a6120160ex991.htm

Other income includes $472 million and $864 million in litigation settlement proceeds in the fourth quarter of 2009 and 2008, respectively. Excluding the settlement proceeds, other income increased $82 million from the prior year, primarily due to the revaluation of the interest-only strip receivable. The fourth quarter 2009 includes a $38 million unfavorable revaluation of the interest-only strip receivable compared to a $116 million unfavorable revaluation in the fourth quarter 2008.

Expenses were down $18 million, or 3% from the prior year, reflecting the impact of cost containment initiatives, partially offset by costs associated with the global expansion initiative of $13 million and a $9 million charge related to a facility closure. The fourth quarter of 2008 included a $39 million benefit due to curtailment of the company’s pension plan.

Third-Party Payments

Pretax income of $24 million in the quarter was up $3 million from the prior year. Revenues were up $6 million reflecting an increase in transactions on the PULSE network, lower incentive payments and higher fee revenues. Expenses were up $2 million including a higher level of international marketing investments, partially offset by the impact of cost containment initiatives.

Third-Party Payments dollar volume for the fourth quarter of $33 billion was down 2% from the prior year. However, the number of transactions on the PULSE network increased 5% to 677 million, due to increased transactions from new and existing clients, partially offset by the loss of volume from one large financial institution.

Capital Markets Activity

During the quarter, the company’s wholly-owned subsidiary, Discover Bank, raised approximately $700 million through a subordinated debt issuance, increasing tier 2 regulatory capital. In addition, the company’s securitization trust issued $1.3 billion of asset-backed securities through the TALF program.

Dividends

The company’s board declared a cash dividend of $0.02 per share of common stock, payable on Jan. 21, 2010, to stockholders of record at the close of business on Dec. 31, 2009.

Adoption of Statement of Financial Accounting Standards No. 166 and 167

The company adopted Statement of Financial Accounting Standards No. 166 and 167 on Dec. 1, 2009, which requires the consolidation of its credit card securitization trusts. At adoption, the company added approximately $21.1 billion of assets, including a $2.1 billion addition to loan loss reserves, and approximately $22.4 billion of liabilities to its balance sheet. The net impact of the new accounting is a reduction to stockholders’ equity of $1.3 billion. The company estimates its pro-forma total and tier 1 regulatory capital ratios after adoption would be 16.0% and 13.3%, respectively.

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are based upon the current beliefs and expectations of the company’s management and are subject to significant risks and uncertainties. Actual results may differ materially from those set forth in the forward-looking statements. These forward-looking statements speak only as of the date of this press release, and there is no undertaking to update or revise them as more information becomes available. The following factors, among others, could cause actual results to differ materially from those set forth in the forward-looking statements: the actions and initiatives of current and potential competitors; our ability to manage credit risks and securitize our receivables; changes in economic variables, such as the availability of consumer credit, the housing market, energy costs, the number and size of personal bankruptcy filings, the rate of unemployment and the levels of consumer confidence and consumer debt; the level and volatility of equity prices, commodity prices and interest rates, currency values, investments, other market fluctuations and other market indices; the availability and cost of funding and capital; access to U.S. equity, debt and deposit markets; the ability to manage our liquidity risk; the impact of rating agency actions; losses in our investment portfolio; the ability to increase or sustain Discover card usage or attract new cardmembers and introduce new products or services; our ability to attract new merchants and maintain relationships with current merchants; our ability to successfully achieve interoperability among our networks and maintain relationships with network participants; material security breaches of key systems; unforeseen and catastrophic events; our reputation; the potential effects of technological changes; the effect of political, economic and market conditions and geopolitical events; unanticipated developments relating to lawsuits, investigations or similar matters; the impact of current, pending and future legislation, regulation and regulatory and legal actions, including new laws and rules limiting or modifying certain credit card practices, new laws and rules affecting securitizations, and legislation related to government programs to stabilize the financial markets; changes to accounting rules or the interpretations thereof; our ability to attract and retain employees; our ability to protect our intellectual property; the impact of any potential future acquisitions; investor sentiment; resolution of our dispute with Morgan Stanley; and the restrictions on our operations resulting from financing transactions.

