|
x
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
|
For the quarterly period ended August 31, 2011
|
o
|
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
|
|
36-2517428
|
(State or other jurisdiction of incorporation or organization)
|
|
(I.R.S. Employer Identification No.)
|
|
|
|
2500 Lake Cook Road,
Riverwoods, Illinois 60015
|
|
(224) 405-0900
|
(Address of principal executive offices, including zip code)
|
|
(Registrant’s telephone number, including area code)
|
Large accelerated filer
x
|
Accelerated filer
o
|
Non-accelerated filer
o
(Do not check if a smaller reporting company)
|
Smaller reporting company
o
|
|
|
|
Part I.
|
FINANCIAL INFORMATION
|
Item 1.
|
Financial Statements
|
|
August 31,
2011 |
|
November 30,
2010 |
||||
|
(unaudited)
(dollars in thousands,
except share amounts)
|
||||||
Assets
|
|
|
|
||||
Cash and cash equivalents
|
$
|
3,957,525
|
|
|
$
|
5,098,733
|
|
Restricted cash
|
937,230
|
|
|
1,363,758
|
|
||
Other short-term investments
|
—
|
|
|
375,000
|
|
||
Investment securities:
|
|
|
|
||||
Available-for-sale (amortized cost of $5,798,756 and $4,989,958 at August 31, 2011 and November 30, 2010, respectively)
|
5,899,080
|
|
|
5,002,579
|
|
||
Held-to-maturity (fair value of $51,189 and $70,195 at August 31, 2011 and November 30, 2010, respectively)
|
53,088
|
|
|
72,816
|
|
||
Total investment securities
|
5,952,168
|
|
|
5,075,395
|
|
||
Loan receivables:
|
|
|
|
||||
Loans held for sale
|
738,382
|
|
|
788,101
|
|
||
Loan portfolio:
|
|
|
|
||||
Credit card
|
46,177,673
|
|
|
45,156,994
|
|
||
Other
|
4,279,613
|
|
|
2,891,318
|
|
||
Purchased credit-impaired loans
|
2,886,783
|
|
|
—
|
|
||
Total loan portfolio
|
53,344,069
|
|
|
48,048,312
|
|
||
Total loan receivables
|
54,082,451
|
|
|
48,836,413
|
|
||
Allowance for loan losses
|
(2,273,058
|
)
|
|
(3,304,118
|
)
|
||
Net loan receivables
|
51,809,393
|
|
|
45,532,295
|
|
||
Premises and equipment, net
|
465,871
|
|
|
460,732
|
|
||
Goodwill
|
255,421
|
|
|
255,421
|
|
||
Intangible assets, net
|
189,298
|
|
|
188,973
|
|
||
Other assets
|
2,158,761
|
|
|
2,434,661
|
|
||
Total assets
|
$
|
65,725,667
|
|
|
$
|
60,784,968
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
||||
Deposits:
|
|
|
|
||||
Interest-bearing deposit accounts
|
$
|
37,470,037
|
|
|
$
|
34,309,839
|
|
Non-interest bearing deposit accounts
|
116,847
|
|
|
103,544
|
|
||
Total deposits
|
37,586,884
|
|
|
34,413,383
|
|
||
Short-term borrowings
|
100,000
|
|
|
—
|
|
||
Long-term borrowings
|
17,718,200
|
|
|
17,705,728
|
|
||
Accrued expenses and other liabilities
|
2,314,667
|
|
|
2,209,011
|
|
||
Total liabilities
|
57,719,751
|
|
|
54,328,122
|
|
||
Commitments, contingencies and guarantees (Notes 8, 11, and 12)
|
|
|
|
||||
Stockholders’ Equity:
|
|
|
|
||||
Common stock, par value $.01 per share; 2,000,000,000 shares authorized; 549,475,683 and 547,128,270 shares issued at August 31, 2011 and November 30, 2010, respectively
|
5,495
|
|
|
5,471
|
|
||
Additional paid-in capital
|
3,492,663
|
|
|
3,435,318
|
|
||
Retained earnings
|
4,763,180
|
|
|
3,126,488
|
|
||
Accumulated other comprehensive loss
|
(19,979
|
)
|
|
(82,548
|
)
|
||
Treasury stock, at cost; 11,278,326 and 2,446,506 shares at August 31, 2011 and November 30, 2010, respectively
|
(235,443
|
)
|
|
(27,883
|
)
|
||
Total stockholders’ equity
|
8,005,916
|
|
|
6,456,846
|
|
||
Total liabilities and stockholders’ equity
|
$
|
65,725,667
|
|
|
$
|
60,784,968
|
|
|
August 31,
2011 |
|
November 30,
2010 |
||||
|
(unaudited)
(dollars in thousands)
|
||||||
Assets
|
|
|
|
||||
Restricted cash
|
$
|
937,230
|
|
|
$
|
1,363,758
|
|
Credit card loan receivables
|
33,978,980
|
|
|
34,452,989
|
|
||
Other loan receivables
|
2,876,923
|
|
|
—
|
|
||
Allowance for loan losses allocated to securitized loan receivables
|
(1,589,949
|
)
|
|
(2,431,399
|
)
|
||
Other assets
|
30,404
|
|
|
24,083
|
|
||
Liabilities
|
|
|
|
||||
Long-term borrowings
|
$
|
15,260,509
|
|
|
$
|
14,919,400
|
|
Accrued interest payable
|
12,803
|
|
|
11,758
|
|
|
For the Three Months Ended
August 31, |
|
For the Nine Months Ended
August 31, |
||||||||||||
|
2011
|
|
2010
|
|
2011
|
|
2010
|
||||||||
|
(unaudited) (dollars in thousands, except per share amounts)
|
||||||||||||||
Interest income:
|
|
|
|
|
|
|
|
||||||||
Credit card loans
|
$
|
1,423,496
|
|
|
$
|
1,455,907
|
|
|
$
|
4,243,803
|
|
|
$
|
4,423,654
|
|
Other loans
|
157,424
|
|
|
67,588
|
|
|
428,762
|
|
|
183,150
|
|
||||
Investment securities
|
15,676
|
|
|
5,574
|
|
|
42,535
|
|
|
15,966
|
|
||||
Other interest income
|
2,496
|
|
|
6,870
|
|
|
10,234
|
|
|
24,101
|
|
||||
Total interest income
|
1,599,092
|
|
|
1,535,939
|
|
|
4,725,334
|
|
|
4,646,871
|
|
||||
Interest expense:
|
|
|
|
|
|
|
|
||||||||
Deposits
|
241,719
|
|
|
279,137
|
|
|
749,584
|
|
|
882,921
|
|
||||
Short-term borrowings
|
33
|
|
|
—
|
|
|
116
|
|
|
—
|
|
||||
Long-term borrowings
|
120,301
|
|
|
110,000
|
|
|
375,060
|
|
|
324,561
|
|
||||
Total interest expense
|
362,053
|
|
|
389,137
|
|
|
1,124,760
|
|
|
1,207,482
|
|
||||
Net interest income
|
1,237,039
|
|
|
1,146,802
|
|
|
3,600,574
|
|
|
3,439,389
|
|
||||
Provision for loan losses
|
99,514
|
|
|
712,565
|
|
|
692,763
|
|
|
2,824,035
|
|
||||
Net interest income after provision for loan losses
|
1,137,525
|
|
|
434,237
|
|
|
2,907,811
|
|
|
615,354
|
|
||||
Other income:
|
|
|
|
|
|
|
|
||||||||
Discount and interchange revenue, net
|
282,889
|
|
|
273,932
|
|
|
809,631
|
|
|
805,209
|
|
||||
Fee product revenue
|
107,858
|
|
|
104,132
|
|
|
321,527
|
|
|
309,590
|
|
||||
Loan fee income
|
84,243
|
|
|
92,465
|
|
|
250,596
|
|
|
267,483
|
|
||||
Transaction processing revenue
|
43,931
|
|
|
40,184
|
|
|
131,792
|
|
|
109,570
|
|
||||
Merchant fees
|
4,110
|
|
|
7,220
|
|
|
12,981
|
|
|
23,091
|
|
||||
Gain (loss) on investments
|
(3,614
|
)
|
|
18,951
|
|
|
(3,622
|
)
|
|
19,131
|
|
||||
Other income
|
32,546
|
|
|
27,260
|
|
|
135,526
|
|
|
88,790
|
|
||||
Total other income
|
551,963
|
|
|
564,144
|
|
|
1,658,431
|
|
|
1,622,864
|
|
||||
Other expense:
|
|
|
|
|
|
|
|
||||||||
Employee compensation and benefits
|
241,881
|
|
|
204,210
|
|
|
684,782
|
|
|
602,510
|
|
||||
Marketing and business development
|
133,398
|
|
|
130,532
|
|
|
393,244
|
|
|
313,175
|
|
||||
Information processing and communications
|
63,547
|
|
|
62,357
|
|
|
194,852
|
|
|
190,862
|
|
||||
Professional fees
|
106,042
|
|
|
85,289
|
|
|
301,122
|
|
|
239,169
|
|
||||
Premises and equipment
|
18,063
|
|
|
17,722
|
|
|
53,268
|
|
|
53,273
|
|
||||
Other expense
|
79,476
|
|
|
66,128
|
|
|
245,431
|
|
|
155,601
|
|
||||
Total other expense
|
642,407
|
|
|
566,238
|
|
|
1,872,699
|
|
|
1,554,590
|
|
||||
Income before income tax expense
|
1,047,081
|
|
|
432,143
|
|
|
2,693,543
|
|
|
683,628
|
|
||||
Income tax expense
|
398,263
|
|
|
171,526
|
|
|
979,414
|
|
|
268,482
|
|
||||
Net income
|
$
|
648,818
|
|
|
$
|
260,617
|
|
|
$
|
1,714,129
|
|
|
$
|
415,146
|
|
Net income allocated to common stockholders
|
$
|
641,772
|
|
|
$
|
258,194
|
|
|
$
|
1,694,636
|
|
|
$
|
321,613
|
|
Basic earnings per share
|
$
|
1.18
|
|
|
$
|
0.47
|
|
|
$
|
3.11
|
|
|
$
|
0.59
|
|
Diluted earnings per share
|
$
|
1.18
|
|
|
$
|
0.47
|
|
|
$
|
3.11
|
|
|
$
|
0.58
|
|
Dividends paid per share
|
$
|
0.06
|
|
|
$
|
0.02
|
|
|
$
|
0.14
|
|
|
$
|
0.06
|
|
|
Preferred Stock
|
|
Common Stock
|
|
Additional
Paid-in
Capital
|
|
Retained
Earnings
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
Treasury
Stock
|
|
Total
Stockholders’
Equity
|
||||||||||||||||||||
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
|
|
|
|
|||||||||||||||||||||
|
(unaudited) (dollars and shares in thousands)
|
||||||||||||||||||||||||||||||||
Balance at November 30, 2009
|
1,225
|
|
|
$
|
1,158,066
|
|
|
544,799
|
|
$
|
5,448
|
|
|
$
|
3,573,231
|
|
|
$
|
3,873,262
|
|
|
$
|
(154,818
|
)
|
|
$
|
(19,642
|
)
|
|
$
|
8,435,547
|
|
|
Adoption of ASC 810 (FASB Statement No. 167), net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,411,117
|
)
|
|
78,561
|
|
|
—
|
|
|
(1,332,556
|
)
|
|||||||
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
415,146
|
|
|
—
|
|
|
—
|
|
|
415,146
|
|
|||||||
Adjustments related to investment securities, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6,276
|
)
|
|
—
|
|
|
|
||||||||
Adjustments related to cash flow hedges, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
158
|
|
|
—
|
|
|
|
||||||||
Adjustments related to pension and postretirement benefits, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
78
|
|
|
—
|
|
|
|
|
|||||||
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6,040
|
)
|
|
—
|
|
|
(6,040
|
)
|
|||||||
Total comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
409,106
|
|
|||||||
Purchases of treasury stock
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(8,145
|
)
|
|
(8,145
|
)
|
|||||||
Common stock issued under employee benefit plans
|
—
|
|
|
—
|
|
|
67
|
|
|
1
|
|
|
867
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
868
|
|
|||||||
Common stock issued and stock-based compensation expense
|
—
|
|
|
—
|
|
|
2,125
|
|
|
21
|
|
|
29,402
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
29,423
|
|
|||||||
Income tax deficiency on stock based compensation plans
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,411
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,411
|
)
|
|||||||
Dividends paid—common stock
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(32,923
|
)
|
|
—
|
|
|
—
|
|
|
(32,923
|
)
|
|||||||
Accretion of preferred stock discount
|
—
|
|
|
66,492
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(66,492
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|||||||
Dividends—preferred stock
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(23,811
|
)
|
|
—
|
|
|
—
|
|
|
(23,811
|
)
|
|||||||
Redemption of preferred stock
|
(1,225
|
)
|
|
(1,224,558
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,224,558
|
)
|
|||||||
Repurchase of stock warrant
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(172,000
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(172,000
|
)
|
|||||||
Special dividend—Morgan Stanley
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
33,757
|
|
|
—
|
|
|
—
|
|
|
33,757
|
|
|||||||
Balance at August 31, 2010
|
—
|
|
|
$
|
—
|
|
|
546,991
|
|
$
|
5,470
|
|
|
$
|
3,428,089
|
|
|
$
|
2,787,822
|
|
|
$
|
(82,297
|
)
|
|
$
|
(27,787
|
)
|
|
$
|
6,111,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Balance at November 30, 2010
|
—
|
|
|
—
|
|
|
547,128
|
|
5,471
|
|
|
3,435,318
|
|
|
3,126,488
|
|
|
(82,548
|
)
|
|
(27,883
|
)
|
|
6,456,846
|
|
||||||||
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,714,129
|
|
|
—
|
|
|
—
|
|
|
1,714,129
|
|
|||||||
Adjustments related to investment securities, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
54,897
|
|
|
—
|
|
|
|
||||||||
Adjustments related to cash flow hedges, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7,330
|
|
|
—
|
|
|
|
||||||||
Adjustments related to pension and postretirement benefits, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
342
|
|
|
—
|
|
|
|
|
|||||||
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
62,569
|
|
|
—
|
|
|
62,569
|
|
|||||||
Total comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,776,698
|
|
|||||||
Purchases of treasury stock
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(207,560
|
)
|
|
(207,560
|
)
|
|||||||
Common stock issued under employee benefit plans
|
—
|
|
|
—
|
|
|
40
|
|
|
—
|
|
|
906
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
906
|
|
|||||||
Common stock issued and stock based compensation expense
|
—
|
|
|
—
|
|
|
2,308
|
|
|
24
|
|
|
56,439
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
56,463
|
|
|||||||
Dividends paid—common stock
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(77,437
|
)
|
|
—
|
|
|
—
|
|
|
(77,437
|
)
|
|||||||
Balance at August 31, 2011
|
—
|
|
|
$
|
—
|
|
|
549,476
|
|
|
$
|
5,495
|
|
|
$
|
3,492,663
|
|
|
$
|
4,763,180
|
|
|
$
|
(19,979
|
)
|
|
$
|
(235,443
|
)
|
|
$
|
8,005,916
|
|
|
For the Nine Months Ended
August 31, |
||||||
|
2011
|
|
2010
|
||||
|
(unaudited)
|
||||||
|
(dollars in thousands)
|
||||||
Cash flows from operating activities
|
|
|
|
||||
Net income
|
$
|
1,714,129
|
|
|
$
|
415,146
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
||||
Provision for loan losses
|
692,763
