|
x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
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For the quarterly period ended May 31, 2012
|
o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
|
For the transition period from to
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Delaware
|
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36-2517428
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(State or other jurisdiction of incorporation or organization)
|
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(I.R.S. Employer Identification No.)
|
|
|
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2500 Lake Cook Road,
Riverwoods, Illinois 60015
|
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(224) 405-0900
|
(Address of principal executive offices, including zip code)
|
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(Registrant’s telephone number, including area code)
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Large accelerated filer
x
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Accelerated filer
o
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Non-accelerated filer
o
(Do not check if a smaller reporting company)
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Smaller reporting company
o
|
|
|
|
Part I.
|
FINANCIAL INFORMATION
|
Item 1.
|
Financial Statements
|
|
May 31,
2012 |
|
November 30,
2011 |
||||
|
(unaudited)
(dollars in thousands,
except share amounts)
|
||||||
Assets
|
|
|
|
||||
Cash and cash equivalents
|
$
|
5,112,069
|
|
|
$
|
2,849,843
|
|
Restricted cash
|
1,802,881
|
|
|
1,285,820
|
|
||
Other short-term investments
|
250
|
|
|
—
|
|
||
Investment securities:
|
|
|
|
||||
Available-for-sale (amortized cost of $6,445,885 and $6,019,927 at May 31, 2012 and November 30, 2011, respectively)
|
6,557,344
|
|
|
6,107,831
|
|
||
Held-to-maturity (fair value of $96,042 and $96,042 at May 31, 2012 and November 30, 2011, respectively)
|
94,620
|
|
|
98,222
|
|
||
Total investment securities
|
6,651,964
|
|
|
6,206,053
|
|
||
Loan receivables:
|
|
|
|
||||
Loans held for sale
|
—
|
|
|
714,180
|
|
||
Loan portfolio:
|
|
|
|
||||
Credit card
|
46,610,407
|
|
|
46,638,625
|
|
||
Other
|
5,451,930
|
|
|
4,733,742
|
|
||
Purchased credit-impaired loans
|
4,995,320
|
|
|
5,250,388
|
|
||
Total loan portfolio
|
57,057,657
|
|
|
56,622,755
|
|
||
Total loan receivables
|
57,057,657
|
|
|
57,336,935
|
|
||
Allowance for loan losses
|
(1,869,253
|
)
|
|
(2,205,196
|
)
|
||
Net loan receivables
|
55,188,404
|
|
|
55,131,739
|
|
||
Premises and equipment, net
|
492,444
|
|
|
483,250
|
|
||
Goodwill
|
255,421
|
|
|
255,421
|
|
||
Intangible assets, net
|
184,501
|
|
|
188,018
|
|
||
Other assets
|
2,395,471
|
|
|
2,383,793
|
|
||
Total assets
|
$
|
72,083,405
|
|
|
$
|
68,783,937
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
||||
Deposits:
|
|
|
|
||||
Interest-bearing deposit accounts
|
$
|
41,427,004
|
|
|
$
|
39,463,887
|
|
Non-interest bearing deposit accounts
|
124,282
|
|
|
113,575
|
|
||
Total deposits
|
41,551,286
|
|
|
39,577,462
|
|
||
Short-term borrowings
|
—
|
|
|
50,000
|
|
||
Long-term borrowings
|
19,023,907
|
|
|
18,287,178
|
|
||
Accrued expenses and other liabilities
|
2,609,354
|
|
|
2,627,086
|
|
||
Total liabilities
|
63,184,547
|
|
|
60,541,726
|
|
||
Commitments, contingencies and guarantees (Notes 9, 12, and 13)
|
|
|
|
||||
Stockholders’ Equity:
|
|
|
|
||||
Common stock, par value $.01 per share; 2,000,000,000 shares authorized; 552,287,795 and 549,748,783 shares issued at May 31, 2012 and November 30, 2011, respectively
|
5,523
|
|
|
5,497
|
|
||
Additional paid-in capital
|
3,555,104
|
|
|
3,507,754
|
|
||
Retained earnings
|
6,303,466
|
|
|
5,243,318
|
|
||
Accumulated other comprehensive loss
|
(41,016
|
)
|
|
(51,679
|
)
|
||
Treasury stock, at cost; 35,047,041 and 20,918,354 shares at May 31, 2012 and November 30, 2011, respectively
|
(924,219
|
)
|
|
(462,679
|
)
|
||
Total stockholders’ equity
|
8,898,858
|
|
|
8,242,211
|
|
||
Total liabilities and stockholders’ equity
|
$
|
72,083,405
|
|
|
$
|
68,783,937
|
|
|
May 31,
2012 |
|
November 30,
2011 |
||||
|
(unaudited)
(dollars in thousands)
|
||||||
Assets
|
|
|
|
||||
Restricted cash
|
$
|
1,801,881
|
|
|
$
|
1,274,175
|
|
Credit card loan receivables
|
32,983,831
|
|
|
33,815,860
|
|
||
Purchased credit-impaired loans
|
2,701,874
|
|
|
2,839,871
|
|
||
Allowance for loan losses allocated to securitized loan receivables
|
(1,223,653
|
)
|
|
(1,510,730
|
)
|
||
Other assets
|
30,783
|
|
|
33,724
|
|
||
Liabilities
|
|
|
|
||||
Long-term borrowings
|
$
|
17,121,359
|
|
|
$
|
15,842,512
|
|
Accrued interest payable
|
14,269
|
|
|
13,184
|
|
|
For the Three Months Ended
May 31, |
|
For the Six Months Ended
May 31, |
||||||||||||
|
2012
|
|
2011
|
|
2012
|
|
2011
|
||||||||
|
(unaudited)
(dollars in thousands, except per share amounts)
|
||||||||||||||
Interest income:
|
|
|
|
|
|
|
|
||||||||
Credit card loans
|
$
|
1,421,115
|
|
|
$
|
1,403,191
|
|
|
$
|
2,844,921
|
|
|
$
|
2,820,307
|
|
Other loans
|
210,043
|
|
|
151,802
|
|
|
412,880
|
|
|
271,338
|
|
||||
Investment securities
|
19,987
|
|
|
14,644
|
|
|
37,498
|
|
|
26,859
|
|
||||
Other interest income
|
4,473
|
|
|
3,641
|
|
|
6,878
|
|
|
7,738
|
|
||||
Total interest income
|
1,655,618
|
|
|
1,573,278
|
|
|
3,302,177
|
|
|
3,126,242
|
|
||||
Interest expense:
|
|
|
|
|
|
|
|
||||||||
Deposits
|
216,458
|
|
|
251,170
|
|
|
445,231
|
|
|
507,865
|
|
||||
Short-term borrowings
|
—
|
|
|
37
|
|
|
1
|
|
|
83
|
|
||||
Long-term borrowings
|
124,081
|
|
|
128,772
|
|
|
248,567
|
|
|
254,759
|
|
||||
Total interest expense
|
340,539
|
|
|
379,979
|
|
|
693,799
|
|
|
762,707
|
|
||||
Net interest income
|
1,315,079
|
|
|
1,193,299
|
|
|
2,608,378
|
|
|
2,363,535
|
|
||||
Provision for loan losses
|
232,584
|
|
|
175,540
|
|
|
384,113
|
|
|
593,249
|
|
||||
Net interest income after provision for loan losses
|
1,082,495
|
|
|
1,017,759
|
|
|
2,224,265
|
|
|
1,770,286
|
|
||||
Other income:
|
|
|
|
|
|
|
|
||||||||
Discount and interchange revenue, net
|
265,324
|
|
|
265,826
|
|
|
529,635
|
|
|
526,742
|
|
||||
Protection products revenue
|
101,194
|
|
|
105,116
|
|
|
206,055
|
|
|
213,669
|
|
||||
Loan fee income
|
77,256
|
|
|
80,753
|
|
|
161,707
|
|
|
166,353
|
|
||||
Transaction processing revenue
|
52,174
|
|
|
45,310
|
|
|
104,655
|
|
|
87,861
|
|
||||
Merchant fees
|
3,523
|
|
|
4,216
|
|
|
7,228
|
|
|
8,871
|
|
||||
Gain (loss) on investments
|
28
|
|
|
(149
|
)
|
|
28
|
|
|
(7
|
)
|
||||
Other income
|
33,641
|
|
|
42,772
|
|
|
73,335
|
|
|
102,979
|
|
||||
Total other income
|
533,140
|
|
|
543,844
|
|
|
1,082,643
|
|
|
1,106,468
|
|
||||
Other expense:
|
|
|
|
|
|
|
|
||||||||
Employee compensation and benefits
|
249,357
|
|
|
229,826
|
|
|
496,082
|
|
|
442,901
|
|
||||
Marketing and business development
|
119,012
|
|
|
124,181
|
|
|
250,441
|
|
|
259,846
|
|
||||
Information processing and communications
|
71,448
|
|
|
66,588
|
|
|
141,911
|
|
|
131,305
|
|
||||
Professional fees
|
110,085
|
|
|
104,749
|
|
|
209,585
|
|
|
195,080
|
|
||||
Premises and equipment
|
18,857
|
|
|
17,957
|
|
|
36,166
|
|
|
35,205
|
|
||||
Other expense
|
179,709
|
|
|
91,843
|
|
|
291,310
|
|
|
165,955
|
|
||||
Total other expense
|
748,468
|
|
|
635,144
|
|
|
1,425,495
|
|
|
1,230,292
|
|
||||
Income before income tax expense
|
867,167
|
|
|
926,459
|
|
|
1,881,413
|
|
|
1,646,462
|
|
||||
Income tax expense
|
330,576
|
|
|
326,040
|
|
|
713,816
|
|
|
581,151
|
|
||||
Net income
|
$
|
536,591
|
|
|
$
|
600,419
|
|
|
$
|
1,167,597
|
|
|
$
|
1,065,311
|
|
Net income allocated to common stockholders
|
$
|
531,545
|
|
|
$
|
593,488
|
|
|
$
|
1,156,013
|
|
|
$
|
1,052,912
|
|
Basic earnings per share
|
$
|
1.01
|
|
|
$
|
1.09
|
|
|
$
|
2.19
|
|
|
$
|
1.93
|
|
Diluted earnings per share
|
$
|
1.00
|
|
|
$
|
1.09
|
|
|
$
|
2.18
|
|
|
$
|
1.93
|
|
Dividends paid per share
|
$
|
0.10
|
|
|
$
|
0.06
|
|
|
$
|
0.20
|
|
|
$
|
0.08
|
|
|
For the Three Months Ended
May 31, |
|
For the Six Months Ended
May 31, |
||||||||||||
|
2012
|
|
2011
|
|
2012
|
|
2011
|
||||||||
|
(unaudited)
(dollars in thousands, except per share amounts)
|
||||||||||||||
Net income
|
$
|
536,591
|
|
|
$
|
600,419
|
|
|
$
|
1,167,597
|
|
|
$
|
1,065,311
|
|
Other comprehensive income, net of taxes
|
|
|
|
|
|
|
|
||||||||
Unrealized gain on securities available for sale, net of tax
|
7,245
|
|
|
31,974
|
|
|
14,695
|
|
|
16,727
|
|
||||
Unrealized (loss) gain on cash flow hedge
s, net of tax
|
(773
|
)
|
|
7,947
|
|
|
(2,256
|
)
|
|
(878
|
)
|
||||
Unrealized pension and post-retirement benefit gain(loss), net of tax
|
1,116
|
|
|
—
|
|
|
(1,776
|
)
|
|
341
|
|
||||
Other comprehensive income
|
7,588
|
|
|
39,921
|
|
|
10,663
|
|
|
16,190
|
|
||||
Comprehensive income
|
$
|
544,179
|
|
|
$
|
640,340
|
|
|
$
|
1,178,260
|
|
|
$
|
1,081,501
|
|
|
|
Common Stock
|
|
Additional
Paid-in
Capital
|
|
Retained
Earnings
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
Treasury
Stock
|
|
Total
Stockholders’
Equity
|
|||||||||||||||
|
|
Shares
|
|
Amount
|
|
|
|
|
|
||||||||||||||||||
|
(unaudited)
(dollars and shares in thousands)
|
||||||||||||||||||||||||||
Balance at November 30, 2010
|
|
547,128
|
|
|
$
|
5,471
|
|
|
$
|
3,435,318
|
|
|
$
|
3,126,488
|
|
|
$
|
(82,548
|
)
|
|
$
|
(27,883
|
)
|
|
$
|
6,456,846
|
|
Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,065,311
