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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 estimate of probable incurred losses considers uncollectible principal, interest and
fees reflected in the loan receivables. The allowance is evaluated quarterly 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. Charge-offs of loan
balances representing unpaid interest and fees result in a reversal of interest and fee income, respectively, which is
effectively a reclassification of provision of loan losses (also see “— Significant Revenue Recognition Accounting Policies
— Loan Interest and Fee Income”).
The Company calculates its allowance for loan losses by estimating probable losses separately for classes of the
loan portfolio with similar loan characteristics, which generally results in segmenting the portfolio by loan product type.
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. For substantially all of its loan receivables, the Company uses a migration analysis to estimate the likelihood
that a loan will progress through the various stages of delinquency. The Company uses other analyses to estimate losses
incurred on non-delinquent accounts. The considerations in these analyses include past and current loan performance,
loan growth and seasoning, current risk management practices, account collection strategies, economic conditions,
bankruptcy filings, policy changes and forecasting uncertainties. For the majority of its portfolio, the Company estimates
its allowance for loan losses on a pooled basis, which includes loans that are delinquent and/or no longer accruing
interest and/or certain loans that have defaulted from a loan modification program.
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 and personal loans, as well as temporary
modifications on student loans and certain grants of student loan forbearance are accounted for as troubled debt
restructurings. With respect to student loans, the Company does not anticipate significant shortfalls in collections on the
contractual amounts due from borrowers using a first hardship forbearance period as the historical performance of
these borrowers is not significantly different from the overall portfolio. However, when a borrower is 30 or more days
delinquent and granted a second hardship 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.
Consistent with the Company's measurement of impairment of modified loans on a pooled basis, the discount rate used
for credit card loans in internal programs is the average current annual percentage rate applied to non-impaired credit
card loans, which approximates what would have applied to the pool of modified loans prior to impairment. The
discount rate used for credit card loans in external programs reflects a rate that is consistent with rates offered to
cardmembers not in a program that have similar risk characteristics. For student and personal loans, the discount rate
used is the average contractual rate prior to modification. 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.
Purchased software and capitalized costs related to internally developed software are amortized over their useful
lives of three to ten years. Costs incurred during the application development stage related to internally developed
software are capitalized. Costs are expensed as incurred during the preliminary project stage and post implementation