DFS 5.31.2011 10Q
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended May 31, 2011
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                    to 
                    
Commission File Number 001-33378
DISCOVER FINANCIAL SERVICES
(Exact name of registrant as specified in its charter)
 
Delaware
 
36-2517428
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
2500 Lake Cook Road,
Riverwoods, Illinois 60015
 
(224) 405-0900
(Address of principal executive offices, including zip code)
 
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  S    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  S    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  x
Accelerated filer  o
Non-accelerated filer  o (Do not check if a  smaller reporting company)    
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  S
As of June 24, 2011, there were 545,669,541 shares of the registrant’s Common Stock, par value $0.01 per share, outstanding.
 

Table of Contents

DISCOVER FINANCIAL SERVICES
Quarterly Report on Form 10-Q
for the quarterly period ended May 31, 2011
TABLE OF CONTENTS
 
 
 
Except as otherwise indicated or unless the context otherwise requires, “Discover Financial Services,” “Discover,” “DFS,” “we,” “us,” “our,” and “the Company” refer to Discover Financial Services and its subsidiaries.
We own or have rights to use the trademarks, trade names and service marks that we use in conjunction with the operation of our business, including, but not limited to: Discover®, PULSE®, Cashback Bonus®, Discover® More® Card, Discover® MotivaSM Card, Discover® Open Road® Card, Discover® Network and Diners Club International®. All other trademarks, trade names and service marks included in this quarterly report on Form 10-Q are the property of their respective owners.
Table of Contents

Part I.
FINANCIAL INFORMATION

Item 1.
Financial Statements
DISCOVER FINANCIAL SERVICES
Condensed Consolidated Statements of Financial Condition
 
May 31,
2011
 
November 30,
2010
 
(unaudited)
(dollars in thousands,
except share amounts)
Assets
 
 
 
Cash and cash equivalents
$
3,772,960

 
$
5,098,733

Restricted cash
1,014,369

 
1,363,758

Other short-term investments
—

 
375,000

Investment securities:

 

Available-for-sale (amortized cost of $5,456,691 and $4,989,958 at May 31, 2011 and November 30, 2010, respectively)
5,496,034

 
5,002,579

Held-to-maturity (fair value of $58,766 and $70,195 at May 31, 2011 and November 30, 2010, respectively)
61,376

 
72,816

Total investments securities
5,557,410

 
5,075,395

Loan receivables:
 
 
 
Loans held for sale
756,683

 
788,101

Loan portfolio:
 
 
 
Credit card
44,960,645

 
45,156,994

Other
3,845,530

 
2,891,318

Purchased credit-impaired loans
2,946,997

 
—

Total loan portfolio
51,753,172

 
48,048,312

Total loan receivables
52,509,855

 
48,836,413

Allowance for loan losses
(2,632,320
)
 
(3,304,118
)
Net loan receivables
49,877,535

 
45,532,295

Premises and equipment, net
471,112

 
460,732

Goodwill
255,421

 
255,421

Intangible assets, net
191,296

 
188,973

Other assets
2,297,430

 
2,434,661

Total assets
$
63,437,533

 
$
60,784,968

Liabilities and Stockholders’ Equity
 
 
 
Deposits:
 
 
 
Interest-bearing deposit accounts
$
35,115,848

 
$
34,309,839

Non-interest bearing deposit accounts
103,335

 
103,544

Total deposits
35,219,183

 
34,413,383

Short-term borrowings
100,000

 
—

Long-term borrowings
17,938,507

 
17,705,728

Accrued expenses and other liabilities
2,656,543

 
2,209,011

Total liabilities
55,914,233

 
54,328,122

Commitments, contingencies and guarantees (Note 8, 11, and 12)

 

Stockholders’ Equity:
 
 
 
Common stock, par value $.01 per share; 2,000,000,000 shares authorized; 548,373,523 and 547,128,270 shares issued at May 31, 2011 and November 30, 2010, respectively
5,484

 
5,471

Additional paid-in capital
3,469,557

 
3,435,318

Retained earnings
4,147,598

 
3,126,488

Accumulated other comprehensive loss
(66,358
)
 
(82,548
)
Treasury stock, at cost; 2,721,186 and 2,446,506 shares at May 31, 2011 and November 30, 2010, respectively
(32,981
)
 
(27,883
)
Total stockholders’ equity
7,523,300

 
6,456,846

Total liabilities and stockholders’ equity
$
63,437,533

 
$
60,784,968


The table below presents the carrying amounts of certain assets and liabilities of Discover Financial Services’ consolidated variable interest entities (VIEs) which are included in the condensed consolidated statements of financial condition above. The assets in the table below include only those assets that can be used to settle obligations of the consolidated VIEs. The liabilities in the table below include third party liabilities of consolidated VIEs only, and exclude intercompany balances that eliminate in consolidation. The liabilities also exclude amounts for which creditors have recourse to the general credit of the Company.
 
May 31,
2011
 
November 30,
2010
 
(unaudited)
(dollars in thousands)
Assets
 
 
 
Restricted cash
$
1,014,369

 
$
1,363,758

Credit card loan receivables
33,601,461

 
34,452,989

Other loan receivables
2,937,292

 
—

Allowance for loan losses allocated to securitized loan receivables
(1,880,030
)
 
(2,431,399
)
Other assets
31,692

 
24,083

Liabilities
 
 
 
Long-term borrowings
$
15,486,823

 
$
14,919,400

See Notes to Condensed Consolidated Financial Statements.