|
|
|
—
|
|
|
—
|
|
|
1,065,311
|
|
||||||
Other comprehensive income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
16,190
|
|
|
—
|
|
|
16,190
|
|
||||||
Purchases of treasury stock
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,098
|
)
|
|
(5,098
|
)
|
||||||
Common stock issued under employee benefit plans
|
|
26
|
|
|
—
|
|
|
547
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
547
|
|
||||||
Common stock issued and stock-based compensation expense
|
|
1,220
|
|
|
13
|
|
|
33,692
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
33,705
|
|
||||||
Dividends—common stock
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(44,201
|
)
|
|
—
|
|
|
—
|
|
|
(44,201
|
)
|
||||||
Balance at May 31, 2011
|
|
548,374
|
|
|
$
|
5,484
|
|
|
$
|
3,469,557
|
|
|
$
|
4,147,598
|
|
|
$
|
(66,358
|
)
|
|
$
|
(32,981
|
)
|
|
$
|
7,523,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Balance at November 30, 2011
|
|
549,749
|
|
|
$
|
5,497
|
|
|
$
|
3,507,754
|
|
|
$
|
5,243,318
|
|
|
$
|
(51,679
|
)
|
|
$
|
(462,679
|
)
|
|
$
|
8,242,211
|
|
Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,167,597
|
|
|
—
|
|
|
—
|
|
|
1,167,597
|
|
||||||
Other comprehensive income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
10,663
|
|
|
—
|
|
|
10,663
|
|
||||||
Purchases of treasury stock
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(461,540
|
)
|
|
(461,540
|
)
|
||||||
Common stock issued under employee benefit plans
|
|
28
|
|
|
—
|
|
|
828
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
828
|
|
||||||
Common stock issued and stock based compensation expense
|
|
2,511
|
|
|
26
|
|
|
46,522
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
46,548
|
|
||||||
Dividends—common stock
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(107,449
|
)
|
|
—
|
|
|
—
|
|
|
(107,449
|
)
|
||||||
Balance at May 31, 2012
|
|
552,288
|
|
|
$
|
5,523
|
|
|
$
|
3,555,104
|
|
|
$
|
6,303,466
|
|
|
$
|
(41,016
|
)
|
|
$
|
(924,219
|
)
|
|
$
|
8,898,858
|
|
|
For the Six Months Ended
May 31,
|
||||||
|
2012
|
|
2011
|
||||
|
(unaudited)
|
||||||
|
(dollars in thousands)
|
||||||
Cash flows from operating activities
|
|
|
|
||||
Net income
|
$
|
1,167,597
|
|
|
$
|
1,065,311
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
||||
Provision for loan losses
|
384,113
|
|
|
593,249
|
|
||
Deferred income taxes
|
125,654
|
|
|
206,679
|
|
||
Depreciation and amortization on premises and equipment
|
46,569
|
|
|
43,993
|
|
||
Amortization of deferred revenues
|
(102,040
|
)
|
|
(123,758
|
)
|
||
Other depreciation and amortization
|
(74,135
|
)
|
|
(53,502
|
)
|
||
(Gain) loss on investments
|
(28
|
)
|
|
7
|
|
||
Loss on equity method and other investments
|
4,854
|
|
|
—
|
|
||
(Gain) loss on premises and equipment
|
(494
|
)
|
|
123
|
|
||
Loss on sale of other assets
|
314
|
|
|
—
|
|
||
Loss (gain) on loans sold and held for sale
|
514
|
|
|
(6,085
|
)
|
||
Stock-based compensation expense
|
24,244
|
|
|
22,640
|
|
||
Gain on purchase of business
|
—
|
|
|
(15,917
|
)
|
||
Changes in assets and liabilities:
|
|
|
|
||||
(Increase) decrease in other assets
|
(116,869
|
)
|
|
58,062
|
|
||
Increase in accrued expenses and other liabilities
|
42,479
|
|
|
427,637
|
|
||
Net cash provided by operating activities
|
1,502,772
|
|
|
2,218,439
|
|
||
Cash flows from investing activities
|
|
|
|
||||
Maturities of other short-term investments
|
—
|
|
|
375,000
|
|
||
Purchases of other short-term investments
|
(250
|
)
|
|
—
|
|
||
Maturities and sales of available-for-sale investment securities
|
1,089,890
|
|
|
621,507
|
|
||
Purchases of available-for-sale investment securities
|
(1,535,059
|
)
|
|
(1,109,470
|
)
|
||
Maturities of held-to-maturity investment securities
|
3,985
|
|
|
11,886
|
|
||
Purchases of held-to-maturity investment securities
|
(50,736
|
)
|
|
(550
|
)
|
||
Proceeds from sale of loans held for sale
|
270,020
|
|
|
14,944
|
|
||
Net principal disbursed on loans originated for investment
|
(623,137
|
)
|
|
(1,242,036
|
)
|
||
Purchase of loan receivables
|
(282,249
|
)
|
|
(464,897
|
)
|
||
Purchase of business, net of cash acquired
|
—
|
|
|
(401,158
|
)
|
||
Purchase of other investments
|
(22,125
|
)
|
|
—
|
|
||
(Increase) decrease in restricted cash
|
(517,061
|
)
|
|
546,655
|
|
||
Proceeds from sale of premises and equipment
|
515
|
|
|
13
|
|
||
Purchases of premises and equipment
|
(55,995
|
)
|
|
(49,868
|
)
|
||
Net cash used for investing activities
|
(1,722,202
|
)
|
|
(1,697,974
|
)
|
||
Cash flows from financing activities
|
|
|
|
||||
Net (decrease) increase in short-term borrowings
|
(50,000
|
)
|
|
100,000
|
|
||
Proceeds from issuance of securitized debt
|
1,999,773
|
|
|
1,500,000
|
|
||
Maturities and repayment of securitized debt
|
(743,776
|
)
|
|
(3,876,294
|
)
|
||
Repayment of long-term borrowings and bank notes
|
(12,681
|
)
|
|
(334,122
|
)
|
||
Premium paid on debt exchange
|
(114,493
|
)
|
|
—
|
|
||
Proceeds from issuance of common stock
|
14,602
|
|
|
7,153
|
|
||
Purchases of treasury stock
|
(461,467
|
)
|
|
(5,098
|
)
|
||
Net increase in deposits
|
1,956,685
|
|
|
802,624
|
|
||
Dividends paid on common stock
|
(106,987
|
)
|
|
(40,501
|
)
|
||
Net cash provided by (used for) financing activities
|
2,481,656
|
|
|
(1,846,238
|
)
|
||
Net decrease in cash and cash equivalents
|
2,262,226
|
|
|
(1,325,773
|
)
|
||
Cash and cash equivalents, at beginning of period
|
2,849,843
|
|
|
5,098,733
|
|
||
Cash and cash equivalents, at end of period
|
$
|
5,112,069
|
|
|
$
|
3,772,960
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
||||
Cash paid during the period for:
|
|
|
|
||||
Interest expense
|
$
|
637,919
|
|
|
$
|
735,063
|
|
Income taxes, net of income tax refunds
|
$
|
651,999
|
|
|
$
|
377,076
|
|
Non-cash transactions:
|
|
|
|
||||
Assumption of debt by buyer related to loans sold
|
$
|
424,993
|
|
|
$
|
—
|
|
Assumption of SLC debt
|
$
|
—
|
|
|
$
|
2,921,372
|
|
1.
|
Background and Basis of Presentation
|
2.
|
Business Combinations
|
3.
|
Investments
|
(1)
|
Amount represents corporate debt obligations issued under the Temporary Liquidity Guarantee Program (TLGP) that are guaranteed by the Federal Deposit Insurance Corporation (FDIC).
|
(2)
|
Consists of residential mortgage-backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae.
|
(1)
|
Available-for-sale investment securities are reported at fair value.
|
(2)
|
Held-to-maturity investment securities are reported at amortized cost.
|
(3)
|
Amount represents securities pledged as collateral to a government-related merchant for which transaction settlement occurs beyond the normal 24-hour period.
|
(4)
|
Amounts represent residential mortgage-backed securities that were classified as held-to-maturity as they were entered into as a part of the Company's community reinvestment initiatives.
|
(1)
|
Available-for-sale investment securities are reported at fair value.
|
(2)
|
Held-to-maturity investment securities are reported at amortized cost.
|
(3)
|
Amounts represent residential mortgage-backed securities that were classified as held-to-maturity as they were entered into as a part of the Company's Community Reinvestment Act initiatives.
|
4.
|
Loan Receivables
|
|
May 31,
2012 |
|
November 30,
2011 |
||||
Loans held for sale
(1)
|
$
|
—
|
|
|
$
|
714,180
|
|
Loan portfolio:
|
|
|
|
||||
Credit card loans:
|
|
|
|
||||
Discover card
(2)
|
46,400,847
|
|
|
46,419,544
|
|
||
Discover business card
|
209,560
|
|
|
219,081
|
|
||
Total credit card loans
|
46,610,407
|
|
|
46,638,625
|
|
||
Other loans:
|
|
|
|
||||
Personal loans
|
2,916,171
|
|
|
2,648,051
|
|
||
Private student loans
|
2,509,158
|
|
|
2,069,001
|
|
||
Other
|
26,601
|
|
|
16,690
|
|
||
Total other loans
|
5,451,930
|
|
|
4,733,742
|
|
||
PCI student loans
(3)
|
4,995,320
|
|
|
5,250,388
|
|
||
Total loan portfolio
|
57,057,657
|
|
|
56,622,755
|
|
||
Total loan receivables
|
57,057,657
|
|
|
57,336,935
|
|
||
Allowance for loan losses
|
(1,869,253
|
)
|
|
(2,205,196
|
)
|
||
Net loan receivables
|
$
|
55,188,404
|
|
|
$
|
55,131,739
|
|
(1)
|
Amount represents federal student loans. At
November 30, 2011
,
$446.6 million
of federal student loan receivables were pledged as collateral against a long-term borrowing. During first quarter 2012, Discover Bank sold these loans and recorded a loss of
$518 thousand
. As a part of this transaction, the related borrowings were assumed by the purchaser.
|
(2)
|
Amounts include
$20.3 billion
and
$18.5 billion
underlying investors’ interest in trust debt at
May 31, 2012
and
November 30, 2011
, respectively, and
$12.7 billion
and
$15.4 billion
in seller’s interest at
May 31, 2012
and
November 30, 2011
, respectively. See Note 5: Credit Card and Student Loan Securitization Activities for further information.
|
(3)
|
Amounts include
$2.7 billion
and
$2.8 billion
of loans pledged as collateral against the notes issued from the SLC securitization trusts at
May 31, 2012
and
November 30, 2011
, respectively. See Note 5: Credit Card and Student Loan Securitization Activities. Of the remaining
$2.3 billion
and
$2.5 billion
at
May 31, 2012
and
November 30, 2011
, respectively, that were not pledged as collateral, approximately
$14.2 million
and
$12.8 million
represent loans eligible for reimbursement through an indemnification claim. Discover Bank must purchase such loans from the trust before a claim may be filed.
