Discover 2009 Annual Report Download - page 70

resulted in higher interest income. Net interest income also benefited from lower interest expense driven by a lower cost of
funds, which was partially offset by higher borrowings to fund higher loan receivables, higher interest charge-offs and
lower investment income. Provision for loan losses increased $1.2 billion, or 66%, as a result of higher net charge-offs
and a higher reserve rate, each of which reflected the deterioration in economic conditions and delinquency trends, as
well as owned loan growth due to maturing securitizations. Other income increased $672.8 million, or 32%, due to the
payment from MasterCard for its portion of the Visa and MasterCard antitrust litigation settlement and an increase in
discount and interchange revenue. These were partially offset by a $119.3 million write-down of the interest-only strip
receivable and the inclusion of balance transfer fees in interest income beginning in the third quarter of 2008. Other
expenses decreased $79.2 million, or 3%, primarily due to a $38.9 million benefit from our pension curtailment, a lower
level of marketing for new account acquisition and promotional activity, and a decrease in costs related to litigation.
The managed loan balance of $51.1 billion at November 30, 2008 was up 6% from November 30, 2007. This
increase in loans was attributable to lower customer payments, growth in personal and student loans during the year and
a slight increase in credit card volume, up 2% in 2008, largely due to higher gasoline prices. This increase was partially
offset by lower balance transfer activity in 2008. The weakening economic environment adversely impacted customer
delinquencies and charge-offs. The managed over 30 days delinquency rate for the segment, including non-credit card
loans, was 4.56% at November 30, 2008, 98 basis points higher than the comparable prior year. For the year ended
November 30, 2008, the managed segment and credit card charge-off rates were 5.01% and 5.07%, up 118 and 123
basis points from the comparable prior year periods, respectively. Our loan growth combined with the deterioration in
the credit environment led to a $614.7 million increase to our reserves over and above our net charge-offs for the year
ended November 30, 2008.
Payment Services
Revenues, expenses, pretax income and transaction volumes in our Payment Services segment, formerly referred to as
our Third-Party Payments segment, grew significantly in 2009 from 2008. 2009 volumes benefited from the inclusion of
Diners Club transaction volume for the full year in addition to higher activity from new and existing financial institutions
on the PULSE Network. These were partially offset by the loss of volume from one large financial institution along with
lower third-party issuer volume as a result of lower gasoline prices and lower overall spending.
Our Payment Services segment reported pretax income of $106.5 million for the year ended November 30, 2009, up
$25.1 million as compared to the year ended November 30, 2008. Revenues were up $60.6 million mainly driven by
increased transactions on the PULSE Network, along with lower incentive payments and higher fee revenue. Expenses
were also up $33.3 million including a higher level of international marketing investments, partially offset by the impact
of cost containment initiatives. Additionally, the increase in both revenues and expenses during 2009 is due to the
inclusion of Diners Club for the full year.
Our Payment Services segment reported pretax income of $81.4 million for the year ended November 30, 2008, up
$44.5 million as compared to the year ended November 30, 2007. Revenue increased as a result of a record $125.1
billion in segment transaction volume, up 36% from 2007, and higher fee revenues. Additionally, in 2008, Diners Club
contributed $12.7 billion of transaction volume, $27.7 million of revenues and $10.7 million of pretax income.
GAAP to Managed Data Reconciliations
Our senior management evaluates business performance and allocates resources using financial data that is presented
on a managed basis. Securitized loans against which beneficial interests have been issued to third parties are removed
from our GAAP statements of financial condition. Instances in which a wholly-owned subsidiary of Discover Bank
acquires certificated beneficial interests in securitization transactions result in a reduction to loan receivables of the
amount of the acquired beneficial interest and a corresponding increase in investment securities. The portions of interest
income, provision for loan losses and certain components of other income related to the securitized loans against which
beneficial interests have been issued are no longer recorded in our GAAP statements of income; however, they remain
significant factors in determining the securitization income we receive on our retained beneficial interests in those
transactions.
The managed basis presentation generally reverses the effects of securitization transactions; however, there are certain
assets that arise from securitization transactions that are not reversed. Specifically, these assets are the cash collateral
accounts that provide credit enhancement to the investors in certain transactions and payments made by our credit card
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