1
Table of Contents

DISCOVER FINANCIAL SERVICES
Condensed Consolidated Statements of Income

 
For the Three Months Ended
May 31,
 
For the Six Months Ended
May 31,
 
2011
 
2010
 
2011
 
2010
 
(unaudited) (dollars in thousands, except per share amounts)
Interest income:
 
 
 
 
 
 
 
Credit card loans
$
1,403,191

 
$
1,475,860

 
$
2,820,307

 
$
2,967,747

Other loans
151,802

 
62,894

 
271,338

 
115,562

Investment securities
14,644

 
5,064

 
26,859

 
10,392

Other interest income
3,641

 
7,964

 
7,738

 
17,231

Total interest income
1,573,278

 
1,551,782

 
3,126,242

 
3,110,932

Interest expense:
 
 
 
 
 
 
 
Deposits
251,170

 
298,335

 
507,865

 
603,784

Short-term borrowings
37

 
—

 
83

 
—

Long-term borrowings
128,772

 
106,286

 
254,759

 
214,561

Total interest expense
379,979

 
404,621

 
762,707

 
818,345

Net interest income
1,193,299

 
1,147,161

 
2,363,535

 
2,292,587

Provision for loan losses
175,540

 
724,264

 
593,249

 
2,111,470

Net interest income after provision for loan losses
1,017,759

 
422,897

 
1,770,286

 
181,117

Other income:
 
 
 
 
 
 
 
Discount and interchange revenue, net
265,826

 
269,286

 
526,742

 
531,277

Fee product revenue
105,116

 
101,363

 
213,669

 
205,458

Loan fee income
80,753

 
69,733

 
166,353

 
175,018

Transaction processing revenue
45,310

 
36,468

 
87,861

 
69,386

Merchant fees
4,216

 
7,426

 
8,871

 
15,871

Gain (loss) on investment securities
(149
)
 
—

 
(7
)
 
180

Other income
42,772

 
28,568

 
102,979

 
61,530

Total other income
543,844

 
512,844

 
1,106,468

 
1,058,720

Other expense:
 
 
 
 
 
 
 
Employee compensation and benefits
229,826

 
202,536

 
442,901

 
398,300

Marketing and business development
124,181

 
97,970

 
259,846

 
182,643

Information processing and communications
66,588

 
63,087

 
131,305

 
128,505

Professional fees
104,749

 
78,067

 
195,080

 
153,880

Premises and equipment
17,957

 
17,691

 
35,205

 
35,551

Other expense
91,843

 
54,197

 
165,955

 
89,473

Total other expense
635,144

 
513,548

 
1,230,292

 
988,352

Income before income tax expense
926,459

 
422,193

 
1,646,462

 
251,485

Income tax expense
326,040

 
164,126

 
581,151

 
96,956

Net income
$
600,419

 
$
258,067

 
$
1,065,311

 
$
154,529

Net income allocated to common stockholders
$
593,488

 
$
184,590

 
$
1,052,912

 
$
63,524

Basic earnings per share
$
1.09

 
$
0.34

 
$
1.93

 
$
0.12

Diluted earnings per share
$
1.09

 
$
0.33

 
$
1.93

 
$
0.12

Dividends paid per share
$
0.06

 
$
0.02

 
$
0.08

 
$
0.04

See Notes to the Condensed Consolidated Financial Statements.

2
Table of Contents

DISCOVER FINANCIAL SERVICES
Condensed Consolidated Statements of Changes in Stockholders’ Equity


 
Preferred Stock
 
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Treasury
Stock
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
 
(unaudited) (dollars and shares in thousands)
Balance at November 30, 2009
1,225

 
$
1,158,066

 
544,799

 
$
5,448

 
$
3,573,231

 
$
3,873,262

 
$
(154,818
)
 
$
(19,642
)
 
$
8,435,547

Adoption of ASC 810 (FASB Statement No. 167), net of tax
—

 
—

 
—

 
—

 
—

 
(1,411,117
)
 
78,561

 
—

 
(1,332,556
)
Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
—

 
—

 
—

 
—

 
—

 
154,529

 
—

 
—

 
154,529

Adjustments related to investment securities, net of tax
—

 
—

 
—

 
—

 
—

 
—

 
2,238

 
—

 
 
Adjustments related to pension and postretirement benefits, net of tax
—

 
—

 
—

 
—

 
—

 
—

 
79

 
—

 
 
Other comprehensive income
—

 
—

 
—

 
—

 
—

 
—

 
2,317

 
—

 
2,317

Total comprehensive income
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
156,846

Purchases of treasury stock
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(5,469
)
 
(5,469
)
Common stock issued under employee benefit plans
—

 
—

 
43

 
—

 
545

 
—

 
—

 
—

 
545

Common stock issued and stock-based compensation expense
—

 
—

 
1,401

 
14

 
21,285

 
—

 
—

 
—

 
21,299

Income tax deficiency on stock based compensation expense
—

 
—

 
—

 
—

 
(1,369
)
 
—

 
—

 
—

 
(1,369
)
Dividends paid—common stock
—

 
—

 
—

 
—

 
—

 
(21,964
)
 
—

 
—

 
(21,964
)
Accretion of preferred stock discount
—

 
66,492

 
—

 
—

 
—

 
(66,492
)
 
—

 
—

 
—

Dividends—preferred stock
—

 
—

 
—

 
—

 
—

 
(23,811
)
 
—

 
—

 
(23,811
)
Redemption of preferred stock
(1,225
)
 
(1,224,558
)
 
—

 
—

 
—

 
—

 
—

 
—

 
(1,224,558
)
Special dividend—Morgan Stanley
—

 
—

 
—

 
—

 
—

 
33,757

 
—

 
—

 
33,757

Balance at May 31, 2010
—

 
$
—

 
546,243

 
$
5,462

 
$
3,593,692

 
$
2,538,164

 
$
(73,940
)
 
$
(25,111
)
 
$
6,038,267

Balance at November 30, 2010
—

 
$
—

 
547,128

 
$
5,471

 
$
3,435,318

 
$
3,126,488

 
$
(82,548
)
 
$
(27,883
)
 
$
6,456,846

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
—

 
—

 
—

 
—

 
—

 
1,065,311

 
—

 
—

 
1,065,311

Adjustments related to investment securities, net of tax
—

 
—

 
—

 
—

 
—

 
—

 
16,727

 
—

 
 
Adjustments related to cash flow hedges, net of tax
—

 
—

 
—

 
—

 
—

 
—

 
(878
)
 
—

 
 
Adjustments related to pension and postretirement benefits, net of tax
—

 
—

 
—

 
—

 
—

 
—

 
341

 
—

 
 
Other comprehensive income
—

 
—

 
—

 
—

 
—

 
—

 
16,190

 
—

 
16,190

Total comprehensive income
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
1,081,501

Purchases of treasury stock
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(5,098
)
 
(5,098
)
Common stock issued under employee benefit plans
—

 
—

 
26

 
—

 
547

 
—

 
—

 
—

 
547

Common stock issued and stock-based compensation expense
—

 
—

 
1,220

 
13

 
33,692

 
—

 
—

 
—

 
33,705

Dividends paid—common stock
—

 
—

 
—

 
—

 
—

 
(44,201
)
 
—

 
—

 
(44,201
)
Balance at May 31, 2011
—

 
$
—

 
548,374

 
$
5,484

 
$
3,469,557

 
$
4,147,598

 
$
(66,358
)
 
$
(32,981
)
 
$
7,523,300


Notes to the Condensed Consolidated Financial Statements.