Discover Financial Services
Managed Basis 1
(unaudited, dollars in thousands)
	Quarter Ended									Year Ended
	Nov 30, 2009			Aug 31, 2009			Nov 30, 2008			Nov 30, 2009			Nov 30, 2008

Earnings Summary 1
Interest Income 1	$	1,585,690		$	1,664,081		$	1,682,267		$	6,461,072		$	6,545,829
Interest Expense 1		403,298			392,642			602,450			1,648,420			2,356,919
Net Interest Income 1		1,182,392			1,271,439			1,079,817			4,812,652			4,188,910
Other Income 1, 2		984,372			1,116,765			1,287,213			3,917,675			2,953,096
Revenue Net of Interest Expense 1		2,166,764			2,388,204			2,367,030			8,730,327			7,142,006
Provision for Loan Losses 1		989,009			924,427			1,105,971			4,358,341			3,068,604
Total Other Expense		578,507			523,838			594,082			2,222,096			2,415,797
Income Before Income Taxes 2		599,248			939,939			666,977			2,149,890			1,657,605
Tax Expense		228,560			362,485			223,336			855,554			594,692
Income From Continuing Operations 2		370,688			577,454			443,641			1,294,336			1,062,913
Discontinued Operations, Net of Tax 3		-			-			(11,306	)		-			(135,163	)
Net Income 2,3	$	370,688		$	577,454		$	432,335		$	1,294,336		$	927,750

Net Income Available to Common Stockholders	$	352,054		$	559,387		$	432,335		$	1,241,081		$	927,750

Pre-tax Income, U.S. Card 2	$	575,477		$	912,800		$	646,427		$	2,043,346		$	1,576,194
Pre-tax Income, Third Party Payments	$	23,771		$	27,139		$	20,550		$	106,544		$	81,411

Per Share Statistics
Diluted EPS from Continuing Operations 2, 4	$	0.63		$	1.07		$	0.92		$	2.42		$	2.20

Balance Sheet Statistics 5
Total Assets - Managed 1	$	72,978,435		$	67,794,309		$	65,620,476		$	72,978,435		$	65,620,476
Total Equity	$	8,466,755		$	8,386,202		$	5,915,823		$	8,466,755		$	5,915,823
Total Loans - Managed 1	$	50,860,372		$	50,903,845		$	51,095,278		$	50,860,372		$	51,095,278
Average Total Loans - Managed 1	$	50,590,846		$	50,971,056		$	50,707,090		$	51,140,614		$	49,011,148

Key Ratios
Return on Managed Loan Receivables 1		2.94	%		4.49	%		3.52	%		2.53	%		2.17	%
Managed Interest Yield 1		12.34	%		12.73	%		12.65	%		12.36	%		12.61	%
Net Yield on Managed Loan Receivables 1		9.37	%		9.90	%		8.56	%		9.41	%		8.55	%
Managed Net Principal Charge-off Rate 1		8.43	%		8.39	%		5.48	%		7.77	%		5.01	%
Reserve Rate		7.44	%		7.19	%		5.45	%		7.44	%		5.45	%
Reserve Rate (excluding guaranteed student loans) 6		7.87	%		7.45	%		5.48	%		7.87	%		5.48	%
Managed Delinquency Rate (over 30 days) 1		5.31	%		5.10	%		4.56	%		5.31	%		4.56	%
Managed Delinquency Rate (over 90 days) 1		2.78	%		2.60	%		2.17	%		2.78	%		2.17	%


Total Discover Card Volume	$	23,335,440		$	23,955,402		$	25,318,553		$	95,592,170		$	105,734,055
Discover Card Sales Volume	$	21,903,694		$	22,768,927		$	22,025,264		$	87,460,552		$	92,239,779

Volume
PULSE Network	$	24,667,926		$	28,051,978		$	25,033,235		$	109,302,121		$	106,012,108
Third-Party Issuers		1,522,269			1,446,308			1,538,013			5,671,555			6,398,579
Diners Club International 7		7,172,809			6,465,990			7,457,893			26,172,977			12,685,690
Total Third-Party Payments		33,363,004			35,964,276			34,029,141			141,146,653			125,096,377
Discover Network - Proprietary 8		22,712,600			23,579,434			22,875,272			90,688,997			95,688,443
Total	$	56,075,604		$	59,543,710		$	56,904,413		$	231,835,650		$	220,784,820

1.		These numbers are on a managed basis. Managed basis assumes that loans that have been securitized were not sold and presents financial information regarding these loans in a manner similar to the presentation of financial information regarding loans that have not been sold. See Reconciliation of GAAP to Managed Data Schedule.

2.		The quarters ended November 30, 2008, August 31, 2009 and November 30, 2009 include $864 million pre-tax (estimated $535 million after-tax), $472 million pre-tax (estimated $287 million after-tax), and $472 million pre-tax (estimated $285 million after-tax) respectively, and the years ended November 30, 2008 and November 30, 2009 include $864 million pre-tax (estimated $535 million after-tax) and $1.9 billion (estimated $1.2 billion after-tax) respectively related to the Visa/Mastercard antitrust litigation settlement.