|
|
|
2,824,035
|
|
||
Deferred income taxes
|
351,854
|
|
|
63,131
|
|
||
Depreciation and amortization on premises and equipment
|
66,274
|
|
|
68,130
|
|
||
Amortization of deferred revenues
|
(191,290
|
)
|
|
(137,492
|
)
|
||
Other depreciation and amortization
|
(35,346
|
)
|
|
57,947
|
|
||
Loss (gain) on investments
|
3,622
|
|
|
(19,131
|
)
|
||
Loss on premises and equipment
|
3,242
|
|
|
1,930
|
|
||
Loss (gain) on loans sold
|
28
|
|
|
(439
|
)
|
||
Stock-based compensation expense
|
33,690
|
|
|
29,554
|
|
||
Gain on purchase of business
|
(15,917
|
)
|
|
—
|
|
||
Net change in loans originated for sale
|
49,719
|
|
|
(118,557
|
)
|
||
Changes in assets and liabilities:
|
|
|
|
||||
Decrease (increase) in other assets
|
32,339
|
|
|
(230,385
|
)
|
||
Increase (decrease) in accrued expenses and other liabilities
|
106,908
|
|
|
(247,107
|
)
|
||
Net cash provided by operating activities
|
2,812,015
|
|
|
2,706,762
|
|
||
Cash flows from investing activities
|
|
|
|
||||
Maturities of other short-term investments
|
375,000
|
|
|
1,350,000
|
|
||
Purchases of other short-term investments
|
—
|
|
|
(375,000
|
)
|
||
Maturities and sales of available-for-sale investment securities
|
786,463
|
|
|
540,526
|
|
||
Purchases of available-for-sale investment securities
|
(1,627,215
|
)
|
|
(1,239,631
|
)
|
||
Maturities of held-to-maturity investment securities
|
17,466
|
|
|
19,779
|
|
||
Purchases of held-to-maturity investment securities
|
(550
|
)
|
|
(549
|
)
|
||
Proceeds from sale of loans held for investment
|
611
|
|
|
—
|
|
||
Net principal disbursed on loans held for investment
|
(3,074,805
|
)
|
|
(2,035,023
|
)
|
||
Purchase of loan receivables
|
(596,163
|
)
|
|
—
|
|
||
Purchase of business, net of cash acquired
|
(401,158
|
)
|
|
—
|
|
||
Purchase of other investment
|
(15,000
|
)
|
|
—
|
|
||
Decrease in restricted cash—special dividend escrow
|
—
|
|
|
643,311
|
|
||
Decrease in restricted cash—for securitization investors
|
623,794
|
|
|
547,064
|
|
||
Proceeds from sale of premises and equipment
|
13
|
|
|
146
|
|
||
Purchases of premises and equipment
|
(70,053
|
)
|
|
(29,538
|
)
|
||
Net cash used for investing activities
|
(3,981,597
|
)
|
|
(578,915
|
)
|
||
Cash flows from financing activities
|
|
|
|
||||
Net increase in short-term borrowings
|
100,000
|
|
|
—
|
|
||
Proceeds from issuance of securitized debt
|
2,500,000
|
|
|
1,000,000
|
|
||
Maturities of securitized debt
|
(5,114,986
|
)
|
|
(8,560,528
|
)
|
||
Proceeds from issuance of other long-term borrowings
|
—
|
|
|
1,003,427
|
|
||
Maturities of other long-term borrowings
|
(345,048
|
)
|
|
(590,676
|
)
|
||
Proceeds from issuance of common stock
|
17,928
|
|
|
—
|
|
||
Purchases of treasury stock
|
(207,560
|
)
|
|
(8,145
|
)
|
||
Net increase in deposits
|
3,147,752
|
|
|
1,177,096
|
|
||
Proceeds from acquisition of deposits
|
—
|
|
|
976,627
|
|
||
Redemption of preferred stock
|
—
|
|
|
(1,224,558
|
)
|
||
Repurchase of warrant
|
—
|
|
|
(172,000
|
)
|
||
Dividend paid to Morgan Stanley
|
—
|
|
|
(775,000
|
)
|
||
Dividends paid on common and preferred stock
|
(69,712
|
)
|
|
(59,455
|
)
|
||
Excess tax benefits related to stock-based compensation
|
—
|
|
|
737
|
|
||
Net cash provided by (used for) financing activities
|
28,374
|
|
|
(7,232,475
|
)
|
||
Net decrease in cash and cash equivalents
|
(1,141,208
|
)
|
|
(5,104,628
|
)
|
||
Cash and cash equivalents, at beginning of period
|
5,098,733
|
|
|
13,020,719
|
|
||
Cash and cash equivalents, at end of period
|
$
|
3,957,525
|
|
|
$
|
7,916,091
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
||||
Cash paid during the period for:
|
|
|
|
||||
Interest expense
|
$
|
1,045,370
|
|
|
$
|
1,125,181
|
|
Income taxes, net of income tax refunds
|
$
|
635,360
|
|
|
$
|
112,027
|
|
Non-cash transactions:
|
|
|
|
||||
Assumption of SLC debt
|
$
|
2,921,372
|
|
|
$
|
—
|
|
Special dividend—Morgan Stanley
|
$
|
—
|
|
|
$
|
33,757
|
|
1.
|
Background and Basis of Presentation
|
2.
|
Business Combinations
|
(1)
|
Based on the final SLC closing balance sheet, the Company accrued a
$35 million
liability, at the end of the first quarter of fiscal 2011, payable to Citibank for post-closing adjustments arising from a
$7 million
increase in the Trust Certificate Purchase Price and a
$28 million
reduction in reimbursable liabilities, which together resulted in the difference between the actual and estimated numbers shown. The accrued amount was paid to Citibank during the second quarter of 2011.
|
3.
|
Investment Securities
|
(1)
|
Amount represents corporate debt obligations issued under the Temporary Liquidity Guarantee Program (TLGP) that are guaranteed by the Federal Deposit Insurance Corporation (FDIC).
|
(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)
|
Included in other debt securities at
August 31, 2011
and
November 30, 2010
are commercial advances of
$2.8 million
and
$7.9 million
respectively related to the Company’s Community Reinvestment Act strategies.
|
(1)
|
Available-for-sale investment securities are reported at fair value.
|
(2)
|
Held-to-maturity investment securities are reported at amortized cost.
|
4.
|
Loan Receivables
|
|
August 31,
2011 |
|
November 30,
2010 |
||||
Loans held for sale
(1)
|
$
|
738,382
|
|
|
$
|
788,101
|
|
Loan portfolio:
|
|
|
|
||||
Credit card loans:
|
|
|
|
||||
Discover card
(2)
|
45,949,224
|
|
|
44,904,267
|
|
||
Discover business card
|
228,449
|
|
|
252,727
|
|
||
Total credit card loans
|
46,177,673
|
|
|
45,156,994
|
|
||
Other consumer loans:
|
|
|
|
||||
Personal loans
|
2,439,330
|
|
|
1,877,633
|
|
||
Private student loans
|
1,828,493
|
|
|
999,322
|
|
||
Other
|
11,790
|
|
|
14,363
|
|
||
Total other consumer loans
|
4,279,613
|
|
|
2,891,318
|
|
||
PCI student loans
(3)
|
2,886,783
|
|
|
—
|
|
||
Total loan portfolio
|
53,344,069
|
|
|
48,048,312
|
|
||
Total loan receivables
|
54,082,451
|
|
|
48,836,413
|
|
||
Allowance for loan losses
|
(2,273,058
|
)
|
|
(3,304,118
|
)
|
||
Net loan receivables
|
$
|
51,809,393
|
|
|
$
|
45,532,295
|
|
(1)
|
Amount represents federal student loans. At
August 31, 2011
and
November 30, 2010
,
$463.9 million
and
$500.2 million
of federal student loan receivables, respectively, were pledged as collateral against a long-term borrowing.
|
(2)
|
Amounts include
$16.9 billion
and
$19.5 billion
of underlying investors’ interest in trust debt at
August 31, 2011
and
November 30, 2010
, respectively, and
$17.0 billion
and
$14.9 billion
in seller’s interest at
August 31, 2011
and
November 30, 2010
, respectively. See Note 5: Credit Card and Student Loan Securitization Activities for further information.
|
(3)
|
Amount includes
$2.9 billion
of loans pledged as collateral against the notes issued from the SLC securitization trusts. See Note 5: Credit Card and Student Loan Securitization Activities. The remaining
$9.9 million
not pledged as collateral represents 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 August 31, 2011
|
|
|
|
|
|
|
|
|
|
||||||||||
Credit card loans:
|
|
|
|
|
|
|
|
|
|
||||||||||
Discover card
(1)
|
$
|
553,174
|
|
|
$
|
561,127
|
|
|
$
|
1,114,301
|
|
|
$
|
498,752
|
|
|
$
|
208,404
|
|
Discover business card
|
2,885
|
|
|
3,929
|
|
|
6,814
|
|
|
3,655
|
|
|
889
|
|
|||||
Total credit card loans
|
556,059
|
|
|
565,056
|
|
|
1,121,115
|
|
|
502,407
|
|
|
209,293
|
|
|||||
Other consumer loans:
|
|
|
|
|
|
|
|
|
|
||||||||||
Personal loans
|
14,170
|
|
|
6,446
|
|
|
20,616
|
|
|
5,814
|
|
|
3,527
|
|
|||||
Private student loans (excluding PCI)
|
12,415
|
|
|
2,150
|
|
|
14,565
|
|
|
2,150
|
|
|
—
|
|
|||||
Other
(3)
|
438
|
|
|
2,199
|
|
|
2,637
|
|
|
—
|
|
|
2,426
|
|
|||||
Total other consumer loans (excluding PCI)
|
27,023
|
|
|
10,795
|
|
|
37,818
|
|
|
7,964
|
|
|
5,953
|
|
|||||
Total loan receivables (excluding PCI)
(3)
|
$
|
583,082
|
|
|
$
|
575,851
|
|
|
$
|
1,158,933
|
|
|
$
|
510,371
|
|
|
$
|
215,246
|
|
At November 30, 2010
|
|
|
|
|
|
|
|
|
|
||||||||||
Total loan receivables
(1)
|
$
|
908,306
|
|
|
$
|
993,618
|
|
|
$
|
1,901,924
|
|
|
$
|
853,757
|
|
|
$
|
325,900
|
|
(1)
|
Consumer credit card loans that are 90 or more days delinquent and accruing interest include
$36.4 million
and
$35 million
of loans accounted for as troubled debt restructurings at
August 31, 2011
and
November 30, 2010
, respectively.
|
(2)
|
The Company estimates that the gross interest income that would have been recorded in accordance with the original terms of these loans was
$10.6 million
and
$35.6 million
for the three months and nine months ended
August 31, 2011
, 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)
|
Amount also excludes federal student loans that are held for sale.
|
Net Charge-Offs:
|
For the Three Months Ended August 31, 2011
|
|
For the Nine Months Ended August 31, 2011
|
||||||||||
|
Net
Charge-offs
|
|
Net Charge-off
Rate
|
|
Net
Charge-offs
|
|
Net Charge-off
Rate
|
||||||
|
|
|
|
|
|
|
|
||||||
Credit card loans:
|
|
|
|
|
|
|
|
||||||
Discover card
|
$
|
436,242
|
|
|
3.84
|
%
|
|
$
|
1,651,311
|
|
|
4.91
|
%
|
Discover business card
|
3,506
|
|
|
6.01
|
%
|
|
14,937
|
|
|
8.26
|
%
|
||
Total credit card loans
|
439,748
|
|
|
3.85
|
%
|
|
1,666,248
|
|
|
4.93
|
%
|
||
Other consumer loans:
|
|
|
|
|
|
|
|
||||||
Personal loans
|
16,000
|
|
|
2.73
|
%
|
|
50,980
|
|
|
3.19
|
%
|
||
Private student loans (excluding PCI)
|
2,618
|
|
|
0.62
|
%
|
|
5,573
|
|
|
0.49
|
%
|
||
Other
|
410
|
|
|
13.41
|
%
|
|
1,022
|
|
|
10.35
|
%
|
||
Total other consumer loans (excluding PCI)
|
19,028
|
|
|
0.98
|
%
|
|
57,575
|
|
|
1.09
|
%
|
||
Net charge-offs as a percentage of total loans (excluding PCI)
|
$
|
458,776
|
|
|
3.63
|
%
|
|
$
|
1,723,823
|
|
|
4.64
|
%
|
Net charge-offs as a percentage of total loans (including PCI)
|
$
|
458,776
|
|
|
3.43
|
%
|
|
$
|
1,723,823
|
|
|
4.41
|
%
|
|
Credit Risk Profile by FICO
Score
|
||
|
660 and Above
|
|
Less than 660
or No Score
|
Discover card
|
79%
|
|
21%
|
Discover business card
|
87%
|
|
13%
|
Private student loans (excluding PCI)
|
95%
|
|
5%
|
Personal loans
|
95%
|
|
5%
|
|
For the Three Months Ended
August 31, |
|
For the Nine Months Ended
August 31, |
||||||||||||
|
2011
|
|
2010
|
|
2011
|
|
2010
|
||||||||
Balance at beginning of period
|
$
|
2,632,320
|
|
|
$
|
3,930,624
|
|
|
$
|
3,304,118
|
|
|
$
|
1,757,899
|
|
Additions:
|
|
|
|
|
|
|
|
||||||||
Addition to allowance related to securitized receivables
(1)
|
—
|
|
|
—
|
|
|
—
|
|
|
2,144,461
|
|
||||
Provision for loan losses
|
99,514
|
|
|
712,565
|
|
|
692,763
|
|
|
2,824,035
|
|
||||
Deductions:
|
|
|
|
|
|
|
|
||||||||
Charge-offs:
|
|
|
|
|
|
|
|
||||||||
Discover card
|
(584,534
|
)
|
|
(982,920
|
)
|
|
(2,085,452
|
)
|
|
(3,203,959
|
)
|
||||
Discover business card
|
(4,416
|
)
|
|
(14,502
|
)
|
|
(17,672
|
)
|
|
(50,190
|
)
|
||||
Total credit card loans
|
(588,950
|
)
|
|
(997,422
|
)
|
|
(2,103,124
|
)
|
|
(3,254,149
|
)
|
||||
Personal loans
|
(16,458
|
)
|
|
(23,836
|
)
|
|
(52,438
|
)
|
|
(70,957
|
)
|
||||
Federal student loans
|
—
|
|
|
(11
|
)
|
|
—
|
|
|
(308
|
)
|
||||
Private student loans
|
(2,663
|
)
|
|
(660
|
)
|
|
(5,646
|
)
|
|
(1,264
|
)
|
||||
Other
|
(411
|
)
|
|
(139
|
)
|
|
(1,025
|
)
|
|
(858
|
)
|
||||
Total other consumer loans
|
(19,532
|
)
|
|
(24,646
|
)
|
|
(59,109
|
)
|
|
(73,387
|
)
|
||||
Total charge-offs
|
(608,482
|
)
|
|
(1,022,068
|
)
|
|
(2,162,233
|
)
|
|
(3,327,536
|
)
|
||||
Recoveries:
|
|
|
|
|
|
|
|
||||||||
Discover card
|
148,292
|
|
|
121,255
|
|
|
434,141
|
|
|
341,337
|
|
||||
Discover business card
|
910
|
|
|
875
|
|
|
2,735
|
|
|
2,516
|
|
||||
Total credit card loans
|
149,202
|
|
|
122,130
|
|
|
436,876
|
|
|
343,853
|
|
||||
Personal loans
|
458
|
|
|
421
|
|
|
1,458
|
|
|
942
|
|
||||
Private student loans
|
45
|
|
|
14
|
|
|
73
|
|
|
22
|
|
||||
Other
|
1
|
|
|
35
|
|
|
3
|
|
|
45
|
|
||||
Total other consumer loans
|
504
|
|
|
470
|
|
|
1,534
|
|
|
1,009
|
|
||||
Total recoveries
|
149,706
|
|
|
122,600
|
|
|
438,410
|
|
|
344,862
|
|
||||
Net charge-offs
|
(458,776
|
)
|
|
(899,468
|
)
|
|
(1,723,823
|
)
|
|
(2,982,674
|
)
|
||||
Balance at end of period
|
$
|
2,273,058
|
|
|
$
|
3,743,721
|
|
|
$
|
2,273,058
|
|
|
$
|
3,743,721
|
|
(1)
|
On December 1, 2009, upon adoption of FASB Statements No. 166 and 167, the Company recorded
$2.1 billion
allowance for loan losses related to newly consolidated and reclassified credit card loan receivables.
