Discover 2011 Annual Report Download - page 107

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schedule that may include concessionary terms. With re-aging, the outstanding balance of a delinquent account is returned to a
current status. Customers may also qualify for a workout re-age when either a longer term or permanent hardship exists. The
Company's re-age practices are designed to comply with FFIEC guidelines.
Allowance for Loan Losses. The Company maintains an allowance for loan losses at a level that is appropriate to absorb
probable losses inherent in the loan portfolio. The allowance is evaluated monthly for appropriateness and is maintained
through an adjustment to the provision for loan losses. Charge-offs of principal amounts of loans outstanding are deducted from
the allowance and subsequent recoveries of such amounts increase the allowance.
The Company calculates its allowance for loan losses by estimating probable losses separately for segments of the loan
portfolio with similar loan characteristics, which generally results in segmenting the portfolio by loan product type.
For its credit card loan receivables, the Company bases its allowance for loan loss on several analyses that help estimate
incurred losses as of the balance sheet date. While the Company's estimation process includes historical data and analysis, there
is a significant amount of judgment applied in selecting inputs and analyzing the results produced by the models to determine
the allowance. The Company uses a migration analysis to estimate the likelihood that a loan will progress through the various
stages of delinquency. The migration analysis considers uncollectible principal, interest and fees reflected in the loan
receivables. The Company uses other analyses to estimate losses incurred on non-delinquent accounts. The considerations in
these analyses include past performance, risk management techniques applied to various accounts, historical behavior of
different account vintages, current economic conditions, recent trends in delinquencies, bankruptcy filings, account collection
management, policy changes, account seasoning, loan volume and amounts, payment rates, and forecasting uncertainties. The
Company does not evaluate loans for impairment on an individual basis, but instead estimates its allowance for credit card loan
losses on a pooled basis, which includes loans that are delinquent and/or no longer accruing interest.
For its other consumer loans, the Company considers historical and forecasted estimates of incurred losses in estimating
the related allowance for loan losses. The Company may also consider other factors, such as 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. Similar to credit card loans, the Company does not evaluate
other consumer loans for impairment on an individual basis, but instead estimates its allowance for personal and student loans
on a pooled basis, which includes loans that are delinquent and/or no longer accruing interest.
As part of certain collection strategies, the Company may modify the terms of loans to customers experiencing financial
hardship. Temporary and permanent modifications on credit card loans, certain grants of student loan forbearance and long-
term modifications to personal loans are considered troubled debt restructurings and are accounted for in accordance with ASC
310-40, Troubled Debt Restructuring by Creditors. When a delinquent borrower is granted a second forbearance period, the
Company classifies these loans as troubled debt restructurings. Forbearance is granted in either three- or six-month increments
with a lifetime cap of up to 12 months, while private student loans have repayment terms of 10 to 30 years and the actual
maturity can extend for several additional years since no payments are required while the borrower is in school. The
forbearance period does not result in a significant delay in payment relative to the original expected duration. Furthermore, the
Company does not anticipate significant shortfalls in the contractual amount due for borrowers using a first forbearance period
as the historical performance of these borrowers is not significantly different from the overall portfolio. However, when a
delinquent borrower is granted a second forbearance period, the forbearance is considered a troubled debt restructuring.
Loan receivables, other than PCI loans, that have been modified under a troubled debt restructuring are evaluated
separately from the pools of receivables that are subject to the collective analyses described above. Loan receivables modified
in a troubled debt restructuring are recorded at their present values with impairment measured as the difference between the
loan balance and the discounted present value of cash flows expected to be collected. Changes in the present value are recorded
in the provision for loan losses. All of the Company's troubled debt restructurings, which are evaluated collectively on an
aggregated (by loan type) basis, have a related allowance for loan losses.
Premises and Equipment, net. Premises and equipment, net are stated at cost less accumulated depreciation and
amortization, which is computed using the straight-line method over the estimated useful lives of the assets. Buildings are
depreciated over a period of 39 years. The costs of leasehold improvements are capitalized and depreciated over the lesser of
the remaining term of the lease or the asset's estimated useful life, typically ten years. Furniture and fixtures are depreciated
over a period of five to ten years. Equipment is depreciated over three to ten years. Capitalized leases, consisting of computers
and processing equipment, are depreciated over three and six years, respectively. Maintenance and repairs are immediately
expensed, while the costs of improvements are capitalized.
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