x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended May 31, 2012 |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to |
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 |
May 31, 2012 | November 30, 2011 | ||||||
(unaudited) (dollars in thousands, except share amounts) | |||||||
Assets | |||||||
Cash and cash equivalents | $ | 5,112,069 | $ | 2,849,843 | |||
Restricted cash | 1,802,881 | 1,285,820 | |||||
Other short-term investments | 250 | — | |||||
Investment securities: | |||||||
Available-for-sale (amortized cost of $6,445,885 and $6,019,927 at May 31, 2012 and November 30, 2011, respectively) | 6,557,344 | 6,107,831 | |||||
Held-to-maturity (fair value of $96,042 and $96,042 at May 31, 2012 and November 30, 2011, respectively) | 94,620 | 98,222 | |||||
Total investment securities | 6,651,964 | 6,206,053 | |||||
Loan receivables: | |||||||
Loans held for sale | — | 714,180 | |||||
Loan portfolio: | |||||||
Credit card | 46,610,407 | 46,638,625 | |||||
Other | 5,451,930 | 4,733,742 | |||||
Purchased credit-impaired loans | 4,995,320 | 5,250,388 | |||||
Total loan portfolio | 57,057,657 | 56,622,755 | |||||
Total loan receivables | 57,057,657 | 57,336,935 | |||||
Allowance for loan losses | (1,869,253 | ) | (2,205,196 | ) | |||
Net loan receivables | 55,188,404 | 55,131,739 | |||||
Premises and equipment, net | 492,444 | 483,250 | |||||
Goodwill | 255,421 | 255,421 | |||||
Intangible assets, net | 184,501 | 188,018 | |||||
Other assets | 2,395,471 | 2,383,793 | |||||
Total assets | $ | 72,083,405 | $ | 68,783,937 | |||
Liabilities and Stockholders’ Equity | |||||||
Deposits: | |||||||
Interest-bearing deposit accounts | $ | 41,427,004 | $ | 39,463,887 | |||
Non-interest bearing deposit accounts | 124,282 | 113,575 | |||||
Total deposits | 41,551,286 | 39,577,462 | |||||
Short-term borrowings | — | 50,000 | |||||
Long-term borrowings | 19,023,907 | 18,287,178 | |||||
Accrued expenses and other liabilities | 2,609,354 | 2,627,086 | |||||
Total liabilities | 63,184,547 | 60,541,726 | |||||
Commitments, contingencies and guarantees (Notes 9, 12, and 13) | |||||||
Stockholders’ Equity: | |||||||
Common stock, par value $.01 per share; 2,000,000,000 shares authorized; 552,287,795 and 549,748,783 shares issued at May 31, 2012 and November 30, 2011, respectively | 5,523 | 5,497 | |||||
Additional paid-in capital | 3,555,104 | 3,507,754 | |||||
Retained earnings | 6,303,466 | 5,243,318 | |||||
Accumulated other comprehensive loss | (41,016 | ) | (51,679 | ) | |||
Treasury stock, at cost; 35,047,041 and 20,918,354 shares at May 31, 2012 and November 30, 2011, respectively | (924,219 | ) | (462,679 | ) | |||
Total stockholders’ equity | 8,898,858 | 8,242,211 | |||||
Total liabilities and stockholders’ equity | $ | 72,083,405 | $ | 68,783,937 |
May 31, 2012 | November 30, 2011 | ||||||
(unaudited) (dollars in thousands) | |||||||
Assets | |||||||
Restricted cash | $ | 1,801,881 | $ | 1,274,175 | |||
Credit card loan receivables | 32,983,831 | 33,815,860 | |||||
Purchased credit-impaired loans | 2,701,874 | 2,839,871 | |||||
Allowance for loan losses allocated to securitized loan receivables | (1,223,653 | ) | (1,510,730 | ) | |||
Other assets | 30,783 | 33,724 | |||||
Liabilities | |||||||
Long-term borrowings | $ | 17,121,359 | $ | 15,842,512 | |||
Accrued interest payable | 14,269 | 13,184 |
For the Three Months Ended May 31, | For the Six Months Ended May 31, | ||||||||||||||
2012 | 2011 | 2012 | 2011 | ||||||||||||
(unaudited) (dollars in thousands, except per share amounts) | |||||||||||||||
Interest income: | |||||||||||||||
Credit card loans | $ | 1,421,115 | $ | 1,403,191 | $ | 2,844,921 | $ | 2,820,307 | |||||||
Other loans | 210,043 | 151,802 | 412,880 | 271,338 | |||||||||||
Investment securities | 19,987 | 14,644 | 37,498 | 26,859 | |||||||||||
Other interest income | 4,473 | 3,641 | 6,878 | 7,738 | |||||||||||
Total interest income | 1,655,618 | 1,573,278 | 3,302,177 | 3,126,242 | |||||||||||
Interest expense: | |||||||||||||||
Deposits | 216,458 | 251,170 | 445,231 | 507,865 | |||||||||||
Short-term borrowings | — | 37 | 1 | 83 | |||||||||||
Long-term borrowings | 124,081 | 128,772 | 248,567 | 254,759 | |||||||||||
Total interest expense | 340,539 | 379,979 | 693,799 | 762,707 | |||||||||||
Net interest income | 1,315,079 | 1,193,299 | 2,608,378 | 2,363,535 | |||||||||||
Provision for loan losses | 232,584 | 175,540 | 384,113 | 593,249 | |||||||||||
Net interest income after provision for loan losses | 1,082,495 | 1,017,759 | 2,224,265 | 1,770,286 | |||||||||||
Other income: | |||||||||||||||
Discount and interchange revenue, net | 265,324 | 265,826 | 529,635 | 526,742 | |||||||||||
Protection products revenue | 101,194 | 105,116 | 206,055 | 213,669 | |||||||||||
Loan fee income | 77,256 | 80,753 | 161,707 | 166,353 | |||||||||||
Transaction processing revenue | 52,174 | 45,310 | 104,655 | 87,861 | |||||||||||
Merchant fees | 3,523 | 4,216 | 7,228 | 8,871 | |||||||||||
Gain (loss) on investments | 28 | (149 | ) | 28 | (7 | ) | |||||||||
Other income | 33,641 | 42,772 | 73,335 | 102,979 | |||||||||||
Total other income | 533,140 | 543,844 | 1,082,643 | 1,106,468 | |||||||||||
Other expense: | |||||||||||||||
Employee compensation and benefits | 249,357 | 229,826 | 496,082 | 442,901 | |||||||||||
Marketing and business development | 119,012 | 124,181 | 250,441 | 259,846 | |||||||||||
Information processing and communications | 71,448 | 66,588 | 141,911 | 131,305 | |||||||||||
Professional fees | 110,085 | 104,749 | 209,585 | 195,080 | |||||||||||
Premises and equipment | 18,857 | 17,957 | 36,166 | 35,205 | |||||||||||
Other expense | 179,709 | 91,843 | 291,310 | 165,955 | |||||||||||
Total other expense | 748,468 | 635,144 | 1,425,495 | 1,230,292 | |||||||||||
Income before income tax expense | 867,167 | 926,459 | 1,881,413 | 1,646,462 | |||||||||||
Income tax expense | 330,576 | 326,040 | 713,816 | 581,151 | |||||||||||
Net income | $ | 536,591 | $ | 600,419 | $ | 1,167,597 | $ | 1,065,311 | |||||||
Net income allocated to common stockholders | $ | 531,545 | $ | 593,488 | $ | 1,156,013 | $ | 1,052,912 | |||||||
Basic earnings per share | $ | 1.01 | $ | 1.09 | $ | 2.19 | $ | 1.93 | |||||||
Diluted earnings per share | $ | 1.00 | $ | 1.09 | $ | 2.18 | $ | 1.93 | |||||||
Dividends paid per share | $ | 0.10 | $ | 0.06 | $ | 0.20 | $ | 0.08 |
For the Three Months Ended May 31, | For the Six Months Ended May 31, | ||||||||||||||
2012 | 2011 | 2012 | 2011 | ||||||||||||
(unaudited) (dollars in thousands, except per share amounts) | |||||||||||||||
Net income | $ | 536,591 | $ | 600,419 | $ | 1,167,597 | $ | 1,065,311 | |||||||
Other comprehensive income, net of taxes | |||||||||||||||
Unrealized gain on securities available for sale, net of tax | 7,245 | 31,974 | 14,695 | 16,727 | |||||||||||
Unrealized (loss) gain on cash flow hedges, net of tax | (773 | ) | 7,947 | (2,256 | ) | (878 | ) | ||||||||
Unrealized pension and post-retirement benefit gain(loss), net of tax | 1,116 | — | (1,776 | ) | 341 | ||||||||||
Other comprehensive income | 7,588 | 39,921 | 10,663 | 16,190 | |||||||||||
Comprehensive income | $ | 544,179 | $ | 640,340 | $ | 1,178,260 | $ | 1,081,501 |
Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Total Stockholders’ Equity | ||||||||||||||||||||||
Shares | Amount | ||||||||||||||||||||||||||
(unaudited) (dollars and shares in thousands) | |||||||||||||||||||||||||||
Balance at November 30, 2010 | 547,128 | $ | 5,471 | $ | 3,435,318 | $ | 3,126,488 | $ | (82,548 | ) | $ | (27,883 | ) | $ | 6,456,846 | ||||||||||||
Net income | — | — | — | 1,065,311 | — | — | 1,065,311 | ||||||||||||||||||||
Other comprehensive income | — | — | — | — | 16,190 | — | 16,190 | ||||||||||||||||||||
Purchases of treasury stock | — | — | — | — | — | (5,098 | ) | (5,098 | ) | ||||||||||||||||||
Common stock issued under employee benefit plans | 26 | — | 547 | — | — | — | 547 | ||||||||||||||||||||
Common stock issued and stock-based compensation expense | 1,220 | 13 | 33,692 | — | — | — | 33,705 | ||||||||||||||||||||
Dividends—common stock | — | — | — | (44,201 | ) | — | — | (44,201 | ) | ||||||||||||||||||
Balance at May 31, 2011 | 548,374 | $ | 5,484 | $ | 3,469,557 | $ | 4,147,598 | $ | (66,358 | ) | $ | (32,981 | ) | $ | 7,523,300 | ||||||||||||
Balance at November 30, 2011 | 549,749 | $ | 5,497 | $ | 3,507,754 | $ | 5,243,318 | $ | (51,679 | ) | $ | (462,679 | ) | $ | 8,242,211 | ||||||||||||
Net income | — | — | — | 1,167,597 | — | — | 1,167,597 | ||||||||||||||||||||
Other comprehensive income | — | — | — | — | 10,663 | — | 10,663 | ||||||||||||||||||||
Purchases of treasury stock | — | — | — | — | — | (461,540 | ) | (461,540 | ) | ||||||||||||||||||