|
(1)
|
Beginning in
2011
, net charge-offs of interest and fees include amounts related to other consumer loans. Prior to
2011
such amounts were not included as they were not material.
|
|
Credit Card
|
|
Personal
Loans
|
|
Student
Loans
|
|
Other
Loans
|
|
Total
|
||||||||||
At August 31, 2011
|
|
|
|
|
|
|
|
|
|
||||||||||
Allowance for loans evaluated for impairment as:
|
|
|
|
|
|
|
|
|
|
||||||||||
Collectively evaluated for impairment
(1)
|
$
|
1,963,962
|
|
|
$
|
75,562
|
|
|
$
|
43,406
|
|
|
$
|
220
|
|
|
$
|
2,083,150
|
|
Troubled debt restructurings
(2)
|
189,908
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
189,908
|
|
|||||
Purchased credit-impaired
(3)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|||||
Total allowance for loan losses
|
$
|
2,153,870
|
|
|
$
|
75,562
|
|
|
$
|
43,406
|
|
|
$
|
220
|
|
|
$
|
2,273,058
|
|
Recorded investment in loans evaluated for impairment as:
|
|
|
|
|
|
|
|
|
|
||||||||||
Collectively evaluated for impairment
(1)
|
$
|
44,972,100
|
|
|
$
|
2,439,330
|
|
|
$
|
1,828,493
|
|
|
$
|
11,790
|
|
|
$
|
49,251,713
|
|
Troubled debt restructurings
(2)
|
1,205,573
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,205,573
|
|
|||||
Purchased credit-impaired
(3)
|
—
|
|
|
—
|
|
|
2,886,783
|
|
|
—
|
|
|
2,886,783
|
|
|||||
Total recorded investment
|
$
|
46,177,673
|
|
|
$
|
2,439,330
|
|
|
$
|
4,715,276
|
|
|
$
|
11,790
|
|
|
$
|
53,344,069
|
|
At November 30, 2010
|
|
|
|
|
|
|
|
|
|
||||||||||
Allowance for loans evaluated for impairment as:
|
|
|
|
|
|
|
|
|
|
||||||||||
Collectively evaluated for impairment
(1)
|
$
|
3,095,046
|
|
|
$
|
76,087
|
|
|
$
|
18,569
|
|
|
$
|
574
|
|
|
$
|
3,190,276
|
|
Troubled debt restructurings
(2)
|
113,842
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
113,842
|
|
|||||
Purchased credit-impaired
(3)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|||||
Total allowance for loan losses
|
$
|
3,208,888
|
|
|
$
|
76,087
|
|
|
$
|
18,569
|
|
|
$
|
574
|
|
|
$
|
3,304,118
|
|
Recorded investment in loans evaluated for impairment as:
|
|
|
|
|
|
|
|
|
|
||||||||||
Collectively evaluated for impairment
(1)
|
$
|
44,851,650
|
|
|
$
|
1,877,633
|
|
|
$
|
999,322
|
|
|
$
|
14,363
|
|
|
$
|
47,742,968
|
|
Troubled debt restructurings
(2)
|
305,344
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
305,344
|
|
|||||
Purchased credit-impaired
(3)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|||||
Total recorded investment
|
$
|
45,156,994
|
|
|
$
|
1,877,633
|
|
|
$
|
999,322
|
|
|
$
|
14,363
|
|
|
$
|
48,048,312
|
|
(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 such loans was
$1.0 billion
at
August 31, 2011
. All loans accounted for as troubled debt restructurings have a related allowance for loan losses. In the first quarter
2011
, the Company began accounting for credit card loans modified through temporary hardship and external programs as troubled debt restructurings. The impact on the total allowance for loan losses as a result of this change was not material.
|
(3)
|
Represents loans evaluated for impairment in accordance with ASC 310-30,
Receivables-Loans and Debt Securities Acquired with Deteriorated Credit Quality.
|
(1)
|
In addition to loans modified through permanent workout programs, in the first quarter
2011
, the Company began accounting for credit card loans modified through temporary hardship and external programs as troubled debt restructurings. The impact on the allowance for loan losses as a result of this change was not material.
|
(2)
|
The Company does not separately track interest income on loans in modification programs. Amounts shown are estimated by applying an average interest rate to the average loans in the various modification programs.
|
(3)
|
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.
|
(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.
|
|
For the Three Months Ended
August 31, 2011
|
For the Nine Months Ended
August 31, 2011
|
||||
Balance at beginning of period
|
$
|
1,772
|
|
$
|
—
|
|
Acquisition of The Student Loan Corporation
|
—
|
|
1,776
|
|
||
Accretion into interest income
|
(54
|
)
|
(149
|
)
|
||
Reclassifications from non-accretable difference
|
—
|
|
91
|
|
||
Balance at end of period
|
$
|
1,718
|
|
$
|
1,718
|
|
5.
|
Credit Card and Student Loan Securitization Activities
|
(1)
|
As of November 30, 2010, the full amount was pledged as collateral against a long-term borrowing.
|
(2)
|
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)(2)
|
|
Group excess spread percentage
|
16.92
|
%
|
DiscoverSeries excess spread percentage
|
16.76
|
%
|
(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.
|
(2)
|
Discount Series (DCMT 2009-SD) makes principal collections available for reallocation to other series to cover shortfalls in interest and servicing fees and to reimburse charge-offs. Three-month rolling average excess spread rates reflected the availability of these additional collections.
|
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 this long-term borrowing against changes in fair value attributable to changes in LIBOR. See Note 14: Derivatives and Hedging Activities.
|
(4)
|
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 held for sale at
August 31, 2011
and
November 30, 2010
. Principal and interest payments on the underlying student loans will reduce the balance of the secured borrowing over time, with final maturity in August 2013. However, upon sale of the loans, this loan facility will be repaid.
|
Year
|
Amount
|
||
2011
|
$
|
526,234
|
|
2012
|
3,325,989
|
|
|
2013
|
5,632,873
|
|
|
2014
|
1,989,293
|
|
|
2015
|
599,819
|
|
|
Thereafter
|
5,643,992
|
|
|
Total
|
$
|
17,718,200
|
|
8.
|
Income Taxes
|
9.
|
Earnings Per Share
|
10.
|
Capital Adequacy
|
11.
|
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.
|
12.
|
Litigation
|
13.
|
Fair Value Disclosures
|
(1)
|
There were
no
transfers between Levels 1 and 2 within the fair value hierarchy for the three and nine months ended August 31, 2011 and 2010.
|
For the Three Months Ended August 31, 2010
|
|
Balance at
May 31, 2010
|
|
|
Total Realized
and Unrealized
Gains (Losses)
|
|
Sales
|
|
Net Transfers
Into and/
or Out
of Level 3
|
|
Balance at August 31, 2010
|
|
Change in unrealized gains (losses) related to financial instruments held at
August 31, 2010
|
||||||||||||
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Asset-backed commercial paper notes
|
|
63,732
|
|
|
7,161
|
|
(1)
|
|
(70,893
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
||||||
Equity securities
|
|
17
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
17
|
|
|
—
|
|
|||||||
Available-for-sale investment securities
|
|
$
|
63,749
|
|
|
$
|
7,161
|
|
|
$
|
(70,893
|
)
|
|
$
|
—
|
|
|
$
|
17
|
|
|
—
|
|
For the Nine Months Ended August 31, 2010
|
|
Balance at November 30, 2009
|
|
Derecognition
of assets upon
adoption
of Statement
No. 167
|
|
Total Realized
and Unrealized
Gains (Losses)
|
|
Sales
|
|
Net Transfers
Into and/
or Out
of Level 3
|
|
Balance at August 31, 2010
|
|
Change in unrealized gains (losses) related to financial instruments
held at
August 31, 2010
|
||||||||||||||||
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Certificated retained interest in DCENT
|
|
$
|
2,204,969
|
|
|
$
|
(2,204,969
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
||
Credit card asset-backed securities of other issuers
|
|
381,705
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(381,705
|
)
|
|
—
|
|
|
—
|
|
|||||||||
Asset-backed commercial paper notes
|
|
58,792
|
|
|
—
|
|
|
12,101
|
|
(1
|
)
|
|
(70,893
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|||||||
Equity securities
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
17
|
|
|
17
|
|
|
—
|
|
|||||||||
Available-for-sale investment securities
|
|
$
|
2,645,466
|
|
|
$
|
(2,204,969
|
)
|
|
$
|
12,101
|
|
|
$
|
(70,893
|
)
|
|
$
|
(381,688
|
)
|
|
$
|
17
|
|
|
—
|
|
|||
Cash collateral accounts
|
|
$
|
822,585
|
|
|
$
|
(822,585
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
||
Interest-only strip receivable
|
|
117,579
|
|
|
(117,579
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|||||||||
Amounts due from asset securitization
|
|
$
|
940,164
|
|
|
$
|
(940,164
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
(1)
|
Reflects unrealized pretax gains recorded in other comprehensive income in the condensed consolidated statement of financial condition.
|
14.
|
Derivatives and Hedging Activities
|
(1)
|
The foreign exchange forward contracts have notional amounts of EUR
4 million
and GBP
1.7 million
as of
August 31, 2011
and
November 30, 2010
.
|
15.
|
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, 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 operating 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.
|
For the Nine Months Ended
|
Direct
Banking
|
|
Payment
Services
|
|
Total
|
||||||
August 31, 2011
|
|
|
|
|
|
||||||
Interest income
|
|
|
|
|
|
||||||
Credit card
|
$
|
4,243,803
|
|
|
$
|
—
|
|
|
$
|
4,243,803
|
|
Private student loans
|
229,933
|
|
|
—
|
|
|
229,933
|
|
|||
Personal loans
|
189,525
|
|
|
—
|
|
|
189,525
|
|
|||
Other
|
62,044
|
|
|
29
|
|
|
62,073
|
|
|||
Total interest income
|
4,725,305
|
|
|
29
|
|
|
4,725,334
|
|
|||
Interest expense
|
1,124,597
|
|
|
163
|
|
|
1,124,760
|
|
|||
Net interest income (expense)
|
3,600,708
|
|
|
(134
|
)
|
|
3,600,574
|
|
|||
Provision for loan losses
|
692,763
|
|
|
—
|
|
|
692,763
|
|
|||
Other income
|
1,436,764
|
|
|
221,667
|
|
|
1,658,431
|
|
|||
Other expense
|
1,774,915
|
|
|
97,784
|
|
|
1,872,699
|
|
|||
Income before income tax expense
|
$
|
2,569,794
|
|
|
$
|
123,749
|
|
|
$
|
2,693,543
|
|
August 31, 2010
|
|
|
|
|
|
||||||
Interest income
|
|
|
|
|
|
||||||
Credit card
|
$
|
4,423,654
|
|
|
$
|
—
|
|
|
$
|
4,423,654
|
|
Private student loans
|
33,025
|
|
|
—
|
|
|
33,025
|
|
|||
Personal loans
|
129,832
|
|
|
—
|
|
|
129,832
|
|
|||
Other
|
60,345
|
|
|
15
|
|
|
60,360
|
|
|||
Total interest income
|
4,646,856
|
|
|
15
|
|
|
4,646,871
|
|
|||
Interest expense
|
1,207,322
|
|
|
160
|
|
|
1,207,482
|
|
|||
Net interest income (expense)
|
3,439,534
|
|
|
(145
|
)
|
|
3,439,389
|
|
|||
Provision for loan losses
|
2,824,035
|
|
|
—
|
|
|
2,824,035
|
|
|||
Other income
|
1,423,823
|
|
|
199,041
|
|
|
1,622,864
|
|
|||
Other expense
|
1,465,749
|
|
|
88,841
|
|
|
1,554,590
|
|
|||
Income (loss) before income tax expense
|
$
|
573,573
|
|
|
$
|
110,055
|
|
|
$
|
683,628
|
|
16.
|
Subsequent Events
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
•
|
Net income was $649 million in the third quarter 2011 as compared to $261 million in the third quarter 2010.
|
•
|
Discover card sales volume showed strong year-over-year growth of 9% with $26.3 billion in volume in the quarter.
|
•
|
Credit card loans increased $930 million, or 2%, as compared to the third quarter of 2010 and grew $1.2 billion, or 3%, from second quarter 2011. Total loans increased 8% from the prior year to $54.1 billion.
|
•
|
Credit performance continued to improve in the third quarter of 2011. The delinquency rate for credit card loans over 30 days past due at August 31, 2011 was 2.43% compared to 2.79% at May 31, 2011. Our credit card net charge-off rate declined to 3.85% for the quarter as compared to 5.01% for the second quarter 2011. Additionally, we had a $359 million reduction of our allowance for loan losses during the third quarter of 2011.
|
•
|
Payment Services continues to grow profitably with pretax income of $38 million in the quarter. Transaction volume for the segment was $45 billion in the quarter, an increase of 15% from the same period in the prior year.
|
•
|
We agreed to acquire approximately $2.5 billion of private student loans from Citibank, N.A. ("Citi") for a purchase price equal to 99% of the outstanding aggregate principal and accrued interest balance of the purchased loans through the closing date. The acquisition is expected to close on or around September 30, 2011, subject to customary closing conditions.
|
•
|
We repurchased 8.4 million shares of our common stock in the third quarter for approximately $198 million through our share repurchase program.
|
•
|
We issued $800 million of credit card asset-backed securities in a registered public offering on September 20, 2011 at an interest rate of one-month LIBOR plus 21 basis points and with a maturity of three years.
|
(1)
|
Represents gross proprietary sales volume on the Discover Network.
|
(2)
|
Represents Discover card activity related to net sales, balance transfers, cash advances and fee-based products.
