Discover 2011 Annual Report Download - page 39

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expenses through building economies of scale, which will reduce our origination and servicing costs. If we are unable to
accomplish these objectives, it may have a negative impact on our results of operations, affect our competitive position in the
marketplace and prevent us from sustaining and growing our student loan portfolio.
Our framework for managing risks may not be effective in mitigating our risk of loss.
Our risk management framework seeks to mitigate risk and appropriately balance risk and return. We have established
processes and procedures intended to identify, measure, monitor and report the types of risk to which we are subject, including
credit risk, market risk, liquidity risk, operational risk, legal and compliance risk, and strategic risk. We seek to monitor and
control our risk exposure through a framework of policies, procedures and reporting requirements. Management of our risks in
some cases depends upon the use of analytical and/or forecasting models. If the models that we use to mitigate these risks are
inadequate, we may incur increased losses. In addition, there may be risks that exist, or that develop in the future, that we have
not appropriately anticipated, identified or mitigated. If our risk management framework does not effectively identify or
mitigate our risks, we could suffer unexpected losses and our financial condition and results of operations could be materially
adversely affected.
Our business depends on our ability to manage our credit risk, and failing to manage this risk successfully may result in
high charge-off rates, which would materially adversely affect our business, profitability and financial condition.
Our success depends on our ability to manage our credit risk while attracting new customers with profitable usage
patterns. We select our customers, manage their accounts and establish terms and credit limits using proprietary scoring models
and other analytical techniques that are designed to set terms and credit limits to appropriately compensate us for the credit risk
we accept, while encouraging customers to use their available credit. The models and approaches we use may not accurately
predict future charge-offs due to, among other things, inaccurate assumptions. While we continually seek to improve our
assumptions and models, we may make modifications that unintentionally cause them to be less predictive or we may
incorrectly interpret the data produced by these models in setting our credit policies.
Our ability to manage credit risk and avoid high charge-off rates may be adversely affected by economic conditions that
may be difficult to predict, such as the recent financial crisis. Although delinquencies and charge-offs declined significantly in
2011, we believe that we are experiencing historical lows in these rates and that they are likely to increase. In addition, if
economic conditions do not improve, these rates may increase more than expected. The full-year net charge-off rate was 3.99%
in 2011, down from the full-year net charge-off rate of 7.57% in 2010. At November 30, 2011 and 2010, $718 million, or
1.25%, and $1.2 billion, or 2.42%, of our loan receivables were non-performing (defined as loans over 90 days delinquent and
accruing interest plus loans not accruing interest). We remain subject to conditions in the consumer credit environment. There
can be no assurance that our underwriting and portfolio management strategies will permit us to avoid high charge-off levels, or
that our allowance for loan losses will be sufficient to cover actual losses.
A customer's ability to repay us can be negatively impacted by increases in their payment obligations to other lenders
under mortgage, credit card and other consumer loans. Such changes can result from increases in base lending rates or
structured increases in payment obligations, and could reduce the ability of our customers to meet their payment obligations to
other lenders and to us. In addition, a customer's ability to repay us can be negatively impacted by the restricted availability of
credit to consumers generally, including reduced and closed lines of credit. Customers with insufficient cash flow to fund daily
living expenses and lack of access to other sources of credit may be more likely to increase their card usage and ultimately
default on their payment obligations to us, resulting in higher credit losses in our portfolio. Our collection operations may not
compete effectively to secure more of customers' diminished cash flow than our competitors. In addition, we may not identify
customers who are likely to default on their payment obligations to us quickly and reduce our exposure by closing credit lines
and restricting authorizations, which could adversely impact our financial condition and results of operations.
Our ability to manage credit risk also may be adversely affected by legal or regulatory changes (such as bankruptcy
laws, minimum payment regulations and re-age guidance), competitors' actions and consumer behavior, as well as inadequate
collections staffing, techniques, models and performance of vendors such as collection agencies.
We have expanded our marketing of our personal and private student loan products. Also, we significantly increased the
size of our student loan portfolio through two acquisitions in the past fiscal year. Our personal and private student loan
portfolios grew to $2.6 billion and $7.3 billion, respectively, at November 30, 2011, compared to $1.9 billion and $1.0 billion,
respectively, at November 30, 2010. We have less experience in these areas as compared to our traditional credit card lending
business, and there can be no assurance that we will be able to grow these products in accordance with our strategies, manage
our credit risk or generate sufficient revenue to cover our expenses in these markets. Our failure to manage our credit risks may
materially adversely affect our profitability and our ability to grow these products, limiting our ability to further diversify our
business.
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