Discover 2010 Annual Report Download - page 58

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction
with our audited consolidated financial statements and related notes included elsewhere in this annual report on
Form 10-K. Some of the information contained in this discussion and analysis constitutes forward-looking statements that
involve risks and uncertainties. Actual results could differ materially from those discussed in these forward-looking
statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed
below and elsewhere in this annual report on Form 10-K particularly under “Risk Factors” and “Special Note Regarding
Forward-Looking Statements,” which immediately follows “Risk Factors.”
Unless otherwise specified, references to Notes to our consolidated financial statements are to the Notes to our audited
consolidated financial statements as of November 30, 2010 and 2009 and for the three-year period ended
November 30, 2010.
Introduction and Overview
Discover Financial Services is a direct banking and payment services company. We are a bank holding company
under the Bank Holding Company Act of 1956, subject to oversight, regulation and examination by the Board of
Governors of the Federal Reserve System (the “Federal Reserve”). We are also a financial holding company under the
Gramm-Leach-Bliley Act. Through our Discover Bank subsidiary, we offer our customers credit cards, student loans,
personal loans and deposit products. Through our DFS Services LLC subsidiary and its subsidiaries, we operate the
Discover Network, the PULSE network (“PULSE”) and Diners Club International (“Diners Club”). The Discover Network
provides credit card transaction processing for Discover card-branded and third-party issued credit cards. PULSE
operates an electronic funds transfer network, providing financial institutions issuing debit cards on the PULSE network
with access to ATMs domestically and internationally, as well as point of sale terminals at retail locations throughout the
U.S. for debit card transactions. Diners Club is a global payments network that grants rights to licensees, which are
generally financial institutions, to issue Diners Club branded credit cards and/or to provide card acceptance services.
Our Diners Club business also offers transaction processing and marketing services to licensees globally. Our fiscal year
ends on November 30 of each year.
Our primary revenues consist of interest income earned on loan receivables and fees earned from customers,
merchants and issuers. The primary costs required to operate our business include funding costs (interest expense), loan
loss provisions, customer rewards, and expenses incurred to grow, manage and service our loan receivables and
networks. Our business activities are funded primarily through the raising of consumer deposits, securitization of loan
receivables and the issuance of both secured and unsecured debt.
Change in Accounting Principle Related to Off-Balance Sheet Securitizations
Beginning with the first quarter 2010, we have included the trusts used in our securitization activities in our
consolidated financial results in accordance with the Financial Accounting Standards Board (“FASB”) Statement of
Financial Accounting Standards No. 166, Accounting for Transfers of Financial Assets – an amendment of FASB
Statement No. 140 (“Statement No. 166”) (codified under the FASB Accounting Standards Codification (“ASC”)
Section 860, Transfers and Servicing) and Statement of Financial Accounting Standards No. 167, Amendments to FASB
Interpretations No. 46(R) (“Statement No. 167”) (codified under ASC Section 810, Consolidation), which were effective
for us on December 1, 2009, the beginning of our 2010 fiscal year.
Under Statement No. 166, the trusts used in our securitization transactions are no longer exempt from consolidation.
Statement No. 167 prescribes an ongoing assessment of our involvement in the activities of the trusts and our rights or
obligations to receive benefits or absorb losses of the trusts that could be potentially significant in order to determine
whether those entities will be required to be consolidated on our financial statements. Based on our assessment, we
concluded that we are the primary beneficiary of the Discover Card Master Trust I (“DCMT”) and the Discover Card
Execution Note Trust (“DCENT”) (the “trusts”) and accordingly, we began consolidating the trusts on December 1, 2009.
Using the carrying amounts of the trust assets and liabilities as prescribed by Statement No. 167, we recorded a $21.1
billion increase in total assets, a $22.4 billion increase in total liabilities and a $1.3 billion decrease in stockholders’
equity (comprised of a $1.4 billion decrease in retained earnings offset by an increase of $0.1 billion in accumulated
other comprehensive income). The significant adjustments to our statement of financial condition upon adoption of
Statements No. 166 and 167 are outlined below:
• Consolidation of $22.3 billion of securitized loan receivables and the related debt issued from the trusts to third-
party investors;
-47-