|
Delinquent and Non-Accruing Loans:
|
|
|
|
|
|
|
|
|
|
||||||||||
|
30-89 Days
Delinquent
|
|
90 or
More Days
Delinquent
|
|
Total Past
Due
|
|
90 or
More Days
Delinquent
and
Accruing
|
|
Total
Non-accruing
(2)
|
||||||||||
At May 31, 2012
|
|
|
|
|
|
|
|
|
|
||||||||||
Credit card loans:
|
|
|
|
|
|
|
|
|
|
||||||||||
Discover card
(1)
|
$
|
428,513
|
|
|
$
|
456,373
|
|
|
$
|
884,886
|
|
|
$
|
401,966
|
|
|
$
|
186,091
|
|
Discover business card
|
2,091
|
|
|
2,986
|
|
|
5,077
|
|
|
2,770
|
|
|
625
|
|
|||||
Total credit card loans
|
430,604
|
|
|
459,359
|
|
|
889,963
|
|
|
404,736
|
|
|
186,716
|
|
|||||
Other loans:
|
|
|
|
|
|
|
|
|
|
||||||||||
Personal loans
|
14,933
|
|
|
8,014
|
|
|
22,947
|
|
|
7,277
|
|
|
3,445
|
|
|||||
Private student loans (excluding PCI)
|
20,683
|
|
|
4,980
|
|
|
25,663
|
|
|
4,290
|
|
|
924
|
|
|||||
Other
|
288
|
|
|
1,489
|
|
|
1,777
|
|
|
—
|
|
|
1,753
|
|
|||||
Total other loans (excluding PCI)
|
35,904
|
|
|
14,483
|
|
|
50,387
|
|
|
11,567
|
|
|
6,122
|
|
|||||
Total loan receivables (excluding PCI)
|
$
|
466,508
|
|
|
$
|
473,842
|
|
|
$
|
940,350
|
|
|
$
|
416,303
|
|
|
$
|
192,838
|
|
At November 30, 2011
|
|
|
|
|
|
|
|
|
|
||||||||||
Credit card loans:
|
|
|
|
|
|
|
|
|
|
||||||||||
Discover card
(1)
|
$
|
554,354
|
|
|
$
|
556,126
|
|
|
$
|
1,110,480
|
|
|
$
|
498,305
|
|
|
$
|
200,208
|
|
Discover business card
|
2,823
|
|
|
3,548
|
|
|
6,371
|
|
|
3,335
|
|
|
860
|
|
|||||
Total credit card loans
|
557,177
|
|
|
559,674
|
|
|
1,116,851
|
|
|
501,640
|
|
|
201,068
|
|
|||||
Other loans:
|
|
|
|
|
|
|
|
|
|
||||||||||
Personal loans
|
15,604
|
|
|
7,362
|
|
|
22,966
|
|
|
6,636
|
|
|
3,628
|
|
|||||
Private student loans (excluding PCI)
|
10,073
|
|
|
2,992
|
|
|
13,065
|
|
|
2,883
|
|
|
125
|
|
|||||
Other
|
507
|
|
|
2,091
|
|
|
2,598
|
|
|
—
|
|
|
2,317
|
|
|||||
Total other loans (excluding PCI)
|
26,184
|
|
|
12,445
|
|
|
38,629
|
|
|
9,519
|
|
|
6,070
|
|
|||||
Total loan receivables (excluding PCI)
(3)
|
$
|
583,361
|
|
|
$
|
572,119
|
|
|
$
|
1,155,480
|
|
|
$
|
511,159
|
|
|
$
|
207,138
|
|
(1)
|
Consumer credit card loans that are 90 or more days delinquent and accruing interest include
$35.3 million
and
$37.9 million
of loans accounted for as troubled debt restructurings at
May 31, 2012
and
November 30, 2011
, respectively.
|
(2)
|
The Company estimates that the gross interest income that would have been recorded in accordance with the original terms of these credit card loans was
$8.3 million
and
$16.7 million
for the
three and six
months ended
May 31, 2012
, respectively. The Company does not separately track the amount of gross interest income that would have been recorded in accordance with the original terms of loans. These amounts were estimated based on customers' current balances and most recent rates.
|
(3)
|
At November 30, 2011, amounts also exclude federal student loans that were held for sale.
|
Net Charge-Offs:
|
For the Three Months Ended May 31,
|
||||||||||||
|
2012
|
|
2011
|
||||||||||
|
Net
Charge-offs
|
|
Net Charge-off
Rate
|
|
Net
Charge-offs
|
|
Net Charge-off
Rate
|
||||||
Credit card loans:
|
|
|
|
|
|
|
|
||||||
Discover card
|
$
|
319,691
|
|
|
2.79
|
%
|
|
$
|
553,827
|
|
|
4.99
|
%
|
Discover business card
|
1,864
|
|
|
3.53
|
%
|
|
4,896
|
|
|
8.22
|
%
|
||
Total credit card loans
|
321,555
|
|
|
2.79
|
%
|
|
558,723
|
|
|
5.01
|
%
|
||
Other loans:
|
|
|
|
|
|
|
|
||||||
Personal loans
|
16,065
|
|
|
2.24
|
%
|
|
15,347
|
|
|
2.88
|
%
|
||
Private student loans (excluding PCI)
|
4,187
|
|
|
0.67
|
%
|
|
2,030
|
|
|
0.51
|
%
|
||
Other
|
115
|
|
|
1.72
|
%
|
|
579
|
|
|
17.33
|
%
|
||
Total other loans (excluding PCI)
|
20,367
|
|
|
1.51
|
%
|
|
17,956
|
|
|
1.59
|
%
|
||
Net charge-offs as a percentage of total loans (excluding PCI)
|
$
|
341,922
|
|
|
2.66
|
%
|
|
$
|
576,679
|
|
|
4.69
|
%
|
Net charge-offs as a percentage of total loans (including PCI)
|
$
|
341,922
|
|
|
2.42
|
%
|
|
$
|
576,679
|
|
|
4.42
|
%
|
|
|
|
|
|
|
|
|
||||||
|
For the Six Months Ended May 31,
|
||||||||||||
|
2012
|
|
2011
|
||||||||||
|
Net
Charge-offs |
|
Net Charge-off
Rate |
|
Net
Charge-offs |
|
Net Charge-off
Rate |
||||||
Credit card loans:
|
|
|
|
|
|
|
|
||||||
Discover card
|
$
|
675,058
|
|
|
2.93
|
%
|
|
$
|
1,215,070
|
|
|
5.46
|
%
|
Discover business card
|
4,200
|
|
|
3.95
|
%
|
|
11,429
|
|
|
9.33
|
%
|
||
Total credit card loans
|
679,258
|
|
|
2.93
|
%
|
|
1,226,499
|
|
|
5.48
|
%
|
||
Other loans:
|
|
|
|
|
|
|
|
||||||
Personal loans
|
33,655
|
|
|
2.41
|
%
|
|
34,981
|
|
|
3.46
|
%
|
||
Private student loans (excluding PCI)
|
6,976
|
|
|
0.59
|
%
|
|
2,954
|
|
|
0.41
|
%
|
||
Other
|
167
|
|
|
1.44
|
%
|
|
613
|
|
|
8.98
|
%
|
||
Total other loans (excluding PCI)
|
40,798
|
|
|
1.50
|
%
|
|
38,548
|
|
|
1.82
|
%
|
||
Net charge-offs as a percentage of total loans (excluding PCI)
|
$
|
720,056
|
|
|
2.78
|
%
|
|
$
|
1,265,047
|
|
|
5.17
|
%
|
Net charge-offs as a percentage of total loans (including PCI)
|
$
|
720,056
|
|
|
2.53
|
%
|
|
$
|
1,265,047
|
|
|
4.92
|
%
|
(1)
|
PCI loans are discussed under the heading "Purchased Credit-Impaired Loans."
|
|
For the Three Months Ended
May 31, |
|
For the Six Months Ended
May 31, |
||||||||||||
|
2012
|
|
2011
|
|
2012
|
|
2011
|
||||||||
Balance at beginning of period
|
$
|
1,978,591
|
|
|
$
|
3,033,459
|
|
|
$
|
2,205,196
|
|
|
$
|
3,304,118
|
|
Additions:
|
|
|
|
|
|
|
|
||||||||
Provision for loan losses
|
232,584
|
|
|
175,540
|
|
|
384,113
|
|
|
593,249
|
|
||||
Deductions:
|
|
|
|
|
|
|
|
||||||||
Charge-offs:
|
|
|
|
|
|
|
|
||||||||
Discover card
|
(474,233
|
)
|
|
(708,287
|
)
|
|
(971,338
|
)
|
|
(1,500,919
|
)
|
||||
Discover business card
|
(2,807
|
)
|
|
(5,869
|
)
|
|
(5,917
|
)
|
|
(13,255
|
)
|
||||
Total credit card loans
|
(477,040
|
)
|
|
(714,156
|
)
|
|
(977,255
|
)
|
|
(1,514,174
|
)
|
||||
Personal loans
|
(16,905
|
)
|
|
(15,931
|
)
|
|
(35,133
|
)
|
|
(35,981
|
)
|
||||
Private student loans
|
(4,296
|
)
|
|
(2,044
|
)
|
|
(7,163
|
)
|
|
(2,983
|
)
|
||||
Other
|
(120
|
)
|
|
(580
|
)
|
|
(172
|
)
|
|
(615
|
)
|
||||
Total other loans
|
(21,321
|
)
|
|
(18,555
|
)
|
|
(42,468
|
)
|
|
(39,579
|
)
|
||||
Total charge-offs
|
(498,361
|
)
|
|
(732,711
|
)
|
|
(1,019,723
|
)
|
|
(1,553,753
|
)
|
||||
Recoveries:
|
|
|
|
|
|
|
|
||||||||
Discover card
|
154,542
|
|
|
154,460
|
|
|
296,280
|
|
|
285,849
|
|
||||
Discover business card
|
943
|
|
|
973
|
|
|
1,717
|
|
|
1,826
|
|
||||
Total credit card loans
|
155,485
|
|
|
155,433
|
|
|
297,997
|
|
|
287,675
|
|
||||
Personal loans
|
840
|
|
|
584
|
|
|
1,478
|
|
|
1,000
|
|
||||
Private student loans
|
109
|
|
|
14
|
|
|
187
|
|
|
29
|
|
||||
Other
|
5
|
|
|
1
|
|
|
5
|
|
|
2
|
|
||||
Total other loans
|
954
|
|
|
599
|
|
|
1,670
|
|
|
1,031
|
|
||||
Total recoveries
|
156,439
|
|
|
156,032
|
|
|
299,667
|
|
|
288,706
|
|
||||
Net charge-offs
|
(341,922
|
)
|
|
(576,679
|
)
|
|
(720,056
|
)
|
|
(1,265,047
|
)
|
||||
Balance at end of period
|
$
|
1,869,253
|
|
|
$
|
2,632,320
|
|
|
$
|
1,869,253
|
|
|
$
|
2,632,320
|
|
|
Credit Card
|
|
Personal
Loans
|
|
Student
Loans
|
|
Other
Loans
|
|
Total
|
||||||||||
At May 31, 2012
|
|
|
|
|
|
|
|
|
|
||||||||||
Allowance for loans evaluated for impairment as:
|
|
|
|
|
|
|
|
|
|
||||||||||
Collectively evaluated for impairment
(1)
|
$
|
1,515,403
|
|
|
$
|
86,373
|
|
|
$
|
63,003
|
|
|
$
|
213
|
|
|
$
|
1,664,992
|
|
Troubled debt restructurings
(2)
|
197,257
|
|
|
4,574
|
|
|
2,430
|
|
|
—
|
|
|
204,261
|
|
|||||
Purchased credit-impaired
(3)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|||||
Total allowance for loan losses
|
$
|
1,712,660
|
|
|
$
|
90,947
|
|
|
$
|
65,433
|
|
|
$
|
213
|
|
|
$
|
1,869,253
|
|
Recorded investment in loans evaluated for impairment as:
|
|
|
|
|
|
|
|
|
|
||||||||||
Collectively evaluated for impairment
(1)
|
$
|
45,445,166
|
|
|
$
|
2,901,686
|
|
|
$
|
2,499,526
|
|
|
$
|
26,601
|
|
|
$
|
50,872,979
|
|
Troubled debt restructurings
(2)
|
1,165,241
|
|
|
14,485
|
|
|
9,632
|
|
|
—
|
|
|
1,189,358
|
|
|||||
Purchased credit-impaired
(3)
|
—
|
|
|
—
|
|
|
4,995,320
|
|
|
—
|
|
|
4,995,320
|
|
|||||
Total recorded investment
|
$
|
46,610,407
|
|
|
$
|
2,916,171
|
|
|
$
|
7,504,478
|
|
|
$
|
26,601
|
|
|
$
|
57,057,657
|
|
At November 30, 2011
|
|
|
|
|
|
|
|
|
|
||||||||||
Allowance for loans evaluated for impairment as:
|
|
|
|
|
|
|
|
|
|
||||||||||
Collectively evaluated for impairment
(1)
|
$
|
1,865,797
|
|
|
$
|
81,838
|
|
|
$
|
52,601
|
|
|
$
|
220
|
|
|
$
|
2,000,456
|
|
Troubled debt restructurings
(2)
|
204,364
|
|
|
237
|
|
|
139
|
|
|
—
|
|
|
204,740
|
|
|||||
Purchased credit-impaired
(3)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|||||
Total allowance for loan losses
|
$
|
2,070,161
|
|
|
$
|
82,075
|
|
|
$
|
52,740
|
|
|
$
|
220
|
|
|
$
|
2,205,196
|
|
Recorded investment in loans evaluated for impairment as:
|
|
|
|
|
|
|
|
|
|
||||||||||
Collectively evaluated for impairment
(1)
|
$
|
45,421,887
|
|
|
$
|
2,640,416
|
|
|
$
|
2,063,562
|
|
|
$
|
16,690
|
|
|
$
|
50,142,555
|
|
Troubled debt restructurings
(2)
|
1,216,738
|
|
|
7,635
|
|
|
5,439
|
|
|
—
|
|
|
1,229,812
|
|
|||||
Purchased credit-impaired
(3)
|
—
|
|
|
—
|
|
|
5,250,388
|
|
|
—
|
|
|
5,250,388
|
|
|||||
Total recorded investment
|
$
|
46,638,625
|
|
|
$
|
2,648,051
|
|
|
$
|
7,319,389
|
|
|
$
|
16,690
|
|
|
$
|
56,622,755
|
|
(1)
|
Represents loans evaluated for impairment in accordance with ASC 450-20,
Loss Contingencies.
