Discover 2010 Annual Report Download - page 109

of tax, reported as a component of accumulated other comprehensive income included in stockholders’ equity. The
Company estimates the fair value of available-for-sale investment securities pursuant to the guidance in ASC Topic 820,
Fair Value Measurements and Disclosures (“ASC 820”). The amortized cost for each held-to-maturity and
available-for-sale investment security is adjusted for amortization of premiums or accretion of discounts, as appropriate.
Such amortization or accretion is included in interest income. The Company evaluates its unrealized loss positions for
other-than-temporary impairment in accordance with GAAP applicable for investments in debt and equity securities and
in accordance with SEC Staff Accounting Bulletin Topic 5M. Realized gains and losses and other-than-temporary
impairments related to investment securities are determined at the individual security level and are reported in other
income.
Loans Held for Sale. When management makes a decision to sell loan receivables, loans will be reclassified as held for
sale. The Company includes its loans held for sale in loan receivables and carries these assets at the lower of aggregate
cost or fair value. In determining fair value, management considers the expected sale price, which is based on market
analysis. An allowance for loan losses does not apply to loans held for sale. At November 30, 2010, the Company had
$788.1 million of loans held for sale, which represented a pool of whole loans specifically designated to be sold. The
Company did not have any loans classified as held for sale at November 30, 2009.
Loan Receivables. Loan receivables consist of credit card receivables and other consumer loans and include loans
classified as 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.
The Company’s loan 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 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 with the intent to sell are included in cash flows from operating
activities. Cash flows associated with loans originated for investment are classified as cash flows from investing activities,
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. 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 identify individual loans for impairment, 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.
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