|
(3)
|
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
August 31, |
|
2011 vs. 2010
increase
(decrease)
|
|
For the Nine Months Ended
August 31, |
|
2011 vs. 2010
increase (decrease) |
||||||||||||||||||||||
|
2011
|
|
2010
|
|
$
|
|
%
|
|
2011
|
|
2010
|
|
|
|
|
||||||||||||||
Interest income
|
$
|
1,599,092
|
|
|
$
|
1,535,939
|
|
|
$
|
63,153
|
|
|
4
|
%
|
|
$
|
4,725,334
|
|
|
$
|
4,646,871
|
|
|
$
|
78,463
|
|
|
2
|
%
|
Interest expense
|
362,053
|
|
|
389,137
|
|
|
(27,084
|
)
|
|
(7
|
)%
|
|
1,124,760
|
|
|
1,207,482
|
|
|
(82,722
|
)
|
|
(7
|
)%
|
||||||
Net interest income
|
1,237,039
|
|
|
1,146,802
|
|
|
90,237
|
|
|
8
|
%
|
|
3,600,574
|
|
|
3,439,389
|
|
|
161,185
|
|
|
5
|
%
|
||||||
Provision for loan losses
|
99,514
|
|
|
712,565
|
|
|
(613,051
|
)
|
|
(86
|
)%
|
|
692,763
|
|
|
2,824,035
|
|
|
(2,131,272
|
)
|
|
(76
|
)%
|
||||||
Net interest income after provision for loan losses
|
1,137,525
|
|
|
434,237
|
|
|
703,288
|
|
|
162
|
%
|
|
2,907,811
|
|
|
615,354
|
|
|
2,292,457
|
|
|
NM
|
|
||||||
Other income
|
551,963
|
|
|
564,144
|
|
|
(12,181
|
)
|
|
(2
|
)%
|
|
1,658,431
|
|
|
1,622,864
|
|
|
35,567
|
|
|
2
|
%
|
||||||
Other expense
|
642,407
|
|
|
566,238
|
|
|
76,169
|
|
|
14
|
%
|
|
1,872,699
|
|
|
1,554,590
|
|
|
318,109
|
|
|
21
|
%
|
||||||
Income (loss) before income tax expense
|
1,047,081
|
|
|
432,143
|
|
|
614,938
|
|
|
142
|
%
|
|
2,693,543
|
|
|
683,628
|
|
|
2,009,915
|
|
|
NM
|
|
||||||
Income tax expense
|
398,263
|
|
|
171,526
|
|
|
226,737
|
|
|
132
|
%
|
|
979,414
|
|
|
268,482
|
|
|
710,932
|
|
|
NM
|
|
||||||
Net income
|
$
|
648,818
|
|
|
$
|
260,617
|
|
|
$
|
388,201
|
|
|
149
|
%
|
|
$
|
1,714,129
|
|
|
$
|
415,146
|
|
|
$
|
1,298,983
|
|
|
NM
|
|
•
|
The level and composition of loan receivables, including the proportion of credit card loans to other consumer 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 investment 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; and
|
•
|
The effectiveness of interest rate swaps in our interest rate risk management program.
|
Average Balance Sheet Analysis
|
|||||||||||||||||||||
|
For the Three Months Ended August 31,
|
||||||||||||||||||||
|
2011
|
|
2010
|
||||||||||||||||||
|
Average
Balance
|
|
Rate
|
|
Interest
|
|
Average
Balance
|
|
Rate
|
|
Interest
|
||||||||||
Assets
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Cash and cash equivalents
|
$
|
3,453,928
|
|
|
0.25
|
%
|
|
$
|
2,160
|
|
|
$
|
8,352,952
|
|
|
0.25
|
%
|
|
$
|
5,326
|
|
Restricted cash
|
1,184,566
|
|
|
0.11
|
%
|
|
336
|
|
|
1,062,261
|
|
|
0.20
|
%
|
|
533
|
|
||||
Other short-term investments
|
—
|
|
|
—
|
%
|
|
—
|
|
|
375,000
|
|
|
1.07
|
%
|
|
1,011
|
|
||||
Investment securities
|
5,814,467
|
|
|
1.07
|
%
|
|
15,676
|
|
|
1,196,306
|
|
|
1.85
|
%
|
|
5,574
|
|
||||
Loan receivables
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Credit card
(2)
|
45,343,304
|
|
|
12.46
|
%
|
|
1,423,496
|
|
|
44,905,220
|
|
|
12.86
|
%
|
|
1,455,907
|
|
||||
Personal loans
|
2,321,496
|
|
|
11.97
|
%
|
|
70,052
|
|
|
1,639,319
|
|
|
11.40
|
%
|
|
47,105
|
|
||||
Federal student loans
(3)
|
747,719
|
|
|
1.57
|
%
|
|
2,957
|
|
|
2,253,184
|
|
|
1.38
|
%
|
|
7,832
|
|
||||
Private student loans
|
4,588,400
|
|
|
7.29
|
%
|
|
84,318
|
|
|
838,237
|
|
|
5.81
|
%
|
|
12,266
|
|
||||
Other
|
12,140
|
|
|
3.13
|
%
|
|
97
|
|
|
51,340
|
|
|
2.98
|
%
|
|
385
|
|
||||
Total loan receivables
|
53,013,059
|
|
|
11.83
|
%
|
|
1,580,920
|
|
|
49,687,300
|
|
|
12.16
|
%
|
|
1,523,495
|
|
||||
Total interest-earning assets
|
63,466,020
|
|
|
10.00
|
%
|
|
1,599,092
|
|
|
60,673,819
|
|
|
10.04
|
%
|
|
1,535,939
|
|
||||
Allowance for loan losses
|
(2,490,577
|
)
|
|
|
|
|
|
(3,856,016
|
)
|
|
|
|
|
||||||||
Other assets
|
3,796,491
|
|
|
|
|
|
|
3,973,848
|
|
|
|
|
|
||||||||
Total assets
|
$
|
64,771,934
|
|
|
|
|
|
|
$
|
60,791,651
|
|
|
|
|
|
||||||
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Interest-bearing deposits:
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Time deposits
(4)
|
$
|
24,829,744
|
|
|
3.30
|
%
|
|
206,645
|
|
|
$
|
26,985,136
|
|
|
3.70
|
%
|
|
251,524
|
|
||
Money market deposits
|
4,676,243
|
|
|
1.38
|
%
|
|
16,284
|
|
|
3,936,681
|
|
|
1.52
|
%
|
|
15,105
|
|
||||
Other interest-bearing deposits
|
6,432,652
|
|
|
1.16
|
%
|
|
18,790
|
|
|
3,485,724
|
|
|
1.42
|
%
|
|
12,508
|
|
||||
Total interest-bearing deposits
(5)
|
35,938,639
|
|
|
2.67
|
%
|
|
241,719
|
|
|
34,407,541
|
|
|
3.22
|
%
|
|
279,137
|
|
||||
Borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Short-term borrowings
|
167,804
|
|
|
0.08
|
%
|
|
33
|
|
|
—
|
|
|
—
|
|
|
—
|
|
||||
Securitized borrowings
|
15,624,848
|
|
|
2.05
|
%
|
|
80,573
|
|
|
14,964,828
|
|
|
1.77
|
%
|
|
66,677
|
|
||||
Other long-term borrowings
(4)
|
2,449,670
|
|
|
6.43
|
%
|
|
39,728
|
|
|
2,884,933
|
|
|
5.96
|
%
|
|
43,323
|
|
||||
Total borrowings
|
18,242,322
|
|
|
2.62
|
%
|
|
120,334
|
|
|
17,849,761
|
|
|
2.44
|
%
|
|
110,000
|
|
||||
Total interest-bearing liabilities
|
54,180,961
|
|
|
2.65
|
%
|
|
362,053
|
|
|
52,257,302
|
|
|
2.95
|
%
|
|
389,137
|
|
||||
Other liabilities and stockholders’ equity
|
10,590,973
|
|
|
|
|
|
|
8,534,349
|
|
|
|
|
|
||||||||
Total liabilities and stockholders’ equity
|
$
|
64,771,934
|
|
|
|
|
|
|
$
|
60,791,651
|
|
|
|
|
|
||||||
Net interest income
|
|
|
|
|
$
|
1,237,039
|
|
|
|
|
|
|
$
|
1,146,802
|
|
||||||
Net interest margin
(6)
|
|
|
9.26
|
%
|
|
|
|
|
|
9.16
|
%
|
|
|
||||||||
Net yield on interest-bearing assets
(7)
|
|
|
7.73
|
%
|
|
|
|
|
|
7.50
|
%
|
|
|
||||||||
Interest rate spread
(8)
|
|
|
7.35
|
%
|
|
|
|
|
|
7.09
|
%
|
|
|
|
For the Nine Months Ended August 31,
|
||||||||||||||||||||
|
2011
|
|
2010
|
||||||||||||||||||
|
Average
Balance |
|
Rate
|
|
Interest
|
|
Average
Balance |
|
Rate
|
|
Interest
|
||||||||||
Assets
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Cash and cash equivalents
|
$
|
3,885,023
|
|
|
0.24
|
%
|
|
$
|
7,143
|
|
|
$
|
10,528,297
|
|
|
0.25
|
%
|
|
$
|
20,018
|
|
Restricted cash
|
1,365,770
|
|
|
0.14
|
%
|
|
1,452
|
|
|
2,401,644
|
|
|
0.15
|
%
|
|
2,646
|
|
||||
Other short-term investments
|
203,832
|
|
|
1.07
|
%
|
|
1,639
|
|
|
189,234
|
|
|
0.90
|
%
|
|
1,437
|
|
||||
Investment securities
|
5,469,488
|
|
|
1.04
|
%
|
|
42,535
|
|
|
910,722
|
|
|
2.34
|
%
|
|
15,966
|
|
||||
Loan receivables
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Credit card
(2)
|
45,021,656
|
|
|
12.56
|
%
|
|
4,243,803
|
|
|
45,931,331
|
|
|
12.83
|
%
|
|
4,423,654
|
|
||||
Personal loans
|
2,127,084
|
|
|
11.87
|
%
|
|
189,525
|
|
|
1,526,095
|
|
|
11.33
|
%
|
|
129,831
|
|
||||
Federal student loans
(3)
|
761,580
|
|
|
1.58
|
%
|
|
9,019
|
|
|
2,044,432
|
|
|
1.20
|
%
|
|
18,462
|
|
||||
Private student loans
|
4,156,790
|
|
|
7.37
|
%
|
|
229,933
|
|
|
781,773
|
|
|
5.63
|
%
|
|
33,026
|
|
||||
Other
|
13,169
|
|
|
2.88
|
%
|
|
285
|
|
|
61,488
|
|
|
3.97
|
%
|
|
1,831
|
|
||||
Total loan receivables
|
52,080,279
|
|
|
11.95
|
%
|
|
4,672,565
|
|
|
50,345,119
|
|
|
12.19
|
%
|
|
4,606,804
|
|
||||
Total interest-earning assets
|
63,004,392
|
|
|
9.99
|
%
|
|
4,725,334
|
|
|
64,375,016
|
|
|
9.62
|
%
|
|
4,646,871
|
|
||||
Allowance for loan losses
|
(2,863,500
|
)
|
|
|
|
|
|
(3,967,079
|
)
|
|
|
|
|
||||||||
Other assets
|
3,781,777
|
|
|
|
|
|
|
4,004,750
|
|
|
|
|
|
||||||||
Total assets
|
$
|
63,922,669
|
|
|
|
|
|
|
$
|
64,412,687
|
|
|
|
|
|
||||||
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Interest-bearing deposits:
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Time deposits
(4)
|
$
|
25,102,544
|
|
|
3.46
|
%
|
|
651,594
|
|
|
$
|
27,637,969
|
|
|
3.90
|
%
|
|
808,646
|
|
||
Money market deposits
|
4,511,303
|
|
|
1.40
|
%
|
|
47,490
|
|
|
4,359,380
|
|
|
1.40
|
%
|
|
45,715
|
|
||||
Other interest-bearing deposits
|
5,576,319
|
|
|
1.21
|
%
|
|
50,500
|
|
|
2,593,249
|
|
|
1.47
|
%
|
|
28,560
|
|
||||
Total interest-bearing deposits
(5)
|
35,190,166
|
|
|
2.84
|
%
|
|
749,584
|
|
|
34,590,598
|
|
|
3.40
|
%
|
|
882,921
|
|
||||
Borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Short-term borrowings
|
125,590
|
|
|
0.12
|
%
|
|
116
|
|
|
—
|
|
|
—
|
|
|
—
|
|
||||
Securitized borrowings
|
16,142,231
|
|
|
2.09
|
%
|
|
253,297
|
|
|
17,872,540
|
|
|
1.55
|
%
|
|
207,580
|
|
||||
Other long-term borrowings
(4)
|
2,472,765
|
|
|
6.56
|
%
|
|
121,763
|
|
|
2,705,586
|
|
|
5.76
|
%
|
|
116,981
|
|
||||
Total borrowings
|
18,740,586
|
|
|
2.67
|
%
|
|
375,176
|
|
|
20,578,126
|
|
|
2.10
|
%
|
|
324,561
|
|
||||
Total interest-bearing liabilities
|
53,930,752
|
|
|
2.78
|
%
|
|
1,124,760
|
|
|
55,168,724
|
|
|
2.92
|
%
|
|
1,207,482
|
|
||||
Other liabilities and stockholders’ equity
|
9,991,917
|
|
|
|
|
|
|
9,243,963
|
|
|
|
|
|
||||||||
Total liabilities and stockholders’ equity
|
$
|
63,922,669
|
|
|
|
|
|
|
$
|
64,412,687
|
|
|
|
|
|
||||||
Net interest income
|
|
|
|
|
$
|
3,600,574
|
|
|
|
|
|
|
$
|
3,439,389
|
|
||||||
Net interest margin
(6)
|
|
|
9.21
|
%
|
|
|
|
|
|
9.10
|
%
|
|
|
||||||||
Net yield on interest-bearing assets
(7)
|
|
|
7.61
|
%
|
|
|
|
|
|
7.12
|
%
|
|
|
||||||||
Interest rate spread
(8)
|
|
|
7.21
|
%
|
|
|
|
|
|
6.70
|
%
|
|
|
(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 above.
|
(2)
|
Interest income on credit card loans includes $60.8 million and $170.1 million of amortization of balance transfer fees for the three and nine months ended August 31, 2011, respectively. Interest income on credit card loans includes $41.0 million and $124.2 million of amortization of balance transfer fees for the three and nine months ended August 31, 2010, respectively.
|
(3)
|
Includes federal student loans held for sale.
|
(4)
|
Includes the impact of interest rate swap agreements used to change a portion of fixed-rate funding to floating-rate funding.
|
(5)
|
Includes the impact of FDIC insurance premiums and special assessments.
|
(6)
|
Net interest margin represents net interest income as a percentage of average total loan receivables.
|
(7)
|
Net yield on interest-earning assets represents net interest income as a percentage of average total interest-earning assets.
