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that the Company has the ability to access. Fair values determined by Level 2 inputs are those that utilize inputs other than
quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs
include quoted prices for similar assets and liabilities in active or inactive markets, quoted prices for the identical assets in
an inactive market, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates
and yield curves that are observable at commonly quoted intervals. Fair values determined by Level 3 inputs are those
based on unobservable inputs, and include situations where there is little, if any, market activity for the asset or liability
being valued. In instances in which the inputs used to measure fair value may fall into different levels of the fair value
hierarchy, the level in the fair value hierarchy within which the fair value measurement in its entirety is classified is based
on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the
significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors
specific to the asset or liability. Also, the FASB clarified in ASC 820-10-35 that it is not appropriate to automatically
conclude that any transaction price in an inactive market is determinable of fair value and, thus, the use of Level 3 inputs
may result in fair value estimates that are more reliable than those that would be indicated by the use of observable prices
in a market that is not active.
Disclosures concerning assets and liabilities measured at fair value on a recurring basis at November 30, 2009 are as
follows (dollars in thousands):
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
Significant
Other
Observable
Inputs (Level 2)
Significant
Unobservable
Inputs (Level 3)
Balance at
November 30,
2009
Assets
Available-for-sale investment securities ............................................................. $ 15 $ — $2,645,466 $2,645,481
Amounts due from asset securitization(1) ............................................................ $— $ — $ 940,164 $ 940,164
Derivative financial instruments(2) ..................................................................... $— $1,369 $ — $ 1,369
(1) Balances represent only the components of amounts due from asset securitization that are marked to fair value.
(2) The Company does not offset the fair value of derivative contracts with a negative fair value against the fair value of contracts with a positive fair value.
The Company considers relevant and observable market prices in its fair value calculations, evaluating the frequency of
transactions, the size of the bid-ask spread and the significance of adjustments made when considering transactions
involving similar assets or liabilities to assess the relevance of those observed prices. If relevant and observable prices are
available, the fair values of the related assets or liabilities would be classified as Level 2. If relevant and observable prices
are not available, other valuation techniques would be used and the fair values of the financial instruments would be
classified as Level 3. The Company utilizes both observable and unobservable inputs in determining the fair values of
financial instruments classified within the Level 3 category. The level to which an asset or liability is classified is based
upon the lowest level of input that is significant to the fair value measurement. If the fair value of an asset or liability is
measured based on observable inputs as well as unobservable inputs which contributed significantly to the determination
of fair value, the asset or liability would be classified in Level 3 of the fair value hierarchy.
The Level 3 category includes the Company’s retained interests in the form of Class B and Class C notes issued by
DCENT, which are reported in available-for-sale investment securities. Through the third quarter of 2008, the Company’s
valuation of these investments utilized the discount rate reflecting bid-ask spreads derived from observable transactions
for similar securities. During the fourth quarter of 2008 and the first three quarters of 2009, the Company utilized a
discount rate reflective of the implied rate of return as of September 25, 2008, the last date on which the Company
considered the market for these assets to be active, adjusted for incremental changes occurring thereafter in liquidity risk.
The Company considered the following factors in concluding that the market for subordinated tranche credit card asset-
backed securities was inactive since September 25, 2008:
• Primary market credit card asset-backed securitization transactions averaging more than $4 billion per month
through September 2008 ceased to exist altogether after September 25, 2008 (excluding issuances to related
parties). The Federal Reserve’s Term Asset-Backed Securities Loan Facility (“TALF”) favorably impacted the issuance
volumes of triple-A rated securities in 2009, however, primary market transactions for lower rated credit card asset-
backed securities, specifically A-rated and BBB-rated securities, remained closed.
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