Discover 2009 Annual Report Download - page 61

2008 and 2007 Highlights
• We acquired Diners Club International (“Diners Club”) for $168 million on June 30, 2008. Diners Club has network
licensees, which are generally financial institutions, that issue Diners Club branded credit cards and/or provide card
acceptance services in over 185 countries and territories.
• We sold our U.K. credit card business (“Goldfish”) to Barclays Bank PLC on March 31, 2008. This business
represented substantially all of our International Card segment, which is presented in discontinued operations in this
report.
• On June 30, 2007, we spun off from Morgan Stanley through the distribution of shares of our common stock to
holders of Morgan Stanley common stock. Our results of operations for the year ended November 30, 2007 include
costs incurred as a result of the distribution of approximately $34 million, including costs that were allocated to the
International Card segment, reported as discontinued operations in this report.
Outlook
The economic environment in 2009 was particularly challenging. Although we have seen some encouraging trends in
certain economic indicators and in some of our own statistics, we have yet to see sustained economic improvement. In the
last half of 2009, our charge-off and delinquency rates continued to rise, although not as quickly as they had risen in the
last half of 2008 and into the first half of 2009, indicating that our loan losses might be approaching, but have not yet
reached, their peak. We anticipate higher credit losses in 2010 and, given the continued uncertainty regarding the
economic environment and somewhat higher level of delinquencies at the end of the fourth quarter 2009 compared to the
end of the previous quarter, we increased our allowance for loan losses as a percentage of total loans to 7.44% at
November 30, 2009. Additionally, our results in 2010 will not benefit from the Visa and MasterCard antitrust litigation
settlement and will be adversely impacted by the new credit card legislation. See “– Legislative and Regulatory
Developments” below for a further discussion.
We anticipate that adjustments that we made to certain aspects of our business in 2009 in response to the current
economic environment and the new credit card legislation will impact our 2010 financial results. Specifically, in the third
quarter 2009, we made changes to new and existing accounts, such as increasing standard annual percentage rates and
converting many accounts with fixed rates to variable rates. The higher rates charged on standard balances along with a
decline in the level of promotional rate offers during the year had a positive impact on our 2009 net interest yield on
credit card loan receivables. Although the benefit of these actions will continue to accumulate in 2010, the impact will not
be as significant as in 2009 and will also be offset by all of the restrictions under the CARD Act, as described below. We
expect to maintain our current level of loan receivables through emphasizing our Cashback Bonus rewards program, our
customer service and our other lending products, including student and personal loans.
We also took certain actions to reduce our operating expenses in 2009, which included reducing headcount. We plan
to invest in marketing and other initiatives to grow our deposit products and our network capabilities, but we will continue
to focus on sustaining a lower level of overall operating expenses compared to prior years.
At November 30, 2009, we had increased our liquidity reserve, primarily consisting of cash and cash equivalents, to
$14.2 billion, in anticipation of approximately $12.5 billion of asset-backed securities and deposit maturities in the first
half of 2010. In 2009, we relied principally on deposits to fund our business, experiencing $3.6 billion growth in our
total deposit balance at November 30, 2009 as compared to November 30, 2008, while our level of securitization
borrowings from third parties declined by approximately $2.2 billion. In 2010, we plan to continue to grow deposits,
particularly direct-to-consumer deposits, as a percentage of our total funding by using both organic and inorganic
methods. Our ability to issue asset-backed securities in 2010 depends on a number of factors, including market liquidity
as well as legislative and regulatory developments.
In 2009, we issued $1.2 billion of senior preferred stock and a warrant to purchase shares of our common stock to the
U.S. Treasury under the CPP. We subsequently raised a total of $1.6 billion in various capital market transactions. We
also increased our capital in 2009 through growth in retained earnings. Going forward, as we continue to evaluate our
capital levels, we will also evaluate our continued participation in the CPP and we intend, at the appropriate time, subject
to the approval of the Federal Reserve, to repurchase our preferred stock from the U.S. Treasury.
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