|
(8)
|
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
August 31, 2011 vs. August 31, 2010
|
|
For the Nine Months Ended
August 31, 2011 vs. August 31, 2010
|
||||||||||||||||||||
|
Volume
|
|
Rate
|
|
Total
|
|
Volume
|
|
Rate
|
|
Total
|
||||||||||||
Increase/(decrease) in net interest income due to changes in:
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Cash and cash equivalents
|
$
|
(3,066
|
)
|
|
$
|
(100
|
)
|
|
$
|
(3,166
|
)
|
|
$
|
(12,235
|
)
|
|
$
|
(640
|
)
|
|
$
|
(12,875
|
)
|
Restricted cash
|
343
|
|
|
(539
|
)
|
|
(196
|
)
|
|
(1,105
|
)
|
|
(88
|
)
|
|
(1,193
|
)
|
||||||
Other short-term investments
|
(505
|
)
|
|
(506
|
)
|
|
(1,011
|
)
|
|
115
|
|
|
87
|
|
|
202
|
|
||||||
Investment securities
|
25,910
|
|
|
(15,808
|
)
|
|
10,102
|
|
|
45,211
|
|
|
(18,642
|
)
|
|
26,569
|
|
||||||
Loan receivables:
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Credit card
|
78,559
|
|
|
(110,970
|
)
|
|
(32,411
|
)
|
|
(86,712
|
)
|
|
(93,139
|
)
|
|
(179,851
|
)
|
||||||
Personal loans
|
20,479
|
|
|
2,468
|
|
|
22,947
|
|
|
53,288
|
|
|
6,405
|
|
|
59,693
|
|
||||||
Federal student loans
|
(11,144
|
)
|
|
6,269
|
|
|
(4,875
|
)
|
|
(16,550
|
)
|
|
7,108
|
|
|
(9,442
|
)
|
||||||
Private student loans
|
68,155
|
|
|
3,897
|
|
|
72,052
|
|
|
183,740
|
|
|
13,167
|
|
|
196,907
|
|
||||||
Other
|
(419
|
)
|
|
130
|
|
|
(289
|
)
|
|
(1,145
|
)
|
|
(401
|
)
|
|
(1,546
|
)
|
||||||
Total loan receivables
|
155,630
|
|
|
(98,206
|
)
|
|
57,424
|
|
|
132,621
|
|
|
(66,860
|
)
|
|
65,761
|
|
||||||
Total interest income
|
178,312
|
|
|
(115,159
|
)
|
|
63,153
|
|
|
164,607
|
|
|
(86,143
|
)
|
|
78,464
|
|
||||||
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Interest-bearing deposits:
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Time deposits
|
(19,171
|
)
|
|
(25,708
|
)
|
|
(44,879
|
)
|
|
(70,429
|
)
|
|
(86,623
|
)
|
|
(157,052
|
)
|
||||||
Money market deposits
|
8,216
|
|
|
(7,037
|
)
|
|
1,179
|
|
|
1,599
|
|
|
176
|
|
|
1,775
|
|
||||||
Other interest-bearing deposits
|
20,278
|
|
|
(13,996
|
)
|
|
6,282
|
|
|
30,716
|
|
|
(8,775
|
)
|
|
21,941
|
|
||||||
Total interest-bearing deposits
|
9,323
|
|
|
(46,741
|
)
|
|
(37,418
|
)
|
|
(38,114
|
)
|
|
(95,222
|
)
|
|
(133,336
|
)
|
||||||
Borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Short-term borrowings
|
33
|
|
|
—
|
|
|
33
|
|
|
116
|
|
|
—
|
|
|
116
|
|
||||||
Securitized borrowings
|
3,042
|
|
|
10,854
|
|
|
13,896
|
|
|
(32,085
|
)
|
|
77,802
|
|
|
45,717
|
|
||||||
Other long-term borrowings
|
(20,315
|
)
|
|
16,720
|
|
|
(3,595
|
)
|
|
(14,730
|
)
|
|
19,512
|
|
|
4,782
|
|
||||||
Total borrowings
|
(17,240
|
)
|
|
27,574
|
|
|
10,334
|
|
|
(46,699
|
)
|
|
97,314
|
|
|
50,615
|
|
||||||
Total interest expense
|
(7,917
|
)
|
|
(19,167
|
)
|
|
(27,084
|
)
|
|
(84,813
|
)
|
|
2,092
|
|
|
(82,721
|
)
|
||||||
Net interest income
|
$
|
186,229
|
|
|
$
|
(95,992
|
)
|
|
$
|
90,237
|
|
|
$
|
249,420
|
|
|
$
|
(88,235
|
)
|
|
$
|
161,185
|
|
(1)
|
The rate/volume variance for each category has been allocated on a consistent basis between rate and volume variances between August 31, 2011 and August 31, 2010 based on the percentage of the rate or volume variance to the sum of the two absolute variances.
|
|
August 31,
2011 |
|
November 30,
2010 |
||||
Loans held for sale
|
$
|
738,382
|
|
|
$
|
788,101
|
|
Loan portfolio:
|
|
|
|
||||
Credit card loans:
|
|
|
|
||||
Discover card
|
45,949,224
|
|
|
44,904,267
|
|
||
Discover business card
|
228,449
|
|
|
252,727
|
|
||
Total credit card loans
|
46,177,673
|
|
|
45,156,994
|
|
||
Other consumer loans:
|
|
|
|
||||
Personal loans
|
2,439,330
|
|
|
1,877,633
|
|
||
Private student loans
|
1,828,493
|
|
|
999,322
|
|
||
Other
|
11,790
|
|
|
14,363
|
|
||
Total other consumer loans
|
4,279,613
|
|
|
2,891,318
|
|
||
PCI student loans
(1)
|
2,886,783
|
|
|
—
|
|
||
Total loan portfolio
|
53,344,069
|
|
|
48,048,312
|
|
||
Total loan receivables
|
54,082,451
|
|
|
48,836,413
|
|
||
Allowance for loan losses
|
(2,273,058
|
)
|
|
(3,304,118
|
)
|
||
Net loan receivables
|
$
|
51,809,393
|
|
|
$
|
45,532,295
|
|
(1)
|
Represents purchased credit-impaired private student loans acquired from SLC on December 31, 2010 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)
|
On December 1, 2009, upon adoption of the Financial Accounting Standards Board (“FASB”) Statements No. 166 and 167, the Company recorded $2.1 billion allowance for loan losses related to newly consolidated and reclassified credit card loan receivables.
|
(1)
|
Charge-offs for PCI loans did not result in a charge to earnings during 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 (dollars in thousands):
|
|||||||||||||
|
August 31,
2011 |
|
November 30,
2010 |
||||||||||
|
$
|
|
%
|
|
$
|
|
%
|
||||||
Loans 30 days delinquent or more:
|
|
|
|
|
|
|
|
||||||
Credit card loans
|
$
|
1,121,115
|
|
|
2.43
|
%
|
|
$
|
1,831,119
|
|
|
4.06
|
%
|
Personal loans
|
$
|
20,616
|
|
|
0.85
|
%
|
|
$
|
29,486
|
|
|
1.57
|
%
|
Private student loans (excluding PCI
(1)
)
|
$
|
14,565
|
|
|
0.80
|
%
|
|
$
|
5,030
|
|
|
0.50
|
%
|
|
|
|
|
|
|
|
|
||||||
Loans 90 days delinquent or more:
|
|
|
|
|
|
|
|
||||||
Credit card loans
|
$
|
565,056
|
|
|
1.22
|
%
|
|
$
|
958,216
|
|
|
2.12
|
%
|
Personal loans
|
$
|
6,446
|
|
|
0.26
|
%
|
|
$
|
10,670
|
|
|
0.57
|
%
|
Private student loans (excluding PCI
(1)
)
|
$
|
2,150
|
|
|
0.12
|
%
|
|
$
|
1,408
|
|
|
0.14
|
%
|
(1)
|
Excludes PCI loans that were acquired as part of the SLC transaction 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.
|
|
For the Three Months Ended
August 31, |
|
2011 vs. 2010
increase
(decrease)
|
|
For the Nine Months Ended
August 31, |
|
2011 vs. 2010
increase
(decrease)
|
||||||||||||||||||||||
2011
|
|
2010
|
|
$
|
|
%
|
|
2011
|
|
2010
|
|
$
|
|
%
|
|||||||||||||||
Discount and interchange revenue
(1)
|
$
|
282,889
|
|
|
$
|
273,932
|
|
|
$
|
8,957
|
|
|
3
|
%
|
|
$
|
809,631
|
|
|
$
|
805,209
|
|
|
$
|
4,422
|
|
|
1
|
%
|
Fee products
|
107,858
|
|
|
104,132
|
|
|
3,726
|
|
|
4
|
%
|
|
321,527
|
|
|
309,590
|
|
|
11,937
|
|
|
4
|
%
|
||||||
Loan fee income
|
84,243
|
|
|
92,465
|
|
|
(8,222
|
)
|
|
(9
|
)%
|
|
250,596
|
|
|
267,483
|
|
|
(16,887
|
)
|
|
(6
|
)%
|
||||||
Transaction processing revenue
|
43,931
|
|
|
40,184
|
|
|
3,747
|
|
|
9
|
%
|
|
131,792
|
|
|
109,570
|
|
|
22,222
|
|
|
20
|
%
|
||||||
Merchant fees
|
4,110
|
|
|
7,220
|
|
|
(3,110
|
)
|
|
(43
|
)%
|
|
12,981
|
|
|
23,091
|
|
|
(10,110
|
)
|
|
(44
|
)%
|
||||||
(Loss) gain on investments
|
(3,614
|
)
|
|
18,951
|
|
|
(22,565
|
)
|
|
(119
|
)%
|
|
(3,622
|
)
|
|
19,131
|
|
|
(22,753
|
)
|
|
(119
|
)%
|
||||||
Other income
|
32,546
|
|
|
27,260
|
|
|
5,286
|
|
|
19
|
%
|
|
135,526
|
|
|
88,790
|
|
|
46,736
|
|
|
53
|
%
|
||||||
Total other income
|
$
|
551,963
|
|
|
$
|
564,144
|
|
|
$
|
(12,181
|
)
|
|
(2
|
)%
|
|
$
|
1,658,431
|
|
|
$
|
1,622,864
|
|
|
$
|
35,567
|
|
|
2
|
%
|
(1)
|
Net of rewards, including
Cashback Bonus
rewards, of $234 million and $194 million for the three months ended
August 31, 2011
and
2010
, respectively, and $664 million and $535 million for the nine months ended
August 31, 2011
and
2010
, respectively.
|
|
For the Three Months Ended
August 31, |
|
2011 vs. 2010
increase
(decrease)
|
|
For the Nine Months Ended
August 31, |
|
2011 vs. 2010
increase
(decrease)
|
||||||||||||||||||||||
|
2011
|
|
2010
|
|
$
|
|
%
|
|
2011
|
|
2010
|
|
$
|
|
%
|
||||||||||||||
Employee compensation and benefits
|
$
|
241,881
|
|
|
$
|
204,210
|
|
|
$
|
37,671
|
|
|
18
|
%
|
|
$
|
684,782
|
|
|
$
|
602,510
|
|
|
$
|
82,272
|
|
|
14
|
%
|
Marketing and business development
|
133,398
|
|
|
130,532
|
|
|
2,866
|
|
|
2
|
%
|
|
393,244
|
|
|
313,175
|
|
|
80,069
|
|
|
26
|
%
|
||||||
Information processing and communications
|
63,547
|
|
|
62,357
|
|
|
1,190
|
|
|
2
|
%
|
|
194,852
|
|
|
190,862
|
|
|
3,990
|
|
|
2
|
%
|
||||||
Professional fees
|
106,042
|
|
|
85,289
|
|
|
20,753
|
|
|
24
|
%
|
|
301,122
|
|
|
239,169
|
|
|
61,953
|
|
|
26
|
%
|
||||||
Premises and equipment
|
18,063
|
|
|
17,722
|
|
|
341
|
|
|
2
|
%
|
|
53,268
|
|
|
53,273
|
|
|
(5
|
)
|
|
—
|
%
|
||||||
Other expense
|
79,476
|
|
|
66,128
|
|
|
13,348
|
|
|
20
|
%
|
|
245,431
|
|
|
155,601
|
|
|
89,830
|
|
|
58
|
%
|
||||||
Total other expense
|
$
|
642,407
|
|
|
$
|
566,238
|
|
|
$
|
76,169
|
|
|
14
|
%
|
|
$
|
1,872,699
|
|
|
$
|
1,554,590
|
|
|
$
|
318,109
|
|
|
21
|
%
|
|
Total
|
|
Three Months
or Less
|
|
Over Three
Months
Through Six
Months
|
|
Over Six
Months
Through
Twelve
Months
|
|
Over Twelve
Months
|
||||||||||
Certificates of deposit in amounts less than $100,000
(1)
|
$
|
19,524,679
|
|
|
$
|
1,873,291
|
|
|
$
|
2,115,900
|
|
|
$
|
4,835,014
|
|
|
$
|
10,700,474
|
|
Certificates of deposit in amounts of $100,000 to less than $250,000
(1)
|
4,999,091
|
|
|
605,042
|
|
|
729,184
|
|
|
1,288,124
|
|
|
2,376,741
|
|
|||||
Certificates of deposit in amounts of $250,000
(1)
or greater
|
1,148,445
|
|
|
172,498
|
|
|
218,013
|
|
|
286,318
|
|
|
471,616
|
|
|||||
Savings deposits, including money market deposit accounts
|
11,797,822
|
|
|
11,797,822
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|||||
Total interest-bearing deposits
|
$
|
37,470,037
|
|
|
$
|
14,448,653
|
|
|
$
|
3,063,097
|
|
|
$
|
6,409,456
|
|
|
$
|
13,548,831
|
|
(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
|
$
|
12,619,715
|
|
|
$
|
3,852,305
|
|
|
$
|
7,167,952
|
|
|
$
|
599,639
|
|
|
$
|
999,819
|
|
|
For the three months ended,
August 31, 2011
|
|
For the nine months ended,
August 31, 2011
|
|
||
|
Maximum Daily Balance During the Period
|
Maximum Daily Balance During the Period
|
||||
Overnight Federal Funds purchased
|
$
|
265,000
|
|
$
|
265,000
|
|
Overnight repurchase agreements
|
—
|
|
48,188
|
|
(1)
|
An “sf” in the rating denotes an identification for structured finance product ratings that was implemented for these products by the rating agencies as of September 2010.
|
(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 $302 million and $1.5 billion of investments accounted for in the liquidity investment portfolio that were pledged to the Federal Reserve as of August 31, 2011 and November 30, 2010, 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)
|
||||||
June 1- 30, 2011
|
|
|
|
|
|
|
|
||||||
Repurchase program
(1)
|
55,330
|
|
|
$
|
25.68
|
|
|
55,330
|
|
|
$
|
998,579,341
|
|
Employee transactions
(2)
|
—
|
|
|
$
|
—
|
|
|
N/A
|
|
N/A
|
|||
July 1 - 31, 2011
|
|
|
|
|
|
|
|
||||||
Repurchase program
(1)
|
716,784
|
|
|
$
|
25.62
|
|
|
716,784
|
|
|
$
|
980,214,629
|
|
Employee transactions
(2)
|
161,511
|
|
|
$
|
26.55
|
|
|
N/A
|
|
N/A
|
|||
August 1 - 31, 2011
|
|
|
|
|
|
|
|
||||||
Repurchase program
(1)
|
7,614,731
|
|
|
$
|
23.36
|
|
|
7,614,731
|
|
|
$
|
802,325,809
|
|
Employee transactions
(2)
|
8,784
|
|
|
$
|
23.24
|
|
|
N/A
|
|
N/A
|
|||
|
|
|
|
|
|
|
|
||||||
Total
|
|
|
|
|
|
|
|
||||||
Repurchase program
(1)
|
8,386,845
|
|
|
$
|
23.57
|
|
|
8,386,845
|
|
|
$
|
802,325,809
|
|
Employee transactions
(2)
|
170,295
|
|
|
$
|
27.11
|
|
|
N/A
|
|
N/A
|
Item 3.
|
Defaults Upon Senior Securities
|
Item 4.
|
(Removed and Reserved)
|
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
|
|
|
|
10.1
|
|
Third Amendment to the Discover Financial Services Change in Control Severance Policy, effective as of August 1, 2011 (filed as Exhibit 10.3 to Discover Financial Services' Quarterly Report on Form 10-Q for the quarter ended May 31, 2011 and incorporated herein by reference thereto).
|
|
|
|
10.2
|
|
Asset Purchase Agreement between Discover Bank and Citibank, N.A. dated August 31, 2011.
