Executive Summary

This paper documents die Custom Risk Score (CRS 2003) redevelopment process undertaken by the Risk Management Acquisitions Group Model Development Team, a rigorous analytical and modeling effort leading to the derivation of a revised and improved FNBM CRS metric set with which to effectively evaluate and segment new account applicants for optimal profitability consistent with effective management of credit risk. The study was performed in a manner consistent with statistical and credit industry best practices, and was analytically comprised of a systematic application of Factor Analysis, Cluster Analysis, and Logistic Regression1 methods applied to a broad array of internal and external (bureau) credit history attributes pertaining to a suitable sample of FNBM accounts. The resulting tool consists of a stratified "suite" of scorecards more closely calibrated to empirically evident incoming applicant clusters, and thus represents a significant improvement over its predecessor CRS 2001, which, while effective and statistically valid in its own right, was based on a portfolio-wide single-score logistic regression underwriting model. The CRS 2003 scorecard suite development project is succincdy summarized by the following steps: □ Data preparation; □ Preliminary/exploratory data analysis; □ Factor Analysis; □ Cluster Analysis; □ Individual cluster modeling and validation.