|
(2)
|
Represents loans evaluated for impairment in accordance with ASC 310-10,
Receivables,
which consists of modified loans accounted for as troubled debt restructurings. The unpaid principal balance of credit card loans was
$1.0 billion
at both
May 31, 2012
and
November 30, 2011
. The unpaid principal balance of personal loans was
$14.2 million
and
$7.5 million
at
May 31, 2012
and
November 30, 2011
, respectively. The unpaid principal balance of student loans was
$9.0 million
and
$5.4 million
at
May 31, 2012
and
November 30, 2011
, respectively. All loans accounted for as troubled debt restructurings have a related allowance for loan losses.
|
(3)
|
Represents loans evaluated for impairment in accordance with ASC 310-30,
Receivables-Loans and Debt Securities Acquired with Deteriorated Credit Quality.
|
|
|||||||||||
|
Average recorded investment in loans
|
|
Interest income recognized on impaired loans
(1)
|
|
Gross interest income that would have been recorded with original terms
(2)
|
||||||
For the Six Months Ended May 31, 2012:
|
|
|
|
|
|
||||||
Credit card loans
|
|
|
|
|
|
||||||
Modified credit card loans that have reverted to pre-modification payment terms
(3)
|
$
|
254,450
|
|
|
$
|
23,106
|
|
|
N/A
|
|
|
Internal programs
|
$
|
567,588
|
|
|
$
|
8,994
|
|
|
$
|
36,534
|
|
External programs
|
$
|
633,190
|
|
|
$
|
27,211
|
|
|
$
|
4,361
|
|
Personal loans
(4)
|
$
|
12,290
|
|
|
$
|
768
|
|
|
N/A
|
|
|
Student loans
(4)
|
$
|
7,291
|
|
|
$
|
265
|
|
|
N/A
|
|
|
For the Six Months Ended May 31, 2011:
|
|
|
|
|
|
||||||
Credit card loans
|
|
|
|
|
|
||||||
Internal programs
|
$
|
542,599
|
|
|
$
|
12,142
|
|
|
$
|
31,539
|
|
External programs
|
$
|
734,911
|
|
|
$
|
31,583
|
|
|
$
|
5,069
|
|
(1)
|
The Company does not separately track interest income on all of its loans modification programs. Amounts shown are estimated by applying an average interest rate to the average loans in the various modification programs.
|
(2)
|
The Company does not separately track the amount of gross interest income that would have been recorded if the loans in modification programs had not been restructured and interest had instead been recorded in accordance with the original terms. Amounts shown are estimated by applying the difference between the average interest rate earned on non-impaired credit card loans and the average interest rate earned on loans in the modification programs to the average loans in the modification programs.
|
(3)
|
This balance is considered impaired, but is excluded from the internal and external program amounts reflected in this table. Represents credit card loans that were modified in troubled debt restructurings but that have subsequently reverted back to the loans' pre-modification payment terms either due to noncompliance with the terms of the modification or successful completion of a temporary modification program.
|
(4)
|
As interest rates for personal loan customers in modification programs and student loan customers that have been granted forbearance periods are rarely modified, gross interest income that would have been recorded with original terms is not significant.
|
(1)
|
The outstanding balance upon default is the loan balance at the end of the month prior to default.
|
(2)
|
A customer defaults from a modification program after two consecutive missed payments.
|
(3)
|
Terms revert back to the pre-modification terms for customers who default from a temporary program and charging privileges remain revoked.
|
(1)
|
Amount represents principal and interest payments, both currently due and due in the future, adjusted for the effect of estimated prepayments.
|
(2)
|
Charge-offs on acquired loans will be written off against non-accretable difference.
|
(3)
|
Amount accreted into interest income over the estimated lives of the acquired loans.
|
(1)
|
Amount represents principal and interest payments, both currently due and due in the future, adjusted for the effect of estimated prepayments.
|
(2)
|
Charge-offs on acquired loans will be written off against non-accretable difference.
|
(3)
|
Amount to be accreted into interest income over the estimated lives of the acquired loans.
|
5.
|
Credit Card and Student Loan Securitization Activities
|
(1)
|
The Company maintains its allowance for loan losses at an amount sufficient to absorb probable losses inherent in all loan receivables, which includes all loan receivables in the trusts. Therefore, credit risk associated with the transferred receivables is fully reflected on the Company’s balance sheet in accordance with GAAP.
|
(1)
|
Investors’ interests include third-party interests and subordinated interests held by wholly-owned subsidiaries of Discover Bank.
|
|
3-Month Rolling
Average Excess
Spread
(1)
|
|
Group excess spread percentage
|
13.29
|
%
|
DiscoverSeries excess spread percentage
|
13.19
|
%
|
(1)
|
DCMT certificates refer to the higher of the Group excess spread or their applicable series excess spread (not shown) and DiscoverSeries notes refer to the higher of the Group or DiscoverSeries excess spread in assessing whether an economic early amortization has been triggered.
|
6.
|
Deposits
|
(1)
|
$100,000
represents the basic insurance amount previously covered by the FDIC. Effective July 21, 2010, the basic insurance per depositor was permanently increased to
$250,000
.
|
7.
|
Borrowings
|
(1)
|
London Interbank Offered Rate (“LIBOR”).
|
(2)
|
Repayment of this debt is dependent upon the timing of principal and interest payments on the underlying student loans. The dates shown represent final maturity dates.
|
(3)
|
The Company uses interest rate swaps to hedge portions of these long-term borrowings against changes in fair value attributable to changes in LIBOR. See Note 15: Derivatives and Hedging Activities.
|
(4)
|
During second quarter 2012, the Company exchanged
$321.5 million
outstanding aggregate principal amount of 10.25% Senior Notes due 2019 for the same aggregate principal amount of new 5.20% Senior Notes due 2022 and a cash premium. The new 5.20% Senior Notes due 2022 are carried at a discount as a result of the cash premium paid.
|
(5)
|
Under a program established by the U.S. Department of Education, this loan facility was entered into to fund certain federal student loans, which were
|
Year
|
Amount
|
||
Due in 2012
|
$
|
2,796,764
|
|
Due in 2013
|
5,171,998
|
|
|
Due in 2014
|
3,781,790
|
|
|
Due in 2015
|
1,590,617
|
|
|
Due in 2016
|
390,145
|
|
|
Thereafter
|
5,292,593
|
|
|
Total
|
$
|
19,023,907
|
|
8.
|
Accumulated Other Comprehensive Income
|
|
Net Unrealized Gains (Losses) on securities
|
|
Derivatives
|
|
Adjustments Related to Pension and Other Post Retirement Benefits
|
|
Accumulated Other Comprehensive Income (Loss)
|
||||
For the three months ended May 31, 2012
|
|
|
|
|
|
|
|
||||
Balance at February 29, 2012
|
$62,338
|
|
$5,522
|
|
$(116,464)
|
|
$(48,604)
|
||||
Unrealized gain on available-for-sale investment securities, net of tax expense of $4,368
|
7,245
|
|
|
—
|
|
|
—
|
|
|
7,245
|
|
Unrealized (loss) on cash flow hedges, net of tax benefit of $467
|
—
|
|
|
(773
|
)
|
|
—
|
|
|
(773
|
)
|
Unrealized pension and post retirement benefit gain, net of tax benefit of $1,100
|
—
|
|
|
—
|
|
|
1,116
|
|
|
1,116
|
|
Balance at May 31, 2012
|
$69,583
|
|
$4,749
|
|
(115,348
|
)
|
|
$(41,016)
|
|||
|
|
|
|
|
|
|
|
||||
For the three months ended May 31, 2011
|
|
|
|
|
|
|
|
||||
Balance at February 28, 2011
|
$(7,326)
|
|
$(6,300)
|
|
$(92,653)
|
|
$(106,279)
|
||||
Unrealized gain on available-for-sale investment securities, net of tax expense of $19,083
|
31,974
|
|
|
—
|
|
|
—
|
|
|
31,974
|
|
Unrealized gain on cash flow hedges, net of tax expense of $4,736
|
—
|
|
|
7,947
|
|
|
—
|
|
|
7,947
|
|
Balance at May 31, 2011
|
$24,648
|
|
$1,647
|
|
$(92,653)
|
|
$(66,358)
|
||||
|
|
|
|
|
|
|
|
||||
For the six months ended May 31, 2012
|
|
|
|
|
|
|
|
||||
Balance at November 30, 2011
|
$54,888
|
|
$7,005
|
|
$(113,572)
|
|
$(51,679)
|
||||
Unrealized gain on available-for-sale investment securities, net of tax expense of $8,861
|
14,695
|
|
|
—
|
|
|
—
|
|
|
14,695
|
|
Unrealized (loss) on cash flow hedges, net of tax benefit of $1,362
|
—
|
|
|
(2,256
|
)
|
|
—
|
|
|
(2,256
|
)
|
Unrealized pension and post retirement benefit loss, net of tax benefit of $1,920
|
—
|
|
|
—
|
|
|
(1,776
|
)
|
|
(1,776
|
)
|
Balance at May 31, 2012
|
$69,583
|
|
$4,749
|
|
$(115,348)
|
|
$(41,016)
|
||||
|
|
|
|
|
|
|
|
||||
For the six months ended May 31, 2011
|
|
|
|
|
|
|
|
||||
Balance at November 30, 2010
|
$7,921
|
|
$2,525
|
|
$(92,994)
|
|
$(82,548)
|
||||
Unrealized gain on available-for-sale investment securities, net of tax expense of $9,996
|
16,727
|
|
|
—
|
|
|
—
|
|
|
16,727
|
|
Unrealized (loss) on cash flow hedges, net of tax benefit of $524
|
—
|
|
|
(878
|
)
|
|
—
|
|
|
(878
|
)
|
Unrealized pension and post retirement benefit gain, net of tax expense of $202
|
—
|
|
|
—
|
|
|
341
|
|
|
341
|
|
Balance at May 31, 2011
|
$24,648
|
|
$1,647
|
|
$(92,653)
|
|
$(66,358)
|
9.
|
Income Taxes
|
10.
|
Earnings Per Share
|
11.
|
Capital Adequacy
|
12.
|
Commitments, Contingencies and Guarantees
|
•
|
Merchant Guarantee
. Diners Club has entered into contractual relationships with certain international merchants, which generally include travel-related businesses, for the benefit of all Diners Club licensees. The licensees hold the primary liability to settle the transactions of their customers with these merchants. However, Diners Club retains a counterparty exposure if a licensee fails to meet its financial payment obligation to one of these merchants.
|
•
|
ATM Guarantee.