Common stock issued under employee benefit plans | 28 | — | 828 | — | — | — | 828 | ||||||||||||||||||||
Common stock issued and stock based compensation expense | 2,511 | 26 | 46,522 | — | — | — | 46,548 | ||||||||||||||||||||
Dividends—common stock | — | — | — | (107,449 | ) | — | — | (107,449 | ) | ||||||||||||||||||
Balance at May 31, 2012 | 552,288 | $ | 5,523 | $ | 3,555,104 | $ | 6,303,466 | $ | (41,016 | ) | $ | (924,219 | ) | $ | 8,898,858 |
For the Six Months Ended May 31, | |||||||
2012 | 2011 | ||||||
(unaudited) | |||||||
(dollars in thousands) | |||||||
Cash flows from operating activities | |||||||
Net income | $ | 1,167,597 | $ | 1,065,311 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Provision for loan losses | 384,113 | 593,249 | |||||
Deferred income taxes | 125,654 | 206,679 | |||||
Depreciation and amortization on premises and equipment | 46,569 | 43,993 | |||||
Amortization of deferred revenues | (102,040 | ) | (123,758 | ) | |||
Other depreciation and amortization | (74,135 | ) | (53,502 | ) | |||
(Gain) loss on investments | (28 | ) | 7 | ||||
Loss on equity method and other investments | 4,854 | — | |||||
(Gain) loss on premises and equipment | (494 | ) | 123 | ||||
Loss on sale of other assets | 314 | — | |||||
Loss (gain) on loans sold and held for sale | 514 | (6,085 | ) | ||||
Stock-based compensation expense | 24,244 | 22,640 | |||||
Gain on purchase of business | — | (15,917 | ) | ||||
Changes in assets and liabilities: | |||||||
(Increase) decrease in other assets | (116,869 | ) | 58,062 | ||||
Increase in accrued expenses and other liabilities | 42,479 | 427,637 | |||||
Net cash provided by operating activities | 1,502,772 | 2,218,439 | |||||
Cash flows from investing activities | |||||||
Maturities of other short-term investments | — | 375,000 | |||||
Purchases of other short-term investments | (250 | ) | — | ||||
Maturities and sales of available-for-sale investment securities | 1,089,890 | 621,507 | |||||
Purchases of available-for-sale investment securities | (1,535,059 | ) | (1,109,470 | ) | |||
Maturities of held-to-maturity investment securities | 3,985 | 11,886 | |||||
Purchases of held-to-maturity investment securities | (50,736 | ) | (550 | ) | |||
Proceeds from sale of loans held for sale | 270,020 | 14,944 | |||||
Net principal disbursed on loans originated for investment | (623,137 | ) | (1,242,036 | ) | |||
Purchase of loan receivables | (282,249 | ) | (464,897 | ) | |||
Purchase of business, net of cash acquired | — | (401,158 | ) | ||||
Purchase of other investments | (22,125 | ) | — | ||||
(Increase) decrease in restricted cash | (517,061 | ) | 546,655 | ||||
Proceeds from sale of premises and equipment | 515 | 13 | |||||
Purchases of premises and equipment | (55,995 | ) | (49,868 | ) | |||
Net cash used for investing activities | (1,722,202 | ) | (1,697,974 | ) | |||
Cash flows from financing activities | |||||||
Net (decrease) increase in short-term borrowings | (50,000 | ) | 100,000 | ||||
Proceeds from issuance of securitized debt | 1,999,773 | 1,500,000 | |||||
Maturities and repayment of securitized debt | (743,776 | ) | (3,876,294 | ) | |||
Repayment of long-term borrowings and bank notes | (12,681 | ) | (334,122 | ) | |||
Premium paid on debt exchange | (114,493 | ) | — | ||||
Proceeds from issuance of common stock | 14,602 | 7,153 | |||||
Purchases of treasury stock | (461,467 | ) | (5,098 | ) | |||
Net increase in deposits | 1,956,685 | 802,624 | |||||
Dividends paid on common stock | (106,987 | ) | (40,501 | ) | |||
Net cash provided by (used for) financing activities | 2,481,656 | (1,846,238 | ) | ||||
Net decrease in cash and cash equivalents | 2,262,226 | (1,325,773 | ) | ||||
Cash and cash equivalents, at beginning of period | 2,849,843 | 5,098,733 | |||||
Cash and cash equivalents, at end of period | $ | 5,112,069 | $ | 3,772,960 | |||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | |||||||
Cash paid during the period for: | |||||||
Interest expense | $ | 637,919 | $ | 735,063 | |||
Income taxes, net of income tax refunds | $ | 651,999 | $ | 377,076 | |||
Non-cash transactions: | |||||||
Assumption of debt by buyer related to loans sold | $ | 424,993 | $ | — | |||
Assumption of SLC debt | $ | — | $ | 2,921,372 |
1. | Background and Basis of Presentation |
2. | Business Combinations |