3
Table of Contents

DISCOVER FINANCIAL SERVICES
Condensed Consolidated Statements of Cash Flows
 
For the Six Months Ended
May 31,
 
2011
 
2010
 
(unaudited)

 
(dollars in thousands)
Cash flows from operating activities
 
 
 
Net income
$
1,065,311

 
$
154,529

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan losses
593,249

 
2,111,470

Deferred income taxes
206,679

 
(14,949
)
Depreciation and amortization on premises and equipment
43,993

 
46,272

Amortization of deferred revenues
(123,758
)
 
(91,538
)
Other depreciation and amortization
(53,502
)
 
37,479

Loss (gain) on investment securities
7

 
(180
)
Loss (gain) on equipment
123

 
(159
)
Stock-based compensation expense
22,640

 
20,923

Gain on purchase of business
(15,917
)
 
—

Net change in loans originated for sale
31,418

 
(98,665
)
Changes in assets and liabilities:

 

(Increase) decrease in other assets
58,062

 
(260,270
)
Increase (decrease) in accrued expenses and other liabilities
427,637

 
538,895

Net cash provided by operating activities
2,255,942

 
2,443,807

Cash flows from investing activities
 
 
 
Maturities of other short-term investments
375,000

 
1,350,000

Purchases of other short-term investments
—

 
(375,000
)
Maturities and sales of available-for-sale investment securities
621,507

 
394,418

Purchases of available-for-sale investment securities
(1,109,470
)
 
(929,070
)
Maturities of held-to-maturity investment securities
11,886

 
6,229

Purchases of held-to-maturity investment securities
(550
)
 
(549
)
Net principal disbursed on loans held for investment
(1,264,595
)
 
(1,085,456
)
Purchase of loan receivables
(464,897
)
 
—

Purchase of business, net of cash acquired
(401,158
)
 
—

Decrease in restricted cash—special dividend escrow
—

 
643,311

Decrease in restricted cash—for securitization investors
546,655

 
553,648

Proceeds from sale of equipment
13

 
144

Purchases of premises and equipment
(49,868
)
 
(17,461
)
Net cash (used for) provided by investing activities
(1,735,477
)
 
540,214

Cash flows from financing activities
 
 
 
Net increase in short-term borrowings
100,000

 
—

Proceeds from issuance of securitized debt
1,500,000

 
1,000,000

Maturities of securitized debt
(3,876,294
)
 
(8,360,528
)
Proceeds from issuance of other long-term borrowings
—

 
1,003,427

Maturities of other long-term borrowings
(334,122
)
 
(188,200
)
Proceeds from issuance of common stock
7,153

 
—

Purchases of treasury stock
(5,098
)
 
(5,469
)
Net increase in deposits
802,624

 
1,952,266

Proceeds from acquisition of deposits
—

 
976,627

Redemption of preferred stock
—

 
(1,224,558
)
Dividend paid to Morgan Stanley
—

 
(775,000
)
Dividends paid on common and preferred stock
(40,501
)
 
(48,497
)
Excess tax benefits related to stock-based compensation
—

 
921

Net cash used for financing activities
(1,846,238
)
 
(5,669,011
)
Net decrease in cash and cash equivalents
(1,325,773
)
 
(2,684,990
)
Cash and cash equivalents, at beginning of period
5,098,733

 
13,020,719

Cash and cash equivalents, at end of period
$
3,772,960

 
$
10,335,729

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
Cash paid during the year for:
 
 
 
Interest expense
$
735,063

 
$
765,286

Income taxes, net of income tax refunds
$
377,076

 
$
56,989

Non-cash transactions:
 
 
 
Assumption of SLC debt
$
2,921,372

 
$
—

Special dividend—Morgan Stanley
$
—

 
$
33,757


See Notes to the Condensed Consolidated Financial Statements.

4
Table of Contents

Notes to the Condensed Consolidated Financial Statements
(unaudited)
 
1.
Background and Basis of Presentation
Description of Business. Discover Financial Services (“DFS” or the “Company”) is a direct banking and payment services company. The Company is a bank holding company under the Bank Holding Company Act of 1956 and a financial holding company under the Gramm-Leach-Bliley Act. The Company is subject to oversight, regulation and examination by the Board of Governors of the Federal Reserve System (the “Federal Reserve”). Through its Discover Bank subsidiary, a Delaware state-chartered bank, the Company offers its customers credit cards, student loans, personal loans and deposit products. Through its DFS Services LLC subsidiary and its subsidiaries, the Company operates the Discover Network, the PULSE Network (“PULSE”) and Diners Club International (“Diners Club”). The Discover Network is a payment card transaction processing network for Discover card-branded and third-party issued credit, debit and prepaid cards. PULSE operates an electronic funds transfer network, providing financial institutions issuing debit cards on the PULSE network with access to ATMs domestically and internationally, as well as point of sale terminals at retail locations throughout the U.S. for debit card transactions. Diners Club is a global payments network of licensees, which are generally financial institutions, that issue Diners Club branded credit cards and/or provide card acceptance services.
The Company’s business segments are Direct Banking and Payment Services. The Direct Banking segment includes Discover card-branded credit cards issued to individuals and small businesses on the Discover Network and other consumer products and services, including personal loans, student loans, prepaid cards and other consumer lending and deposit products offered through the Company’s Discover Bank subsidiary. The Payment Services segment includes PULSE, Diners Club and the Company’s third-party issuing business, which includes credit, debit and prepaid cards issued on the Discover Network by third parties.
Basis of Presentation. The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. In the opinion of management, the financial statements reflect all adjustments which are necessary for a fair presentation of the results for the quarter. All such adjustments are of a normal, recurring nature. The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and related disclosures. These estimates are based on information available as of the date of the condensed consolidated financial statements. The Company believes that the estimates used in the preparation of the condensed consolidated financial statements are reasonable. Actual results could differ from these estimates. These interim condensed consolidated financial statements should be read in conjunction with the Company’s 2010 audited consolidated financial statements filed with the Company’s annual report on Form 10-K for the fiscal year ended November 30, 2010.
Recently Issued Accounting Pronouncements
    
In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. This ASU will require companies to present the components of net income and other comprehensive income either as one continuous statement or as two consecutive statements. It eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders' equity. The standard does not change the items which must be reported in other comprehensive income, how such items are measured or when they must be reclassified to net income. This standard is effective for interim and annual periods beginning after December 15, 2011. Because this ASU impacts presentation only, it will have no effect on the Company's financial condition, results of operations or cash flows.

