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2012

[BANK OF AMERICA TO
ACQUIRE DISCOVER
FINANCIAL ]
This document is a pitch for the acquisition of Discover Financial Services (DFS) by
Bank of America (BAC). The evaluation is done by RED Financial Group.


Content
Executive Summary
Historical Overview of United States of Americas Banking System
Proposal
Bank of America
Discover Financial Service
Valuation
Deal structure
Synergies
Risk
Conclusion
Appendix i
Appendix ii












Executive Summary
This report is written to explore the nature of merger between Bank of America and Discover
financial services. The primary objective of this report is to find out whether the merger is
beneficial or otherwise.
The team felt this merger as a friendly merger as no apparent hostile reports were found. From
the analysis, this take over is valued at about $23.7 billion and 1.2705 shares of Bank of America
for every 1 share of Discover, which is calculated after observing the data collected.
This is a product merger, where Bank of America is adding Discovers Credit card to its value
chain. This is considered a vertical merger.
Following the nature of this takeover, new antitrust law for financial services has been setup to
avoid similar problems in takeover in the future. This report ,among others, will also answer
some key questions such as is the merger worth the money paid, what value has been created,
is the premium paid fair or otherwise.










Historical Overview of United States of Americas Banking System

The financial services industry has witnessed its greatest challenges since the Great Depression, due to
the bursting of the housing bubble and the resulting credit crunch. Within a period of weeks, venerable
institutions have been brought to their knees by dysfunctional credit markets and the punishing stock
market. The U.S. and European governments, as well as Japan, have pumped liquidity into the system
and taken on direct capital investments in these financial behemoths, in an effort to stabilize credit
markets and prevent a global economic meltdown.
The industry comprises complex networks of organizations, which primarily deal with management of
money and create conditions for investors and corporations to flourish in the market. The growth of
other sectors is closely dependent on this industry as it is a prime source of liquidity and thereby
ensures the overall prosperity and economic stability. This multi-trillion dollar services industry
comprises companies varying a great deal in size and their offerings as well. The industry grouping is
widely branched out to include companies providing varied services, preventing a simple categorization
of this industry.
The U.S. financial sector is the third-largest sector of the economy after manufacturing and real estate,
and accounts for nearly one-tenth of the total U.S. GDP. It is also a major contributor to the tax base and
quality jobs. The U.S. financial services structure is the most sophisticated and efficient globally. It
follows the federal and state regulatory structure to oversee and supervise all financial activities. Over
the decades, U.S. financial firms have flourished under this regulatory framework and have also gained
substantial global presence and dominance. Of the top 10 global financial services firms in terms of
revenue, four are U.S.-based banks, including Bank of America , JP Morgan Chase, Goldman Sachs and
Morgan Stanley that are the largest in terms of global market share.


The housing crisis, declining corporate profits, rising oil prices, increasing interest rates and geopolitical
uncertainties have led to unfavorable and weak financial markets over the past year. Investment
banking and brokerage companies have witnessed a decline in their revenues due to trading losses and
decrease in underwriting activities. Also, many foreign markets have outperformed U.S. stock markets
luring U.S. investors to invest overseas. But it is the subprime mortgage crisis, and the subsequent credit
crunch, that has loomed large over this industry, with most players taking substantial write-offs, and
threatening the very existence of stalwart firms like Lehman Brothers (now defunct) and Bear Stearns
(now part of JP Morgan Chase).
Up until the recent credit crisis, reforms in the financial sector such as the Gramm-Leach-Bliley Financial
Services Modernization Act had lent the sector more stability and efficiency, but certainly not nearly
enough to deal with the tidal forces of the crisis. The Act came in effect in 1999 and removed barriers
that limited competition and introduced regulations for financial conglomerates offering a wide range of
services ranging from banking and insurance to securities broking and asset management. The Sarbanes-
Oxley Act of 2002 laid down strict guidelines for accounting firms and auditors to adhere to, which
resulted in more transparency. Another major reform was introduced by the previous New York State
Attorney General Eliot Spitzer who brought changes in financial markets by issuing guidelines that
restricted manipulative practices adopted by companies operating in the market.
The Bankruptcy Abuse Prevention and Consumer Protection Act, which came into effect in 2005, is
another step toward minimization of losses occurring to financial services companies. The Act
empowers financial services firms by making it difficult for individuals to file for Chapter 7 bankruptcy.
Certainly further regulatory reforms will be implemented as a result of the subprime mortgage crisis,
and Treasury Secretary Paulson has proposed a new regulatory structure.