PULSE entered into contractual relationships with certain international ATM acquirers in which DFS Services LLC retains counterparty exposure if an issuer fails to fulfill its settlement obligation.
|
(1)
|
Represents period transactions processed on the Discover Network to which a potential liability exists which, in aggregate, can differ from credit card sales volume.
|
13.
|
Litigation and Regulatory Matters
|
14.
|
Fair Value Disclosures
|
Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis
(dollars in thousands)
|
||||||||||||||||||||||||
For the Six Months Ended
May 31, 2011 |
|
Balance at November 30, 2010
|
|
Total Realized
and Unrealized
Gains (Losses)
|
|
Sales
|
|
Net Transfers
Into and/
or Out
of Level 3
|
|
Balance at May 31, 2011
|
|
Change in unrealized gains (losses) related to financial instruments
held at
May 31, 2011
|
||||||||||||
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Equity securities
|
|
$
|
17
|
|
|
$
|
144
|
|
|
$
|
(161
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Available-for-sale investment securities
|
|
$
|
17
|
|
|
$
|
144
|
|
|
$
|
(161
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
15.
|
Derivatives and Hedging Activities
|
(1)
|
The foreign exchange forward contracts have notional amounts of EUR
15.4 million
, GBP
1.9 million
and SGD
1.5 million
as of
May 31, 2012
and EUR
14.0 million
and GBP
1.7 million
as of November 30, 2011.
|
16.
|
Segment Disclosures
|
•
|
Direct Banking.
The Direct Banking segment includes Discover card-branded credit cards issued to individuals and small businesses and other consumer products and services, including personal loans, student loans, prepaid cards and other consumer lending and deposit products offered through the Company’s Discover Bank subsidiary. The majority of the Direct Banking revenues relate to interest income earned on each of its loan products. Additionally, the Company’s credit card products generate substantially all of the Company’s revenues related to discount and interchange, protection products (previously referred to as "fee products") and loan fee income.
|
•
|
Payment Services.
The Payment Services segment includes PULSE, an automated teller machine, debit and electronic funds transfer network; Diners Club, a global payments network; and the Company’s third-party issuing business, which includes credit, debit and prepaid cards issued on the Discover Network by third parties. The majority of the Payment Services revenues relate to transaction processing revenue from PULSE and royalty and licensee revenue (included in other income) from Diners Club.
|
•
|
Corporate overhead is not allocated between segments; all corporate overhead is included in the Direct Banking segment.
|
•
|
Through its operation of the Discover Network, the Direct Banking segment incurs fixed marketing, servicing and infrastructure costs that are not specifically allocated among the segments.
|
•
|
The assets of the Company are not allocated among the operating segments in the information reviewed by the Company’s chief operating decision maker.
|
•
|
The revenues of each segment are derived from external sources. The segments do not earn revenue from intercompany sources.
|
•
|
Income taxes are not specifically allocated among the operating segments in the information reviewed by the Company’s chief operating decision maker.
|
17.
|
Subsequent Events
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
•
|
Net income for the second quarter of 2012 was $537 million, compared to $600 million for the second quarter of 2011.
|
•
|
Credit card loans grew $1.6 billion to $46.6 billion and Discover card sales volume increased 5% from the prior year.
|
•
|
Credit card loan delinquencies and net charge-offs reached historic lows with a delinquency rate for loans over 30 days past due of 1.91% and a net charge-off rate of 2.79%.
|
•
|
Payment services pretax income was up 10% from the prior year to $47 million. Transaction volume for the segment was $51.4 billion in the quarter, an increase of 12% from the prior year.
|
•
|
We repurchased 13.5 million shares of our common stock for $447 million, reducing our number of shares outstanding by 2.4%.
|
•
|
We issued $1.0 billion of credit card asset-backed securities in a registered public offering through a securitization trust at an annual interest rate of one-month LIBOR plus 0.15% with a maturity of two years.
|
•
|
On June 6, 2012, through our Discover Home Loans, Inc. subsidiary, we acquired substantially all of the operating and related assets of Home Loan Center, Inc., a subsidiary of Tree.com, Inc., adding a residential mortgage lending component to our direct banking business.
|
•
|
On June 13, 2012, we issued $1.5 billion of credit card asset-backed securities in a registered public offering through a securitization trust, comprised of a $800 million issuance at an interest rate of 0.86% with a maturity of three years, and a $650 million issuance at an interest rate of one-month LIBOR plus 0.37% with a maturity of five years.
|
•
|
On June 14, 2012, we announced a cash dividend of $0.10 per share of common stock, payable on July 19, 2012, to stockholders of record at the close of business on July 5, 2012.
|
(1)
|
Diners Club volume is derived from data provided by licensees for Diners Club branded cards issued outside North America and is subject to subsequent revision or amendment.
|
(2)
|
Represents gross proprietary sales volume on the Discover Network.
|
(3)
|
Represents Discover card activity related to net sales, balance transfers, cash advances, and other activity.
|
(4)
|
Represents Discover card activity related to net sales.
|
The following table outlines changes in our condensed consolidated statements of income for the periods presented (dollars in thousands):
|
|||||||||||||||||||||||||||||
|
For the Three Months Ended
May 31, |
|
2012 vs. 2011
increase (decrease) |
|
For the Six Months Ended
May 31, |
|
2012 vs. 2011
increase (decrease) |
||||||||||||||||||||||
|
2012
|
|
2011
|
|
$
|
|
%
|
|
2012
|
|
2011
|
|
$
|
|
%
|
||||||||||||||
Interest income
|
$
|
1,655,618
|
|
|
$
|
1,573,278
|
|
|
$
|
82,340
|
|
|
5
|
%
|
|
$
|
3,302,177
|
|
|
$
|
3,126,242
|
|
|
$
|
175,935
|
|
|
6
|
%
|
Interest expense
|
340,539
|
|
|
379,979
|
|
|
(39,440
|
)
|
|
(10
|
)%
|
|
693,799
|
|
|
762,707
|
|
|
(68,908
|
)
|
|
(9
|
)%
|
||||||
Net interest income
|
1,315,079
|
|
|
1,193,299
|
|
|
121,780
|
|
|
10
|
%
|
|
2,608,378
|
|
|
2,363,535
|
|
|
244,843
|
|
|
10
|
%
|
||||||
Provision for loan losses
|
232,584
|
|
|
175,540
|
|
|
57,044
|
|
|
33
|
%
|
|
384,113
|
|
|
593,249
|
|
|
(209,136
|
)
|
|
(35
|
)%
|
||||||
Net interest income after provision for loan losses
|
1,082,495
|
|
|
1,017,759
|
|
|
64,736
|
|
|
6
|
%
|
|
2,224,265
|
|
|
1,770,286
|
|
|
453,979
|
|
|
26
|
%
|
||||||
Other income
|
533,140
|
|
|
543,844
|
|
|
(10,704
|
)
|
|
(2
|
)%
|
|
1,082,643
|
|
|
1,106,468
|
|
|
(23,825
|
)
|
|
(2
|
)%
|
||||||
Other expense
|
748,468
|
|
|
635,144
|
|
|
113,324
|
|
|
18
|
%
|
|
1,425,495
|
|
|
1,230,292
|
|
|
195,203
|
|
|
16
|
%
|
||||||
Income (loss) before income tax expense
|
867,167
|
|
|
926,459
|
|
|
(59,292
|
)
|
|
(6
|
)%
|
|
1,881,413
|
|
|
1,646,462
|
|
|
234,951
|
|
|
14
|
%
|
||||||
Income tax expense
|
330,576
|
|
|
326,040
|
|
|
4,536
|
|
|
1
|
%
|
|
713,816
|
|
|
581,151
|
|
|
132,665
|
|
|
23
|
%
|
||||||
Net income
|
$
|
536,591
|
|
|
$
|
600,419
|
|
|
$
|
(63,828
|
)
|
|
(11
|
)%
|
|
$
|
1,167,597
|
|
|
$
|
1,065,311
|
|
|
$
|
102,286
|
|
|
10
|
%
|
•
|
The level and composition of loan receivables, including the proportion of credit card loans to other 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 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;
|
•
|
The effectiveness of interest rate swaps in our interest rate risk management program; and
|
•
|
The difference between the carrying amount and future cash flows expected to be collected on PCI loans.
|
Average Balance Sheet Analysis
|
|||||||||||||||||||||
|
For the Three Months Ended May 31.
