest and fee components in estimating uncollectible accounts. The Company uses
other analyses to estimate losses incurred on non-delinquent accounts. The considerations in these analyses include past
performance, risk management techniques applied to various accounts, historical behavior of different account vintages, current
economic conditions, recent trends in delinquencies, bankruptcy filings, account collection management, policy changes,
account seasoning, loan volume and amounts, payment rates, and forecasting uncertainties. The Company does not evaluate
loans for impairment on an individual basis, but instead estimates its allowance for loan losses on a pooled basis, which
includes loans that are delinquent and/or no longer accruing interest and/or defaulted from a loan modification program, as
discussed below under the section entitled "Impaired Loans and Troubled Debt Restructurings".
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