The financial services sector had been among one of the fastest growing sectors in the U.S., at least
before the recent meltdown of profits. Along with traditional activities in brokering and equities dealing,
derivatives and debt instruments trading and dealing, and the rise in personal incomes have acted as
revenue drivers for the industry until this year. Investment advice services to individuals and
corporations have resulted in additional revenue for players, particularly in the consumer finance
segment. The U.S., which boasts the largest population of high-net-worth individuals having total assets
in excess of $10 trillion, offers significant opportunities for players operating in the market. With the rise
of the aging and retiring population in the U.S., many companies are targeting this demography and
offering innovative retirement products and services. Along with U.S.-based players, many non U.S.-
based players, such as Barclays PLC, Deutsche Bank and UBS, are also leveraging their active presence in
the U.S. and taking advantage of these opportunities.



Going Interstate: A New Dawn for U.S. Banking
These laws have had profound effects on the structure of the U.S. banking system. Between
1976 and 1992, the proportion of banks affiliated with holding companies increased from 26
percent to 73 percent. While 42 percent of all banks are now affiliated with one-bank (one-
state) BHCs, about 31 percent of all banks are now part of multibank BHCs (MBHCs), many of
which cross state borders.
In seven states, out-of-state organizations account for more than 60 percent of banking assets;
in other states, out-of-state organizations are virtually nonexistent. Although the number of
U.S. banks declined throughout the 1980s, the number of branches increased, as a result of
relaxed branching restrictions. Table 1, which gives a snapshot of Eighth District states, is a
good illustration of the wide variety of banking and branching laws currently in effect and the
corresponding differences in banking structure that result



Mergers and Acquisitions (Financial Services): 2011
2011 was a challenging year for financial services M&A. The volume of announced deal activity was
down 10% compared with 2010 and while disclosed deal value was up from $50.9 billion in 2010 to
$72.1 billion in 2011, one transaction accounted for this increase: Capital One Financial Corporations
$32.7 billion acquisition of HSBC Holdings PLCs US credit and retail services business.
The decline in deal volume was driven by a 24% decline in the banking sector, which saw 248 deals
announced in 2011 compared with 325 in 2010. The number of FDIC-assisted transactions (included in
total deal volume) experienced a more severe decline, from 157 deals in 2010 to 90 in 2011.


Without the FDIC-assisted transactions, the total would be 156 deals in 2011, the lowest level in the last
five years. The banking sector still represented the second-largest sector in 2011 by value with total
disclosed deal value of $16.9 billion and announced transactions such as Capital One Financial
Corporations $9.1 billion acquisition of ING Bank, FSB. While attracting some criticism that it would
create another too big to fail financial giant, this transaction received Federal Reserve Board approval
on February 14, 2012. Other notable transactions in the banking sector included PNC Bank, National
Associations $3.5 billion acquisition of RBC Bank (USA) and Comerica Banks $0.8 billion acquisition of
Sterling Bancshares, Inc.





