|
10.3
|
|
Amendment No. 3 to Discover Financial Services Employee Stock Purchase Plan.
|
|
|
|
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.
|
|
|
Page
|
ARTICLE I
|
||
DEFINITIONS, ACCOUNTING TERMS AND INTERPRETATIONS
|
||
|
|
|
Section 1.1
|
Defined Terms
|
|
Section 1.2
|
Computations of Time Periods
|
|
Section 1.3
|
Accounting Terms and Principles
|
|
Section 1.4
|
Certain Terms
|
|
|
|
|
ARTICLE II
|
||
PURCHASE AND SALE
|
||
|
|
|
Section 2.1
|
Purchase and Sale of the Aquired Assets
|
|
Section 2.2
|
Intent and Characterization
|
|
|
|
|
ARTICLE III
|
||
REPRESENTATIONS AND WARRANTIES
|
||
|
|
|
Section 3.1
|
Representations and Warranties of each Party
|
|
Section 3.2
|
Additional Representations and Warranties of the Seller
|
|
Section 3.3
|
Additional Representations and Warranties of the Buyer
|
|
|
|
|
ARTICLE IV
|
||
CLOSING
|
||
|
|
|
Section 4.1
|
Closing
|
|
|
|
|
ARTICLE V
|
||
CONDITIONAL PRECEDENT
|
||
|
|
|
Section 5.1
|
Conditions to the Obligations of the Buyer
|
|
Section 5.2
|
Conditions to the Obligations of the Seller
|
|
Section 5.3
|
Closing Documents
|
|
|
|
|
ARTICLE VI
|
||
COVENANTS
|
||
|
|
|
Section 6.1
|
No Public Announcements
|
|
Section 6.2
|
Conduct of Business
|
|
Section 6.3
|
Seller Actions
|
Section 6.4
|
Tax Matters
|
|
Section 6.5
|
Exclusivity
|
|
Section 6.6
|
Notification of Certain Matters
|
|
Section 6.7
|
Appropriate Action
|
|
Section 6.8
|
Further Assurances
|
|
Section 6.9
|
Right of First Offer
|
|
Section 6.10
|
Confidential Information
|
|
Section 6.11
|
Nonpublic Personal Inforamtion
|
|
Section 6.12
|
Access to Information
|
|
Section 6.13
|
Borrower Communications
|
|
|
|
|
ARTICLE VII
|
||
INDEMNIFICATION
|
||
|
|
|
Section 7.1
|
Liability of the Buyer and the Seller; Indemnities
|
|
Section 7.2
|
Remedies Exclusive
|
|
Section 7.3
|
Mitigation
|
|
|
|
|
ARTICLE VIII
|
||
TERMINATION, AMENDMENT AND WAIVER
|
||
|
|
|
Section 8.1
|
Termination
|
|
Section 8.2
|
Effect of Termination
|
|
Section 8.3
|
Amendment
|
|
Section 8.4
|
Waiver
|
|
Section 8.5
|
Survival
|
|
|
|
|
ARTICLE IX
|
||
MISCELLANEOUS
|
||
|
|
|
Section 9.1
|
Assignments
|
|
Section 9.2
|
Costs and Expenses
|
|
Section 9.3
|
Relationship of Parties
|
|
Section 9.4
|
Notices, Etc.
|
|
Section 9.5
|
Governing Law
|
|
Section 9.6
|
Entire Agreement; No Third Party Beneficiaries
|
|
Section 9.7
|
Submission to Jurisdiction; Service of Process
|
|
Section 9.8
|
Waiver of Jury Trial
|
|
Section 9.9
|
Severability
|
|
Section 9.10
|
Article and Section Titles
|
|
Section 9.11
|
Execution in Counterparts
|
|
|
|
|
|
|
|
(a)
|
The terms “herein,” “hereof,” “hereto” and “hereunder” and similar terms refer to this Agreement as a whole and not to any particular Article, Section, subsection or clause in this
Agreement.
|
(b)
|
Unless otherwise expressly indicated herein, (i) references in this Agreement to an Appendix, Article, Section, clause or sub-clause refer to the appropriate Appendix, Article, Section, clause or sub-clause in or to this Agreement and (ii) the words “above” and “below,” when following a reference to a clause or a sub-clause of this Agreement, refer to a clause or sub-clause within, respectively, the same Section or clause.
|
(c)
|
The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter genders of such term.
|
(d)
|
References in this Agreement to any statute shall be to such statute as amended or modified from time to time and to any successor legislation thereto, in each case as in effect at the time any such reference is operative.
|
(e)
|
The term “including” when used in this Agreement means “including without limitation” except when used in the computation of time periods.
|
(f)
|
The terms “Seller” and “Buyer” include their respective permitted successors and assigns hereunder.
|
(g)
|
References in this Agreement (including in Appendix A) to another agreement, instrument or other document means such agreement, instrument or other document as the same may be amended, supplemented or otherwise modified from time to time in accordance with the terms
|
(h)
|
In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties hereto and no presumption or burden of proof shall arise favoring or disfavoring either Party by virtue of the authorship of any of the provisions of this Agreement.
|
(a)
|
On the terms and subject to the satisfaction of the conditions set forth in this Agreement, including the conditions precedent set forth in
Article V
, and in reliance on the representations, warranties, covenants and agreements set forth in this Agreement, the Seller agrees to sell, transfer, assign and grant to the Buyer, and the Buyer agrees to purchase, on the Closing Date without recourse to the Seller and without representations or warranties (except as specifically set forth herein), all of the Seller’s right, title and interest in, to and under (i) the Loans that are identified on the Loan Transmittal Summary Form (the “
Purchased Loans
”) and all obligations with respect thereto, (ii) all principal, interest, fees and other payments and reimbursements of principal and interest with respect to the Purchased Loans (collectively, “Collections”) received or deemed to have been received, in each case, after the Closing Date, whether accruing before, on or after the Closing Date), (iii) all other claims, rights and remedies (including pursuant to any Proceeding) as against the Borrowers of the Purchased Loans, (iv) the Loan Files related to the Purchased Loans including the Notes evidencing the Purchased Loans, (v) subject to
Section 6.11(b)
, all Nonpublic Personal Information related to the Purchased Loans, (vi) all documents, books, records and other information maintained by or on behalf of the Seller with respect to the Purchased Loans, (vii) all insurance policies. risk sharing agreements and other agreements or arrangements supporting or securing payment of the Purchased Loans, and (viii) all proceeds of the property referenced in
clauses (i)
through
(vii)
above (collectively, the “
Acquired Assets
”), in consideration of the payment of the Estimated Purchase Price to the Seller in the manner provided in
Section 2.1(b)
and subsequently adjusted pursuant to Section 2.1(e). The Estimated Purchase Price will be based upon the Estimated Schedule of Purchased Loans determined as of the Measuring Date and will be adjusted after the Closing Date pursuant to
Section 2.1(e)
based upon the Schedule of Purchased Loans.
|
(b)
|
Delivery or transfer of the Acquired Assets shall be made on the Closing Date. On the Closing Date, the Buyer shall pay or cause to be paid to the Seller the Estimated Purchase Price by wire transfer of immediately available funds in U.S. dollars to the account specified by the Seller to the Buyer by written notice at least two (2) Business Days prior to the Closing Date.
|
(c)
|
Upon receipt of (i) evidence of the payment of the Estimated Purchase Price and (ii) a fully executed Bill of Sale, Assignment and Assumption Agreement, the Seller shall cause the
|
(d)
|
The sale and purchase of the Acquired Assets on the Closing Date shall be consummated upon (i) the payment by the Buyer to the Seller of the Estimated Purchase Price in the manner provided in
Section 2.1(b)
and (ii) the execution and delivery by the Seller and the Buyer of the Bill of Sale, Assignment and Assumption Agreement. Upon the satisfaction of such conditions, such sale and purchase shall be effective as of 11:59 p.m. (New York City time) on the Closing Date.
|
(e)
|
Within sixty (60) days after the Closing Date, the Buyer shall provide the Seller with the Schedule of Purchased Loans and shall calculate the Purchase Price based upon the Schedule of Purchased Loans, subject to the Seller timely providing any information reasonably requested by the Buyer to prepare the Schedule of Purchased Loans. The Seller shall have fifteen (15) Business Days after delivery of the Schedule of Purchased Loans and Purchase Price calculation to review and comment on the Schedule of Purchased Loans and the Purchase Price calculation. During this period the Seller and the Buyer (to the extent available to it) will provide information relating to the Schedule of Purchased Loans and calculation of the Purchase Price as reasonably requested by the other, and the Buyer will meet with the Seller to discuss this information and the calculations. If during this fifteen (15) Business Day period the Seller does not notify the Buyer that it disagrees with the Buyer’s Purchase Price calculation, then the Buyer’s calculation will be final and binding on the Buyer and the Seller as of the end of such fifteen (15) Business Day period. If during this fifteen (15) Business Day period the Seller notifies the Buyer that the Seller disagrees with the Buyer’s calculation, the Buyer and the Seller will meet to attempt to resolve any differences. If they are unable to agree on the adjustments within the next thirty (30) days, then the Buyer and the Seller will be free to pursue an additional review by jointly selecting an independent accounting firm to review the calculations and make a determination as to the Purchase Price. If the Seller and the Buyer are unable to agree on an accounting firm, then they will apply to the American Arbitration Association to make the selection. (The independent accounting firm selected pursuant to this
Section 2.1(e)
is referred to herein as the “
Arbitration Firm
”). The Arbitration Firm will be instructed to complete its review within twenty (20) days and to calculate the Purchase Price in accordance with this
Section 2.1
. The decision of the Arbitration Firm will be final and binding on the Buyer and the Seller.
|
(f)
|
If the Purchase Price as finally determined pursuant to
Section 2.1(e)
exceeds the Estimated Purchase Price, then the Buyer shall pay the Seller the amount of such excess no later than fifteen (15) Business Days after the date of final determination pursuant to
Section 2.1(e)
by wire transfer of immediately available funds in U.S. dollars to the account specified by the Seller to the Buyer by written notice at least two (2) Business Days prior to such payment. If the Purchase Price as finally determined pursuant to
Section 2.1(e)
is less than the Estimated Purchase Price, then the Seller shall refund to the Buyer the amount of such difference within
|
(g)
|
After the Closing Date, the Seller shall promptly (and in any event within two (2) Business days after receipt and identification thereof) remit or credit, or cause to be remitted or credited, to the Buyer all funds received by the Seller that constitute Collections received after the Closing Date with respect to any Purchased Loans.
|
(h)
|
The Buyer will be responsible for the expense of any notices sent to the applicable Borrowers regarding the purchase and sale of the Loans;
provided
that the Seller shall cooperate with all reasonable requests by the Buyer to accurately and timely deliver all such notifications. Such notices shall be in form and substance and in accordance with timing mutually agreed upon by both parties.
|
(q)
|
The Seller and the Buyer intend that the transfer and assignment of the Acquired Assets pursuant to this Agreement and the Bill of Sale, Assignment and Assumption Agreement constitute a valid sale of the Acquired Assets from the Seller to the Buyer, conveying good title to the Acquired Assets free and clear of any Lien, and the beneficial interest in and title to the Acquired Assets shall not be part of the Seller’s estate in the event of the bankruptcy of the Seller or the appointment of a receiver or conservator with respect to the Seller. The Seller and the Buyer intend and agree to treat the transfer and assignment of the Acquired Assets as an absolute transfer for Tax, financial and accounting purposes, and as an absolute and complete conveyance of title for property Law purposes.
|
(r)
|
In the event (but only in the event) that the conveyance of the Acquired Assets is characterized by a court or other Governmental Authority as security for a loan rather than a sale, the Seller will be deemed to have granted to the Buyer, and the Seller hereby grants to the Buyer, a security interest in all of its right, title and interest in, to and under the Acquired Assets as security for a loan in the amount of the Purchase Price.
|
(a)
|
Organization; Power
. Such Party is duly organized or formed, validly existing and in good standing under the Laws of the jurisdiction of its organization or formation, has all requisite corporate or similar power and authority to carry on its business as now conducted and to
|
(b)
|
Authorization; Enforceability; Due Execution and Delivery
. Such Party has all necessary corporate or similar power and authority to execute and deliver the Transaction Documents to which it is a party, to perform its obligations thereunder and to consummate the Transaction contemplated thereby. The execution and delivery by such Party of the Transaction Documents to which it is a party and the consummation by such Party of the Transaction contemplated thereby have been duly and validly authorized by all necessary corporate or similar action of such Party, and no other proceedings on the part of such Party are necessary to authorize the execution and delivery of the Transaction Documents or to consummate the Transaction contemplated thereby. The Transaction Documents to which such Party is a party have been (or at the time of the Closing, will be) duly and validly executed and delivered by such Party and, assuming the due authorization, execution and delivery of each other party thereto, the Transaction Documents to which it is a party each constitutes a legal, valid and binding obligation of such Party, enforceable against such Party in accordance with its terms (except as such enforceability may be limited by bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and other similar Laws of general applicability relating to or affecting creditor’s rights, and to general equitable principles, regardless of whether considered in a proceeding in equity or at law).
|
(c)
|
Government and Third Party Approvals; No Conflicts
. Except as would not reasonably be expected to have a material adverse effect on such Party’s ability to timely perform its material obligations under the Transaction Documents to which it is a party, the execution and delivery of the Transaction Documents to which such Party is a party by such Party and the consummation of the Transaction contemplated thereby do not and will not (i) require any consent, approval, registration or filing with any Governmental Authority or any other third party by such Party except for those that have been obtained and are in full force and effect, (ii) violate any Law, the certificate of incorporation, the articles of association or by-laws or other organizational documents of such Party or its Subsidiaries or any Order applicable to such Party, (iii) violate, conflict with or result in a default under any indenture, agreement or other instrument binding upon such Party or its Subsidiaries or assets or give rise to a right thereunder to require any payment by such Party or its Subsidiaries or (iv) result in any Lien on any assets of such Party or its Subsidiaries.
|
(d)
|
Litigation
. There is no Proceeding by or before any arbitrator or Governmental Authority pending or, to the knowledge of such Party, threatened, against such Party or its Subsidiaries, and there is no Order, before any arbitrator or Governmental Authority, in each case, as to which there is a reasonable possibility of an adverse determination that would reasonably be expected to have a material adverse effect on such Party’s ability to timely perform its material obligations under any Transaction Documents to which it is a party.
|
(e)
|
Compliance with Law
. Such Party and each of its Subsidiaries is in compliance with all
|
(g)
|
Investment Company Act Status
. Such Party is not an investment company as defined in, or subject to regulation under, the U.S. Investment Company Act of 1940.
|
(a)
|
Representations and Warranties regarding the Acquired Assets
. The Seller affirms each of its representations and warranties set forth in
Appendix B
and as of the Closing Date affirms the accuracy of the information provided in the Bill of Sale, Assignment and Assumption Agreement, including the information in the Loan Transmittal Summary Form. The Seller affirms the accuracy of the information in the Estimated Schedule of Purchased Loans as of the date specified therein.
|
(b)
|
Compliance with Laws with respect to Origination of Loans
. With respect to each state or jurisdiction therein in which the Seller or any of its Affiliates undertakes origination activities of Loans, the Seller or such Affiliate is and has been in compliance in all material respects with such state’s or jurisdiction’s (as applicable) Laws, settlement agreements and other standards and procedures, including those promulgated by agencies or officers thereof, applicable to it and pertaining to the conduct of participants in the student loan industry, including any applicable voluntary code of conduct, to the extent the Seller or any such Affiliate has assented thereto.