Net cash consideration paid. The following table provides a calculation of the amount paid by the Company for SLC based on the net assets of the SLC securitization trusts acquired after applying an 8.5% discount to the trust assets (the “Trust Certificate Purchase Price”) (dollars in millions): | |||
Actual | |||
Gross trust assets | $ | 3,977 | |
Less: 8.5% discount | (338 | ) | |
Net trust assets | 3,639 | ||
Less: Principal amount of and accrued interest on trust debt | (3,193 | ) | |
Trust Certificate Purchase Price | $ | 446 |
Although the Company paid SLC shareholders $600 million for the acquisition of SLC (“Aggregate Merger Consideration”), the Company received a purchase price adjustment from Citibank, N.A. (“Citibank”) equivalent to the amount by which the Aggregate Merger Consideration exceeded the value of the Trust Certificate Purchase Price. In addition, Citibank agreed to adjust the cash consideration paid by the Company to compensate it for (i) agreeing to commute certain insurance policies covering certain of the loans acquired and (ii) the value of non-trust related liabilities assumed by the Company. The following table provides a summary of total consideration paid by Discover including post-closing adjustments (dollars in millions): | |||
Actual | |||
Aggregate Merger Consideration | $ | 600 | |
Less: Purchase price adjustment | (154 | ) | |
Trust Certificate Purchase Price | 446 | ||
Less: Further adjustments provided for by Citibank | |||
Cash received for consent to insurance commutation | (16 | ) | |
Cash received related to reimbursable liabilities | (29 | ) | |
Net cash consideration paid | $ | 401 |
The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of the SLC acquisition (dollars in thousands): | |||
At December 31, 2010 | |||
Student loan receivables | $ | 3,070,042 | |
Cash | 155,347 | ||
Indemnification asset | 74,571 | ||
Student relationships intangible | 2,400 | ||
Trade name intangible | 3,800 | ||
Total intangible assets | 6,200 | ||
Other assets | 217,441 | ||
Total assets acquired | 3,523,601 | ||
Securitized debt | 2,921,372 | ||
Other liabilities | 38,889 | ||
Total liabilities assumed | 2,960,261 | ||
Net assets acquired | $ | 563,340 |
3. | Investments |
The Company’s investment securities consist of the following (dollars in thousands): | |||||||
May 31, 2012 | November 30, 2011 | ||||||
U.S. Treasury securities | $ | 2,661,307 | $ | 2,563,800 | |||
U.S. government agency securities | 2,467,241 | 2,795,223 | |||||
States and political subdivisions of states | 38,841 | 40,936 | |||||
Other securities: | |||||||
Credit card asset-backed securities of other issuers | 180,263 | 299,889 | |||||
Corporate debt securities(1) | 221,337 | 449,469 | |||||
To-be-announced investment securities | — | 50,254 | |||||
Residential mortgage-backed securities - Agency (2) | 1,082,975 | 6,482 | |||||
Total other securities | 1,484,575 | 806,094 | |||||
Total investment securities | $ | 6,651,964 | $ | 6,206,053 |
(1) | Amount represents corporate debt obligations issued under the Temporary Liquidity Guarantee Program (TLGP) that are guaranteed by the Federal Deposit Insurance Corporation (FDIC). |
(2) | Consists of residential mortgage-backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae. |
The amortized cost, gross unrealized gains and losses, and fair value of available-for-sale and held-to-maturity investment securities are as follows (dollars in thousands): | |||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
At May 31, 2012 | |||||||||||||||
Available-for-Sale Investment Securities(1) | |||||||||||||||
U.S. Treasury securities | $ | 2,609,613 | $ | 51,207 | $ | (63 | ) | $ | 2,660,757 | ||||||
U.S. government agency securities | 2,421,354 | 45,887 | — | 2,467,241 | |||||||||||
Credit card asset-backed securities of other issuers | 176,223 | 4,040 | — | 180,263 | |||||||||||
Corporate debt securities | 221,029 | 308 | — | 221,337 | |||||||||||
Residential mortgage-backed securities - Agency | 1,017,666 | 10,080 | — | 1,027,746 | |||||||||||
Total available-for-sale investment securities | $ | 6,445,885 | $ | 111,522 | $ | (63 | ) | $ | 6,557,344 | ||||||
Held-to-Maturity Investment Securities(2) | |||||||||||||||
U.S. Treasury securities(3) | $ | 550 | $ | — | $ | — | $ | 550 | |||||||
States and political subdivisions of states | 38,841 | 172 | (626 | ) | 38,387 | ||||||||||
Residential mortgage-backed securities - Agency (4) | 55,229 | 1,876 | — | 57,105 | |||||||||||
