Discover 2009 Annual Report Download - page 59

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction
with our audited consolidated financial statements and related notes included elsewhere in this annual report on
Form 10-K. Some of the information contained in this discussion and analysis constitutes forward-looking statements that
involve risks and uncertainties. Actual results could differ materially from those discussed in these forward-looking
statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed
below and elsewhere in this annual report on Form 10-K particularly under “Special Note Regarding Forward-Looking
Statements” and “Risk Factors.”
Unless otherwise specified, references to Notes to our consolidated financial statements are to the Notes to our audited
consolidated financial statements as of November 30, 2009 and 2008 and for the three-year period ended
November 30, 2009.
Introduction and Overview
Discover Financial Services is a leading credit card issuer in the United States and an electronic payment services
company. In March 2009, we became a bank holding company under the Bank Holding Company Act of 1956 and a
financial holding company under the Gramm-Leach-Bliley Act in connection with our participation in the U.S. Treasury’s
Capital Purchase Program (“CPP”). Therefore, we are now subject to oversight, regulation and examination by the Board
of Governors of the Federal Reserve System (the “Federal Reserve”). Through our Discover Bank subsidiary, we offer our
customers credit cards, other consumer loans and deposit products. Through our DFS Services LLC subsidiary and its
subsidiaries, we operate the Discover Network, the PULSE Network and Diners Club. The Discover Network operates a
credit card transaction processing network for Discover card-branded and third-party issued credit 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 that grants rights to licensees, which are generally financial
institutions, to issue Diners Club branded credit cards and/or to provide card acceptance services. Our Diners Club
business also offers transaction processing and marketing services to licensees globally. Our fiscal year ends on
November 30 of each year.
Our primary revenues come from interest income earned on loan receivables, securitization income derived from the
transfer of credit card loan receivables to securitization trusts and subsequent issuance of beneficial interests through
securitization transactions, and fees earned from customers, merchants and issuers. The primary expenses required to
operate our business include funding costs (interest expense), loan loss provisions, customer rewards, and expenses
incurred to grow, manage and service our loan receivables.
Our business activities are funded primarily through the raising of consumer deposits, securitization of loan receivables
and the issuance of both secured and unsecured debt. In a credit card securitization, loan receivables are transferred to a
securitization trust, from which beneficial interests are issued to investors. We continue to own and service the accounts
that generate the securitized loans. The trusts utilized by us to facilitate asset securitization transactions are not our
subsidiaries. These trusts are excluded from our consolidated financial statements in accordance with accounting
principles generally accepted in the United States (“GAAP”). Because our securitization activities qualify as sales under
GAAP and accordingly are not treated as secured financing transactions, we remove credit card loan receivables equal
to the amount of the investors’ interests in securitized loans from our consolidated statements of financial condition. As a
result, asset securitizations have a significant effect on our consolidated financial statements in that the portions of interest
income, net charge-offs and certain components of other income related to the securitized loans against which beneficial
interests have been issued are no longer recorded in our consolidated statements of income; however, they remain
significant factors in determining the securitization income we receive on our retained beneficial interests in those
transactions.
As described in “– Accounting Treatment for Off-Balance Sheet Securitizations,” pursuant to new accounting guidance,
the securitization trusts will be consolidated in our financial statements effective December 1, 2009. Beginning on that
date, our results of operations will no longer reflect securitization income, but will instead report interest income, net
charge-offs and certain other income associated with all securitized loan receivables and interest expense associated with
debt issued to third-party investors in the same line items in our results of operations as non-securitized credit card loan
receivables and corporate debt.
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