Discover 2010 Annual Report Download - page 81

Net interest margin was 9.14% for the year ended November 30, 2010, down 31 basis points as compared to the
year ended November 30, 2009 as adjusted. This reflects a greater proportion of lower-rate student loans in our loan
portfolio for much of the year, lower rates earned on higher balances in our liquidity investment portfolio and higher
rates paid on long-term borrowings, partially offset by lower deposit funding costs and an improvement in credit card
yield. Yield on credit card loan receivables improved as a result of fewer promotional rate balances and higher interest
rates earned on standard balances, partially offset by the impact of legislative changes related to restrictions on
increasing interest rates on existing balances beginning in February 2010. Although the yield on credit card loan
receivables was higher for the full year 2010 as compared to 2009 as adjusted, the credit card yield during the fourth
quarter 2010 was lower than the fourth quarter 2009 as adjusted. In 2011, we expect the credit card yield to decline as
a result of the continued impact of the implementation of CARD Act provisions and a planned increase in promotional
rate offers.
The level of net interest income also declined during the year ended November 30, 2010, as compared to the year
ended November 30, 2009 as adjusted, because of a decline in the average level of credit card loan receivables, which
was driven by a reduction in promotional rate balances and an increase in the payment rate. This was partially offset by
an increase in the level of student loans and a higher average level of liquidity.
Interest expense declined slightly for the year ended November 30, 2010 as compared to the year ended
November 30, 2009 as adjusted largely as a result of lower interest expense on securitized debt and deposits offset by
higher expense associated with subordinated debt issuances in late 2009 and April 2010. Interest expense on securitized
debt declined because of a significant level of maturities in the first half of 2010. Interest expense on deposits declined as
the decline in deposit interest rates more than offset the higher level of deposit borrowings, which replaced the maturing
asset-backed securities.
For the Year Ended November 30, 2009 compared to the Year Ended November 30, 2008
Net interest income was $4.8 billion for the year ended November 30, 2009 as adjusted, an increase of 16% as
compared to the year ended November 30, 2008 as adjusted. The increase in net interest income was primarily due to
an increase in net interest margin along with an increase in the average level of loan receivables.
Net interest margin was 9.45% for the year ended November 30, 2009 as adjusted, up 92 basis points as compared
to the year ended November 30, 2008 as adjusted. The increase was due to lower funding costs partially offset by a
lower yield on our loan receivables and liquidity investment portfolio. In 2008, interest expense was negatively impacted
by the disruptions in the capital markets, which caused the differential between LIBOR (the rate to which our securitized
borrowings are benchmarked) and the Federal Funds rate (which impacts the prime rate, the rate to which our floating
rate credit card receivables are benchmarked). By 2009, the differential between LIBOR and the Federal Funds rate had
narrowed to more normalized ranges.
The yield on loan receivables was 12.40% for the year ended November 30, 2009 as adjusted, down 19 basis points
as compared to the year ended November 30, 2008 as adjusted due to a higher level of student and personal loans,
which earn lower interest rates. The yield on credit card loans was 12.63% in both 2009 as adjusted and 2008 as
adjusted as an increase in rates on standard balances and a reduction in promotional rate balances were offset by an
increase in finance charge charge-offs.
The increase in net interest income in 2009 as adjusted as compared to 2008 as adjusted was also due to an increase
in the average level of loan receivables. This was primarily attributable to a decline in the credit card payment rate and
an increase in both student and personal loan receivable balances, partially offset by lower balance transfer activity and
lower sales volume.
Interest expense declined significantly for the period ending November 30, 2009 as adjusted compared to the same
period in 2008 as adjusted primarily due to a decline in funding costs related to securitized borrowings as discussed
above. Throughout 2009 we grew our deposits business, which provided a significant source of funds while the
securitization market was disrupted. Due to the decline in benchmark deposit rates throughout 2009, our cost of funds
related to deposits improved during 2009 as compared to 2008.
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