Discover 2009 Annual Report Download - page 84

Excess spread. The following table provides the components of excess spread (dollars in thousands):
For the Years Ended November 30,
2009 vs. 2008
increase
(decrease)
2008 vs. 2007
increase
(decrease)
2009 2008 2007 $ % $ %
Interest income on securitized loans.................................................. $ 3,315,992 $ 3,853,266 $ 3,794,272 $(537,274) (14%) $ 58,994 2%
Interest paid to investors in asset-backed securities.............................. (397,136) (1,068,915) (1,517,858) 671,779 63% 448,943 30%
Net interest income........................................................................ 2,918,856 2,784,351 2,276,414 134,505 5% 507,937 22%
Other fee revenue on securitized loans(1) ........................................... 1,139,180 1,259,182 1,135,347 (120,002) (10%) 123,835 11%
Net charge-offs on securitized loans................................................. (1,995,936) (1,472,989) (1,119,508) (522,947) (36%) (353,481) (32%)
Net revenues on securitized loans .................................................... 2,062,100 2,570,544 2,292,253 (508,444) (20%) 278,291 12%
Servicing fees on securitized loans ................................................... (492,095) (553,398) (538,409) 61,303 11% (14,989) (3%)
Excess spread............................................................................... $ 1,570,005 $ 2,017,146 $ 1,753,844 $(447,141) (22%) $ 263,302 15%
(1) Other fee income includes discount and interchange revenue, loan fee income and fee products revenue.
For the year ended November 30, 2009, excess spread on securitized loans decreased $447.1 million, or 22%, as
compared to the year ended November 30, 2008. The decrease was mainly due to higher net charge-offs and lower
other fee revenue on securitized loans partially offset by higher net interest income. Higher net charge-offs were reflective
of the current economic environment. Lower other fee revenue was attributable to a lower level of securitized loans. The
increase in net interest income was due to a decrease in the interest paid to investors reflective of the impact of a lower
average LIBOR on floating rate investor interests, partially offset by lower interest income earned on securitized loans as a
result of the lower level of securitized loans.
For the year ended November 30, 2008, excess spread on securitized loans increased $263.3 million, or 15%, as
compared to the year ended November 30, 2007. The increase was attributable to higher net interest income and higher
other fee revenue on securitized loans offset in part by higher net charge-offs. The increase in net interest income related
largely to a decrease in interest paid to investors reflective of the impact of a lower average LIBOR on floating rate
investor interests, offset in part by wider spreads paid to investors on new transactions. Higher other fee revenue was
attributable to the higher level of outstanding securitized loans receiving discount and interchange revenue. The higher
net charge-offs were reflective of the weakening economic and credit environment.
Servicing fees on securitized loans. Servicing fees are paid to the Company for servicing the transferred loan
receivables in accordance with contractual requirements and are largely dependent on the level of securitized loans. We
are paid a servicing fee from the cash flows generated by the securitized loans, which include interest income and loan
fee income and, effective with trust actions taken in July 2009, discount and interchange revenue for all securitized loans.
In 2009, servicing fees decreased as compared to 2008 by $61.3 million, or 11%, as a result of a lower level of
securitized loans, while servicing fees increased in 2008 as compared to 2007 by $15.0 million, or 3%, due to a higher
level of securitized loans.
Net revaluation of retained interests. The components of net revaluation of retained interests are summarized in the
table below (dollars in thousands):
For the Years Ended November 30,
2009 vs. 2008
increase
(decrease)
2008 vs. 2007
increase
(decrease)
2009 2008 2007 $ $
Initial gain on new securitization transactions(1)................................................ $ 16,707 $ 71,872 $122,949 $(55,165) $ (51,077)
Revaluation of retained interests .................................................................... (176,794) (191,196) (71,603) 14,402 (119,593)
Net revaluation of retained interests ............................................................... $(160,087) $(119,324) $ 51,346 $(40,763) $(170,670)
(1) Net of issuance discounts, as applicable.
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