Discover 2011 Annual Report Download - page 71

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Direct Banking
For the Year Ended November 30, 2011 compared to the Year Ended November 30, 2010
Our Direct Banking segment reported pretax income of $3.3 billion for the year ended November 30, 2011, as compared
to pretax income of $1.1 billion for the year ended November 30, 2010.
Loan receivables totaled $57.3 billion at November 30, 2011, which was up from $48.8 billion at November 30, 2010.
This was primarily driven by the increase in private student loans due to the acquisition of $3.1 billion of loans from SLC in the
first quarter of 2011 (see Note 4: Business Combinations to our consolidated financial statements), and an additional $2.4
billion of student loans acquired in the fourth quarter of 2011 (see Note 6: Loan Receivables to our consolidated financial
statements). Credit card loan receivables were $46.6 billion at November 30, 2011, which was up from $45.2 billion at
November 30, 2010. Personal loan receivables were $2.6 billion at November 30, 2011, which was up from $1.9 billion at
November 30, 2010. Discover card sales volume was $100.1 billion for the year ended November 30, 2011, an increase of 8%
as compared to the same period in 2010. This growth was driven primarily by an increase in spending by both new and existing
customers partially due to increased marketing.
Net interest margin rose slightly for the year ended November 30, 2011 as compared to the same period in 2010. This
was driven by an increase in yield on our liquidity portfolio and a decrease in interest expense as a percentage of total loans,
partially offset by a decline in yield related to loans. The increase in yield on our liquidity portfolio was driven by a shift to
higher yielding investment securities. The decrease in interest expense was related to maturities of deposits bearing higher
interest rates, partially offset by increased interest expense on securitized borrowings. The yield on loans declined reflecting an
increase in lower yielding student loans. For a more detailed discussion on net interest income, see “-Net Interest Income.”
At November 30, 2011, our delinquency rate for credit card loans over 30 days past due was 2.39% as compared to
4.06% at November 30, 2010, reflective of improvement throughout 2011 in the underlying credit quality of our portfolio. For
the year ended November 30, 2011, our net charge-off rate on credit cards declined to 4.50%, as compared to 8.08% for the
same period in 2010. A reduction in the loan loss reserve rate and a decline in the level of net charge-offs led to a decline in the
provision for loan losses for the year ended November 30, 2011 as compared to the same period in 2010. For a more detailed
discussion on provision for loan losses, see “-Loan Quality-Provision and Allowance for Loan Losses.”
Total other income increased for the year ended November 30, 2011 as compared to the same period in 2010,
primarily due to the inclusion of income from the transition service agreement related to the acquisition of SLC in first quarter
2011 (see Note 4: Business Combinations to our condensed consolidated financial statements). Furthermore, discount and
interchange revenue and revenue from fee products increased during the year ended November 30, 2011 as compared to the
same period in 2010. These increases were partially offset by a decline in loan fee income as well as a modest loss on
investments. The increase in discount and interchange revenue was driven by higher sales volume, partially offset by higher
Cashback Bonus rewards. Higher levels of revenue from fee products were driven by lower charge-offs relating to these
products during the year ended November 30, 2011 as compared to the same period in 2010. Gain on investments declined for
the year ended November 30, 2011 as compared to the same period in 2010 due to the inclusion of a gain of $19.6 million
related to the liquidation of the collateral supporting the asset-backed commercial paper notes of Golden Key U.S. LLC
(“Golden Key”) during 2010. There was not a similar benefit recognized in 2011. Furthermore, other income in 2010 also
included a $23 million charge related to the decision we made in 2010 to sell our remaining federal student loans. There was no
such charge to other income during 2011.
Total other expense increased for the year ended November 30, 2011 as compared to the same period in 2010
primarily due to higher compensation expenses from increased headcount and higher bonuses. Furthermore, there were higher
marketing and business development costs related to new account acquisitions. Professional fees also increased due to higher
costs related to key technology initiatives, costs relating to the SLC acquisition, as well as an increase in costs related to efforts
to recover charged-off accounts. Furthermore, other expense also rose due to an increase in fraud related costs, an increase in
legal reserves related to pending litigation and higher investments in various growth initiatives. For the year ended November
30, 2010, other expense benefited from a $29 million expense reversal related to the payment to Morgan Stanley under an
amendment to the special dividend agreement that occurred in the first quarter of 2010. There was not a similar benefit
recognized in 2011.
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