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This ASU is intended to result in convergence between U.S. GAAP and International Financial Reporting Standards (“IFRS”) requirements for measurement of and disclosures about fair value. The amendments are not expected to have a significant impact on companies applying U.S. GAAP. Key provisions of the amendment include: a prohibition on grouping financial instruments for purposes of determining fair value, except when an entity manages market and credit risks on the basis of the entity’s net exposure to the group; an extension of the prohibition against the use of a blockage factor to all fair value measurements (that prohibition currently applies only to financial instruments with quoted prices in active markets); and a requirement that for recurring Level 3 fair value measurements, entities disclose quantitative information about unobservable inputs, a description of the valuation process used and qualitative details about the sensitivity of the measurements. In addition, for items not carried at fair value but for

5
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which fair value is disclosed, entities will be required to disclose the level within the fair value hierarchy that applies to the fair value measurement disclosed. This ASU is effective for interim and annual periods beginning after December 15, 2011. The adoption of this ASU is not expected to have a significant impact on the Company’s fair value measurements, financial condition, results of operations or cash flows.

In April 2011, the FASB issued ASU No. 2011-03, Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements. This ASU amends the sale accounting requirement concerning a transferor’s ability to repurchase transferred financial assets even in the event of default by the transferee, which typically is facilitated in a repurchase agreement by the presence of a collateral maintenance provision. Specifically, the level of cash collateral received by a transferor will no longer be relevant in determining whether a repurchase agreement constitutes a sale. As a result of this amendment, more repurchase agreements will be treated as secured financings rather than sales. This ASU is effective prospectively for new transfers and existing transactions that are modified in the first interim or annual period beginning on or after December 15, 2011. Because essentially all repurchase agreements entered into by the Company have historically been deemed to constitute secured financing transactions, this amendment is expected to have no impact on the Company’s characterization of such transactions and therefore is not expected to have any impact on the Company's financial condition, results of operations or cash flows.

In April 2011, the FASB issued ASU No. 2011-02, Receivables (Topic 310): A Creditor's Determination of Whether a Restructuring Is a Troubled Debt Restructuring. This ASU is intended to clarify the FASB’s views on the conditions under which a loan modification should be deemed to be a troubled debt restructuring and could result in the determination that more loan modifications meet that definition. Loans which constitute troubled debt restructurings are considered impaired when calculating the allowance for loan losses and are subject to additional disclosures pursuant to ASU No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, which becomes effective concurrent with ASU No. 2011-02. The amendment is effective for the first interim or annual period ending after June 15, 2011 and must be applied retrospectively to loan modifications occurring on or after the beginning of the fiscal year of adoption. The Company has reviewed the loan modifications it makes in light of this guidance, and has determined that this amendment is not expected to result in any change to the characterization of the Company's current loan modification programs. The amendment is therefore not expected to impact the Company's financial condition, results of operations or cash flows. 

2.
Business Combinations
Acquisition of The Student Loan Corporation. On December 31, 2010, the Company acquired The Student Loan Corporation (“SLC”), which is now a wholly-owned subsidiary of Discover Bank and included in the Company’s Direct Banking segment. The Company acquired SLC’s ongoing private student loan business, which includes certain private student loans held in three securitization trusts and other assets, and assumed SLC’s asset-backed securitization debt incurred by those trusts and other liabilities. The acquired loans are considered to be purchased credit-impaired loans for accounting purposes, the details of which are discussed further in Note 4: Loan Receivables. The acquisition significantly increased the size of the Company’s private student loan portfolio. In addition, the acquisition has provided the Company with a developed student loan business platform, additional school relationships and SLC’s website. Since the acquisition date, the results of operations and cash flows of SLC have been included in the Company’s condensed consolidated results of operations and cash flows. Pro forma data is not provided as the impact of the SLC acquisition was not significant to the Company’s condensed consolidated results of operations or cash flows.
Net cash consideration paid. The following table provides a calculation of the amount paid by the Company for SLC based on the net assets of the SLC securitization trusts acquired after applying an 8.5% discount to the trust assets (the “Trust Certificate Purchase Price”) (dollars in millions):

 
Actual
 
Estimate at
Closing
December 31,
2010
 
 
Gross trust assets
$
3,977

 
$
3,993

Less: 8.5% discount
(338
)
 
(339
)
Net trust assets
3,639

 
3,654

Less: Principal amount of and accrued interest on trust debt
(3,193
)
 
(3,215
)
Trust Certificate Purchase Price
$
446

 
$
439



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Although the Company paid SLC shareholders $600 million for the acquisition of SLC (“Aggregate Merger Consideration”), the Company received a purchase price adjustment from Citibank, N.A. (“Citibank”) equivalent to the amount by which the Aggregate Merger Consideration exceeded the value of the Trust Certificate Purchase Price. In addition, Citibank agreed to adjust the cash consideration paid by the Company to compensate it for (i) agreeing to commute certain insurance policies covering certain of the loans acquired and (ii) for the value of non-trust related liabilities assumed by the Company. The following table provides a summary of total consideration paid by Discover at the closing of the acquisition on December 31, 2010 and a summary of the consideration revised for post-closing adjustments (dollars in millions): 
 
Actual
 
Estimate at
Closing
December 31,
2010
 
 
Aggregate Merger Consideration
$
600

 
$
600

Less: Purchase price adjustment(1)
(154
)
 
(161
)
Trust Certificate Purchase Price
446

 
439

Less: Further adjustments provided for by Citibank
 
 
 
