Discover 2009 Annual Report Download - page 121

In addition to reflecting changes in certain fair value estimates, securitization income also includes annual servicing
fees received by the Company and excess servicing income earned on the transferred loan receivables from which
beneficial interests have been issued. Annual servicing fees are based on a percentage of the monthly investor principal
balance outstanding and approximate adequate compensation to the Company for performing the servicing.
Accordingly, the Company does not recognize servicing assets or servicing liabilities for these servicing rights. Failure to
service the transferred loan receivables in accordance with contractual requirements may lead to a termination of the
servicing rights and the loss of future servicing fees.
The following table summarizes the Company’s retained interests in credit card securitizations (dollars in thousands):
November 30,
2009 2008
Available-for-sale investment securities........................................................................................................................... $ 2,204,969 $ 981,742
Held-to-maturity investment securities ............................................................................................................................. 2,296,139 —
Loan receivables (seller’s interest)(1) ................................................................................................................................ 9,852,352 14,831,938
Amounts due from asset securitization:
Cash collateral accounts(2) ......................................................................................................................................... 822,585 1,121,447
Accrued interest receivable........................................................................................................................................ 519,275 473,694
Interest-only strip receivable ...................................................................................................................................... 117,579 300,120
Other subordinated retained interests.......................................................................................................................... 220,288 315,823
Other .................................................................................................................................................................... 12,324 22,516
Amounts due from asset securitization......................................................................................................................... 1,692,051 2,233,600
Total retained interests........................................................................................................................................... $16,045,511 $18,047,280
(1) Loan receivables net of allowance for loan losses were $9.1 billion and $14.0 billion at November 30, 2009 and 2008, respectively.
(2) $0.8 billion and $1.0 billion at November 30, 2009 and 2008, respectively, were pledged as security against a long-term borrowing. See Note 12: Long-term borrowings.
The Company’s retained interests are subject to credit, payment and interest rate risks on the transferred credit card
loan receivables. To protect investors, the securitization structures include certain features that could result in earlier-than-
expected repayment of the securities, which could cause the Company to sustain a loss of one or more of its retained
interests and could prompt the need for the Company to seek alternative sources of funding. The primary investor
protection feature relates to the availability and adequacy of cash flows in the securitized pool of receivables to meet
contractual requirements, the insufficiency of which triggers early repayment of the securities. The Company refers to this
as the “economic early amortization” feature. Investors are allocated cash flows derived from activities related to the
accounts comprising the securitized pool of receivables, the amounts of which reflect finance charges billed, certain fee
assessments, allocations of merchant discount and interchange, and recoveries on charged-off accounts. From these cash
flows, investors are reimbursed for charge-offs occurring within the securitized pool of receivables and receive a
contractual rate of return and the Company is paid a servicing fee as servicer. Any cash flows remaining in excess of
these requirements are paid to the Company and recorded as excess spread, included in securitization income on the
Company’s consolidated statements of income. An excess spread of less than 0% for a contractually specified period,
generally a three-month average, would trigger an economic early amortization event. Such an event could result in the
Company incurring losses related to its subordinated retained interests, including amounts reported in investment
securities and amounts due from asset securitization. The investors and the securitization trusts have no recourse to the
Company’s other assets for a shortage in cash flows.
Another feature of our securitization structure that is designed to protect investors’ interests from loss, which is
applicable only to the notes issued from DCENT, is a reserve account funding requirement in which excess cash flows
generated by the transferred loan receivables are held at the trust for the benefit of the investors, rather than paid to the
Company. This requirement is triggered when DCENT’s three-month average excess spread rate decreases to below
4.50%, with increasing funding requirements as excess spread levels decline below preset levels to 0%. Funding of the
reserve account is required on the trust distribution date in the month following the occurrence of the performance trigger.
The reserve account funding requirement has been triggered only once, in August 2009. As DCENT’s three-month
average excess spread subsequently increased to over the 4.50% threshold, this amount was released to the Company on
the trust distribution date in the following month.
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