Discover 2010 Annual Report Download - page 69

Outlook
Credit performance improved throughout 2010 and we believe delinquencies and net charge-offs will continue to
improve in 2011 as compared to 2010 levels. We expect this improvement to result in further reductions of our loan loss
reserves.
In 2011, we expect the continued impact of the implementation of CARD Act provisions along with an anticipated
increase in the volume of promotional rate offers to unfavorably impact credit card yield, although we believe it will be
partially offset by continued improvement in interest charge-offs. The decline in credit card yield, together with the
addition of lower rate student loans from the acquisition of The Student Loan Corporation, discussed further below, will
lead to a reduction in our net interest margin.
We believe that the significant investments we made in marketing and advertising in 2010 will continue to benefit
Discover card sales volumes in 2011. This along with an expected increase in the volume of promotional rate offers may
result in a modest increase in the level of credit card loan receivables.
At November 30, 2010, we had $10.1 billion in our liquidity investment portfolio. Maturities of deposit and
securitization obligations leveled off in the second half of 2010 and we expect 2011 maturities will be relatively stable by
comparison. In 2011, the level of our liquidity investment portfolio will fluctuate primarily due to asset requirements,
maturity obligations and deposit cash flows. With respect to new funding, we expect to continue to grow
direct-to-consumer deposits in 2011 and take advantage of opportunities to issue asset-backed securities when we believe
market conditions are favorable.
We experienced strong growth in volumes in our payments business in 2010, which we expect to continue in 2011.
Our investment in building brand awareness and global acceptance is expected to grow in 2011 compared to 2010
levels. We believe that our strategic network alliances with key card networks such as Korea’s BC Card, Japan’s JCB,
China UnionPay and Serbia’s DinaCard, along with the continued development of merchant acquirer relationships, will
be our foundation for driving global acceptance and volumes.
Recent Developments
On December 31, 2010, we acquired The Student Loan Corporation (“SLC”) in a merger transaction for $600 million.
We received a purchase price closing adjustment in the form of a cash payment of approximately $234 million from
Citibank, N.A. (“Citibank”), the 80% owner of SLC before the merger, resulting in a net cash outlay of approximately
$366 million for the acquisition of SLC. In the transaction, we acquired SLC’s ongoing private student loan business and
approximately $4.2 billion of private student loans and other assets, along with assuming approximately $3.4 billion of
SLC’s existing asset-backed securitization debt funding and other liabilities. We acquired the loans and other assets at an
8.5% discount, which will be applied to the balance sheet items through purchase accounting entries. SLC is now a
wholly-owned subsidiary of Discover Bank. The acquisition significantly increased the size of our private student loan
portfolio, which was $1.0 billion at November 30, 2010. In addition, the acquisition has provided us with a developed
student loan business platform, additional school relationships, experienced personnel and SLC’s website.
Legislative and Regulatory Developments
Financial Regulatory Reform
In July 2010, the President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the
“Reform Act”), which contains a comprehensive set of provisions designed to govern the practices and oversight of
financial institutions and other participants in the financial markets. The Reform Act, as well as other legislative and
regulatory changes, could have a significant impact on us by, for example, requiring us to change our business practices,
requiring us to meet more stringent capital, liquidity and leverage ratio requirements, limiting our ability to pursue
business opportunities, imposing additional costs on us, limiting fees we can charge for services, impacting the value of
our assets, or otherwise adversely affecting our businesses.
The Reform Act addresses risks to the economy and the payments system, especially those posed by large systemically
significant financial firms, including bank holding companies with assets of at least $50 billion, which would include us. It
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