|
||||||||||||||||||||
|
2012
|
|
2011
|
||||||||||||||||||
|
Average
Balance |
|
Rate
|
|
Interest
|
|
Average
Balance |
|
Rate
|
|
Interest
|
||||||||||
Assets
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Cash and cash equivalents
|
$
|
5,801,431
|
|
|
0.28
|
%
|
|
$
|
4,043
|
|
|
$
|
3,984,464
|
|
|
0.24
|
%
|
|
$
|
2,444
|
|
Restricted cash
|
991,865
|
|
|
0.17
|
%
|
|
430
|
|
|
1,575,877
|
|
|
0.14
|
%
|
|
546
|
|
||||
Other short-term investments
|
228
|
|
|
—
|
%
|
|
—
|
|
|
240,218
|
|
|
1.08
|
%
|
|
651
|
|
||||
Investment securities
|
6,551,039
|
|
|
1.21
|
%
|
|
19,987
|
|
|
5,515,194
|
|
|
1.05
|
%
|
|
14,644
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Loan receivables
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Credit card
(2)(3)
|
45,771,612
|
|
|
12.35
|
%
|
|
1,421,115
|
|
|
44,288,191
|
|
|
12.57
|
%
|
|
1,403,191
|
|
||||
Personal loans
|
2,843,834
|
|
|
12.31
|
%
|
|
87,995
|
|
|
2,114,348
|
|
|
11.90
|
%
|
|
63,418
|
|
||||
Federal student loans
(4)
|
—
|
|
|
—
|
%
|
|
—
|
|
|
757,249
|
|
|
1.61
|
%
|
|
3,075
|
|
||||
Private student loans
|
2,480,740
|
|
|
7.15
|
%
|
|
44,582
|
|
|
1,582,213
|
|
|
7.28
|
%
|
|
29,018
|
|
||||
PCI student loans
|
5,057,140
|
|
|
6.07
|
%
|
|
77,192
|
|
|
2,971,709
|
|
|
7.50
|
%
|
|
56,199
|
|
||||
Other
|
26,742
|
|
|
4.07
|
%
|
|
274
|
|
|
13,241
|
|
|
2.74
|
%
|
|
92
|
|
||||
Total loan receivables
|
56,180,068
|
|
|
11.55
|
%
|
|
1,631,158
|
|
|
51,726,951
|
|
|
11.93
|
%
|
|
1,554,993
|
|
||||
Total interest-earning assets
|
69,524,631
|
|
|
9.47
|
%
|
|
1,655,618
|
|
|
63,042,704
|
|
|
9.90
|
%
|
|
1,573,278
|
|
||||
Allowance for loan losses
|
(1,966,734
|
)
|
|
|
|
|
|
(2,844,808
|
)
|
|
|
|
|
||||||||
Other assets
|
3,882,999
|
|
|
|
|
|
|
3,670,603
|
|
|
|
|
|
||||||||
Total assets
|
$
|
71,440,896
|
|
|
|
|
|
|
$
|
63,868,499
|
|
|
|
|
|
||||||
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Interest-bearing deposits:
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Time deposits
(5)
|
$
|
26,520,492
|
|
|
2.73
|
%
|
|
182,047
|
|
|
$
|
24,957,359
|
|
|
3.46
|
%
|
|
217,966
|
|
||
Money market deposits
|
5,483,816
|
|
|
0.89
|
%
|
|
12,320
|
|
|
4,484,128
|
|
|
1.24
|
%
|
|
14,053
|
|
||||
Other interest-bearing savings deposits
|
8,742,357
|
|
|
1.01
|
%
|
|
22,091
|
|
|
5,525,342
|
|
|
1.38
|
%
|
|
19,151
|
|
||||
Total interest-bearing deposits
(6)
|
40,746,665
|
|
|
2.11
|
%
|
|
216,458
|
|
|
34,966,829
|
|
|
2.85
|
%
|
|
251,170
|
|
||||
Borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Short-term borrowings
|
—
|
|
|
—
|
%
|
|
—
|
|
|
114,446
|
|
|
0.13
|
%
|
|
37
|
|
||||
Securitized borrowings
(5)
|
16,934,031
|
|
|
2.00
|
%
|
|
85,135
|
|
|
16,408,463
|
|
|
2.14
|
%
|
|
88,314
|
|
||||
Other long-term borrowings
(5)
|
1,969,181
|
|
|
7.87
|
%
|
|
38,946
|
|
|
2,451,251
|
|
|
6.55
|
%
|
|
40,458
|
|
||||
Total borrowings
|
18,903,212
|
|
|
2.61
|
%
|
|
124,081
|
|
|
18,974,160
|
|
|
2.69
|
%
|
|
128,809
|
|
||||
Total interest-bearing liabilities
|
59,649,877
|
|
|
2.27
|
%
|
|
340,539
|
|
|
53,940,989
|
|
|
2.79
|
%
|
|
379,979
|
|
||||
Other liabilities and stockholders’ equity
|
11,791,019
|
|
|
|
|
|
|
9,927,510
|
|
|
|
|
|
||||||||
Total liabilities and stockholders’ equity
|
$
|
71,440,896
|
|
|
|
|
|
|
$
|
63,868,499
|
|
|
|
|
|
||||||
Net interest income
|
|
|
|
|
$
|
1,315,079
|
|
|
|
|
|
|
$
|
1,193,299
|
|
||||||
Net interest margin
(7)
|
|
|
9.31
|
%
|
|
|
|
|
|
9.15
|
%
|
|
|
||||||||
Net yield on interest-earning assets
(8)
|
|
|
7.52
|
%
|
|
|
|
|
|
7.51
|
%
|
|
|
||||||||
Interest rate spread
(9)
|
|
|
7.20
|
%
|
|
|
|
|
|
7.11
|
%
|
|
|
|
For the Six Months Ended May 31.
|
||||||||||||||||||||
|
2012
|
|
2011
|
||||||||||||||||||
|
Average
Balance |
|
Rate
|
|
Interest
|
|
Average
Balance |
|
Rate
|
|
Interest
|
||||||||||
Assets
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Cash and cash equivalents
|
$
|
4,596,156
|
|
|
0.27
|
%
|
|
$
|
6,240
|
|
|
$
|
4,102,938
|
|
|
0.24
|
%
|
|
$
|
4,982
|
|
Restricted cash
|
761,642
|
|
|
0.17
|
%
|
|
638
|
|
|
1,457,369
|
|
|
0.15
|
%
|
|
1,116
|
|
||||
Other short-term investments
|
115
|
|
|
—
|
%
|
|
—
|
|
|
306,868
|
|
|
1.07
|
%
|
|
1,640
|
|
||||
Investment securities
|
6,426,942
|
|
|
1.17
|
%
|
|
37,498
|
|
|
5,295,103
|
|
|
1.02
|
%
|
|
26,859
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Loan receivables
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Credit card
(2)(3)
|
46,342,222
|
|
|
12.28
|
%
|
|
2,844,921
|
|
|
44,859,065
|
|
|
12.61
|
%
|
|
2,820,307
|
|
||||
Personal loans
|
2,782,908
|
|
|
12.29
|
%
|
|
170,970
|
|
|
2,028,810
|
|
|
11.81
|
%
|
|
119,473
|
|
||||
Federal student loans
(4)
|
242,477
|
|
|
1.64
|
%
|
|
1,984
|
|
|
768,587
|
|
|
1.58
|
%
|
|
6,062
|
|
||||
Private student loans
|
2,375,051
|
|
|
7.16
|
%
|
|
85,064
|
|
|
1,439,332
|
|
|
7.03
|
%
|
|
50,459
|
|
||||
PCI student loans
|
5,123,251
|
|
|
6.03
|
%
|
|
154,435
|
|
|
2,499,283
|
|
|
7.64
|
%
|
|
95,156
|
|
||||
Other
|
23,183
|
|
|
3.68
|
%
|
|
427
|
|
|
13,688
|
|
|
2.76
|
%
|
|
188
|
|
||||
Total loan receivables
|
56,889,092
|
|
|
11.45
|
%
|
|
3,257,801
|
|
|
51,608,765
|
|
|
12.01
|
%
|
|
3,091,645
|
|
||||
Total interest-earning assets
|
68,673,947
|
|
|
9.62
|
%
|
|
3,302,177
|
|
|
62,771,043
|
|
|
9.99
|
%
|
|
3,126,242
|
|
||||
Allowance for loan losses
|
(2,101,817
|
)
|
|
|
|
|
|
(3,052,011
|
)
|
|
|
|
|
||||||||
Other assets
|
3,941,464
|
|
|
|
|
|
|
3,774,339
|
|
|
|
|
|
||||||||
Total assets
|
$
|
70,513,594
|
|
|
|
|
|
|
$
|
63,493,371
|
|
|
|
|
|
||||||
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Interest-bearing deposits:
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Time deposits
(5)
|
$
|
26,384,525
|
|
|
2.84
|
%
|
|
374,245
|
|
|
$
|
25,240,443
|
|
|
3.52
|
%
|
|
443,494
|
|
||
Money market deposits
|
5,451,937
|
|
|
0.96
|
%
|
|
26,162
|
|
|
4,427,927
|
|
|
1.27
|
%
|
|
28,116
|
|
||||
Other interest-bearing savings deposits
|
8,394,167
|
|
|
1.07
|
%
|
|
44,824
|
|
|
5,143,448
|
|
|
1.41
|
%
|
|
36,255
|
|
||||
Total interest-bearing deposits
(6)
|
40,230,629
|
|
|
2.21
|
%
|
|
445,231
|
|
|
34,811,818
|
|
|
2.93
|
%
|
|
507,865
|
|
||||
Borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Short-term borrowings
|
5,016
|
|
|
0.04
|
%
|
|
1
|
|
|
104,250
|
|
|
0.16
|
%
|
|
83
|
|
||||
Securitized borrowings
(5)
|
16,485,585
|
|
|
2.05
|
%
|
|
169,319
|
|
|
16,403,765
|
|
|
2.11
|
%
|
|
172,725
|
|
||||
Other long-term borrowings
(5)
|
2,136,505
|
|
|
7.42
|
%
|
|
79,248
|
|
|
2,484,440
|
|
|
6.62
|
%
|
|
82,034
|
|
||||
Total borrowings
|
18,627,106
|
|
|
2.67
|
%
|
|
248,568
|
|
|
18,992,455
|
|
|
2.69
|
%
|
|
254,842
|
|
||||
Total interest-bearing liabilities
|
58,857,735
|
|
|
2.36
|
%
|
|
693,799
|
|
|
53,804,273
|
|
|
2.84
|
%
|
|
762,707
|
|
||||
Other liabilities and stockholders’ equity
|
11,655,859
|
|
|
|
|
|
|
9,689,097
|
|
|
|
|
|
||||||||
Total liabilities and stockholders’ equity
|
$
|
70,513,594
|
|
|
|
|
|
|
$
|
63,493,370
|
|
|
|
|
|
||||||
Net interest income
|
|
|
|
|
$
|
2,608,378
|
|
|
|
|
|
|
$
|
2,363,535
|
|
||||||
Net interest margin
(7)
|
|
|
9.17
|
%
|
|
|
|
|
|
9.18
|
%
|
|
|
||||||||
Net yield on interest-earning assets
(8)
|
|
|
7.60
|
%
|
|
|
|
|
|
7.55
|
%
|
|
|
||||||||
Interest rate spread
(9)
|
|
|
7.26
|
%
|
|
|
|
|
|
7.15
|
%
|
|
|
(1)
|
Average balances of loan receivables include non-accruing loans, which are included in the yield calculations. If the non-accruing loan balances were excluded, there would not be a material impact on the amounts reported.
|
(2)
|
Interest income on credit card loans includes $42.8 million and $73.8 million of amortization of balance transfer fees for the
three and six
months ended
May 31, 2012
, respectively. Interest income on credit card loans includes $55.9 million and $109.4 million of amortization of balance transfer fees for the
three and six
months ended
May 31, 2011
, respectively.
|
(3)
|
Includes the impact of interest rate swap agreements used to change a portion of certain floating-rate credit card loan receivables to fixed rates.
|
(4)
|
Includes federal student loans held for sale, which were all sold during the first quarter of 2012.
|
(5)
|
Includes the impact of interest rate swap agreements used to change a portion of fixed-rate funding to floating-rate funding.
|
(6)
|
Includes the impact of FDIC insurance premiums and special assessments, and all periods reflect management's current product allocation methodology.
|
(7)
|
Net interest margin represents net interest income as a percentage of average total loan receivables.
|
(8)
|
Net yield on interest-earning assets represents net interest income as a percentage of average total interest-earning assets.
|
(9)
|
Interest rate spread represents the difference between the rate on total interest-earning assets and the rate on total interest-bearing liabilities.