Total held-to-maturity investment securities | $ | 94,620 | $ | 2,048 | $ | (626 | ) | $ | 96,042 | ||||||
At November 30, 2011 | |||||||||||||||
Available-for-Sale Investment Securities(1) | |||||||||||||||
U.S. Treasury securities | $ | 2,516,008 | $ | 47,242 | $ | — | $ | 2,563,250 | |||||||
U.S. government agency securities | 2,762,265 | 34,166 | (1,208 | ) | 2,795,223 | ||||||||||
Credit card asset-backed securities of other issuers | 293,231 | 6,658 | — | 299,889 | |||||||||||
Corporate debt securities | 448,423 | 1,066 | (20 | ) | 449,469 | ||||||||||
Total available-for-sale investment securities | $ | 6,019,927 | $ | 89,132 | $ | (1,228 | ) | $ | 6,107,831 | ||||||
Held-to-Maturity Investment Securities(2) | |||||||||||||||
U.S. Treasury securities(3) | $ | 550 | $ | — | $ | — | $ | 550 | |||||||
States and political subdivisions of states | 40,936 | 197 | (2,823 | ) | 38,310 | ||||||||||
Residential mortgage-backed securities - Agency (4) | 6,482 | 650 | — | 7,132 | |||||||||||
To-be-announced investment securities | 50,254 | — | (204 | ) | 50,050 | ||||||||||
Total held-to-maturity investment securities | $ | 98,222 | $ | 847 | $ | (3,027 | ) | $ | 96,042 |
(1) | Available-for-sale investment securities are reported at fair value. |
(2) | Held-to-maturity investment securities are reported at amortized cost. |
(3) | Amount represents securities pledged as collateral to a government-related merchant for which transaction settlement occurs beyond the normal 24-hour period. |
(4) | Amounts represent residential mortgage-backed securities that were classified as held-to-maturity as they were entered into as a part of the Company's community reinvestment initiatives. |
The following table provides information about investment securities with aggregate gross unrealized losses and the length of time that individual investment securities have been in a continuous unrealized loss position as of May 31, 2012 and November 30, 2011 (dollars in thousands): | ||||||||||||||||||
Number of Securities in a Loss Position | Less than 12 months | More than 12 months | ||||||||||||||||
Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||
At May 31, 2012 | ||||||||||||||||||
Available-for-Sale Investment Securities | ||||||||||||||||||
U.S. Treasury securities | 1 | $ | 99,785 | $ | 63 | $ | — | $ | — | |||||||||
Held-to-Maturity Investment Securities | ||||||||||||||||||
State and political subdivisions of states | 3 | $ | 1,730 | $ | 20 | $ | 12,504 | $ | 606 | |||||||||
At November 30, 2011 | ||||||||||||||||||
Available-for-Sale Investment Securities | ||||||||||||||||||
U.S. government agency securities | 2 | $ | 242,898 | $ | 1,208 | $ | — | $ | — | |||||||||
Corporate debt securities | 3 | $ | 100,041 | $ | 20 | $ | — | $ | — | |||||||||
Held-to-Maturity Investment Securities | ||||||||||||||||||
State and political subdivisions of states | 6 | $ | 2,689 | $ | 46 | $ | 27,768 | $ | 2,777 | |||||||||
To-be-announced investment securities | 2 | $ | 50,050 | $ | 204 | $ | — | $ | — |
Contractual maturities of available-for-sale debt securities and held-to-maturity debt securities at May 31, 2012 are provided in the table below (dollars in thousands): | |||||||||||||||||||
One Year or Less | After One Year Through Five Years | After Five Years Through Ten Years | After Ten Years | Total | |||||||||||||||
Available-for-sale—Amortized Cost (1) | |||||||||||||||||||
U.S. Treasury securities | $ | 263,776 | $ | 2,345,837 | $ | — | $ | — | $ | 2,609,613 | |||||||||
U.S. government agency securities | 447,232 | 1,974,122 | — | — | 2,421,354 | ||||||||||||||
Credit card asset-backed securities of other issuers | 122,237 | 53,986 | — | — | 176,223 | ||||||||||||||
Corporate debt securities | 221,029 | — | — | — | 221,029 | ||||||||||||||
Residential mortgage-backed securities - Agency | — | — | 345,109 | 672,557 | 1,017,666 | ||||||||||||||
Total available-for-sale investment securities | $ | 1,054,274 | $ | 4,373,945 | $ | 345,109 | $ | 672,557 | $ | 6,445,885 | |||||||||
Held-to-maturity—Amortized Cost (2) | |||||||||||||||||||
U.S. Treasury securities | $ | 550 | $ | — | $ | — | $ | — | $ | 550 | |||||||||
State and political subdivisions of states | 680 | 2,470 | 2,425 | 33,266 | 38,841 | ||||||||||||||
Residential mortgage-backed securities - Agency(3) | — | — | — | 55,229 | 55,229 | ||||||||||||||
