Discover 2009 Annual Report Download - page 75

Income Taxes
We are subject to the income tax laws of the jurisdictions where we have business operations, primarily the United
States, its states and municipalities. We must make judgments and interpretations about the application of these inherently
complex tax laws when determining the provision for income taxes and must also make estimates about when in the
future certain items will affect taxable income in the various taxing jurisdictions. Disputes over interpretations of the tax
laws may be settled with the taxing authority upon examination or audit. We regularly evaluate the likelihood of
assessments in each of the taxing jurisdictions resulting from current and subsequent years’ examinations, and tax
reserves are established as appropriate.
Changes in the estimate of income taxes can occur due to tax rate changes, interpretations of tax laws, the status and
resolution of examinations by the taxing authorities, and newly enacted laws and regulations that impact the relative
merits of tax positions taken. When such changes occur, the effect on our consolidated financial condition and results of
operations can be significant. See Note 19: Income Taxes to our consolidated financial statements for additional
information about income taxes.
Earnings Summary
The following table outlines changes in our consolidated statement of income for the periods presented (dollars in
thousands):
For the Years Ended November 30,
2009 vs. 2008
increase (decrease)
2008 vs. 2007
increase (decrease)
2009 2008 2007 $ % $ %
Interest income............................................................................. $3,145,080 $2,692,563 $2,584,402 $ 452,517 17% $ 108,161 4%
Interest expense............................................................................ 1,251,284 1,288,004 1,223,270 (36,720) (3%) 64,734 5%
Net interest income....................................................................... 1,893,796 1,404,559 1,361,132 489,237 35% 43,427 3%
Provision for loan losses ................................................................ 2,362,405 1,595,615 733,887 766,790 48% 861,728 117%
Net interest income after provision for loan losses.............................. (468,609) (191,056) 627,245 (277,553) (145%) (818,301) (130%)
Other income............................................................................... 4,840,595 4,264,458 3,376,682 576,137 14% 887,776 26%
Other expense ............................................................................. 2,251,088 2,415,797 2,478,214 (164,709) (7%) (62,417) (3%)
Income from continuing operations before income tax expense ............ 2,120,898 1,657,605 1,525,713 463,293 28% 131,892 9%
Income tax expense ...................................................................... 844,713 594,692 561,514 250,021 42% 33,178 6%
Income from continuing operations.................................................. $1,276,185 $1,062,913 $ 964,199 $ 213,272 20% $ 98,714 10%
Net Interest Income
Net interest income represents the difference between interest income earned on interest-earning assets which we own
and the interest expense incurred to finance those assets. Net interest margin represents interest income, net of interest
expense, as a percentage of total interest-earning assets on an annualized basis. Our interest-earning assets consist of:
(i) loan receivables, (ii) our liquidity reserve which includes amounts on deposit with the Federal Reserve, highly rated
certificates of deposit, and triple-A rated government mutual funds, (iii) certain retained interests in securitization
transactions included in amounts due from asset securitization, and (iv) investment securities. Interest-earning assets do
not include investors’ interests in securitization transactions that have been transferred to third parties. Similarly, interest
income does not include the interest yield on the related loans. Our interest-bearing liabilities consist primarily of
deposits, both brokered and direct-to-consumer. Net interest income is influenced by the following:
• The level and composition of interest-earning assets and liabilities, including the percentage of floating rate credit
card loan receivables we own and the percentage of floating rate liabilities we owe;
• Changes in the interest rate environment, including the levels of interest rates and the relationship between interest
rate indices, such as the prime rate and federal funds rate;
• Credit performance of our loans, particularly with regard to charge-offs of finance charges which reduce interest
income; and
• The terms of certificates of deposit upon initial offering, including maturity and interest rate.
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