|
Rate/Volume Variance Analysis
(1)
|
|||||||||||||||||||||||
|
For the Three Months Ended
May 31, 2012 vs. May 31, 2011
|
|
For the Six Months Ended
May 31, 2012 vs. May 31, 2011
|
||||||||||||||||||||
|
Volume
|
|
Rate
|
|
Total
|
|
Volume
|
|
Rate
|
|
Total
|
||||||||||||
Increase/(decrease) in net interest income due to changes in:
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Cash and cash equivalents
|
$
|
1,225
|
|
|
$
|
374
|
|
|
$
|
1,599
|
|
|
$
|
643
|
|
|
$
|
615
|
|
|
$
|
1,258
|
|
Restricted cash
|
(723
|
)
|
|
607
|
|
|
(116
|
)
|
|
(743
|
)
|
|
265
|
|
|
(478
|
)
|
||||||
Other short-term investments
|
(325
|
)
|
|
(326
|
)
|
|
(651
|
)
|
|
(820
|
)
|
|
(820
|
)
|
|
(1,640
|
)
|
||||||
Investment securities
|
2,951
|
|
|
2,392
|
|
|
5,343
|
|
|
6,302
|
|
|
4,337
|
|
|
10,639
|
|
||||||
Loan receivables:
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Credit card
|
139,133
|
|
|
(121,209
|
)
|
|
17,924
|
|
|
179,187
|
|
|
(154,573
|
)
|
|
24,614
|
|
||||||
Personal loans
|
22,346
|
|
|
2,231
|
|
|
24,577
|
|
|
46,448
|
|
|
5,049
|
|
|
51,497
|
|
||||||
Federal student loans
|
(3,075
|
)
|
|
—
|
|
|
(3,075
|
)
|
|
(4,683
|
)
|
|
605
|
|
|
(4,078
|
)
|
||||||
Private student loans
|
18,997
|
|
|
(3,433
|
)
|
|
15,564
|
|
|
33,631
|
|
|
974
|
|
|
34,605
|
|
||||||
PCI student loans
|
83,362
|
|
|
(62,369
|
)
|
|
20,993
|
|
|
116,287
|
|
|
(57,008
|
)
|
|
59,279
|
|
||||||
Other
|
123
|
|
|
59
|
|
|
182
|
|
|
161
|
|
|
78
|
|
|
239
|
|
||||||
Total loan receivables
|
260,886
|
|
|
(184,721
|
)
|
|
76,165
|
|
|
371,031
|
|
|
(204,875
|
)
|
|
166,156
|
|
||||||
Total interest income
|
264,014
|
|
|
(181,674
|
)
|
|
82,340
|
|
|
376,413
|
|
|
(200,478
|
)
|
|
175,935
|
|
||||||
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Interest-bearing deposits:
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Time deposits
|
75,412
|
|
|
(111,331
|
)
|
|
(35,919
|
)
|
|
52,356
|
|
|
(121,605
|
)
|
|
(69,249
|
)
|
||||||
Money market deposits
|
13,100
|
|
|
(14,833
|
)
|
|
(1,733
|
)
|
|
12,505
|
|
|
(14,459
|
)
|
|
(1,954
|
)
|
||||||
Other interest-bearing deposits
|
29,966
|
|
|
(27,026
|
)
|
|
2,940
|
|
|
31,816
|
|
|
(23,247
|
)
|
|
8,569
|
|
||||||
Total interest-bearing deposits
|
118,478
|
|
|
(153,190
|
)
|
|
(34,712
|
)
|
|
96,677
|
|
|
(159,311
|
)
|
|
(62,634
|
)
|
||||||
Borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Short-term borrowings
|
(18
|
)
|
|
(19
|
)
|
|
(37
|
)
|
|
(46
|
)
|
|
(36
|
)
|
|
(82
|
)
|
||||||
Securitized borrowings
|
13,841
|
|
|
(17,020
|
)
|
|
(3,179
|
)
|
|
2,394
|
|
|
(5,800
|
)
|
|
(3,406
|
)
|
||||||
Other long-term borrowings
|
(32,702
|
)
|
|
31,190
|
|
|
(1,512
|
)
|
|
(22,790
|
)
|
|
20,004
|
|
|
(2,786
|
)
|
||||||
Total borrowings
|
(18,879
|
)
|
|
14,151
|
|
|
(4,728
|
)
|
|
(20,442
|
)
|
|
14,168
|
|
|
(6,274
|
)
|
||||||
Total interest expense
|
99,599
|
|
|
(139,039
|
)
|
|
(39,440
|
)
|
|
76,235
|
|
|
(145,143
|
)
|
|
(68,908
|
)
|
||||||
Net interest income
|
$
|
164,415
|
|
|
$
|
(42,635
|
)
|
|
$
|
121,780
|
|
|
$
|
300,178
|
|
|
$
|
(55,335
|
)
|
|
$
|
244,843
|
|
(1)
|
The rate/volume variance for each category has been allocated on a consistent basis between rate and volume variances between
May 31, 2012
and
May 31, 2011
based on the percentage of the rate or volume variance to the sum of the two absolute variances.
|
|
May 31,
2012 |
|
November 30,
2011 |
||||
Loans held for sale
|
$
|
—
|
|
|
$
|
714,180
|
|
Loan portfolio:
|
|
|
|
||||
Credit card loans:
|
|
|
|
||||
Discover card
|
46,400,847
|
|
|
46,419,544
|
|
||
Discover business card
|
209,560
|
|
|
219,081
|
|
||
Total credit card loans
|
46,610,407
|
|
|
46,638,625
|
|
||
Other loans:
|
|
|
|
||||
Personal loans
|
2,916,171
|
|
|
2,648,051
|
|
||
Private student loans
|
2,509,158
|
|
|
2,069,001
|
|
||
Other
|
26,601
|
|
|
16,690
|
|
||
Total other loans
|
5,451,930
|
|
|
4,733,742
|
|
||
PCI student loans
(1)
|
4,995,320
|
|
|
5,250,388
|
|
||
Total loan portfolio
|
57,057,657
|
|
|
56,622,755
|
|
||
Total loan receivables
|
57,057,657
|
|
|
57,336,935
|
|
||
Allowance for loan losses
|
(1,869,253
|
)
|
|
(2,205,196
|
)
|
||
Net loan receivables
|
$
|
55,188,404
|
|
|
$
|
55,131,739
|
|
(1)
|
Represents purchased credit-impaired private student loans which do not have a related allowance for loan losses or charge-offs (see Note 4: Loan Receivables to our condensed consolidated financial statements).
|
•
|
The impact of general economic conditions on the consumer, including unemployment levels, bankruptcy trends and interest rate movements;
|
•
|
Changes in consumer spending and payment behaviors;
|
•
|
Changes in our loan portfolio, including the overall mix of accounts, products and loan balances within the portfolio;
|
•
|
The level and direction of historical and anticipated loan delinquencies and charge-offs;
|
•
|
The credit quality of the loan portfolio, which reflects, among other factors, our credit granting practices and effectiveness of collection efforts; and
|
•
|
Regulatory changes or new regulatory guidance.
|
(1)
|
Charge-offs for PCI loans did not result in a charge to earnings during 2012 or 2011 and are therefore excluded from the calculation. See Note 4: Loan Receivables to our condensed consolidated financial statements for more information regarding the accounting for charge-offs on PCI loans.
|
The following table presents the amounts and delinquency rates of key loan portfolio segments that are 30 and 90 days or more delinquent, loan receivables that are not accruing interest, regardless of delinquency and restructured loans (dollars in thousands):
|
|||||||||||||
|
May 31,
2012 |
|
November 30,
2011 |
||||||||||
|
$
|
|
%
|
|
$
|
|
%
|
||||||
Loans 30 days delinquent or more:
|
|
|
|
|
|
|
|
||||||
Credit card loans
|
$
|
889,963
|
|
|
1.91
|
%
|
|
$
|
1,116,851
|
|
|
2.39
|
%
|
Personal loans
|
$
|
22,947
|
|
|
0.79
|
%
|
|
$
|
22,966
|
|
|
0.87
|
%
|
Private student loans (excluding PCI
(1)
)
|
$
|
25,663
|
|
|
1.02
|
%
|
|
$
|
13,065
|
|
|
0.63
|
%
|
|
|
|
|
|
|
|
|
||||||
Loans 90 days delinquent or more:
|
|
|
|
|
|
|
|
||||||
Credit card loans
|
$
|
459,359
|
|
|
0.99
|
%
|
|
$
|
559,674
|
|
|
1.20
|
%
|
Personal loans
|
$
|
8,014
|
|
|
0.27
|
%
|
|
$
|
7,362
|
|
|
0.28
|
%
|
Private student loans (excluding PCI
(1)
)
|
$
|
4,980
|
|
|
0.20
|
%
|
|
$
|
2,992
|
|
|
0.14
|
%
|
|
|
|
|
|
|
|
|
||||||
Loans not accruing interest
|
$
|
192,838
|
|
|
0.37
|
%
|
|
$
|
207,138
|
|
|
0.40
|
%
|
|
|
|
|
|
|
|
|
||||||
Restructured loans
|
|
|
|
|
|
|
|
||||||
Credit card loans
(2)
|
$
|
1,165,241
|
|
|
2.50
|
%
|
|
$
|
1,216,738
|
|
|
2.61
|
%
|
Personal loans
|
$
|
14,485
|
|
|
0.47
|
%
|
|
$
|
7,635
|
|
|
0.29
|
%
|
Private student loans (excluding PCI
(1)
)
|
$
|
9,632
|
|
|
0.38
|
%
|
|
$
|
5,439
|
|
|
0.26
|
%
|
(1)
|
Excludes PCI loans which are accounted for on a pooled basis. Since a pool is accounted for as a single asset with a single composite interest rate and aggregate expectation of cash flows, the past-due status of a pool, or that of the individual loans within a pool, is not meaningful. Because we are recognizing interest income on a pool of loans, it is all considered to be performing.
|
(2)
|
Restructured loans include
$35.3 million
and
$37.9 million
at May 31, 2012 and November 30, 2011, respectively, that are also included in loans over 90 days delinquent or more.
|
|
For the Three Months Ended
May 31, |
|
2012 vs. 2011
increase
(decrease)
|
|
For the Six Months Ended
May 31, |
|
2012 vs. 2011
increase
(decrease)
|
||||||||||||||||||||||
2012
|
|
2011
|
|
$
|
|
%
|
|
2012
|
|
2011
|
|
$
|
|
%
|
|||||||||||||||
Discount and interchange revenue
(1)
|
$
|
265,324
|
|
|
$
|
265,826
|
|
|
$
|
(502
|
)
|
|
—
|
%
|
|
$
|
529,635
|
|
|
$
|
526,742
|
|
|
$
|
2,893
|
|
|
1
|
%
|
Protection products
|
101,194
|
|
|
105,116
|
|
|
(3,922
|
)
|
|
(4
|
)%
|
|
206,055
|
|
|
213,669
|
|
|
(7,614
|
)
|
|
(4
|
)%
|
||||||
Loan fee income
|
77,256
|
|
|
80,753
|
|
|
(3,497
|
)
|
|
(4
|
)%
|
|
161,707
|
|
|
166,353
|
|
|
(4,646
|
)
|
|
(3
|
)%
|
||||||
Transaction processing revenue
|
52,174
|
|
|
45,310
|
|
|
6,864
|
|
|
15
|
%
|
|
104,655
|
|
|
87,861
|
|
|
16,794
|
|
|
19
|
%
|
||||||
Merchant fees
|
3,523
|
|
|
4,216
|
|
|
(693
|
)
|
|
(16
|
)%
|
|
7,228
|
|
|
8,871
|
|
|
(1,643
|
)
|
|
(19
|
)%
|
||||||
Gain on investments
|
28
|
|
|
(149
|
)
|
|
177
|
|
|
(119
|
)%
|
|
28
|
|
|
(7
|
)
|
|
35
|
|
|
NM
|
|
||||||
Other income
|
33,641
|
|
|
42,772
|
|
|
(9,131
|
)
|
|
(21
|
)%
|
|
73,335
|
|
|
102,979
|
|
|
(29,644
|
)
|
|
(29
|
)%
|
||||||
Total other income
|
$
|
533,140
|
|
|
$
|
543,844
|
|
|
$
|
(10,704
|
)
|
|
(2
|
)%
|
|
$
|
1,082,643
|
|
|
$
|
1,106,468
|
|
|
$
|
(23,825
|
)
|
|
(2
|
)%
|
(1)
|
Net of rewards, including
Cashback Bonus
rewards, of $248 million and $224 million for the three months ended
May 31, 2012
and
2011
, respectively, and $485 million and $430 million for the
six
months ended
May 31, 2012
and
May 31, 2011
, respectively.