3.		The year ended November 30, 2008 includes a loss from discontinued operations, net of tax, of $135 million consisting of a $166 million loss related to the sale of the Goldfish business partially offset by $31 million of income related to the Goldfish business operations.

4.		Earnings per share is based on net income available to common stockholders. Net income available to common stockholders equals net income less dividends and accretion of discount on shares of preferred stock.

5.		Based on continuing operations except for equity. Equity includes $1.2 billion of preferred stock and $7.3 billion of common equity as of November 30, 2009.

6.		Reserve Rate (excluding guaranteed student loans), a non-GAAP measure, represents the allowance for loan losses as a percentage of total loans excluding guaranteed student loans. The Company believes that a reserve rate excluding the government guaranteed portion of student loans is a more meaningful valuation to investors of the portion of the portfolio that has a risk of loss. For a corresponding reconciliation of loans excluding the guaranteed portion of student loans to a GAAP financial measure, see Reconciliation of GAAP to Managed Data schedule.

7.		Volume is derived from data provided by licensees for Diners Club branded cards issued outside of North America and is subject to subsequent revision or amendment.

8.		Gross proprietary sales volume on the Discover Network.

DISCOVER FINANCIAL SERVICES

RECONCILIATION OF GAAP TO MANAGED DATA

The following presents a reconciliation for certain information disclosed above. The data below is presented on both a "managed" loan basis and as reported under generally accepted accounting principles ("owned" loan basis). Managed loan data assumes that the company's securitized loan receivables have not been sold and presents the results of securitized loan receivables in the same manner as the company's owned loans. The company operates its business and analyzes its financial performance on a managed basis. Accordingly, underwriting and servicing standards are comparable for both owned and securitized loans. The company believes that managed loan information is useful to investors because it provides information regarding the quality of loan origination and credit performance of the entire managed portfolio and allows investors to understand the related credit risks inherent in owned loans and retained interests in securitizations. Managed loan data is also relevant because the company services the securitized and owned loans, and the related accounts, in the same manner without regard to ownership of the loans. In addition, investors often request information on a managed basis which provides a more meaningful comparison to industry competitors.

Reserve rate (excluding guaranteed student loans), a non-GAAP financial measure, represents the allowance for loan losses as a percentage of total loans excluding guaranteed student loans. A reconciliation of total loans, a GAAP financial measure, to loans excluding the guaranteed portion of student loans is shown below. A portion of the Company's student loans are 97% guaranteed by the federal government under the Federal Family Education Loan Program. These guaranteed student loans carry little default risk and therefore, are reserved at a significantly lower rate than the remaining portfolio. Management believes that a reserve rate excluding the government guaranteed portion of student loans is a more meaningful valuation to investors of the portion of the portfolio that has a risk of loss.

Discover Financial Services
Reconciliation of GAAP to Managed Data
(unaudited, dollars in thousands)
	Quarter Ended									Year Ended
	Nov 30, 2009			Aug 31, 2009			Nov 30, 2008			Nov 30, 2009			Nov 30, 2008

Interest Income
GAAP Basis	$	638,086		$	833,217		$	736,006		$	3,145,080		$	2,692,563
Securitization Adjustments		947,604			830,864			946,261			3,315,992			3,853,266
Managed Basis	$	1,585,690		$	1,664,081		$	1,682,267		$	6,461,072		$	6,545,829

Interest Expense
GAAP Basis	$	314,158		$	304,401		$	329,672		$	1,251,284		$	1,288,004
Securitization Adjustments		89,140			88,241			272,778			397,136			1,068,915
Managed Basis	$	403,298		$	392,642		$	602,450		$	1,648,420		$	2,356,919

Net Interest Income
GAAP Basis	$	323,928		$	528,816		$	406,334		$	1,893,796		$	1,404,559
Securitization Adjustments		858,464			742,623			673,483			2,918,856			2,784,351
Managed Basis	$	1,182,392		$	1,271,439		$	1,079,817		$	4,812,652		$	4,188,910

Other Income
GAAP Basis	$	1,253,559		$	1,315,960		$	1,568,901		$	4,840,595		$	4,264,458
Securitization Adjustments		(269,187	)		(199,195	)		(281,688	)		(922,920	)		(1,311,362	)
Managed Basis	$	984,372		$	1,116,765		$	1,287,213		$	3,917,675		$	2,953,096

