Discover 2010 Annual Report Download - page 91

Total other expense decreased $39 million in 2010 as compared to 2009 as adjusted. Employee compensation and
benefits expense decreased as we benefitted from cost containment initiatives undertaken in 2009, which included
lowering headcount. Information processing and communications expense was lower in 2010 than in 2009 due to our
efforts to reduce costs associated with ongoing contracts. Other expense was lower in 2010 due to (i) a $29 million
nonrecurring benefit related to the reversal of expense that had been recorded related to the payment to Morgan Stanley
under an amendment to the special dividend agreement (see Note 21: Litigation to our consolidated financial statements);
(ii) a $20 million restructuring charge recorded during the second quarter 2009 as a result of the reduction in headcount
and (iii) a $14 million decline in costs relating to fraud. These declines in expenses were partially offset by an increase in
marketing expenses, due to increased advertising and promotional marketing expenses and higher investments in account
acquisition, and an increase in professional fees, due to higher collection fees and advisory expenses related to the
acquisition of The Student Loan Corporation.
Total other expense decreased $194 million in 2009 as adjusted as compared to 2008. Expenses were lower overall
reflecting the impact of cost containment initiatives such as a reduction of headcount, lower marketing and lower litigation
expense. Marketing expenses decreased $125 million primarily due to a reduction in new account acquisition. Other
expense increased $11 million due to the inclusion of a full year of Diners Club expenses compared to only six months in
2008, a $20 million charge related to a reduction in force, increased costs associated with the global expansion initiative
and a charge related to a facility closure. Additionally, in 2008, other expense included a $39 million benefit due to the
curtailment of our pension plan. These increases in other expense were partially offset by lower postage, supplies and
credit bureau fees resulting from lower account acquisition activity and fraud costs.
Income Tax Expense
For 2010, we had tax expense of $504 million as compared to a tax benefit of $92 million for 2009 as adjusted. The
increase was the result of shifting from an as adjusted pretax loss position in 2009 to a pretax income position in 2010.
2010 also includes $49.9 million of state tax expense which is attributable to an increase in pretax income and tax
liabilities in additional states.
For 2009 as adjusted, we had a $92 million tax benefit as compared to tax expense of $150 million in 2008 as
adjusted, as a result of shifting from an as adjusted pretax income position in 2008 to a pretax loss position in 2009.
Included in 2009 was a $24 million valuation allowance on a tax benefit arising from the sale of the Goldfish business in
2008 that we no longer believed was realizable. 2009 also had a higher effective state tax rate due to estimated taxes
payable in additional states.
Liquidity and Capital Resources
Funding and Liquidity
We seek to maintain diversified funding sources and a strong liquidity profile in order to fund our business and repay
or refinance our maturing obligations. In addition, we seek to achieve an appropriate maturity profile, utilize a cost-
effective mix of funding sources and ensure that the composition of our funding sources provides appropriate
diversification. Our primary funding sources include deposits, sourced directly from consumers or through brokers, term
asset-backed securitizations, private asset-backed securitizations and long-term borrowings.
Funding Sources
Deposits. We offer deposit products, including certificates of deposit, money market accounts, online savings accounts
and Individual Retirement Account (“IRA”) certificates of deposit, to customers through two channels: (i) through direct
marketing, internet origination and affinity relationships (“direct-to-consumer deposits”); and (ii) indirectly through
contractual arrangements with securities brokerage firms (“brokered deposits”).
Since November 30, 2009, direct-to-consumer deposits have grown $8.0 billion, or 64%, which includes
approximately $1 billion of deposit accounts acquired in March 2010 from a third party. At November 30, 2010, we
had $20.6 billion of direct-to-consumer deposits and $13.7 billion of brokered deposits Since November 30, 2009, we
have deemphasized the brokered deposit channel in favor of our direct-to-consumer deposit program. Remaining
maturities of our certificates of deposit range from one month to ten years, with a weighted average maturity of 22
months at November 30, 2010.
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