A Proposal
Such an acquisition would no doubt be in line with Bank of Americas strategy of focusing on
traditional banking services for growth. And the bank has made it clear in the recent past that it
will not shy away from opportunities to grow inorganically. So, is there really value to be gained
from such a merger between the second largest U.S. bank in terms of assets and the fourth
largest payments firm?
We maintain a $11.36 price estimate for Bank of Americas stock, which is around 10% below
the current market price. We also have a $40.53 price estimate for Discovers stock, which is
close to its current market price.
Discover Is Unique, Growing
Discover operates the fourth largest payments processing network after Visa, MasterCard and
American Express. And the company also has a decent share of the number of credit cards in
circulation. Discover is also eying various international markets with recent tie-ups to issue
credit cards in foreign countries and has also looked to diversify beyond credit cards and
payment offerings as is evident from the acquisition of a student loan portfolio and platform
from Citigroup.

With this we would like to add that this deal certainly looks like a Win-Win Deal




Bank of American (BAC)
Snapshot

Executive Team
Brian T. Moynihan
Chief Executive Officer
Catherine P. Bessant
Global Technology and
Operations Executive
David C. Darnell
Co-Chief Operating Officer
Anne M. Finucane
Global Strategy and
Marketing Officer
Christine P. Katziff
Corporate General Auditor
Terrence P. Laughlin
Chief Risk Office


Gary G. Lynch
Global Chief of Legal, Compliance
and Regulatory Relations
Thomas K. Montag
Co-Chief Operating Officer
Charles H. Noski
Vice Chairmam
Edward P. O'Keefe
General Counsel














Andrea B. Smith
Global Head of Human Resources
Ron D. Sturzenegger
Legacy Asset Servicing Executive
Bruce R. Thompson
Chief Financial Office


Headquartered in Charlotte, North Carolina, Bank of America is a financial holding company. Its
banking and non-banking subsidiaries across the United States and in other international
markets provide a diverse range of banking and non-banking financial services and products
On October 18, 2011, Bank of America reported its 3Q11 earnings results. The company
reported earnings of .0.56 per share, substantially exceeding the Zacks Consensus Estimate of
$0.20. This was also a far cry from the loss of $0.77 in the prior-year quarter. The sale of non-
core assets and accounting gains made it possible for the company to swing to profit.
Results for the quarter benefited from significant pre-tax gains from certain non-recurring items
including positive fair value adjustments on structured liabilities (4.5 billion), the sale of a stake
in China Construction Bank ($3.6 billion) and trading Debit Valuation Adjustments ($1.7 billion).
The quarter also witnessed a 2.2 billion pre-tax loss from private equity and strategic
adjustments. Results for the prior-year quarter included a $10.4 billion goodwill impairment
charge.
Excluding these nonrecurring items, the company would have incurred a loss of about 0.02 per
share compared with earnings of $0.27 in the year-ago quarter.
A substantial reduction in the size of balance sheet enhanced Tier 1 common equity ratio and
strong liquidity levels despite a substantial reduction in both short-term as well as long-term
debt were among the positives during the quarter. Moreover, the core results were aided by an
improved top line and lower provision for credit losses. However, a higher non-interest expense
despite the absence of goodwill impairment was on the flip side.
RED FINANCIAL GROUP

Earlier in February 2011, the company had announced the strategic reorganization of the Home
Loans and Insurance segment as Consumer Real Estate Services, and also stated that the name
Home Loans and Insurance would be retained for a particular division in the renamed
segment. The Deposits segment includes the results of consumer deposit activities that
comprise a comprehensive range of products, provided to consumers and small businesses.
Additionally, this segment includes student lending and the net effect of the companys Asset
and Liability Management (ALM) activities. The products of this segment include traditional
savings accounts, money market savings accounts, Certificate of Deposits (CDs), and both non-
interest and interest-bearing checking accounts. The Card Services segment offers a broad
range of products including U.S. consumer and business cards, consumer lending, and debit
cards to consumers as well as small businesses. The Consumer Real Estate Services segment
originates first- and second-lien mortgage loans. The first-lien mortgage loans are generally sold
into the secondary mortgage market or to Corporate Investments in All Other segment while
retaining servicing and the customer relationship. Second-lien mortgages are retained on the
segments balance sheet. The segment services mortgage loans including those it owns, loans
owned by other segments, and loans owned by outside investors. The Global Commercial
Banking segment provides a wide range of lending-related products and services, integrated
working capital management, and treasury solutions to clients through a network of offices and
client relationship teams along with various product partners. Lending products and services
include commercial loans and commitment facilities, real estate lending, asset-based lending
and indirect consumer loans. Capital management and treasury solutions include treasury
management, foreign exchange, and short-term investing options. The Global Banking &
RED FINANCIAL GROUP