Revenue Net of Interest Expense
GAAP Basis	$	1,577,487		$	1,844,776		$	1,975,235		$	6,734,391		$	5,669,017
Securitization Adjustments		589,277			543,428			391,795			1,995,936			1,472,989
Managed Basis	$	2,166,764		$	2,388,204		$	2,367,030		$	8,730,327		$	7,142,006

Provision for Loan Losses
GAAP Basis	$	399,732		$	380,999		$	714,176		$	2,362,405		$	1,595,615
Securitization Adjustments		589,277			543,428			391,795			1,995,936			1,472,989
Managed Basis	$	989,009		$	924,427		$	1,105,971		$	4,358,341		$	3,068,604

Total Assets
GAAP Basis	$	46,010,146		$	42,698,290		$	39,892,382		$	46,010,146		$	39,892,382
Securitization Adjustments		26,968,289			25,096,019			25,728,094			26,968,289			25,728,094
Managed Basis	$	72,978,435		$	67,794,309		$	65,620,476		$	72,978,435		$	65,620,476

Total Loans
GAAP Basis	$	23,625,084		$	25,489,809		$	25,216,611		$	23,625,084		$	25,216,611
Securitization Adjustments		27,235,288			25,414,036			25,878,667			27,235,288			25,878,667
Managed Basis	$	50,860,372		$	50,903,845		$	51,095,278		$	50,860,372		$	51,095,278

Total Loans - GAAP Basis	$	23,625,084		$	25,489,809		$	25,216,611		$	23,625,084		$	25,216,611
Less: Guaranteed portion of student loans		1,274,453			889,963			152,135			1,274,453			152,135
Total Loans excluding guaranteed portion of student loans	$	22,350,631		$	24,599,846		$	25,064,476		$	22,350,631		$	25,064,476

Average Total Loans
GAAP Basis	$	23,835,598		$	26,380,203		$	22,945,494		$	26,552,574		$	21,348,493
Securitization Adjustments		26,755,248			24,590,853			27,761,596			24,588,040			27,662,655
Managed Basis	$	50,590,846		$	50,971,056		$	50,707,090		$	51,140,614		$	49,011,148

Return on Loan Receivables
GAAP Basis		6.24	%		8.68	%		7.78	%		4.87	%		4.98	%
Securitization Adjustments		5.56	%		9.32	%		6.43	%		5.26	%		3.84	%
Managed Basis		2.94	%		4.49	%		3.52	%		2.53	%		2.17	%

Interest Yield
GAAP Basis		10.25	%		12.10	%		11.36	%		11.31	%		10.89	%
Securitization Adjustments		14.21	%		13.40	%		13.71	%		13.49	%		13.93	%
Managed Basis		12.34	%		12.73	%		12.65	%		12.36	%		12.61	%

Net Yield on Loan Receivables
GAAP Basis		5.45	%		7.95	%		7.12	%		7.13	%		6.58	%
Securitization Adjustments		12.87	%		11.98	%		9.76	%		11.87	%		10.07	%
Managed Basis		9.37	%		9.90	%		8.56	%		9.41	%		8.55	%

Net Principal Charge-off Rate
GAAP Basis		7.98	%		8.05	%		5.25	%		7.45	%		4.59	%
Securitization Adjustments		8.83	%		8.77	%		5.68	%		8.12	%		5.32	%
Managed Basis		8.43	%		8.39	%		5.48	%		7.77	%		5.01	%

Delinquency Rate (over 30 days)
GAAP Basis		4.92	%		4.86	%		4.35	%		4.92	%		4.35	%
Securitization Adjustments		5.65	%		5.35	%		4.77	%		5.65	%		4.77	%
Managed Basis		5.31	%		5.10	%		4.56	%		5.31	%		4.56	%

Delinquency Rate (over 90 days)
GAAP Basis		2.58	%		2.46	%		2.06	%		2.58	%		2.06	%
Securitization Adjustments		2.95	%		2.74	%		2.27	%		2.95	%		2.27	%
Managed Basis		2.78	%		2.60	%		2.17	%		2.78	%		2.17	%

	Continuing Operations		Discontinued Operations	Net Income
	Earnings	Diluted EPS	Earnings	Earnings	Diluted EPS
	(millions)		(millions)	(millions)
4Q09	$371	$0.63	-	$371	$0.63
4Q08	$444	$0.92	($12)	$432	$0.89

2009	$1,294	$2.42	-	$1,294	$2.42
2008	$1,063	$2.20	($135)	$928	$1.92