Cash received for consent to insurance commutation
(16
)
 
(16
)
Cash received related to reimbursable liabilities(1)
(29
)
 
(57
)
Net cash consideration paid(1)
$
401

 
$
366

______________
(1)
Based on the final SLC closing balance sheet, the Company accrued a $35 million liability, at the end of the first quarter of fiscal 2011, payable to Citibank for post-closing adjustments arising from a $7 million increase in the Trust Certificate Purchase Price and a $28 million reduction in reimbursable liabilities, which together resulted in the difference between the actual and estimated numbers shown. The accrued amount was paid to Citibank during the quarter ended May 31, 2011.
Net assets acquired. The Company acquired net assets (including $155 million of cash) with an aggregate fair value of $572 million in exchange for cash consideration of $556 million, resulting in the recognition of a bargain purchase gain of approximately $16 million. The bargain purchase gain primarily resulted from Citibank’s adjustment of the cash consideration to be paid by the Company in exchange for the Company’s consent to permit SLC to commute, immediately prior to the acquisition, certain student loan insurance policies covering loans in one of the three trusts. The bargain purchase gain is recorded in other income on the Company’s condensed consolidated statement of income. Adjustments to these amounts may occur during 2011 as the Company completes its final valuation analysis of assets acquired and liabilities assumed.
The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of the SLC acquisition (dollars in thousands):

 
At December 31,
2010
Student loan receivables
$
3,050,784

Cash
155,347

Indemnification asset
101,127

Student relationships intangible
2,400

Trade name intangible
3,800

Total intangible assets
6,200

Other assets
218,514

Total assets acquired
3,531,972

Securitized debt
2,921,372

Other liabilities
38,178

Total liabilities assumed
2,959,550

Net assets acquired
$
572,422

The Company acquired $6.2 million in identifiable intangible assets. These intangible assets consist of student relationships and trade name intangibles. Acquired student relationships consist of those relationships in existence between SLC and the numerous students that carry student loan balances. This intangible asset is deemed to have a finite useful life of five years and will be amortized over this period. Trade name intangibles relate to trademarks, trade names and internet domains and content. This intangible asset is deemed to have an indefinite useful life and therefore is not subject to amortization.

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The Company also recorded a $101 million indemnification asset at the acquisition date. This asset reflects the discounted present value of payments expected to be received under Citibank’s indemnification of student loan credit losses that would have been recoverable under certain student loan insurance policies which, as noted above, were commuted pursuant to an agreement entered into by SLC with the Company’s consent immediately prior to the acquisition. The indemnification pertains only to loans in one of the three SLC securitization trusts that we acquired, namely the SLC Private Student Loan Trust 2010-A (“SLC 2010-A”). The SLC 2010-A trust included loans with an aggregate outstanding principal balance of $1.2 billion at the time of acquisition; outstanding loans in that trust totaled $1.1 billion as of May 31, 2011. The initial value of the indemnification asset is based on the insured portion of expected credit losses reflected in the initial carrying value of the related loans. Under the terms of the indemnification agreement with Citibank, indemnification payments related to student loan credit losses are subject to an overall cap of $166.8 million, consistent with the terms of the insurance policies which the indemnification serves to replace.
The subsequent accounting for the indemnification asset will generally reflect the manner in which the indemnified loans are subsequently measured. The value of the indemnification asset will increase or decrease as expected credit losses on the purchased credit-impaired (“PCI”) student loans increase or decrease, respectively. An increase in expected losses on PCI student loans that results in the immediate recognition of an allowance for loan losses will result in an immediate increase in the indemnification asset. A decrease in expected losses that results in an immediate reversal of a previously recognized loan loss allowance will result in the immediate reduction of the indemnification asset. Recognition of an allowance for loan losses on PCI student loans is discussed in more detail within Note 4: Loan Receivables under “Purchased Credit-Impaired Loans.” To the extent that a decrease in expected losses results in a prospective increase in the accretable yield on PCI student loans rather than an immediate reduction of the loan loss allowance, the value of the indemnification asset will be adjusted prospectively through a reduction in the rate of amortization. Amortization and valuation adjustments to the indemnification asset are recorded through other income on the condensed consolidated statement of income.

3.
Investment Securities
 
The Company’s investment securities consist of the following (dollars in thousands):

 
May 31,
2011
 
November 30,
2010
U.S. Treasury securities
$
2,084,968

 
$
1,575,403

U.S. government agency securities
2,385,116

 
1,888,701

States and political subdivisions of states
43,086

 
51,774

Other securities:

 

Credit card asset-backed securities of other issuers
522,149

 
1,031,112

Corporate debt securities(1)
504,351

 
507,896

Residential mortgage-backed securities
7,384

 
9,800

Other debt and equity securities
10,356

 
10,709

Total other securities
1,044,240

 
1,559,517

Total investment securities
$
5,557,410

 
$
5,075,395

___________________________
 
(1)
Amount represents corporate debt obligations issued under the Temporary Liquidity Guarantee Program (TLGP) that are guaranteed by the Federal Deposit Insurance Corporation (FDIC).

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The amortized cost, gross unrealized gains and losses, and fair value of available-for-sale and held-to-maturity investment securities are as follows (dollars in thousands): 

 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
At May 31, 2011
 
 
 
 
 
 
 
Available-for-Sale Investment Securities(1)
 
 
 
 
 
 
 
U.S Treasury securities
$
2,072,437

 
$
12,342

 
$
(361
)
 
$
2,084,418

U.S government agency securities
2,369,032

 
16,084

 
—

 
$
2,385,116

Credit card asset-backed securities of other issuers
512,159

 
9,997

 
(7
)
 
$
522,149

Corporate debt securities
503,063

 
1,288

 
—

 
$
504,351

Total available-for-sale investment securities
$
5,456,691

 
$
39,711

 
$
(368
)
 
$
5,496,034

Held-to-Maturity Investment Securities(2)
 
 
 
 
 
 
 
U.S. Treasury securities(3)
$
550

 
$
—

 
$
—

 
$
550

States and political subdivisions of states
43,086

 
204

 
(3,539
)
 
39,751

Residential mortgage-backed securities
7,384

 
725

 
—

 
8,109

Other debt securities(4)
10,356

 
—

 
—

 
10,356

Total held-to-maturity investment securities
$
61,376

 
$
929

 
$
(3,539
)
 