Total held-to-maturity investment securities | $ | 1,230 | $ | 2,470 | $ | 2,425 | $ | 88,495 | $ | 94,620 | |||||||||
Available-for-sale—Fair Values (1) | |||||||||||||||||||
U.S. Treasury securities | $ | 264,040 | $ | 2,396,717 | $ | — | $ | — | $ | 2,660,757 | |||||||||
U.S. government agency securities | 448,385 | 2,018,856 | — | — | 2,467,241 | ||||||||||||||
Credit card asset-backed securities of other issuers | 124,255 | 56,008 | — | — | 180,263 | ||||||||||||||
Corporate debt securities | 221,337 | — | — | — | 221,337 | ||||||||||||||
Residential mortgage-backed securities - Agency | — | — | 347,108 | 680,638 | 1,027,746 | ||||||||||||||
Total available-for-sale investment securities | $ | 1,058,017 | $ | 4,471,581 | $ | 347,108 | $ | 680,638 | $ | 6,557,344 | |||||||||
Held-to-maturity—Fair Values (2) | |||||||||||||||||||
U.S. Treasury securities | $ | 550 | $ | — | $ | — | $ | — | $ | 550 | |||||||||
State and political subdivisions of states | 681 | 2,451 | 2,542 | 32,713 | 38,387 | ||||||||||||||
Residential mortgage-backed securities - Agency(3) | — | — | — | 57,105 | 57,105 | ||||||||||||||
Total held-to-maturity investment securities | $ | 1,231 | $ | 2,451 | $ | 2,542 | $ | 89,818 | $ | 96,042 |
(1) | Available-for-sale investment securities are reported at fair value. |
(2) | Held-to-maturity investment securities are reported at amortized cost. |
(3) | Amounts represent residential mortgage-backed securities that were classified as held-to-maturity as they were entered into as a part of the Company's Community Reinvestment Act initiatives. |
4. | Loan Receivables |
May 31, 2012 | November 30, 2011 | ||||||
Loans held for sale(1) | $ | — | $ | 714,180 | |||
Loan portfolio: | |||||||
Credit card loans: | |||||||
Discover card(2) | 46,400,847 | 46,419,544 | |||||
Discover business card | 209,560 | 219,081 | |||||
Total credit card loans | 46,610,407 | 46,638,625 | |||||
Other loans: | |||||||
Personal loans | 2,916,171 | 2,648,051 | |||||
Private student loans | 2,509,158 | 2,069,001 | |||||
Other | 26,601 | 16,690 | |||||
Total other loans | 5,451,930 | 4,733,742 | |||||
PCI student loans(3) | 4,995,320 | 5,250,388 | |||||
Total loan portfolio | 57,057,657 | 56,622,755 | |||||
Total loan receivables | 57,057,657 | 57,336,935 | |||||
Allowance for loan losses | (1,869,253 | ) | (2,205,196 | ) | |||
Net loan receivables | $ | 55,188,404 | $ | 55,131,739 |
(1) | Amount represents federal student loans. At November 30, 2011, $446.6 million of federal student loan receivables were pledged as collateral against a long-term borrowing. During first quarter 2012, Discover Bank sold these loans and recorded a loss of $518 thousand. As a part of this transaction, the related borrowings were assumed by the purchaser. |
(2) | Amounts include $20.3 billion and $18.5 billion underlying investors’ interest in trust debt at May 31, 2012 and November 30, 2011, respectively, and $12.7 billion and $15.4 billion in seller’s interest at May 31, 2012 and November 30, 2011, respectively. See Note 5: Credit Card and Student Loan Securitization Activities for further information. |
(3) | Amounts include $2.7 billion and $2.8 billion of loans pledged as collateral against the notes issued from the SLC securitization trusts at May 31, 2012 and November 30, 2011, respectively. See Note 5: Credit Card and Student Loan Securitization Activities. Of the remaining $2.3 billion and $2.5 billion at May 31, 2012 and November 30, 2011, respectively, that were not pledged as collateral, approximately $14.2 million and $12.8 million represent loans eligible for reimbursement through an indemnification claim. Discover Bank must purchase such loans from the trust before a claim may be filed. |
Delinquent and Non-Accruing Loans: | |||||||||||||||||||
30-89 Days Delinquent | 90 or More Days Delinquent | Total Past Due | 90 or More Days Delinquent and Accruing | Total Non-accruing(2) | |||||||||||||||
At May 31, 2012 | |||||||||||||||||||
Credit card loans: | |||||||||||||||||||
Discover card(1) | $ | 428,513 | $ | 456,373 | $ | 884,886 | $ | 401,966 | $ | 186,091 | |||||||||
Discover business card | 2,091 | 2,986 | 5,077 | 2,770 | 625 | ||||||||||||||
Total credit card loans | 430,604 | 459,359 | 889,963 | 404,736 | 186,716 | ||||||||||||||
Other loans: | |||||||||||||||||||
Personal loans | 14,933 | 8,014 | 22,947 | 7,277 | 3,445 | ||||||||||||||
Private student loans (excluding PCI) | 20,683 | 4,980 | 25,663 | 4,290 | 924 | ||||||||||||||
Other | 288 | 1,489 | 1,777 | — | 1,753 | ||||||||||||||
Total other loans (excluding PCI) | 35,904 | 14,483 | 50,387 | 11,567 | 6,122 | ||||||||||||||
Total loan receivables (excluding PCI) | $ | 466,508 | $ | 473,842 | $ | 940,350 | $ | 416,303 | $ | 192,838 | |||||||||
At November 30, 2011 | |||||||||||||||||||
Credit card loans: | |||||||||||||||||||
Discover card(1) | $ | 554,354 | $ | 556,126 | $ | 1,110,480 | $ | 498,305 | $ | 200,208 | |||||||||
Discover business card | 2,823 | 3,548 | 6,371 | 3,335 | 860 | ||||||||||||||
Total credit card loans | 557,177 | 559,674 | 1,116,851 | 501,640 | 201,068 | ||||||||||||||
Other loans: | |||||||||||||||||||
Personal loans | 15,604 | 7,362 | 22,966 | 6,636 | 3,628 | ||||||||||||||
Private student loans (excluding PCI) | 10,073 | 2,992 | 13,065 | 2,883 | 125 | ||||||||||||||
Other | 507 | 2,091 | 2,598 | — | 2,317 | ||||||||||||||
Total other loans (excluding PCI) | 26,184 | 12,445 | 38,629 | 9,519 | 6,070 | ||||||||||||||
Total loan receivables (excluding PCI)(3) | $ | 583,361 | $ | 572,119 | $ | 1,155,480 | $ | 511,159 | $ | 207,138 |
(1) | Consumer credit card loans that are 90 or more days delinquent and accruing interest include $35.3 million and $37.9 million of loans accounted for as troubled debt restructurings at May 31, 2012 and November 30, 2011, respectively. |
(2) | The Company estimates that the gross interest income that would have been recorded in accordance with the original terms of these credit card loans was $8.3 million and $16.7 million for the three and six months ended May 31, 2012, respectively. The Company does not separately track the amount of gross interest income that would have been recorded in accordance with the original terms of loans. These amounts were estimated based on customers' current balances and most recent rates. |
(3) | At November 30, 2011, amounts also exclude federal student loans that were held for sale. |
Net Charge-Offs: | For the Three Months Ended May 31, | ||||||||||||
2012 | 2011 | ||||||||||||
Net Charge-offs | Net Charge-off Rate | Net Charge-offs | Net Charge-off Rate | ||||||||||
Credit card loans: | |||||||||||||
Discover card | $ | 319,691 | 2.79 | % | $ | 553,827 | 4.99 | % | |||||
Discover business card | 1,864 | 3.53 | % | 4,896 | 8.22 | % | |||||||
Total credit card loans | 321,555 | 2.79 | % | 558,723 | 5.01 | % | |||||||
Other loans: | |||||||||||||
Personal loans | 16,065 | 2.24 | % | 15,347 | 2.88 | % | |||||||
Private student loans (excluding PCI) | 4,187 | 0.67 | % | 2,030 | 0.51 | % | |||||||
Other | 115 | 1.72 | % | 579 | 17.33 | % | |||||||
Total other loans (excluding PCI) | 20,367 | 1.51 | % | 17,956 | 1.59 | % | |||||||
Net charge-offs as a percentage of total loans (excluding PCI) | $ | 341,922 | 2.66 | % | $ | 576,679 | 4.69 | % | |||||
Net charge-offs as a percentage of total loans (including PCI) | $ | 341,922 | 2.42 | % | $ | 576,679 | 4.42 | % | |||||
For the Six Months Ended May 31, | |||||||||||||
2012 | 2011 | ||||||||||||
Net Charge-offs | Net Charge-off Rate | Net Charge-offs | Net Charge-off Rate | ||||||||||
Credit card loans: | |||||||||||||
Discover card | $ | 675,058 | 2.93 | % | $ | 1,215,070 | 5.46 | % | |||||
Discover business card | 4,200 | 3.95 | % | 11,429 | 9.33 | % | |||||||
Total credit card loans | 679,258 | 2.93 | % | 1,226,499 | 5.48 | % | |||||||
Other loans: | |||||||||||||
Personal loans | 33,655 | 2.41 | % | 34,981 | 3.46 | % | |||||||
Private student loans (excluding PCI) | 6,976 | 0.59 | % | 2,954 | 0.41 | % | |||||||
Other | 167 | 1.44 | % | 613 | 8.98 | % | |||||||
Total other loans (excluding PCI) | 40,798 | 1.50 | % | 38,548 | 1.82 | % | |||||||
Net charge-offs as a percentage of total loans (excluding PCI) | $ | 720,056 | 2.78 | % | $ | 1,265,047 | 5.17 | % | |||||
Net charge-offs as a percentage of total loans (including PCI) | $ | 720,056 | 2.53 | % | $ | 1,265,047 | 4.92 | % |
As part of credit risk management activities, on an ongoing basis the Company reviews information related to the performance of a customer’s account with the Company as well as information from credit bureaus, such as a FICO or other credit scores, relating to the customer’s broader credit performance. Credit scores are generally obtained at origination of the account and are refreshed monthly or quarterly thereafter to assist us in predicting customer behavior. Historically, the Company has noted that a significant proportion of delinquent accounts have FICO scores below 660. The following table provides FICO scores available for the Company’s customers as a percentage of each class of loan receivables: | |||||||||||
May 31, 2012 | November 30, 2011 | ||||||||||
660 and Above | Less than 660 or No Score | 660 and Above | Less than 660 or No Score | ||||||||
Discover card | 82 | % | 18 | % | 81 | % | 19 | % | |||
Discover business card | 90 | % | 10 | % | 89 | % | 11 | % | |||
Personal loans | 97 | % | 3 | % | 97 | % | 3 | % | |||
Private student loans (excluding PCI)(1) | 95 | % | 5 | % | 95 | % | 5 | % |
(1) | PCI loans are discussed under the heading "Purchased Credit-Impaired Loans." |
For the Three Months Ended May 31, | For the Six Months Ended May 31, | ||||||||||||||
2012 | 2011 | 2012 | 2011 | ||||||||||||
Balance at beginning of period | $ | 1,978,591 | $ | 3,033,459 | $ | 2,205,196 | $ | 3,304,118 | |||||||
Additions: | |||||||||||||||
Provision for loan losses | 232,584 | 175,540 | 384,113 | 593,249 | |||||||||||
Deductions: | |||||||||||||||
Charge-offs: | |||||||||||||||
Discover card | (474,233 | ) | (708,287 | ) | (971,338 | ) | (1,500,919 | ) | |||||||
Discover business card | (2,807 | ) | (5,869 | ) | (5,917 | ) | (13,255 | ) | |||||||
Total credit card loans | (477,040 | ) | (714,156 | ) | (977,255 | ) | (1,514,174 | ) | |||||||
Personal loans | (16,905 | ) | (15,931 | ) | (35,133 | ) | (35,981 | ) | |||||||
Private student loans | (4,296 | ) | (2,044 | ) | (7,163 | ) | (2,983 | ) | |||||||
Other | (120 | ) | (580 | ) | (172 | ) | (615 | ) | |||||||
Total other loans | (21,321 | ) | (18,555 | ) | (42,468 | ) | (39,579 | ) | |||||||
Total charge-offs | (498,361 | ) | (732,711 | ) | (1,019,723 | ) | (1,553,753 | ) | |||||||
Recoveries: | |||||||||||||||
Discover card | 154,542 | 154,460 | 296,280 | 285,849 | |||||||||||
Discover business card | 943 | 973 | 1,717 | 1,826 | |||||||||||
Total credit card loans | 155,485 | 155,433 | 297,997 | 287,675 | |||||||||||
Personal loans | 840 | 584 | 1,478 | 1,000 | |||||||||||
Private student loans | 109 | 14 | 187 | 29 | |||||||||||
Other | 5 | 1 | 5 | 2 | |||||||||||
Total other loans | 954 | 599 | 1,670 | 1,031 | |||||||||||
Total recoveries | 156,439 | 156,032 | 299,667 | 288,706 | |||||||||||
Net charge-offs | (341,922 | ) | (576,679 | ) | (720,056 | ) | (1,265,047 | ) | |||||||
Balance at end of period | $ | 1,869,253 | $ | 2,632,320 | $ | 1,869,253 | $ | 2,632,320 |
Net charge-offs of principal are recorded against the allowance for loan losses, as shown in the table above. Information regarding net charge-offs of interest and fee revenues on credit card and other loans is as follows (dollars in thousands): | |||||||||||||||
For the Three Months Ended May 31, | For the Six Months Ended May 31, | ||||||||||||||
2012 | 2011 | 2012 | 2011 | ||||||||||||
Interest accrued subsequently charged off, net of recoveries (recorded as a reduction of interest income) | $ | 92,035 | $ | 163,494 | $ | 195,403 | $ | 351,715 | |||||||
Fees accrued subsequently charged off, net of recoveries (recorded as a reduction to other income) | $ | 17,825 | $ | 28,584 | $ | 37,658 | $ | 63,954 |
Credit Card | Personal Loans | Student Loans | Other Loans | Total | |||||||||||||||
At May 31, 2012 | |||||||||||||||||||
Allowance for loans evaluated for impairment as: | |||||||||||||||||||
Collectively evaluated for impairment(1) | $ | 1,515,403 | $ | 86,373 | $ | 63,003 | $ | 213 | $ | 1,664,992 | |||||||||
Troubled debt restructurings(2) | 197,257 | 4,574 | 2,430 | — | 204,261 | ||||||||||||||
Purchased credit-impaired(3) | — | — | — | — | — | ||||||||||||||
Total allowance for loan losses | $ | 1,712,660 | $ | 90,947 | $ | 65,433 | $ | 213 | $ | 1,869,253 | |||||||||
Recorded investment in loans evaluated for impairment as: | |||||||||||||||||||
Collectively evaluated for impairment(1) | $ | 45,445,166 | $ | 2,901,686 | $ | 2,499,526 | $ | 26,601 | $ | 50,872,979 | |||||||||
Troubled debt restructurings(2) | 1,165,241 | 14,485 | 9,632 | — | 1,189,358 | ||||||||||||||
Purchased credit-impaired(3) | — | — | 4,995,320 | — | 4,995,320 | ||||||||||||||
Total recorded investment | $ | 46,610,407 | $ | 2,916,171 | $ |