Discover 2011 Annual Report Download - page 106

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Loan Receivables. Loan receivables consist of credit card receivables and other consumer loans and include purchased
credit-impaired ("PCI") loans as well as loans held for sale. Loan receivables also include unamortized net deferred loan
origination fees and costs (also see “ - Loan Interest and Fee Income”). Credit card loan receivables include consumer credit
card loan receivables and business credit card loan receivables. Credit card loan receivables are reported at their principal
amounts outstanding and include uncollected billed interest and fees and are reduced for unearned revenue related to balance
transfer fees (also see “ - Loan Interest and Fee Income”). Other consumer loans consist of student loans, personal loans and
other loans and are reported at their principal amounts outstanding.
PCI loans are loans acquired at prices which reflected a discount related to deterioration in individual loan credit quality
since origination. The Company's PCI loans are comprised entirely of private student loans acquired during fiscal year 2011.
These loans are accounted for pursuant to ASC Subtopic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit
Quality.
The PCI student loans were aggregated into pools based on common risk characteristics at the time of their acquisition.
Loans were grouped primarily on the basis of origination date as loans originated in a particular year generally reflect the
application of common origination strategies and/or underwriting criteria. Each pool is accounted for as a single asset and each
has a single composite interest rate, total contractual cash flows and total expected cash flows.
Interest income on PCI loans is recognized on the basis of expected cash flows rather than contractual cash flows. The
total amount of interest income recognizable on a pool of PCI loans (i.e., its accretable yield) is the difference between the
carrying amount of the loan pool and the future cash flows expected to be collected without regard to whether the expected
cash flows represent principal or interest collections. Interest is recognized on an effective yield basis over the life of the loan
pool.
The initial estimates of the fair value of the PCI student loans included the impact of expected credit losses, and
therefore, no allowance for loan loss was recorded as of the purchase dates. The difference between contractually required cash
flows and cash flows expected to be collected, as measured at the acquisition dates, is not permitted to be accreted. Charge-offs
are absorbed by this non-accretable difference and do not result in a charge to earnings.
The estimate of cash flows expected to be collected is updated each reporting period to reflect management's latest
expectations of future credit losses and borrower prepayments, and interest rates in effect in the current period. To the extent
expected credit losses increase after the acquisition dates, the Company will record an allowance for loan losses through the
provision for loan losses, which will reduce net income. Changes in expected cash flows related to changes in prepayments or
interest rate indices for variable rate loans generally are recorded prospectively as adjustments to interest income.
To the extent that a significant increase in cash flows due to lower expected losses is deemed probable, the Company
will first reverse any previously established allowance for loan losses and then increase the amount of remaining accretable
yield. The increase to yield would be recognized prospectively over the remaining life of the loan pool. An increase in the
accretable yield would reduce the remaining non-accretable difference available to absorb subsequent charge-offs. Disposals of
loans, which may include sales of loans or receipt of payments in full from the borrower or charge-offs, result in removal of the
loans from their respective pools.
The Company's loan receivables are deemed to be held for investment at origination or acquisition because management
has the intent and ability to hold them for the foreseeable future. In determining the amount of loans that can continue to be
held for investment, management considers capital levels and scheduled maturities of funding instruments used.
Cash flows associated with loans that are originated or acquired with the intent to sell are included in cash flows from
operating activities. Cash flows associated with loans originated or acquired for investment are classified as cash flows from
investing activities, regardless of a subsequent change in intent.
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. Closed-
end consumer loan receivables are charged off at the end of the month during which an account becomes 120 days
contractually past due. 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 and willingness
to repay. Accounts meeting specific criteria are re-aged when the Company and the customer agree on a temporary repayment
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