$
58,766

At November 30, 2010
 
 
 
 
 
 
 
Available-for-Sale Investment Securities(1)
 
 
 
 
 
 
 
U.S Treasury securities
$
1,576,094

 
$
344

 
$
(1,585
)
 
$
1,574,853

U.S government agency securities
1,888,909

 
1,090

 
(1,298
)
 
1,888,701

Credit card asset-backed securities of other issuers
1,017,183

 
13,983

 
(54
)
 
1,031,112

Corporate debt securities
507,757

 
241

 
(102
)
 
507,896

Equity securities
15

 
2

 
—

 
17

Total available-for-sale investment securities
$
4,989,958

 
$
15,660

 
$
(3,039
)
 
$
5,002,579

Held-to-Maturity Investment Securities(2)
 
 
 
 
 
 
 
U.S. Treasury securities(3)
$
550

 
$
—

 
$
—

 
$
550

States and political subdivisions of states
51,774

 
281

 
(3,771
)
 
48,284

Residential mortgage-backed securities
9,800

 
869

 
—

 
10,669

Other debt securities(4)
10,692

 
—

 
—

 
10,692

Total held-to-maturity investment securities
$
72,816

 
$
1,150

 
$
(3,771
)
 
$
70,195

_________________________
(1)
Available-for-sale investment securities are reported at fair value.
(2)
Held-to-maturity investment securities are reported at amortized cost.
(3)
Amount represents securities pledged as collateral to a government-related merchant for which transaction settlement occurs beyond the normal 24-hour period.
(4)
Included in other debt securities at May 31, 2011 and November 30, 2010 are commercial advances of $7.6 million and $7.9 million respectively related to the Company’s Community Reinvestment Act strategies.

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The following table provides information about investment securities with aggregate gross unrealized losses and the length of time that individual investment securities have been in a continuous unrealized loss position as of May 31, 2011 and November 30, 2010 (dollars in thousands):

 
Number of
Securities
in a Loss
Position
 
Less than 12 months
 
More than 12 months
 
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
At May 31, 2011
 
 
 
 
 
 
 
 
 
Available-for-Sale Investment Securities
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
3

 
$
227,467

 
$
361

 
$
—

 
$
—

U.S. government agency securities
—

 
—

 
—

 
$
—

 
$
—

Credit card asset-backed securities of other issuers
7

 
44,379

 
7

 
$
—

 
$
—

Corporate debt securities
—

 
—

 
—

 
$
—

 
$
—

Held-to-Maturity Investment Securities
 
 
 
 
 
 
 
 
 
State and political subdivisions of states
4

 
$
6,449

 
$
6

 
$
23,037

 
$
3,533

At November 30, 2010
 
 
 
 
 
 
 
 
 
Available-for-Sale Investment Securities
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
17

 
$
1,262,670

 
$
1,585

 
$
—

 
$
—

U.S. government agency securities
18

 
$
1,181,148

 
$
1,298

 
$
—

 
$
—

Credit card asset-backed securities of other issuers
23

 
$
238,646

 
$
54

 
$
—

 
$
—

Corporate debt securities
5

 
$
230,441

 
$
102

 
$
—

 
$
—

Held-to-Maturity Investment Securities
 
 
 
 
 
 
 
 
 
State and political subdivisions of states
4

 
$
7,731

 
$
239

 
$
27,603

 
$
3,532


During the three and six months ended May 31, 2011, the Company received $291.4 million and $633.4 million, respectively, of proceeds related to maturities or redemptions of investment securities. For the three and six months ended May 31, 2011, approximately $288.6 million and $621.3 million of these proceeds related to maturities of credit card asset-backed securities of other issuers.


The Company records unrealized gains and losses on its available-for-sale investment securities in other comprehensive income. For the six months ended May 31, 2011 and 2010, the Company recorded net unrealized gains of $26.7 million ($16.7 million after tax) and $3.6 million ($2.2 million after tax), respectively, in other comprehensive income.

At both May 31, 2011 and November 30, 2010, the Company had $3.5 million of gross unrealized losses in a continuous loss position for more than 12 months on its held-to-maturity investment securities in states and political subdivisions of states. The Company believes the unrealized loss on these investments is the result of changes in interest rates subsequent to the Company’s acquisitions of these securities and that the reduction in value is temporary. The Company does not intend to sell these investments nor does it expect to be required to sell these investments before recovery of their amortized cost bases, but rather expects to collect all amounts due according to the contractual terms of these securities.

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Maturities of available-for-sale debt securities and held-to-maturity debt securities at May 31, 2011 are provided in the table below (dollars in thousands): 

 
One Year
or
Less
 
After One
Year
Through
Five Years
 
After Five
Years
Through
Ten Years
 
After Ten
Years
 
Total
Available-for-sale—Amortized Cost (1)
 
 
 
 
 
 
 
 
 
U.S Treasury securities
$
401,431

 
$
1,671,006

 
$
—

 
$
—

 
$
2,072,437

U.S government agency securities
773,726

 
1,595,306

 
—

 
—

 
2,369,032

Credit card asset-backed securities of other issuers
340,613

 
171,546

 
—

 
—

 
512,159

Corporate debt securities
278,716

 
224,347

 
—

 
—

 
503,063

Total available-for-sale investment securities
$
1,794,486

 
$
3,662,205

 
$
—

 
$
—

 
$
5,456,691

Held-to-maturity—Amortized Cost (2)
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
550

 
$
—

 
$
—

 
$
—

 
$
550

State and political subdivisions of states
—

 
2,405

 
3,900

 
36,781

 
43,086

Residential mortgage-backed securities
—

 
—

 
—

 
7,384

 
7,384

Other debt securities
619

 
4,209

 
1,895

 
3,633

 
10,356

Total held-to-maturity investment securities
$
1,169

 
$
6,614

 
$
5,795

 
$
47,798

 
$
61,376

Available-for-sale—Fair Values (1)
 
 
 
 
 
 
 
 
 