Markets segment provides financial products, advisory services, financing, securities clearing, as
well as settlement and custody services globally to institutional investor clients to support their
investing and trading activities. It also works with commercial and corporate clients to provide
debt and equity underwriting and distribution capabilities, merger-related and other advisory
services, and risk management products using interest rate, equity, credit, currency and
commodity derivatives, foreign exchange, fixed income and mortgage-related products.
Corporate banking services provide a wide range of lending-related products and services,
integrated working capital management, and treasury solutions to clients.
Bank of America is a banking group organized around 3 areas of activity:
- commercial banking (58% of revenues);
- market banking and asset management (24.2%);
- business and investment banking (17.8%).

At the end of 2011, the group managed EUR797.7 billion in current deposits and EUR715.2
billion in current credits.
RED FINANCIAL GROUP



Valuation
BANK OF AMERICA CORP's P/E ratio indicates a significant premium compared to an average of
15.35 for the Diversified Financial Services industry and a significant premium compared to the
S&P 500 average of 15.82. Conducting a second comparison, its price-to-book ratio of 0.44
indicates a significant discount versus the S&P 500 average of 2.15 and a discount versus the
industry average of 1.38. The price-to-sales ratio is below the S&P 500 average and is well
below the industry average, indicating a discount.
RED FINANCIAL GROUP




SWOT Analysis Bank of America
Strengths
Large market share: Bank of America is the largest U.S.-based financial holding company, with a
sizable U.S. presence, strong customer base, and large deposit holdings. The banks global
assets equal to $2.261 trillion.
RED FINANCIAL GROUP

Cleaning up: Faced with pressures from investors, regulators, and the overall economy, Bank of
America has initiated several recent steps to clean up its act:
BAC has agreed to more than $12 billion in settlements related to mortgages.
BAC has agreed to sell half of its China construction Bank stake to raise capital.
BAC has secured further capital by selling its Balboa insurance business.
BAC sold its Canadian credit card business, exiting its credit card businesses in the
U.K. and Ireland. Additionally, it has put other international credit card units up for sale.
BAC has agreed to sell parts of its mortgage business to give abetter insight of its
assets.
BAC is cutting 3,500 jobs in the current quarter and working on a broader
restructuring that could eliminate thousands of additional positions. Although this move has a
negative impact on domestic jobs, it helps BAC as a company cut down on its costs.
Berkshire Hathaway' $5 billion investment helps firm up Bank of Americas capital levels.
Weakness
Legal expenses: Bank of America faces litigation problems driving up its expenses. If the bank is
forced to pay out billions in litigation costs for mortgages that later defaulted, it could drain
earnings for years and contribute to further losses across the financial industry.
Bank of America resulted in weak second quarter earnings:
RED FINANCIAL GROUP

The second-quarter 2011 net loss was $9.13 billion, equal to $0.90 per share.
Second-quarter net interest income fell 7.9%, while the net interest margin
narrowed to 2.49% from 2.66%, and interest earning assets dropped 1.3%.
Opportunities
Optimistically thinking, when the economy rebounds, Bank of America will outdo its peers
considering the fact that Bank of America holds the largest market share in the U.S. and owns a
massively large customer base.
Bank regulators from the Federal Reserve have been pushing Bank of America to put in place a
plan for what to do if conditions worsen. Although this announcement had a negative impact
on the stock price when announced, it is actually an opportunity for Bank of America to clean
up its act and secure creditable capital for the company.
Declines in the loan loss provision are hopeful for Bank of America to drive earnings growth in
2012.
Threats
Weak trend in U.S. consumer behaviors ultimately impact Bank of Americas products and
services during a downward economy.
Litigation threats further keep the stock volatile as investors remain skeptical:
The federal agency that oversees the mortgage giants, Fannie Mae and Freddie
Mac), is set to file suits against more than a dozen big banks accusing them of misrepresenting
RED FINANCIAL GROUP