|
(c)
|
Compliance with Laws with respect to the Purchased Loans Generally
. Neither the Seller nor any of its Affiliates, nor any of their respective Representatives is or has been in violation in any respect of any Law or Order applicable to the Purchased Loans, including all Laws applicable to the marketing, origination, ownership, sale, servicing and collection of the Purchased Loans and the Seller’s business, except for such violation that has not had and would not have, individually or in the aggregate, a Seller Material Adverse Effect. The servicing and collection practices used by the Seller and its Affiliates with respect to the Purchased Loans are and have been compliant with all applicable Laws and have met customary standards and practices utilized by similar student lenders in their servicing businesses, except for such non-compliance that has not had and would not have, individually or in the aggregate, a Seller Material Adverse Effect.
|
(d)
|
Data Processing Systems
. All automated data processing systems used by or on behalf of the Seller comply and have complied in all material respects with all applicable Law governing loan origination or servicing, including, the Gramm-Leach-Bliley Act of 1999 restrictions, information reporting requirements of the Internal Revenue Service and credit bureau report format requirements of the Consumer Data Industry Association and applicable state Law
|
(e)
|
Seller Information
. The Seller is a national banking association.
|
(f)
|
Borrower Incentive Programs
. Since December 31, 2010, none of the Seller, its Affiliates or their respective Representatives have offered Borrowers of any Purchased Loans any borrower incentive programs not (A) required by Law or (B) put into effect with respect to the related Purchased Loans on or prior to December 31, 2010.
|
(g)
|
No Other Representations or Warranties
. Except for the representations and warranties contained in
Section 3.1
,
Section 3.2
and
Appendix B
, and the information provided in the Bill of Sale, Assignment and Assumption Agreement, neither the Seller nor any other Person on behalf of the Seller or any of its Subsidiaries or Affiliates makes any express or implied representation or warranty with respect to the Seller or any of its Subsidiaries or Affiliates or with respect to the Acquired Assets or any other information provided to the Buyer in connection with the Transaction.
|
(a)
|
Additional Funds
. The Buyer has, and as of the Closing will have, cash on hand sufficient to (i) enable the Buyer to perform its obligations hereunder, (ii) consummate the Transaction and (iii) pay all costs and expenses incurred by the Buyer in connection with this Agreement and the other Transaction Documents and the Transaction, including (x) the Purchase Price and (y) any other payments or obligations of the Buyer pursuant to the Transaction Documents.
|
(a)
|
Subject to the satisfaction or, if permissible, waiver of the conditions set forth in
Article V
, and provided that this Agreement has not been terminated pursuant to Section 8.1, the closing of the Transaction (the “
Closing
”) will take place at 10:00 a.m., New York time, on September 30, 2011, at the offices of Skadden, Arps, Slate, Meagher & Flom LLP, Four Times Square, New York, New York 10036, unless another time, date or place is agreed to in writing by the Parties (such date on which the Closing occurs being the “
Closing Date
”);
provided
that neither Party shall unreasonably withhold, condition or delay its assent to the other Party’s request to change such time, date or place.
|
(b)
|
Each condition precedent to the Closing will be deemed to have been satisfied or waived upon the execution and delivery by the Seller and the Buyer of the Bill of Sale, Assignment and
|
(a)
|
no Governmental Authority shall have commenced, enacted, issued, promulgated, enforced or entered any suit, proceeding, Order or other Law which is then in effect and has the effect of making the Transaction illegal or otherwise prohibiting the consummation of the Transaction;
|
(b)
|
the Seller shall have executed and delivered to the Buyer a special power of attorney and blanket endorsement with respect to the Purchased Loans in favor of the Buyer, substantially in the form of
Appendix C
, authorizing the Buyer to endorse each of the Notes evidencing such Purchased Loans on the Seller’s behalf;
|
(c)
|
the representations and warranties of the Seller contained in the Transaction Documents to which it is a party shall be true and correct (without giving effect to any limitation as to materiality or Seller Material Adverse Effect or similar qualifiers set forth therein) at and as of the Closing Date with the same force and effect as if made at and as of the Closing Date (other than those representations and warranties that address matters only as of a particular date or only with respect to a specific period of time, which need only be true and correct as of such date or with respect to such period), except where the failure of such representations and warranties to be true and correct would not reasonably be expected to have, individually or in the aggregate, a Seller Material Adverse Effect;
|
(d)
|
the Seller shall have performed and complied in all material respects with all material agreements and covenants required by the Transaction Documents to be performed or complied with by the Seller at or prior to the Closing;
|
(e)
|
since the date hereof, there shall not have been any receiver or conservator appointed for the Seller or all or any substantial part of its property;
|
(f)
|
the corrections to the Estimated Schedule of Purchased Loans described in
Section 5.2(c)
do not result, in the aggregate, in a change to the Estimated Purchase Price of more than $25,000,000; and
|
(g)
|
all documents and certificates specified in
Section 5.3
to be delivered by the parties to the Transaction Documents (other than the Buyer) on the Closing Date shall be duly executed and delivered by all signatories as required pursuant to the respective terms thereof.
|
(a)
|
no Governmental Authority shall have commenced, enacted, issued, promulgated, enforced or entered any suit, proceeding, Order or other Law which is then in effect and has the effect of making the Transaction illegal or otherwise prohibiting the consummation of the Transaction;
|
(b)
|
the representations and warranties of the Buyer contained in the Transaction Documents to which it is a party shall be true and correct (without giving effect to any limitation as to materiality or Buyer Material Adverse Effect or similar qualifiers set forth therein) at and as of the Closing Date with the same force and effect as if made at and as of the Closing Date (other than those representations and warranties that address matters only as of a particular date or only with respect to a specific period of time, which need only be true and correct as of such date or with respect to such period), except where the failure of such representations and warranties to be true and correct would not reasonably be expected to have, individually or in the aggregate, a Buyer Material Adverse Effect;
|
(c)
|
the Buyer shall have delivered to the Seller the Estimated Schedule of Purchased Loans no less than 15 calendar days prior to the Closing, and the Buyer and its Affiliates shall have cooperated with the Seller in identifying and correcting any deficiencies contained in the Estimated Schedule of Purchased Loans, each to the extent necessary for the Seller to reasonably affirm the accuracy of the information in the Estimated Schedule of Purchased Loans as of the date specified therein as required by
Section 3.2(a)
;
|
(d)
|
the Buyer shall have performed and complied in all material respects with all material agreements and covenants required by the Transaction Documents to be performed or complied with by the Buyer at or prior to the Closing;
|
(e)
|
since the date hereof, there shall not have been any receiver or conservator appointed for the Buyer or all or any substantial part of its property; and
|
(f)
|
all documents, certificates and opinions specified in
Section 5.3
to be delivered by the other parties to the Transaction Documents (other than the Seller) on the Closing Date shall be duly executed and delivered by all signatories as required pursuant to the respective terms thereof.
|
(a)
|
the Bill of Sale, Assignment and Assumption Agreement (together with the Loan Transmittal Summary Form to be delivered electronically in the form of a Student Loan Tape to the Buyer by the Seller);
|
(b)
|
a certificate issued by the Comptroller of the Currency, as to the corporate existence of the Seller, dated as of a date within thirty (30) days prior to the Closing Date to be delivered by
|
(c)
|
a certificate of good standing of the Buyer dated as of a date within thirty (30) days prior to the Closing Date to be delivered by the Buyer;
|
(d)
|
a limited power of attorney executed by Ricardo Arroyo, Chief Financial Officer of Citibank, N.A., appointing each of Calvin Balliet, Charles Jacques, Daniel Madias and James von Moltke to act as attorneys-in-fact on behalf of Citibank, N.A., with respect to this Agreement and the other Transaction Documents and a Secretary’s Certificate of the Seller attaching its charter, bylaws, board resolutions authorizing the Transaction and the execution and delivery (by power of attorney or otherwise) of the Transaction Documents (which resolutions need not specifically reference the Transaction) and an incumbency certificate; and
|
(e)
|
a Secretary’s Certificate of the Buyer attaching its charter, bylaws, board resolutions authorizing the Transaction and an incumbency certificate.
|
(a)
|
commence a lawsuit against any party other than the Buyer or its Affiliates that may affect the Acquired Assets or the servicing or administration of the Purchased Loans, except for lawsuits brought in the ordinary course of business by the Seller as plaintiff against a Borrower relating to the collection of Purchased Loans, provided that such consent will not be
|
(b)
|
offer Borrowers of any Purchased Loans any borrower incentive programs not (A) required by Law or (B) put into effect with respect to the related Purchased Loans prior to the date hereof; or
|
(c)
|
amend or otherwise modify the terms of any Purchased Loan or change in any material respect the manner in which the Purchased Loans are serviced unless required by Law.
|
(a)
|
All applicable sales, use, transfer, stamp, stock transfer or similar Taxes that are or become due and payable as a result of the Transaction, if any, whether such Taxes are imposed by Law on the Seller, the Buyer, or any of their Affiliates (such Taxes, “
Transfer Taxes
”), shall be borne fifty (50) percent by the Buyer and fifty (50) percent by the Seller. Any Tax Returns with respect to Transfer Taxes shall be prepared by the Party hereto that customarily has primary responsibility for filing such Tax Returns pursuant to applicable Law. Buyer and Seller will provide to one another a true copy of each such Tax Return as filed and evidence of the timely filing thereof.
|
(b)
|
Each Party shall, and shall cause its Affiliates to, (i) provide cooperation and assistance to the other Party hereto, as reasonably requested, in preparing and filing Tax Returns relating to the Acquired Assets and responding to Tax Contests relating to the Acquired Assets; (ii) until the later of (x) the tenth (10th) anniversary of the Closing Date and (y) the expiration of the applicable statute of limitations, retain such information, records, and documents as may be necessary for purposes of preparing and filing such Tax Returns or responding to such Tax Contests; (iii) make available to the other Party, as reasonably requested, such information, records, and documents as may be necessary for purposes of preparing and filing such Tax Returns or responding to such Tax Contests; and (iv) use reasonable efforts, as reasonably requested, to obtain any certificate or other document from any Governmental Authority or any other Person or take any other action, in each case, as may be necessary to mitigate, reduce, or eliminate any Taxes relating to the Acquired Assets that could be imposed on the other Party (including, but not limited to, Taxes resulting from the Transaction).
|
(c)
|
Neither Party nor any of their respective Affiliates shall be entitled, under this agreement, to any information regarding, any access to, any right to review or any right to obtain any consolidated, combined, affiliated or unitary Tax Return which includes the Seller or the Buyer.
|
(d)
|
Unless otherwise required by Law, any payment made pursuant to
Article VII
shall be treated for all Tax purposes as an adjustment to the Purchase Price.
|
(a)
|
At any time prior to the fifth anniversary of the Closing Date, in the event that the Seller intends to sell, assign, transfer, convey or otherwise dispose of all or any portion of the Retained Portfolio (such portion, the “
Offered Assets
”) in a transaction in which the book value of the Offered Assets constitutes twenty-five (25) per cent or more of the book value of the assets to be sold, assigned, transferred, conveyed or otherwise disposed of, the Seller shall give the Buyer written notice (the “
Seller’s Notice
”) of such intended sale, assignment, transfer, conveyance or other disposition, and, for a period of 45 days commencing on the date of its receipt of such written notice, the Buyer will have the exclusive right to offer to purchase the Offered Assets. During such 45-day period, the Seller shall not sell, assign, transfer, convey or otherwise dispose of all or any portion of the Retained Portfolio. In the event that the Buyer exercises its right to offer, the Seller and the Buyer agree to negotiate in good faith the purchase price and other terms of such purchase. In the event that the Buyer does not exercise its right to offer pursuant to this
Section 6.9(a)
, then the Seller shall be free (without having to provide the Buyer with a further right to offer pursuant to this
Section 6.9(a)
) for a period of 90 days from the 45th day following the date of the Buyer’s receipt of the Seller’s Notice, to sell the
|
(b)
|
In the event that the Buyer exercises its right to offer pursuant to
Section 6.9(a)
and the Seller and the Buyer cannot reach mutually agreeable terms for the purchase by the Buyer of the Offered Assets as provided by
Section 6.9(a)
, then the Seller shall be free (without having to provide the Buyer with a further right to offer pursuant to
Section 6.9(a)
), for a period of 90 days from the 45th day following the date of the Buyer’s receipt of the Seller’s Notice, to sell the Offered Assets to any Third Party Purchaser on terms that are no less favorable to the Seller than the most favorable terms offered by the Buyer (the “
First Offer Terms
”);
provided
that such sale complies with the provisions of this
Section 6.9
. If the proposed terms of a third party purchase for the Offered Assets (the “
Third Party Terms
”) are less favorable to the Seller than the First Offer Terms, the Seller shall not sell, assign, transfer, convey or otherwise dispose any of the Offered Assets unless the Seller shall first reoffer the Offered Assets to the Buyer by giving written notice (the “
Reoffer Notice
”) thereof, stating the Seller’s intention to transfer the Offered Assets upon terms less favorable than the First Offer Terms. The Buyer shall then have the irrevocable and exclusive option to submit a second offer for the Offered Assets by notifying the Seller in writing of the terms upon which the Buyer proposes to purchase the Offered Assets (the “
Reoffer Terms
”) within 15 Business Days from the date of the Reoffer Notice,
provided
that
, for the avoidance of doubt, the Reoffer Terms may be the First Offer Terms. If the Buyer has not exercised its option to submit Reoffer Terms or if the Third Party Terms are no less favorable to the Seller than the Reoffer Terms, then the Seller may (without having to provide the Buyer with a further right to offer or reoffer pursuant to
Section 6.9(a)
or this
Section 6.9(b)
) sell the Offered Assets to a Third Party Purchaser within 90 days following the 15th Business Day from the date of the Reoffer Notice, on Third Party Terms that are no less favorable to the Seller than the Reoffer Terms;
provided
that such sale complies with the provisions of this
Section 6.9
. The Seller shall certify to the Buyer that, in its sole and absolute discretion, the Third Party Terms are no less favorable to the Seller than the Reoffer Terms.
|
(a)
|
Each Party shall keep confidential and shall not make available or disclose Confidential Information of the other Party to any Person, or make or permit any use of such Confidential Information without the prior written consent of the other Party. Notwithstanding the foregoing, Confidential Information of the other Party may be disclosed on an as needed basis to the Representatives and Affiliates of the receiving Party as required for the purpose of fulfilling the receiving Party’s obligations or exercising its rights under the Transaction Documents and each Party may utilize applicable Confidential Information (if any) in preparing financial statements, tax returns, and tax information it is required to file under applicable Law;
provided
, that each Party shall be responsible for any unauthorized disclosure of such Confidential Information by its Representatives and Affiliates. Each Party shall take reasonable steps to ensure that any such Confidential Information disclosed to any such Representatives or Affiliates in accordance with this
Section 6.10
is treated as confidential by such Representatives and Affiliates in a manner no less protective of the Confidential Information than is required under this Agreement.
|
(b)
|
The provisions of
Section 6.10
shall not apply to any Confidential Information which: (i) is or becomes commonly known to the public other than by breach of this Agreement or any other agreement that the receiving Party has with any party; (ii) is obtained from a third party who is lawfully authorized to disclose such information free from any obligation of confidentiality; or (iii) is independently developed without reference to any Confidential Information of the other Party.