U.S Treasury securities
$
401,812

 
$
1,682,606

 
$
—

 
$
—

 
$
2,084,418

U.S government agency securities
774,623

 
1,610,493

 
—

 
—

 
2,385,116

Credit card asset-backed securities of other issuers
342,109

 
180,040

 
—

 
—

 
522,149

Corporate debt securities
279,176

 
225,175

 
—

 
—

 
504,351

Total available-for-sale investment securities
$
1,797,720

 
$
3,698,314

 
$
—

 
$
—

 
$
5,496,034

Held-to-maturity—Fair Values (2)
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
550

 
$
—

 
$
—

 
$
—

 
$
550

State and political subdivisions of states
—

 
2,437

 
4,070

 
33,244

 
39,751

Residential mortgage-backed securities
—

 
—

 
—

 
8,109

 
8,109

Other debt securities
619

 
4,209

 
1,895

 
3,633

 
10,356

Total held-to-maturity investment securities
$
1,169

 
$
6,646

 
$
5,965

 
$
44,986

 
$
58,766

_____________________________
(1)
Available-for-sale investment securities are reported at fair value.
(2)
Held-to-maturity investment securities are reported at amortized cost.


11
Table of Contents

4.
Loan Receivables
The Company has three portfolio segments: credit card loans, other consumer loans and purchased credit-impaired (“PCI”) student loans acquired in the SLC transaction (See Note 2: Business Combinations). Within these portfolio segments, the Company has classes of receivables which are depicted in the table below (dollars in thousands): 

 
May 31,
2011
 
November 30,
2010
Loans held for sale(1)
$
756,683

 
$
788,101

Loan portfolio:
 
 
 
Credit card loans:
 
 
 
Discover card(2)
44,723,166

 
44,904,267

Discover business card
237,479

 
252,727

Total credit card loans
44,960,645

 
45,156,994

Other consumer loans:
 
 
 
Personal loans
2,212,888

 
1,877,633

Private student loans
1,620,165

 
999,322

Other
12,477

 
14,363

Total other consumer loans
3,845,530

 
2,891,318

PCI student loans(3)
2,946,997

 
—

Total loan portfolio
51,753,172

 
48,048,312

Total loan receivables
52,509,855

 
48,836,413

Allowance for loan losses
(2,632,320
)
 
(3,304,118
)
Net loan receivables
$
49,877,535

 
$
45,532,295

 ____________________________
(1)
Amount represents federal student loans. At May 31, 2011 and November 30, 2010, $478.1 million and $500.2 million of federal student loan receivables, respectively, were pledged as collateral against a long-term borrowing.
(2)
Amounts include $17.1 billion and $19.5 billion of underlying investors’ interest in trust debt at May 31, 2011 and November 30, 2010, respectively, and $16.5 billion and $14.9 billion in seller’s interest at May 31, 2011 and November 30, 2010, respectively. See Note 5: Credit Card and Student Loan Securitization Activities for further information.
(3)
Amount includes $2.9 billion of loans pledged as collateral against the notes issued from the SLC securitization trusts. See Note 5: Credit Card and Student Loan Securitization Activities. The remaining $18.2 million not pledged as collateral represents loans eligible for reimbursement through an indemnification claim. Discover Bank must purchase such loans from the trust before a claim may be filed.
Credit Quality Indicators. The Company regularly reviews its collection experience (including delinquencies and net charge-offs) in determining its allowance for loan losses. Credit card and closed-end consumer loan receivables are placed on nonaccrual status upon receipt of notification of the bankruptcy or death of a customer or suspected fraudulent activity on an account. In some cases of suspected fraudulent activity, loan receivables may resume accruing interest upon completion of the fraud investigation.

12
Table of Contents

Information related to the delinquencies and net charge-offs in the Company’s loan portfolio, which excludes loans held for sale, is shown below by each class of loan receivables except for PCI student loans, which is shown under the heading “Purchased Credit-Impaired Loans” (dollars in thousands): 

Delinquent and Non-Accruing Loans:
 
 
 
 
 
 
 
 
 
  
30-89 Days
Delinquent
 
90 or
More Days
Delinquent
 
Total Past
Due
 
90 or
More Days
Delinquent
and
Accruing
 
Total
Non-accruing(2)
At May 31, 2011
 
 
 
 
 
 
 
 
 
Credit card loans:
 
 
 
 
 
 
 
 
 
Discover card(1)
$
572,420

 
$
675,737

 
$
1,248,157

 
$
596,397

 
$
232,658

Discover business card
3,120

 
5,040

 
8,160

 
4,741

 
851

Total credit card loans
575,540

 
680,777

 
1,256,317

 
601,138

 
233,509

Other consumer loans:
 
 
 
 
 
 
 
 
 
Personal loans
13,306

 
7,969

 
21,275

 
7,041

 
3,595

Private student loans (excluding PCI)
7,379

 
1,495

 
8,874

 
1,495

 
84

Other
560

 
2,582

 
3,142

 
—

 
2,854

Total other consumer loans (excluding PCI)
21,245

 
12,046

 
33,291

 
8,536

 
6,533

Total loan receivables (excluding PCI)
$
596,785

 
$
692,823

 
$
1,289,608

 
$
609,674

 
$
240,042

At November 30, 2010
 
 
 
 
 
 
 
 
 
Total loan receivables(1)
$
908,306

 
$
993,618

 
$
1,901,924

 
$
853,757

 
$
325,900

______________________ 
(1)
Consumer credit card loans that are 90 or more days delinquent and accruing interest include $53.1 million and $35 million of loans accounted for as troubled debt restructurings at May 31, 2011 and November 30, 2010, respectively.
(2)     The Company estimates that the gross interest income that would have been recorded in accordance with the original terms of these loans was $11.6 million and $25 million for the three months and six months ended May 31, 2011, respectively. The Company does not separately track the amount of gross interest income that would have been recorded in accordance with the original terms of loans. These amounts were estimated based on customers' current balances and most recent rates.

