Discover 2010 Annual Report Download - page 80

Earnings Summary
The following table outlines changes in our consolidated statement of income for the periods presented (dollars in
thousands):
For the Years Ended November 30,
2010 vs. 2009
increase (decrease)
2009 vs. 2008
increase (decrease)
2010
2009
(As
Adjusted1)
2008
(As
Adjusted1)$ % $ %
Interest income ......................................................................... $6,146,218 $6,435,152 $6,491,069 $ (288,934) (4%) $ (55,917) (1%)
Interest expense ........................................................................ 1,582,988 1,605,499 2,311,324 (22,511) (1%) (705,825) (31%)
Net interest income ................................................................... 4,563,230 4,829,653 4,179,745 (266,423) (6%) 649,908 16%
Provision for loan losses ............................................................. 3,206,705 5,123,030 3,476,644 (1,916,325) (37%) 1,646,386 47%
Net interest income after provision for loan losses .......................... 1,356,525 (293,377) 703,101 1,649,902 NM (996,478) (142%)
Other income ........................................................................... 2,094,999 2,186,064 2,193,784 (91,065) (4%) (7,720) 0%
Other expense.......................................................................... 2,182,665 2,222,096 2,415,797 (39,431) (2%) (193,701) (8%)
Income (loss) before income tax expense....................................... 1,268,859 (329,409) 481,088 1,598,268 NM (810,497) (168%)
Income tax expense (benefit)....................................................... 504,071 (92,125) 150,162 596,196 NM (242,287) (161%)
Income (loss) from continuing operations ...................................... $ 764,788 $ (237,284) $ 330,926 $ 1,002,072 NM $ (568,210) (172%)
(1) See “ – Reconciliations of GAAP to As Adjusted Data.”
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). 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, 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; and
• The effectiveness of interest rate swaps in our interest rate risk management program.
For the Year Ended November 30, 2010 compared to the Year Ended November 30, 2009
Net interest income was $4.6 billion for the year ended November 30, 2010, a decline of 6% as compared to the year
ended November 30, 2009 as adjusted. The decline in net interest income was primarily due to a lower average level of
credit card loan receivables as well as a decline in net interest margin.
-69-