the quality of mortgage securities they assembled and sold at the height of the housing bubble,
and seeking billions of dollars in compensation.
The insurance giant, American International Group filed a $10 billion suit against
Bank of America, accusing the bank and its Countrywide Financial and Merrill Lynch units of
misrepresenting the quality of mortgages that backed the securities AIG bought.
Bank faces a threat from defaults in residential lending and credit cards. Bank of America has a
sizable mortgage and credit card business in comparison to its peers. Additional foreclosure,
mortgage put-back costs, and regulatory costs are all future threats.
Bank of America continues to face pressures from lower-than-historical tangible capital ratio.
The banks primary concern is whether it can raise capital levels fast enough to meet upcoming
regulators requirements.










RED FINANCIAL GROUP

Discover Financial Services (DFS)

Snapshot:


Discover Financial Services is a direct banking and payment services company. A bank holding
company under the Bank Holding Company Act of 1956 and a financial holding company under
the Gramm-Leach-Bliley Act, subject to oversight, regulation and examination by the Board of
Governors of the Federal Reserve System (the Federal Reserve). They offer credit cards,
student loans, personal loans and deposit products through our Discover Bank subsidiary. We
RED FINANCIAL GROUP

had $57.3 billion in loan receivables and $26.2 billion in deposits issued through direct-to-
consumer channels and affinity relationships.


Executive Officers of the Registrant
Set forth below is information concerning our executive officers, each of whom is a member of
Executive Committee

Name
David W. Nelms
Roger C. Hochschild
R. Mark Graf

Kathryn McNamara Corley

Carlos Minetti

Diane E. Offereins
RED FINANCIAL GROUP


Mary Oleksiuk

James V. Panzarino

Glenn Schneider

Harit Talwar

Position
Chairman and Chief Executive Officer
President and Chief Operating Officer
Executive Vice President and Chief
Financial Officer
Executive Vice President, General Counsel
and Secretary
Executive Vice President, President -
Consumer Banking and Operations
Executive Vice President, President -
Payment Services
Senior Vice President and Chief Human
Resources Officer
Executive Vice President and Chief Credit
Risk Officer
Senior Vice President and Chief Information
Officer
Executive Vice President, President - U.S.
Cards

Employees

As of January 20, 2012, we employed approximately 11,650 individuals.






RED FINANCIAL GROUP

Comparing DFS with SP500


Discover Network operation includes credit card payments network; the PULSE network
(PULSE), our automated teller machine (ATM), debit and electronic funds transfer network;
and Diners Club International (DinersClub), our global payments network.
On December 31, 2010, Discover acquired The Student Loan Corporation (SLC) in a merger
transaction for $600 million. Discover received a purchase price closing adjustment, resulting in
a net cash outlay of approximately $401 million for the acquisition. Discover acquired SLC's
ongoing private student loan business and approximately $4.2 billion of private student loans
and other assets, along with assuming approximately $3.4 billion of SLC's existing asset-backed
securitization debt funding and other liabilities. In addition, on September 30, 2011, Discover
purchased approximately $2.5 billion of additional private student loans from Citibank, N.A.
RED FINANCIAL GROUP

("Citi") for a purchase price equal to 99% of the outstanding aggregate principal and accrued
interest balance of the purchased loans (excluding certain charged-off loans) through the
closing date. These portfolio acquisitions were accretive to income for the year ended
November 30, 2011. In addition, the SLC acquisition provided Discover with a developed
student loan origination platform, additional school relationships, experienced personnel and
SLC's website.
In May 2011, Discover acquired substantially all of the operating and related assets of Home
Loan Center, Inc., subsidiary of Tree.com, Inc., for approximately $55.9 million, which will add a
residential mortgage lending component to our direct banking business. The acquisition is
subject to closing conditions, including regulatory approvals.