|
|
For the Three Months Ended
May 31, |
|
2012 vs. 2011
increase
(decrease)
|
|
For the Six Months Ended
May 31, |
|
2012 vs. 2011
increase
(decrease)
|
||||||||||||||||||||||
|
2012
|
|
2011
|
|
$
|
|
%
|
|
2012
|
|
2011
|
|
$
|
|
%
|
||||||||||||||
Employee compensation and benefits
|
$
|
249,357
|
|
|
$
|
229,826
|
|
|
$
|
19,531
|
|
|
8
|
%
|
|
$
|
496,082
|
|
|
$
|
442,901
|
|
|
$
|
53,181
|
|
|
12
|
%
|
Marketing and business development
|
119,012
|
|
|
124,181
|
|
|
(5,169
|
)
|
|
(4
|
)%
|
|
250,441
|
|
|
259,846
|
|
|
(9,405
|
)
|
|
(4
|
)%
|
||||||
Information processing and communications
|
71,448
|
|
|
66,588
|
|
|
4,860
|
|
|
7
|
%
|
|
141,911
|
|
|
131,305
|
|
|
10,606
|
|
|
8
|
%
|
||||||
Professional fees
|
110,085
|
|
|
104,749
|
|
|
5,336
|
|
|
5
|
%
|
|
209,585
|
|
|
195,080
|
|
|
14,505
|
|
|
7
|
%
|
||||||
Premises and equipment
|
18,857
|
|
|
17,957
|
|
|
900
|
|
|
5
|
%
|
|
36,166
|
|
|
35,205
|
|
|
961
|
|
|
3
|
%
|
||||||
Other expense
|
179,709
|
|
|
91,843
|
|
|
87,866
|
|
|
96
|
%
|
|
291,310
|
|
|
165,955
|
|
|
125,355
|
|
|
76
|
%
|
||||||
Total other expense
|
$
|
748,468
|
|
|
$
|
635,144
|
|
|
$
|
113,324
|
|
|
18
|
%
|
|
$
|
1,425,495
|
|
|
$
|
1,230,292
|
|
|
$
|
195,203
|
|
|
16
|
%
|
The following table reconciles our effective tax rate to the U.S. federal statutory income tax rate:
|
|||||||||||
|
For the Three Months Ended May 31,
|
|
For the Six Months Ended May 31,
|
||||||||
|
2012
|
|
2011
|
|
2012
|
|
2011
|
||||
U.S. federal statutory income tax rate
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
U.S. state, local and other income taxes, net of U.S. federal income tax benefits
|
3.2
|
|
|
2.9
|
|
|
3.2
|
|
|
2.0
|
|
Valuation allowance — capital loss
|
—
|
|
|
(2.3
|
)
|
|
—
|
|
|
(1.3
|
)
|
Other
|
(0.1
|
)
|
|
(0.4
|
)
|
|
(0.3
|
)
|
|
(0.4
|
)
|
Effective income tax rate
|
38.1
|
%
|
|
35.2
|
%
|
|
37.9
|
%
|
|
35.3
|
%
|
|
Total
|
|
Three
Months
or Less
|
|
Over Three
Months
Through Six
Months
|
|
Over Six
Months
Through
Twelve
Months
|
|
Over Twelve
Months
|
|
Indeterminate
|
||||||||||||
Certificates of deposit in amounts less than $100,000
(1)
|
$
|
20,691,786
|
|
|
$
|
2,469,203
|
|
|
$
|
2,499,591
|
|
|
$
|
3,806,927
|
|
|
$
|
11,916,065
|
|
|
$
|
—
|
|
Certificates of deposit in amounts of $100,000 to less than $250,000
(1)
|
5,280,850
|
|
|
752,709
|
|
|
687,631
|
|
|
1,068,132
|
|
|
2,772,378
|
|
|
—
|
|
||||||
Certificates of deposit in amounts of $250,000
(1)
or greater
|
1,187,519
|
|
|
176,776
|
|
|
158,808
|
|
|
262,429
|
|
|
589,506
|
|
|
—
|
|
||||||
Savings deposits, including money market deposit accounts
|
14,266,849
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
14,266,849
|
|
||||||
Total interest-bearing deposits
|
$
|
41,427,004
|
|
|
$
|
3,398,688
|
|
|
$
|
3,346,030
|
|
|
$
|
5,137,488
|
|
|
$
|
15,277,949
|
|
|
$
|
14,266,849
|
|
(1)
|
$100,000 represents the basic insurance amount previously covered by the FDIC. Effective July 21, 2010, the basic insurance per depositor was permanently increased to $250,000.
|
|
Total
|
|
Less Than
One Year
|
|
One Year
Through
Three Years
|
|
Four Years
Through
Five Years
|
|
After Five
Years
|
||||||||||
Scheduled maturities of long-term borrowings—owed to credit card securitization investors
|
$
|
14,766,288
|
|
|
$
|
6,891,703
|
|
|
$
|
5,874,991
|
|
|
$
|
999,640
|
|
|
$
|
999,954
|
|
|
For the Three Months Ended May 31,
|
|
For the Six Months Ended May 31,
|
||||||||||||
|
2012
|
|
2011
|
|
2012
|
|
2011
|
||||||||
Overnight Federal Funds purchased
|
$
|
—
|
|
|
$
|
200,000
|
|
|
$
|
135,000
|
|
|
$
|
200,000
|
|
Overnight repurchase agreements
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
48,188
|
|
(1)
|
An “sf” in the rating denotes rating agency identification for structured finance product ratings.
|
(2)
|
All Class C notes are currently held by subsidiaries of Discover Bank and, therefore, are not publicly rated.
|
(1)
|
Cash-in-process is excluded from cash and cash equivalents for liquidity purposes.
|
(2)
|
See "—Funding Sources—Additional Funding Sources" for additional information.
|
(3)
|
Excludes $174 million and $276 million of investments accounted for in the liquidity portfolio that were pledged to the Federal Reserve as of
May 31, 2012
and
November 30, 2011
, respectively.
|
Item 3.
|
Quantitative and Qualitative Disclosures About Market Risk
|
Item 1.
|
Legal Proceedings
|
Item 1A.
|
Risk Factors
|
Item 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
Period
|
Total Number of Shares Purchased
|
|
Average Price Paid Per Share
|
|
Total Number of Shares Purchased as Part of Publicly Announced Plan or Program
(1)
|
|
Maximum Dollar Value of Shares that may yet be purchased under the Plans or Programs
(1)
|
||||||
March 1- 31, 2012
|
|
|
|
|
|
|
|
||||||
Repurchase program
(1)
|
205,000
|
|
|
$
|
33.66
|
|
|
205,000
|
|
|
$
|
1,993,099,536
|
|
Employee transactions
(2)
|
1,002
|
|
|
$
|
33.20
|
|
|
N/A
|
|
N/A
|
|||
April 1 - 30, 2012
|
|
|
|
|
|
|
|
||||||
Repurchase program
(1)
|
1,769,275
|
|
|
$
|
32.93
|
|
|
1,769,275
|
|
|
$
|
1,934,842,918
|
|
Employee transactions
(2)
|
635
|
|
|
$
|
33.70
|
|
|
N/A
|
|
N/A
|
|||
May 1 - 31, 2012
|
|
|
|
|
|
|
|
||||||
Repurchase program
(1)
|
11,553,444
|
|
|
$
|
33.05
|
|
|
11,553,444
|
|
|
$
|
1,553,034,486
|
|
Employee transactions
(2)
|
989
|
|
|
$
|
33.51
|
|
|
N/A
|
|
N/A
|
|||
|
|
|
|
|
|
|
|
||||||
Total
|
|
|
|
|
|
|
|
||||||
Repurchase program
(1)
|
13,527,719
|
|
|
$
|
33.04
|
|
|
13,527,719
|
|
|
$
|
1,553,034,486
|
|
Employee transactions
(2)
|
2,626
|
|
|
$
|
32.63
|
|
|
N/A
|
|
N/A
|
Item 3.
|
Defaults Upon Senior Securities
|
Item 4.
|
Mine Safety Disclosures
|
Item 5.
|
Other Information
|
Item 6.
|
Exhibits
|
|
Discover Financial Services
(Registrant)
|
||
|
|
|
|
|
By:
|
|
/s/ R. Mark Graf
|
|
|
|
R. Mark Graf
Executive Vice President, Chief Financial Officer and Chief Accounting Officer
|
Exhibit
Number
|
|
Description
|
|
|
|
|
|
|
3.1
|
|
Amended and Restated Certificate of Incorporation of Discover Financial Services (filed as Exhibit 3.1 to Discover Financial Services' Quarterly Report on Form 10-Q filed on July 1, 2009 and incorporated herein by reference thereto).
|
|
|
|
3.2
|
|
Certificate of Elimination of the Fixed Rate Cumulative Perpetual Preferred Stock, Series A, of Discover Financial Services.
|
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
|
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
|
|
|
|
32.1
|
|
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code.
|
|
|
|
101.INS
|
|
XBRL Instance Document.
|
|
|
|
101.SCH
|
|
XBRL Taxonomy Extension Schema Document.
|
|
|
|
101.CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase Document.
|
|
|
|
101.DEF
|
|
XBRL Taxonomy Extension Definition Linkbase Document.
|
|
|
|
101.LAB
|
|
XBRL Taxonomy Extension Label Linkbase Document.
|
|
|
|
101.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase Document.
|
1.
|
That, pursuant to Section 151 of the General Corporation Law of the State of Delaware and authority granted in the Amended and Restated Certificate of Incorporation of the Company, the Board of Directors of the Company, by resolution duly adopted, authorized the issuance of a series of 1,224,588 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, par value $0.01 per share (the “Preferred Stock”), and established the voting and other powers, preferences and relative, participating, optional or other rights, and the qualifications, limitations and restrictions thereof, and, on March 11, 2009, the Company filed a Certificate of Designation (the “Certificate of Designation”) with respect to such Preferred Stock in the office of the Secretary of State of the State of Delaware.
|
2.
|
That, pursuant to Section 151 of the General Corporation Law of the State of Delaware and authority granted in the Amended and Restated Certificate of Incorporation of the Company, the Board of Directors of the Company, by resolution duly adopted, authorized that the number of shares of Preferred Stock be decreased from 1,224,588 to 1,224,558, and, on April 22, 2009, the Company filed a Certificate of Decrease (the “Certificate of Decrease”) with respect to such Preferred Stock in the office of the Secretary of State of the State of Delaware.
|
3.
|
That the Board of Directors of the Company has adopted resolutions approving the repurchase of said Preferred Stock, including resolutions authorizing certain officers of the Company to execute and deliver such further documentation, and to take all such actions as any officer shall deem necessary, advisable or appropriate, in furtherance of the repurchase of such Preferred Stock, which includes the execution and filing of this Certificate, and said Preferred Stock was repurchased by the Company on April 21, 2010.
|
4.
|
That no shares of said Preferred Stock are outstanding and no shares thereof will be issued subject to said Certificate of Designation and Certificate of Decrease.
|
5.
|
That, accordingly, all matters set forth in the Certificate of Designation and Certificate of Decrease with respect to the Preferred Stock be, and hereby are, eliminated from the Certificate of Incorporation of the Company.
|
DISCOVER FINANCIAL SERVICES
|
|||
|
|||
|
|||
By:
|
/s/ Thomas G. Teichgraeber
|
|
|
|
Name:
|
Thomas G. Teichgraeber
|
|
|
Title:
|
Vice President, Assistant General Counsel and Assistant Secretary
|
1.
|
I have reviewed this Quarterly Report on Form 10-Q of Discover Financial Services (the “registrant”);
|
2.
|
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
|
3.
|
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
|
4.
|
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
|
a)
|
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
|
b)
|
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
|
c)
|
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
|
d)
|
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
|
5.
|
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
|
a)
|
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
|
b)
|
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
|
/s/ DAVID W. NELMS
|
|
David W. Nelms
Chairman and Chief Executive Officer
|
|
1.
|
I have reviewed this Quarterly Report on Form 10-Q of Discover Financial Services (the “registrant”);
|
2.
|
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
|
3.
|
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
|
4.
|
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
|
a)
|
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
|
b)
|
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
|
c)
|
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
|
d)
|
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
|
5.
|
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
|
a)
|
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
|
b)
|
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
|
/s/ R. MARK GRAF
|
|
R. Mark Graf
|
|
Executive Vice President, Chief Financial Officer and Chief Accounting Officer
|
|
1.
|
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
|
2.
|
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
|
/s/ DAVID W. NELMS
|
|
David W. Nelms
|
|
Chairman and Chief Executive Officer
|
|
/s/ R. MARK GRAF
|
|
R. Mark Graf
|
|
Executive Vice President, Chief Financial Officer and Chief Accounting Officer
|
|