|
(c)
|
Nothing in
Section 6.10
shall prevent either Party from disclosing Confidential Information of the other Party where it is required to be disclosed by judicial, administrative, governmental or regulatory process in connection with any action, suit, proceeding or claim or otherwise by any applicable Law;
provided
,
however
, that a Party that is so required to disclose such Confidential Information shall, if legally permitted, give the other Party reasonable prior notice as soon as possible of such required disclosure so as to enable such other Party to seek relief from such disclosure requirement or measures to protect the confidentiality of the disclosure.
|
(d)
|
Each Party shall immediately inform the other Party if it becomes aware of the possession, use or knowledge of any of such other Party’s Confidential Information by any Person not authorized to possess, use or have knowledge of such Confidential Information and shall at the request of such other Party provide such reasonable assistance as is required by such other Party to mitigate any damage caused thereby.
|
(a)
|
The Parties acknowledge that the Acquired Assets include all Nonpublic Personal Information obtained by or on behalf of the Seller or the Buyer in connection with the Purchased Loans. To the extent that any such Nonpublic Personal Information is nonetheless deemed to be owned by the Seller, the Buyer shall have the right to use any such Nonpublic Personal Information obtained by or on behalf of the Seller or the Buyer in connection with the Purchased Loans for any purpose permitted by applicable Law, and the Seller hereby provides the Buyer with an irrevocable, fully paid up, perpetual license to use such Nonpublic Personal Information for such purposes. This
Section 6.11(a)
shall not apply to any Nonpublic Personal Information that: (x) the Seller or one of its Affiliates has independently obtained or will independently obtain without reference to any Nonpublic Personal Information obtained by or on behalf of the Seller or the Buyer in connection with Purchased Loans, or (y) is known to the Seller prior to the Closing Date other than in connection with the Purchased Loans.
|
(b)
|
The Seller shall not use or disclose any Nonpublic Personal Information obtained by or on behalf of the Seller or the Buyer in connection with the Purchased Loans; provided, that the Seller may use such Nonpublic Personal Information (a) as necessary to carry out its rights and responsibilities under this Agreement and the other Transaction Documents, or (b) to the extent required to do so under applicable Law or required to do so in connection with complying with any applicable Law. The foregoing shall not apply to any Nonpublic Personal Information that: (x) the Seller or one of its Affiliates has independently obtained or will independently obtain without reference to any Nonpublic Personal Information obtained by or on behalf of the Seller or the Buyer in connection with the Purchased Loans, or (y) is known to the Seller
|
(a)
|
Until the earlier of the Closing Date or the date, if any, on which this Agreement is terminated pursuant to
Section 8.1
, to the extent permitted by applicable Law, the Seller shall (i) provide the Buyer and its Representatives access during normal business hours and, following reasonable notice from the Buyer, to all documents, instruments, agreements, books, records, Loan Files and other information with respect to the Acquired Assets as the Buyer may reasonably request and (ii) permit such Persons to have reasonable access to such personnel of the Seller during normal business hours as the Buyer may reasonably request; provided, however, that the Seller shall not be required to provide access to any information or documents which would, in the reasonable judgment of the Seller, (x) breach any agreement with any third party if the Seller shall have used its reasonable best efforts to obtain the consent of such third party to such access or disclosure, (y) constitute a waiver of the attorney-client or other privilege held by the Seller or (z) violate any applicable Laws. If any material is withheld by the Seller pursuant to the proviso of the preceding sentence, the Seller shall inform the Buyer as to the general nature of what is being withheld.
|
(b)
|
No information provided or obtained pursuant to this
Section 6.12
shall affect any representation or warranty in this Agreement of either Party or any condition to the obligations of the Parties. The Parties shall comply with, and shall cause their respective Representatives to comply with, all of their respective obligations pursuant to
Section 6.10
with respect to the information provided or obtained pursuant to this
Section 6.12
.
|
(a)
|
Subject to the terms of this Agreement, from and after the Closing Date, the Seller shall indemnify, defend, save and hold harmless the Buyer and its Affiliates and each of its and their respective Representatives (collectively, the “
Buyer Indemnified Parties
”) from and against any and all Losses, as such Losses are incurred, resulting from, arising out of or related to (i) any breach by the Seller of any of its representations, warranties or covenants in this Agreement, the Bill of Sale, Assignment and Assumption Agreement or in any certificate delivered pursuant to the terms hereof or thereof (to the extent relating to such representations
|
(b)
|
Subject to the terms of this Agreement, from and after the Closing Date, the Buyer shall indemnify, defend, save and hold harmless the Seller and its Affiliates and each of its and their respective Representatives (collectively, the “
Seller Indemnified Parties
” and, together with the Buyer Indemnified Parties, the “
Indemnified Parties
”) from and against any and all Losses, as such Losses are incurred, resulting from, arising out of or related to any breach by the Buyer of any of its representations, warranties or covenants in this Agreement, the Bill of Sale, Assignment and Assumption Agreement or in any certificate delivered pursuant to the terms hereof or thereof (to the extent relating to such representations and warranties) or the failure of any such representation or warranty to be accurate.
|
(c)
|
Notwithstanding anything set forth in this Agreement to the contrary, Losses shall be determined without duplication of any other Loss for which an indemnification claim has been made under any other representation, warranty, covenant, or agreement contained in the Transaction Documents and shall be net of any other recoveries actually received by the applicable Indemnified Party in connection with the facts giving rise to the right of indemnification, but without any obligation on the part of such indemnified Party to make such other claims or pursue such other recoveries except to the extent provided in
Section 7.3
.
|
(d)
|
“
Losses
” means all costs, expenses, damages, obligations, Liabilities, purchase obligations (including the amount paid in such purchase and costs and expenses associated therewith), assessments, judgments, losses (including lost profits, opportunity costs and diminution in value), settlements, awards and fees (including reasonable legal, accounting or other professional fees);
provided
,
however
, that “Losses” shall not include lost profits, opportunity costs, diminution in value, damages based upon a multiple of earnings or similar financial measure or exemplary or punitive damages, in each case, except to the extent awarded against an Indemnified Party in a Third Party Claim. For the avoidance of doubt, damages or losses resulting from the failure of the Buyer or any of its Affiliates to receive any amounts with respect to any Purchased Loan (whether or not then due), including any principal, interest, discount or other fees, assessments or other amounts in respect thereof, shall in no event constitute or be deemed to be lost profits, opportunity costs or diminution in value or exemplary or punitive damages, but shall be deemed to be an indemnifiable Loss;
provided
,
however
, that Losses with respect to any Purchased Loan arising out of a breach of any representation or warranty set forth in
Section 3.2(a)
or
Appendix B
of this Agreement shall not exceed the Principal Balance of such Purchased Loan
plus
accrued and unpaid interest thereon
plus
any Mitigation Loss pursuant to
Section 7.3
.
|
(a)
|
by mutual written consent of each of the Buyer and the Seller;
|
(b)
|
by written notice of either the Buyer or the Seller, if any Governmental Authority of competent jurisdiction shall have issued an Order or taken any other action permanently restraining, enjoining or otherwise prohibiting the Transaction, and such Order or other action shall have become final and nonappealable; or
|
(c)
|
by the Seller, on the one hand, or by the Buyer, on the other hand, if the Closing shall not have occurred on or before date that is 75 days after the date hereof (the “
Termination Date
”);
provided
that the right to terminate this Agreement under this
Section 8.1(c)
shall not be available to either Party whose material misrepresentation, inaccuracy, breach of warranty, default or failure to fulfill any covenant or obligation under this Agreement has been the cause of, or resulted in, the failure of the Closing to occur on or before such date.
|
(a)
|
Addresses for Notices
. All notices, demands, requests, consents and other communications provided for, or required to be given, in this Agreement shall be given in writing, or by any telecommunications device capable of creating a written record (including electronic mail) and addressed to the Party to be notified at its respective addresses set forth below. The Parties may change their respective addresses for notices from time to time by written notice to the other Party subject to written acknowledgment of receipt by the other Party.
|
(b)
|
Effectiveness of Notices
. All notices, demands, requests, consents and other communications described in
Section 9.4(a)
above shall be effective (i) if delivered by hand, including any overnight courier service, upon personal delivery, (ii) if delivered by mail, when received in the mails and (iii) if delivered by electronic mail or any other telecommunications device, when transmitted to an electronic mail address (or by another means of electronic delivery) as provided in
Section 9.4(a)
above.
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(a)
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Each of the Buyer and the Seller hereby irrevocably and unconditionally submits, for itself and its property, to the non-exclusive jurisdiction of the Supreme Court of the State of New York sitting in the Borough of Manhattan in The City of New York and of the United States District Court for the Southern District of New York sitting in the Borough of Manhattan in The City of New York, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement, and hereby irrevocably agree that all claims in
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(b)
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Each Party irrevocably consents to the service of the summons and complaint and any other process in any other action or proceeding relating to the Transaction, on behalf of itself or its property, by personal delivery of copies of such process to such Party. Nothing contained in this
Section 9.7
will affect the right of either Party to serve process in any other manner permitted by Law or commence legal proceedings or otherwise proceed against the other Party in any other jurisdiction.
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(a)
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Title
. As of the Closing Date, the Seller has good and marketable title to, and is the sole owner of, the Acquired Assets, free and clear of all Liens, charges, claims, offsets, defenses, counterclaims or encumbrances of any nature and no right of rescission, offsets, defenses or counterclaims have been asserted or threatened with respect to the Acquired Assets. The sale of the Acquired Assets pursuant to the Agreement and the Bill of Sale, Assignment and Assumption constitutes an absolute transfer of all right, title and interest of the Seller in, to and under the Acquired Assets, free and clear of any Lien or adverse claim. Each of the Purchased Loans was acquired by the Seller from SLC pursuant to the Asset Purchase Agreement, dated as of September 17, 2010, by and among SLC, Citibank (South Dakota) National Association, SLC Student Loan Receivables I, Inc. and the Seller.
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(b)
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Uniform Commercial Code Matters
. The Purchased Loans constitute either “Payment Intangibles” or “Instruments” within the meaning of the applicable Uniform Commercial Code.
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(c)
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Description
. The description of the Purchased Loans set forth in the Agreement and in the Loan Transmittal Summary Form is true, complete and correct as of the date specified.
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(d)
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Authorization
. The Seller is authorized to sell, assign and transfer the Acquired Assets, and the sale, assignment and transfer of the Acquired Assets will be made pursuant to and consistent with the Laws and regulations under which the Seller operates, and will not violate any decree, judgment or order of any court or agency, or conflict with or result in a breach of any of the terms, conditions or provisions of any agreement or instrument to which the Seller is a party or by which the Seller or its property is bound, or will constitute a default (or an event which could constitute a default with the passage of time or notice or both) thereunder.
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(e)
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Binding Obligation
. The Purchased Loans were each in full force and effect in accordance with their terms and were the legal, valid and binding obligation of the respective Borrower thereunder subject to no defenses (except the defense of infancy).
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(f)
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No Consents
. No consents and approvals are required by the terms of the Acquired Assets for the consummation of the sale of such Acquired Assets under the Agreement to the Buyer.
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(g)
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Servicing, etc.
Due diligence and reasonable care, and in any event at least that degree of care, skill and attention that is required to be exercised with respect to the “Education Loans” under the 2008 Agreement, have been exercised by the Seller and its Affiliates in the making, administering, servicing and collecting on the Purchased Loans.
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(h)
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Accordance with Program and Law
. Each Purchased Loan has been duly made and serviced
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(i)
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Promissory Notes
. Except for Purchased Loans executed electronically, there was only one executed copy of the Note evidencing each Purchased Loan, which Note is in the possession of the Seller or SLC on behalf of the Seller. For Purchased Loans that were executed electronically, the Seller or SLC on behalf of the Seller has possession of the electronic records evidencing the Note. There exists a Loan File (which may be in hard copy, electronic format or some combination of both) pertaining to each Purchased Loan containing a fully executed Note and application, copies of all written correspondence with the Borrower and notes of other communications with the Borrower, and all other documentation necessary to allow the owner or servicer thereof to collect and enforce such Purchased Loan. The files referred to in the previous sentence are currently in the possession the Seller or SLC on behalf of the Seller.
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(j)
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No Other Notations
. The Notes that constitute or evidence the Purchased Loans do not have any marks or notations indicating that they had been pledged, assigned or otherwise conveyed to any person other than the Buyer.
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(k)
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No Other Security Interest
. The Seller has not pledged, assigned, sold, granted a security interest in or other Lien on, or otherwise conveyed any of the Acquired Assets except with respect to security interests that have been terminated. The Seller has not authorized the filing of and is not aware of any financing statements against the Seller that included a description of collateral covering all or any portion of the Acquired Assets except with respect to security interests that have been terminated.
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(l)
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Assignability
. If the Seller or one of its Subsidiaries is not the original payee of any Note evidencing a Purchased Loan, such Note has been duly and effectively transferred to the Seller in accordance with all applicable requirements of Law and in any event such Purchased Loan and the Note evidencing such Purchased Loan does not require notice to or consent from any Person (including the Borrower) with respect to transfer, sale or assignment of the rights and duties of the holder thereof and does not contain any provision that restricts the ability of the holder thereof or the Buyer to exercise its rights thereunder.
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(m)
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No Modification of Purchased Loans
. No Purchased Loan has been modified, extended or renegotiated in any way not provided for in the Note (as originally executed and delivered).
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(n)
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Fully Disbursed
. Each of the Purchased Loans is fully disbursed and provides that period payments must be made in order to fully amortize the amount financed over its term to maturity (exclusive of any deferral or forbearance periods).
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1.
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Effective on the later of December 31, 2010 or the close of the transaction contemplated by the Separation Agreement between Citibank, N.A. (“CBNA”), The Student Loan Corporation (“SLC”) and Discover Bank (the “Transaction”), the Plan is amended to provide that any employee of Discover Financial Services or its Subsidiary Companies (as defined in the Plan) (“Company”) who was employed by CBNA or SLC on the day prior to the close of the Transaction shall be eligible to participate in the Plan beginning on the date such employee becomes an Eligible Employee.
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2.
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Effective December 1, 2010, the Plan is amended to provide that for purposes of determining eligibility to participate in the Plan, any employee of the Company who was employed by an entity from which the Company bought assets or stock on the day immediately preceding the closing date of such purchase of assets or stock shall be given credit for all prior service with such entity, unless otherwise provided in the purchase agreement between the Company and the entity.
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3.
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Section 4 is hereby amended effective December 1, 2008 to clarify the enrollment process by replacing the first sentence of the second paragraph with the following:
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1.
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I have reviewed this Quarterly Report on Form 10-Q of Discover Financial Services (the “registrant”);
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2.
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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;
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3.
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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;
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4.
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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:
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a)
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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;
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b)
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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;
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c)
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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
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d)
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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
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5.
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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):
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a)
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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
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b)
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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.
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/s/ DAVID W. NELMS
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David W. Nelms
Chairman and Chief Executive Officer
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1.
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I have reviewed this Quarterly Report on Form 10-Q of Discover Financial Services (the “registrant”);
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2.
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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;
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3.
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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;
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4.
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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:
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a)
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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;
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b)
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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;
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c)
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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
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d)
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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
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5.
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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):
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a)
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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
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b)
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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.
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/s/ R. MARK GRAF
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R. Mark Graf
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Executive Vice President, Chief Financial Officer and Chief Accounting Officer
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1.
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The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
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2.
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The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
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/s/ DAVID W. NELMS
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David W. Nelms
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Chairman and Chief Executive Officer
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/s/ R. MARK GRAF
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R. Mark Graf
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Executive Vice President, Chief Financial Officer and Chief Accounting Officer
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