Discover 2009 Annual Report Download - page 60

Our senior management evaluates business performance and allocates resources using financial data that is presented
on a managed basis. Managed loans consist of our on-balance sheet loan portfolio, loans held for sale and loan
receivables that have been securitized and against which beneficial interests have been issued. Owned loans, a subset of
managed loans, refer to our on-balance sheet loan portfolio and loans held for sale and include the undivided seller’s
interest we retain in our securitizations. A managed basis presentation, which is not a presentation in accordance with
GAAP, involves reporting securitized loans with our owned loans in the managed basis statements of financial condition
and reporting the earnings on securitized loans in the same manner as the owned loans instead of as securitization
income. See “– GAAP to Managed Data Reconciliations.”
2009 Highlights
• Net income for 2009 was $1.3 billion, up from $0.9 billion in 2008, which includes $1.2 billion and $0.5 billion,
respectively, of after tax income related to the Visa and MasterCard antitrust litigation settlement (described further
in “Legal Proceedings”). Results for 2008 also include a $0.1 billion loss related to the sale of the Goldfish business
in March 2008.
• The challenging economic environment included increasing unemployment and higher consumer bankruptcies. As a
result, net charge-off rates rose steadily throughout 2009 while delinquency rates remain elevated above prior
periods. The net charge-off rate for 2009 was 7.45% on an owned basis (7.77% on a managed basis), compared to
4.59% on an owned basis in 2008 (5.01% on a managed basis). This increase in our net charge-off rates resulted in
a $1.5 billion reduction of 2009 pretax income as compared to 2008. Additionally, our over 30 days delinquency
rate at November 30, 2009, was 4.92% on an owned basis (5.31% on a managed basis), compared to 4.35% on
an owned basis in 2008 (4.56% on a managed basis). In response to these trends, we increased the loan loss
reserve rate throughout the year, from 5.45% at November 30, 2008 to 7.44% at November 30, 2009.
• Despite the challenging economic environment, we maintained a steady level of managed receivables, and ended
2009 with $50.9 billion in managed loans compared to $51.1 billion at the end of 2008. However, owned loans
fluctuated throughout the year as a result of securitization maturities and, in the second half of 2009, new
securitization transactions. Credit card sales volumes were down 5% in 2009, largely due to lower gasoline prices
but also due to the economic environment generally. This decline in sales, along with a lower level of promotional
rate offers, contributed to a decline in managed credit card loans, which was largely offset by $2 billion of growth
in our personal and student loan products and a lower payment rate on our credit card receivables.
• During 2009, we took actions that resulted in higher net interest yield on loan receivables, including charging higher
standard annual percentage rates and substantially reducing promotional rate offers. These actions, which were
partially offset by a higher level of interest charge-offs, resulted in a net interest yield on loan receivables of 7.13%
in 2009 (9.41% on a managed basis), up from 6.58% in 2008 (8.55% on a managed basis). This higher net interest
yield along with a higher average level of owned loans contributed to $1.9 billion in net interest income for 2009 as
compared to $1.4 billion in 2008.
• We strengthened our liquidity and capital position through a number of capital market transactions during the year:
OIn March 2009, through our participation in the U.S. Treasury’s Capital Purchase Program, we issued and sold
shares of our preferred stock and a warrant to purchase shares of our common stock to the U.S. Treasury for
approximately $1.2 billion in cash and became a bank holding company;
OWe raised $534 million in a common stock offering of approximately 60 million shares in July and August 2009;
OWe raised a total of $1.1 billion in a senior debt offering in July 2009 and a subordinated debt offering in
November 2009; and
OOur securitization trusts issued $2.8 billion of asset-backed securities funded under the Federal Reserve’s Term
Asset-Backed Securities Loan Facility (“TALF”) in July and September 2009.
• We continued to grow our direct-to-consumer deposits and deposit products offered through affinity relationships,
ending 2009 with $12.6 billion of these deposits, an increase of $6.4 billion from 2008. Our total funding from
deposits, including brokered deposits, increased to $32.1 billion in 2009 from $28.5 billion in 2008.
• We significantly reduced our operating expenses in 2009 by reducing promotional rate balance transfer offers and
related marketing expenses, lowering headcount, and implementing several cost containment initiatives. As a result,
our operating expenses decreased $165 million, or 7%, from 2008.
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