Net Charge-Offs:
For the Three Months Ended May 31, 2011
 
For the Six Months Ended May 31, 2011
  
Net
Charge-offs
 
Net Charge-off
Rate
 
Net
Charge-offs
 
Net Charge-off
Rate
 
 
 
 
 
 
 
 
Credit card loans:
 
 
 
 
 
 
 
Discover card
$
553,827

 
4.99
%
 
$
1,215,070

 
5.46
%
Discover business card
4,896

 
8.22
%
 
11,429

 
9.33
%
Total credit card loans
558,723

 
5.01
%
 
1,226,499

 
5.48
%
Other consumer loans:
 
 
 
 
 
 
 
Personal loans
15,347

 
2.88
%
 
34,981

 
3.46
%
Private student loans (excluding PCI)
2,030

 
0.51
%
 
2,954

 
0.41
%
Other
579

 
17.33
%
 
613

 
8.98
%
Total other consumer loans (excluding PCI)
17,956

 
0.96
%
 
38,548

 
1.15
%
Net charge-offs as a percentage of total loans (excluding PCI)
$
576,679

 
4.69
%
 
$
1,265,047

 
5.17
%
Net charge-offs as a percentage of total loans (including PCI)
$
576,679

 
4.42
%
 
$
1,265,047

 
4.92
%

13
Table of Contents

As part of credit risk management activities, on an ongoing basis the Company reviews information related to the performance of a customer’s account with the Company as well as information from credit bureaus, such as a FICO score, relating to the customer’s broader credit performance. FICO scores are generally obtained at origination of the account and monthly or quarterly thereafter. The following table provides the most recent FICO scores available for the Company’s customers as of May 31, 2011, as a percentage of each class of loan receivables: 

 
Credit Risk Profile by FICO
Score
 
660 and Above
 
Less than 660
or No Score
Discover card
78%
 
22%
Discover business card
86%
 
14%
Private student loans (excluding PCI)
94%
 
6%
Personal loans
94%
 
6%
Allowance for Loan Losses. The Company maintains an allowance for loan losses at an appropriate level to absorb probable losses inherent in the loan portfolio. The Company considers the collectibility of all amounts contractually due on its loan receivables, including those components representing interest and fees. Accordingly, the allowance for loan losses represents the estimated uncollectible principal, interest and fee components of loan receivables. The allowance is evaluated monthly 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 for loan loss.
For its credit card loan receivables, the Company bases its allowance for loan losses 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 loan balances used in the migration analysis represent all amounts contractually due and, as a result, the migration analysis captures principal, interest and fee components in estimating uncollectible accounts. 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.
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.

14
Table of Contents

The following table provides changes in the Company’s allowance for loan losses for the three and six months ended May 31, 2011 and 2010 (dollars in thousands): 
 
For the Three Months Ended
May 31,
 
For the Six Months Ended
May 31,
 
2011
 
2010
 
2011
 
2010
Balance at beginning of period
$
3,033,459

 
$
4,207,360

 
$
3,304,118

 
$
1,757,899

Additions:
 
 
 
 
 
 
 
Addition to allowance related to securitized receivables(1)
—

 
—

 
—

 
2,144,461

Provision for loan losses
175,540

 
724,264

 
593,249

 
2,111,470

Deductions:
 
 
 
 
 
 
 
Charge-offs:
 
 
 
 
 
 
 
Discover card
(708,287
)
 
(1,080,554
)
 
(1,500,919
)
 
(2,221,039
)
Discover business card
(5,869
)
 
(16,402
)
 
(13,255
)
 
(35,688
)
Total credit card loans
(714,156
)
 
(1,096,956
)
 
(1,514,174
)
 
(2,256,727
)
Personal loans
(15,931
)
 
(23,041
)
 
(35,981
)
 
(47,121
)
Federal student loans
—

 
(248
)
 
—

 
(297
)
Private student loans
(2,044
)
 
(260
)
 
(2,983
)
 
(604
)
Other
(580
)
 
(711
)
 
(615
)
 
(719
)
Total other consumer loans
(18,555
)
 
(24,260
)
 
(39,579
)
 
(48,741
)
Total charge-offs
(732,711
)
 
(1,121,216
)
 
(1,553,753
)
 
(2,305,468
)
Recoveries:
 
 
 
 
 
 
 
Discover card
154,460

 
118,961

 
285,849

 
220,082

Discover business card
973

 
911

 
1,826

 
1,641

Total credit card loans
155,433

 
119,872

 
287,675

 
221,723

Personal loans
584

 
330

 
1,000

 
521

Federal student loans
—

 
—

 
—

 
—

Private student loans
14

 
6

 
29

 
8

Other
1

 
8

 
2

 
10

Total other consumer loans
599

 
344

 
1,031

 
539

Total recoveries
156,032

 
120,216

 
288,706

 
222,262

Net charge-offs
(576,679
)
 
(1,001,000
)
 
(1,265,047
)
 
(2,083,206
)
Balance at end of period
$
2,632,320

 
$
3,930,624

 
$
2,632,320

 
$
3,930,624

 ______________________
(1)
On December 1, 2009, upon adoption of FASB Statements No. 166 and 167, the Company recorded $2.1 billion allowance for loan losses related to newly consolidated and reclassified credit card loan receivables.
Net charge-offs of principal are recorded against the allowance for loan losses, as shown in the table above. Information regarding net charge-offs of interest and fee revenues on credit card and other consumer loans is as follows (dollars in thousands): 

 
For the Three Months Ended
May 31,
 
For the Six Months Ended
May 31,
 
2011
 
2010
 
2011
 
2010
Interest and fees accrued subsequently charged off, net of recoveries (recorded as a reduction of interest income)(1)
$
163,494

 
$
236,780

 
$
351,715

 
$
504,487

Fees accrued subsequently charged off, net of recoveries (recorded as a reduction to other income)(1)
$
28,584

 
$
77,620

 
$
63,954

 
$
169,708

 _________________________
(1)
Beginning in 2011, net charge-offs of interest and fees include amounts related to other consumer loans. Prior to 2011 such amounts were not included as they were not material.

15
Table of Contents

The following table provides additional detail of the Company’s allowance for loan losses and recorded investment in its loan portfolio (which excludes loans held for sale) by impairment methodology (dollars in thousands): 
 
Credit Card
 
Personal
Loans
 
Student
Loans
 
Other
Loans
 
Total
At May 31, 2011
 
 
 
 
 
 
 
 
 
Allowance for loans evaluated for impairment as:
 
 
 
 
 
 
 
 
 
Collectively evaluated for impairment(1)
$
2,317,443

 
$
74,119

 
$
38,619

 
$
644

 
$
2,430,825

Troubled debt restructurings(2)
201,495

 
—

 
—

 
—