Discover 2014 Annual Report Download - page 75

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possible that others could derive different estimates than ours for the same periods. In addition, changes in estimates
from one period to the next can have a significant impact on our consolidated financial condition and results of
operations. A decrease in expected cash flows involving an increase in estimated credit losses would result in an
immediate charge to earnings for the recognition of a loan loss provision. Increases or decreases in expected cash flows
related solely to changes in estimated prepayments or to changes in variable interest rate indices would result in
prospective yield adjustments over the remaining life of the loans. An increase in expected cash flows due to a
reduction in expected credit losses would result first in the reversal of any previously established loan loss reserve on
PCI loans through an immediate credit to earnings and then, if needed, a prospective adjustment to yield over the
remaining life of the loans.
If management used a different estimate of expected borrower defaults, our consolidated statement of financial
condition and results of operations could have differed. For example, a 10% increase in the expected borrower default
rate of each PCI loan pool as of December 31, 2014 could have resulted in an additional impairment of up to $11
million. This impairment would have been reflected as an increase in provision for loan losses and a decrease in the
carrying value of the PCI loans. The accounting and estimates used in our calculations are discussed further in Note 4:
Loan Receivables to our consolidated financial statements.
Earnings Summary
The following table outlines changes in our consolidated statements of income for the periods presented (dollars
in millions):
For the Calendar Years
Ended December 31, For the Fiscal
Year Ended
November 30,
2012
For the One
Month Ended
December 31,
2012
Calendar Year 2014 vs.
Calendar Year 2013
increase (decrease)
Calendar Year 2013
vs. Fiscal Year 2012
increase (decrease)
2014 2013 $ % $ %
Interest income .................. $ 7,596 $ 7,064 $ 6,703 $ 595 $ 532 8 % $ 361 5 %
Interest expense ................ 1,134 1,146 1,331 103 (12) (1)% (185) (14)%
Net interest income........ 6,462 5,918 5,372 492 544 9 % 546 10 %
Provision for loan losses..... 1,443 1,086 848 178 357 33 % 238 28 %
Net interest income after
provision for loan
losses ......................... 5,019 4,832 4,524 314 187 4 % 308 7 %
Other income.................... 2,015 2,306 2,281 200 (291) (13)% 25 1 %
Other expense .................. 3,340 3,194 3,052 240 146 5 % 142 5 %
Income before income
tax expense ................ 3,694 3,944 3,753 274 (250) (6)% 191 5 %
Income tax expense ........... 1,371 1,474 1,408 104 (103) (7)% 66 5 %
Net income ................... $ 2,323 $ 2,470 $ 2,345 $ 170 $ (147) (6)% $ 125 5 %
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 (net interest income 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 portfolio, on net interest income.
Our interest-earning assets consist of: (i) cash and cash equivalents, primarily related to amounts on deposit with
the Federal Reserve, (ii) restricted cash, (iii) other short-term investments, (iv) investment securities and (v) loan
receivables. 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: