Exhibit 99.1
DISCOVER FINANCIAL SERVICES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED AND COMBINED
FINANCIAL INFORMATION
The accompanying unaudited pro forma condensed consolidated and combined financial information has been prepared to reflect the March 31, 2008 sale by Discover Financial Services (the “Company”) to Barclays Bank PLC of the Company’s U.K. credit card business (the “Goldfish Business”), which represented substantially all of the Company’s International Card segment. The unaudited pro forma condensed consolidated and combined financial statements presented below have been derived from the Company’s audited consolidated and combined financial statements for the year ended November 30, 2007. The pro forma adjustments and notes to the unaudited pro forma condensed consolidated and combined financial statements give effect to the sale of the Goldfish Business. The unaudited pro forma condensed consolidated and combined financial statements should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited consolidated and combined financial statements and the notes to those statements included in the Company’s annual report on Form 10-K for the fiscal year ended November 30, 2007.
The unaudited pro forma condensed consolidated and combined statements of income for the years ended November 30, 2007, 2006 and 2005 have been prepared as though the sale of the Goldfish Business occurred on December 1, 2004. The unaudited pro forma condensed consolidated statement of financial condition has been prepared as though the sale of the Goldfish Business occurred on November 30, 2007. The pro forma adjustments are based upon available information and assumptions that management believes are reasonable, that reflect the expected impacts of events that are directly attributable to the sale of the Goldfish Business, and that are factually supportable and expected to have a continuing impact on us. Such adjustments are estimates and may not prove to be accurate.
The pro forma adjustments include the following items:
| • | removal of the assets and liabilities of the Goldfish Business, including the repayment of inter-company debt; |
| • | the proceeds of the sale and related transaction costs; and |
| • | removal of the results of operations of the Goldfish Business. |
The unaudited pro forma condensed consolidated and combined financial statements are provided for illustrative and informational purposes only and do not reflect what our consolidated and combined financial condition and results of operations would have been had the sale of Goldfish Business occurred at the beginning of all periods presented and are not necessarily indicative of our future financial condition and future results of operations.
Discover Financial Services
Unaudited Pro Forma Condensed Consolidated Statement of Financial Condition
November 30, 2007 | Historical | Pro Forma Adjustments | Pro Forma | |||||||||
| (dollars in millions) | ||||||||||||
Assets | ||||||||||||
Cash and cash equivalents | $ | 8,787 | $ | (161 | )(a) | $ | 8,686 | |||||
| 70 | (b) | |||||||||||
| (10 | ) (c) | |||||||||||
Investment securities | 525 | 525 | ||||||||||
Loan receivables | 23,954 | (3,123 | ) (a) | 20,831 | ||||||||
Allowance for loan losses | (917 | ) | 157 | (a) | (760 | ) | ||||||
Net loan receivables | 23,037 | (2,966 | ) | 20,071 | ||||||||
Amounts due from asset securitization | 3,093 | (52 | ) (a) | 3,041 | ||||||||
Other assets | 1,934 | (161 | ) (a) | 1,773 | ||||||||
Total assets | $ | 37,376 | $ | (3,280 | ) | $ | 34,096 | |||||
Liabilities and Stockholders’ Equity | ||||||||||||
Deposits | $ | 24,725 | $ | (14 | ) (a) | $ | 24,711 | |||||
Short-term borrowings | 3,175 | (2,925 | ) (a) | 250 | ||||||||
Long-term borrowings | 2,134 | — | 2,134 | |||||||||
Accrued expenses and other liabilities | 1,743 | (151 | ) (a) | 1,592 | ||||||||
Total liabilities | 31,777 | (3,090 | ) | 28,687 | ||||||||
Stockholders’ equity | 5,599 | (190 | ) (d) | 5,409 | ||||||||
Total liabilities and stockholders’ equity | $ | 37,376 | $ | (3,280 | ) | $ | 34,096 | |||||
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Discover Financial Services
Unaudited Pro Forma Condensed Consolidated and Combined Statement of Income
For the year ended November 30, 2007 | Historical | Pro Forma Adjustments(a) | Pro Forma | |||||||
