Discover 2009 Annual Report Download - page 85

The net revaluation of retained interests for the year ended November 30, 2009 decreased $40.8 million, as
compared to the year ended November 30, 2008. The decrease included $55.2 million lower initial gains on a lower
level of securitization activity ($3.6 billion of new third-party securitization transactions for the year ended November 30,
2009 as compared to $5.6 billion of new third-party securitization transactions for the year ended November 30, 2008).
The unfavorable revaluation of retained interests of $176.8 million for the year ended November 30, 2009 was largely
related to changes in the assumptions used to value the interest-only strip receivable as compared to the previous period,
including lower projected excess spread. The lower projected excess spread reflected higher projected charge-offs
partially offset by a higher expected net interest spread reflective of repricing actions taken during 2009. This was
partially offset by a gain in our cash collateral account as compared to a loss in the prior year, reflecting a decrease in
the remaining life of our cash collateral accounts.
The net revaluation of retained interests for the year ended November 30, 2008 decreased $170.7 million, as
compared to the year ended November 30, 2007. The decrease included $51.1 million lower initial gains on a lower
level of securitization activity ($5.6 billion of new third-party securitization transactions for the year ended November 30,
2008 as compared to $8.5 billion of new third-party securitization transactions for the year ended November 30, 2007)
and lower projected excess spread on new securitizations as a result of higher charge-offs. The unfavorable revaluation
of retained interests of $191.2 million for the year ended November 30, 2008 largely related to unfavorable changes in
assumptions used to value the interest-only strip receivable as compared to the previous period end, including lower
projected excess spread. The lower projected excess spread reflected higher projected charge-offs, higher interest rate
projections and widening spreads on new securitizations as a result of trends in the securitization markets.
Loan Fee Income
Loan fee income consists primarily of fees on credit card loans and includes late, over-limit, cash advance,
pay-by-phone and other miscellaneous fees, although, beginning in February 2010, we will no longer charge over-limit
or pay-by-phone fees as a result of changes made in connection with the CARD Act. Loan fee income decreased $15.3
million, or 6%, for the year ended November 30, 2009, as compared to November 30, 2008 as a result of deferrals of
balance transfer fees and higher charge-offs and adjustments of loan fees, partially offset by an increase in income from
late fees. Loan fee income decreased $75.5 million, or 22%, for the year ended November 30, 2008, as compared to
November 30, 2007, as a result of deferrals of balance transfer fees. Beginning in mid 2008, balance transfer fees,
historically accounted for in loan fee income, were deferred and accreted into interest income over the life of the loan.
Discount and Interchange Revenue
Discount and interchange revenue includes discount revenue and acquirer interchange net of interchange paid to third-
party issuers in the United States. We earn discount revenue from fees charged to merchants with whom we have entered
into card acceptance agreements for processing credit card purchase transactions. We earn acquirer interchange
revenue from merchant acquirers on all Discover Network card transactions made by credit card customers at merchants
with whom merchant acquirers have entered into card acceptance agreements for processing credit card purchase
transactions. We incur an interchange cost to card issuing entities that have entered into contractual arrangements to
issue cards on the Discover Network. This cost is contractually established and is based on the card issuing organization’s
transaction volume and is reported as a reduction to discount and interchange revenue. We offer our customers various
reward programs, including the Cashback Bonus reward program, pursuant to which we pay certain customers a
percentage of their purchase amounts based on the type and volume of the customer’s purchases. Reward costs are
recorded as a reduction to discount and interchange revenue.
Discount and interchange revenue increased $35.2 million, or 19%, for the year ended November 30, 2009,
compared to November 30, 2008, due to lower customer rewards costs, partially offset by lower revenues earned on a
lower level of owned loans. Lower customer rewards costs were due to a decline in sales volume, partially offset by
adjustments made in the third quarter of 2008 to the rewards liability for an increase in expected forfeitures of
accumulated rewards.
Discount and interchange revenue decreased $53.4 million, or 22% for the year ended November 30, 2008,
compared to November 30, 2007, due to higher allocations to securitized loans, partially offset by lower customer
rewards costs related to revised forfeiture assumptions and higher discount and interchange revenue. The increase in
allocations to securitized loans was due to a higher level of average outstanding securitized loans receiving such
allocations in the 2008 compared to 2007.
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