Discover 2010 Annual Report Download - page 125

Download and view the complete annual report

Please find page 125 of the 2010 Discover annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 185

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136
  • 137
  • 138
  • 139
  • 140
  • 141
  • 142
  • 143
  • 144
  • 145
  • 146
  • 147
  • 148
  • 149
  • 150
  • 151
  • 152
  • 153
  • 154
  • 155
  • 156
  • 157
  • 158
  • 159
  • 160
  • 161
  • 162
  • 163
  • 164
  • 165
  • 166
  • 167
  • 168
  • 169
  • 170
  • 171
  • 172
  • 173
  • 174
  • 175
  • 176
  • 177
  • 178
  • 179
  • 180
  • 181
  • 182
  • 183
  • 184
  • 185

Retained interests classified as available-for-sale investment securities at November 30, 2009 were carried at amounts
that approximated fair value with changes in the fair value estimates recorded in other comprehensive income, net of tax.
Retained interests classified as held-to-maturity investment securities were carried at amortized cost. All other retained
interests in credit card asset securitizations were recorded in amounts due from asset securitization at amounts that
approximated fair value.
Key estimates and sensitivities of reported fair values of certain retained interests to immediate 10% and 20% adverse
changes in those estimates were as follows (dollars in millions):
November 30,
2009
Interest-only receivable strip (carrying amount/fair value) ................................................................................................................... $ 118
Weighted average life (in months)...................................................................................................................................................... 3.5
Weighted average payment rate (rate per month) ................................................................................................................................ 18.70%
Impact on fair value of 10% adverse change .................................................................................................................................... $ (4)
Impact on fair value of 20% adverse change .................................................................................................................................... $ (7)
Weighted average principal charge-offs (rate per annum) ..................................................................................................................... 9.91%
Impact on fair value of 10% adverse change .................................................................................................................................... $ (46)
Impact on fair value of 20% adverse change .................................................................................................................................... $ (81)
Weighted average discount rate (rate per annum) ................................................................................................................................ 16.50%
Impact on fair value of 10% adverse change .................................................................................................................................... $ 0
Impact on fair value of 20% adverse change .................................................................................................................................... $ (1)
Cash collateral accounts (carrying amount/fair value) ......................................................................................................................... $ 823
Weighted average discount rate (rate per annum) ................................................................................................................................ 1.99%
Impact on fair value of 10% adverse change .................................................................................................................................... $ (3)
Impact on fair value of 20% adverse change .................................................................................................................................... $ (7)
Certificated retained beneficial interests reported as available-for-sale investment securities (carrying amount/fair value) ........................... $2,205
Weighted average discount rate (rate per annum) ................................................................................................................................ 6.58%
Impact on fair value of 10% adverse change .................................................................................................................................... $ (14)
Impact on fair value of 20% adverse change .................................................................................................................................... $ (27)
The sensitivity analyses of the interest-only strip receivable, cash collateral accounts and certificated retained beneficial
interests are hypothetical and should be used with caution. Changes in fair value based on a 10% or 20% variation in an
estimate generally cannot be extrapolated because the relationship of the change in the estimate to the change in fair
value may not be linear. Also, the effect of a variation in a particular estimate on the fair value of the interest-only strip
receivable, specifically, is calculated independent of changes in any other estimate; in practice, changes in one factor
may result in changes in another (for example, increases in market interest rates may result in lower payments and
increased charge-offs), which might magnify or counteract the sensitivities. In addition, the sensitivity analyses do not
consider any action that the Company may take to mitigate the impact of any adverse changes in the key estimates.
During the years ended November 30, 2009 and 2008, the Company recognized a net revaluation of its subordinated
retained interests, principally the interest-only strip receivable, consisting of losses of $160.1 million and $119.3 million,
respectively, in securitization income in the consolidated statements of income. Included in these amounts are $16.7
million and $71.9 million, respectively, of initial gains on new securitization transactions, net of issuance discounts, as
applicable.
-114-