| (dollars in millions) | ||||||||||
Interest income | $ | 2,888 | $ | (304 | ) | $ | 2,584 | |||
Interest expense: | ||||||||||
Deposits | 1,045 | — | 1,045 | |||||||
Short-term borrowings | 232 | (143 | ) | 89 | ||||||
Long-term borrowings | 105 | (15 | ) | 90 | ||||||
Total interest expense | 1,382 | (159 | ) | 1,223 | ||||||
Net interest income | 1,506 | (145 | ) | 1,361 | ||||||
Provision for loan losses | 950 | (216 | ) | 734 | ||||||
Net interest income after provision for loan losses | 556 | 72 | 628 | |||||||
Other income | 3,546 | (169 | ) | 3,377 | ||||||
Other expense | 3,157 | (679 | ) | 2,478 | ||||||
Income from continuing operations before income tax expense | 945 | 581 | 1,526 | |||||||
Income tax expense | 356 | 205 | 562 | |||||||
Net income from continuing operations | $ | 589 | $ | 376 | $ | 964 | ||||
Earnings per share | ||||||||||
Basic | $ | 1.23 | $ | 0.79 | $ | 2.02 | ||||
Diluted | $ | 1.23 | $ | 0.78 | $ | 2.01 | ||||
Weighted average shares outstanding (000s) | ||||||||||
Basic | 477,328 | 477,328 | ||||||||
Diluted | 478,879 | 478,879 | ||||||||
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Discover Financial Services
Unaudited Pro Forma Condensed Consolidated and Combined Statement of Income
For the year ended November 30, 2006 | Historical | Pro Forma Adjustments(a) | Pro Forma | |||||||
| (dollars in millions) | ||||||||||
Interest income | $ | 2,459 | $ | (250 | ) | $ | 2,209 | |||
Interest expense: | ||||||||||
Deposits | 670 | — | 670 | |||||||
Short-term borrowings | 194 | (77 | ) | 117 | ||||||
Long-term borrowings | 76 | (28 | ) | 48 | ||||||
Total interest expense | 940 | (104 | ) | 836 | ||||||
Net interest income | 1,519 | (146 | ) | 1,373 | ||||||
Provision for loan losses | 756 | (149 | ) | 607 | ||||||
Net interest income after provision for loan losses | 763 | 3 | 766 | |||||||
Other income | 3,539 | (170 | ) | 3,369 | ||||||
Other expense | 2,719 | (252 | ) | 2,467 | ||||||
Income from continuing operations before income tax expense | 1,583 | 85 | 1,668 | |||||||
Income tax expense | 506 | 30 | 536 | |||||||
Net income from continuing operations | $ | 1,077 | $ | 55 | $ | 1,132 | ||||
Earnings per share | ||||||||||
Basic | $ | 2.26 | $ | 0.11 | $ | 2.37 | ||||
Diluted | $ | 2.26 | $ | 0.11 | $ | 2.37 | ||||
Weighted average shares outstanding (000s) | ||||||||||
Basic | 477,236 | 477,236 | ||||||||
Diluted | 477,236 | 477,236 | ||||||||
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Discover Financial Services
Unaudited Pro Forma Condensed Consolidated and Combined Statement of Income
For the year ended November 30, 2005 | Historical | Pro Forma Adjustments(a) | Pro Forma | |||||||
| (dollars in millions) | ||||||||||
Interest income | $ | 2,175 | $ | (140 | ) | $ | 2,035 | |||
Interest expense: | ||||||||||
Deposits | 611 | — | 611 | |||||||
Short-term borrowings | 108 | (45 | ) | 63 | ||||||
Long-term borrowings | 58 | (14 | ) | 44 | ||||||
Total interest expense | 777 | (59 | ) | 718 | ||||||
Net interest income | 1,398 | (81 | ) | 1,317 | ||||||
Provision for loan losses | 878 | (62 | ) | 816 | ||||||
Net interest income after provision for loan losses | 520 | (19 | ) | 501 | ||||||
Other income | 2,937 | (117 | ) | 2,820 | ||||||
Other expense | 2,533 | (168 | ) | 2,365 | ||||||
Income from continuing operations before income tax expense | 924 | 32 | 956 | |||||||
Income tax expense | 346 | 10 | 356 | |||||||
Net income from continuing operations | $ | 578 | $ | 22 | $ | 600 | ||||
Earnings per share | ||||||||||
Basic | $ | 1.21 | $ | 0.05 | $ | 1.26 | ||||
Diluted | $ | 1.21 | $ | 0.05 | $ | 1.26 | ||||
Weighted average shares outstanding (000s) | ||||||||||
Basic | 477,236 | 477,236 | ||||||||
Diluted | 477,236 | 477,236 | ||||||||
Notes to Unaudited Pro Forma Condensed Consolidated and Combined Financial Statements
| (a) | Represents the removal of the International Card segment from continuing operations of the Company to reflect the sale of the Goldfish Business. |
| (b) | Represents proceeds from the sale of the Goldfish Business. |
| (c) | Represents legal and broker fees related to the sale of the Goldfish Business. |
| (d) | Represents estimated loss on sale of the Goldfish Business based on balances as of November 30, 2007. |
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