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Provision and Allowance for Loan Losses
Provision for loan losses is the expense related to maintaining the allowance for loan losses at a level adequate to
absorb the estimated probable losses in the loan portfolio at each period end date. Factors that influence the provision for
loan losses include:
• The impact of general economic conditions on the consumer, including unemployment levels, bankruptcy trends and
interest rate movements;
• Changes in consumer spending and payment behaviors;
• Changes in our loan portfolio, including the overall mix of accounts, products and loan balances within the portfolio;
• The level and direction of historical and anticipated loan delinquencies and charge-offs;
• The credit quality of the loan portfolio, which reflects, among other factors, our credit granting practices and
effectiveness of collection efforts; and
• Regulatory changes or new regulatory guidance.
In calculating the allowance for loan losses, we estimate probable losses separately for segments of the loan portfolio
that have similar risk characteristics, such as credit card and other consumer loans. For our credit card loans, we use a
migration analysis to estimate the likelihood that a loan will progress through the various stages of delinquency. We use
other analyses to estimate losses incurred from non-delinquent accounts which broadens the identification of loss
emergence. We use these analyses together to determine our allowance for loan losses.
For the year ended November 30, 2010, the provision for loan losses decreased $1.9 billion as compared to the year
ended November 30, 2009 as adjusted. This decrease is attributable to lower net charge-offs, discussed in “ – Net
Charge-offs” below, and a reduction in the allowance for loan losses. The reduction in the allowance for loan losses was
due to improved delinquency statistics, which resulted in lower loan loss reserve rates, as well as a $2.3 billion decline in
the level of credit card loans. More specifically, our allowance at November 30, 2010 was $3.3 billion, a decline of
$598 million as compared to November 30, 2009 as adjusted. This full-year net reduction in the allowance includes a
$305 million increase to the allowance in the first quarter 2010 upon management’s consideration of refined analytics
that expanded its ability to identify loss emergence. By comparison, the allowance for loan losses at November 30, 2009
as adjusted was $3.9 billion, an increase of $1.1 billion as compared to the prior year.
For the year ended November 30, 2009 as adjusted, the provision for loan losses increased $1.6 billion, or 47%,
compared to the year ended November 30, 2008 as adjusted, primarily due to higher net charge-offs resulting from the
deterioration in the economic environment. Additionally, because of rising delinquencies, the loan loss reserve rate
increased 228 basis points in 2009 as adjusted and we added $1.1 billion to our as adjusted allowance for loan losses.
In comparison, the reserve rate increased 180 basis points in 2008 as adjusted and we added $1.0 billion to our as
adjusted allowance for loan losses.
For other consumer loans, we consider historical and forecasted losses in estimating the related allowance for loan
losses. At November 30, 2010, the level of the allowance related to other consumer loans decreased by $16 million as
compared to November 30, 2009. This is largely attributable to a decline in our personal loan reserve rate due to credit
improvement in that portfolio. This was partially offset by a reserve increase related to a higher level of private student
loans. At November 30, 2009, the level of the allowance related to other consumer loans increased by $54 million as
compared to November 30, 2008 mainly due to increased personal loan and private student loan balances.
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