Discover 2009 Annual Report Download - page 108

All new originations of credit card receivables (except for the amount of new receivables transferred to the trust during
the term of a securitization to maintain a constant level of investor interest in receivables) are deemed to be held for
investment at origination because management has the intent and ability to hold them for the foreseeable future. In
determining the amount of loans held for investment, management makes judgments about the Company’s ability to fund
these loans through means other than securitization, such as deposits and other borrowings, and considers the targeted
mix of funding sources to be used. In determining what constitutes the foreseeable future, management considers the short
average life and homogeneous nature of credit card receivables. In assessing whether loans can continue to be held for
investment, management also considers capital levels and scheduled maturities of funding instruments used. Management
believes that the assertion regarding its intent and ability to hold credit card loans for the foreseeable future can be made
with a high degree of certainty given the maturity distribution of deposits and other on-balance sheet funding instruments,
the historic ability to replace maturing deposits and other borrowings with new deposits or borrowings, and historic credit
card payment activity. Due to the homogeneous nature of credit card receivables, loans are classified as held for
investment on a portfolio basis. When a decision to securitize additional credit card receivables is made, to the extent
necessary, loans held for investment will be reclassified as held for sale on a portfolio basis.
Cash flows associated with loans that are originated with the intent to sell are included in cash flows from operating
activities. Cash flows associated with loans originated for investment are classified as investing cash flows, regardless of a
subsequent change in intent.
Allowance for Loan Losses. The Company maintains an allowance for loan losses at a level that is adequate to absorb
probable losses inherent in the loan portfolio. The allowance is evaluated monthly for adequacy and is maintained
through an adjustment to the provision for loan losses. Additions to the allowance are made through charges to the
provision for loan losses or when reserves are acquired as part of a business or portfolio acquisition. Charge-offs of
principal amounts of loans outstanding are deducted from the allowance and subsequent recoveries of such amounts
increase the allowance.
In estimating net charge-offs inherent in the credit card loan portfolio, the Company uses a migration analysis of
delinquent and current credit card receivables. A migration analysis is a technique used to estimate the likelihood that a
loan receivable will progress through the various stages of delinquency and to charge off. The migration analysis
considers uncollectible principal, interest and fees reflected in loan receivables. In determining the proper level of the
allowance for loan losses, management also considers factors that may impact loan loss experience, including current
economic conditions, recent trends in delinquencies and bankruptcy filings, account collection management, policy
changes, account seasoning, loan volume and amounts, payment rates and forecasting uncertainties.
The allowance for loan losses is applicable only to the Company’s owned loan portfolio and does not consider losses
inherent in securitized loans. Net charge-offs related to securitized loans are absorbed by the securitization trusts
pursuant to the terms of documents governing the securitization transactions and, as such, are not included in the
Company’s allowance for loan losses but are reflected in the valuation of the interest-only strip receivable.
Delinquent Loans. The entire balance of an account is contractually past due if the minimum payment is not received by
the specified date on the customer’s billing statement. Delinquency is reported on loans that are 30 or more days past
due.
Credit card loans are charged off at the end of the month during which an account becomes 180 days past due,
except in the case of customer bankruptcies, probate accounts and fraudulent transactions. Customer bankruptcies and
probate accounts are charged off at the end of the month 60 days following the receipt of notification of the bankruptcy
or death, but not later than the 180-day time frame described above. Receivables associated with alleged or potential
fraudulent transactions are adjusted to their net realizable value upon receipt of notification of such fraud through a
charge to other expense and are subsequently written off at the end of the month 90 days following notification, but not
later than the contractual 180-day time frame. The Company’s charge-off policies are designed to comply with guidelines
established by the Federal Financial Institutions Examination Council (“FFIEC”).
The practice of re-aging an account also may affect credit card loan delinquencies and charge-offs. A re-age is
intended to assist delinquent customers who have experienced financial difficulties but who demonstrate both an ability
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