Discover 2015 Annual Report Download - page 72

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Total other expense increased for the year ended December 31, 2015 as compared to the year ended December
31, 2014. The increase was primarily driven by higher professional fees and higher employee compensation and
benefit costs partially offset by the mortgage business goodwill impairment recorded in 2014 with no similar 2015
charge. The increase in professional fees was driven by anti-money laundering and related compliance program
expenses. The growth in employee compensation costs resulted from growth in overall headcount driven in part by
regulatory and compliance needs. Also contributing to the increase in total other expense is an increase in other
expense related to the closure of our mortgage origination business.
For the Year Ended December 31, 2014 compared to the Year Ended December 31, 2013
Our Direct Banking segment reported pretax income of $3.6 billion for the year ended December 31, 2014, as
compared to pretax income of $3.9 billion for the year ended December 31, 2013.
Loan receivables totaled $69.9 billion at December 31, 2014, which was up from $65.8 billion at December 31,
2013, due to growth in credit card loans and other loan portfolios partially offset by a decrease in PCI student loan
balances. The growth in credit card loans was due to growth in customers with revolving balances partially offset by a
higher net principal charge-off rate. The growth within the other loans portfolio was primarily attributable to organic
growth in personal and private student loans. Discover card sales volume was $115.5 billion for the year ended
December 31, 2014, which was an increase of 5% as compared to the year ended December 31, 2013. This volume
growth was driven primarily by continued growth in new accounts combined with lower attrition.
Net interest margin increased for the year ended December 31, 2014 as compared to the year ended December
31, 2013. This was primarily driven by higher yields on total loan receivables combined with lower interest rates on
funding. The increase in loan receivable yields was driven by higher interest rates and growth in non-promotional
revolving balances, partially offset by decline in higher rate balances along with growth in credit card promotional
balances.
Interest income increased during the year ended December 31, 2014 as compared to the year ended December
31, 2013 primarily due to higher average balances of credit card loans, personal loans and private student loans
resulting from growth across these products. The increase was also attributable to higher yields on credit card loans and
PCI student loans, partially offset by a decrease in yield on personal loans along with a decrease in PCI student loan
balances.
Interest expense was relatively flat during the year ended December 31, 2014 as compared to the year ended
December 31, 2013, as lower interest expense on deposits attributable to lower yields was offset by higher interest
expense resulting from increase in borrowings.
At December 31, 2014 and December 31, 2013, our delinquency rate for credit card loans over 30 days past
due was 1.73% and 1.72%, respectively. For the year ended December 31, 2014, our net charge-off rate on credit
cards remained relatively flat as compared to the year ended December 31, 2013. Recent loan growth has led to an
increase in reserves required to cover losses from loan seasoning. "Seasoning" refers to the maturing of a loan portfolio
as, in general, loans do not begin to show signs of credit deterioration or default until they have been in repayment for
some period of time. An increase in reserve requirements combined with lower recoveries led to an increase in the
provision for loan losses for the year ended December 31, 2014, as compared to the year ended December 31, 2013.
For a more detailed discussion on provision for loan losses, see "— Loan Quality — Provision and Allowance for Loan
Losses."
Total other income decreased for the year ended December 31, 2014 as compared to the year ended December
31, 2013 primarily due to a one-time charge to customer rewards costs resulting from the elimination of our current
estimate of customer rewards forfeiture of $178 million, which reduced discount and interchange revenue. Gain on sale
of mortgage loans also decreased, driven primarily by lower mortgage refinance volume due to increased mortgage
interest rates in 2013, as well as changes in product mix. The overall decrease in other income was also attributable to
a decrease in protection product revenue reflecting lower sales volume as we have stopped selling these products.
Total other expense increased for the year ended December 31, 2014 as compared to the year ended December
31, 2013. The increase was primarily due to higher employee compensation costs driven by growth in headcount,
along with higher professional fees related to technology and digital investments. Marketing and business development
costs, and information processing and communications costs also increased due to growth initiatives. The goodwill
impairment of $27 million related to the Discover Home Loans business also contributed to overall increase in total