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Net Interest Income
The tables that follow this section have been provided to supplement the discussion below and provide further analysis
of net interest income, net interest margin and the impact of rate and volume changes on net interest income. Net interest
income represents the difference between interest income earned on our interest-earning assets and the interest expense
incurred to finance those assets. We analyze net interest income in total by calculating net interest margin (interest income, net
of interest expense, as a percentage of average total loan receivables) and net yield on interest-bearing assets (net interest
income as a percentage of average total interest-earning assets). We also separately consider the impact of the level of loan
receivables and the related interest yield and the impact of the cost of funds related to each of our funding sources, along with
the income generated by our liquidity investment portfolio, on net interest income.
Our interest-earning assets consist of: (i) loan receivables, (ii) cash and cash equivalents, which includes amounts on
deposit with the Federal Reserve, certain highly rated certificates of deposit, and triple-A rated government mutual funds,
(iii) restricted cash, (iv) short-term investments and (v) investment securities. Our interest-bearing liabilities consist primarily
of deposits, both direct-to-consumer and brokered, and long-term borrowings, including amounts owed to securitization
investors. Net interest income is influenced by the following:
• The level and composition of loan receivables, including the proportion of credit card loans to other consumer loans,
as well as the proportion of loan receivables bearing interest at promotional rates as compared to standard rates;
• The credit performance of our loans, particularly with regard to charge-offs of finance charges, which reduce interest
income;
• The terms of long-term borrowings and certificates of deposit upon initial offering, including maturity and interest
rate;
• The level and composition of other interest-bearing assets and liabilities, including our liquidity investment portfolio;
• Changes in the interest rate environment, including the levels of interest rates and the relationships among interest
rate indices, such as the prime rate, the Federal Funds rate and LIBOR;
• The effectiveness of interest rate swaps in our interest rate risk management program; and
• The difference between the carrying amount and future cash flows expected to be collected on PCI loans.
For the Year Ended November 30, 2011 compared to the Year Ended November 30, 2010
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, as well as a decrease in interest expense as a percentage of total
loans, partially offset by a decline in yield related to loans.
Interest income on loan receivables increased during the year ended November 30, 2011 as compared to the year ended
November 30, 2010, as an increase in interest income from other consumer loans was partially offset by a decline in interest
income from credit card loans. The increase in interest income from other consumer loans for the year ended November 30,
2011 as compared to the same period in 2010 is primarily attributable to the acquisition of SLC during the first quarter of 2011,
as well as growth in personal loans. For the year ended November 30, 2011, the decline in interest income from credit card
loans was mostly driven by a decline in yield caused by an increase in promotional rate balances and a decrease in customers
who carry a balance on their cards, partially offset by lower interest charge-offs. Furthermore, the decline in yield was also
impacted by the CARD Act that was implemented in 2010, which led to restrictions on imposing default interest rates on
existing balances.
Interest income on other interest-earning assets, which largely relates to investment income on our liquidity investment
portfolio, increased primarily due to a shift in the mix of our liquidity investment portfolio in the fourth quarter of 2010 from
cash and cash equivalents to investments in securities of the U.S Treasury and U.S. government agencies, which typically have
a higher yield than cash and cash equivalents.
Interest expense declined in the year ended November 30, 2011 as compared to the same period in 2010. This was
primarily due to a decline in interest expense related to maturities of deposits bearing higher interest rates. This was partially
offset by an increase in interest expense on securitized borrowings, primarily due to the acquisition of three SLC securitization
trusts in the first quarter of 2011 which have higher funding costs than our credit card securitizations.
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