PAYMENTS: EVOLVING BEYOND THE ACT OF PAYING
Discover has a unique payments business modela multi-branded, global network consisting of
the Discover, PULSE and Diners Club International networks. Together, our networks are well
positioned to meet the needs of financial institutions, merchants and consumers around the
world.
Highlights in 2011 included:
Discover had made tremendous progress over the last few years by partnering with others to
sign and service small- to mid-sized merchants while we maintain direct relationships with our
top 1,400 merchants. The result has been a 41% increase in the number of active U.S.
merchants since 2006.
RED FINANCIAL GROUP

Discover is also very focused on merchant acceptance in international markets. In 2011, signed
agreements with the largest merchant acquirers in Germany, the United Kingdom, Canada and
Puerto Rico to expand acceptance in those markets.
In addition to expanding acceptance, we are increasing the global reach of our networks by
partnering with regional networks around the world. Examples include our network-to-network
agreements with China Union Pay, JCB in Japan, BC Card of Korea and DinaCard of Serbia. We
also expanded our global ATM footprint to more than 800,000 ATM locations in 100 countries,
and we are investing in our Diners Club International business by developing new products,
seeking new franchises, and providing incentives to existing franchises for expansion and
development.
Regulatory change has been one of the challenges in recent years, but it is also presenting us
with an opportunity in PIN debit. PULSE has been working closely with many financial
institutions to help them navigate new regulations, and we believe PULSE is positioned to gain
PIN debit volume when a regulatory change goes into effect April 1, 2012.


RED FINANCIAL GROUP

Operating Model:

Credit Cards
Discover offers credit cards to consumers and small businesses. Discovers credit card
customers are permitted to revolve their balances and repay their obligations over a period
of time and at an interest rate set forth in their card member agreements, which may be either
fixed or variable. The interest that we earn on revolving credit card balances makes up
approximately 90% of our total interest income. We also charge customers other fees, including
fees for late payments, balance transfer transactions and cash advance transactions. We also
offer various products and services in connection with our credit card business, such as
Payment Protection, Identity Theft Protection, Wallet Protection, Credit ScoreTracker and other
fee-based products.
RED FINANCIAL GROUP

Discovers credit card customers' transactions in the U.S. are processed over the Discover
Network. Where they have a direct relationship with a merchant, which is the case with respect
to our large merchants representing a majority of Discover card sales volume, receive discount
and fee revenue from merchants. Discount and fee revenue is based on pricing that is set forth
in contractual agreements with each such merchant and is based on a number of factors
including industry practices, and special marketing arrangements, competitive pricing levels and
merchant size.
Where they do not have a direct relationship with a merchant, we receive acquirer interchange
and assessment fees from the merchant acquirer that settles transactions with the merchant.
The amount of this fee is based on a standardized schedule and can vary based on the type of
merchant or type of card (e.g., consumer or business).
Most cards offer the Cashback Bonus rewards program, the costs of which records as a
reduction of discount and interchange revenue
PULSE Network
PULSE network is one of the nations leading ATM/debit networks. PULSE links cardholders of
more than 6,300 financial institutions with ATMs and point-of-sale (POS) terminals located
throughout the United States. This includes 4,300 financial institutions with which PULSE has
direct relationships and more than 2,000 additional financial institutions through agreements
PULSE has with other debit networks. PULSE also provides cash access at more than 800,000
ATMs in 100 countries.
RED FINANCIAL GROUP

PULSE's primary source of revenue is transaction fees charged for switching and settling ATM,
personal identification number ("PIN") POS debit and signature debit transactions initiated
through the use of debit cards issued by participating financial institutions. In addition, PULSE
offers a variety of optional products and services that produce income for the network,
including signature debit processing, prepaid card processing, and connections to other
regional and national electronic funds transfer networks.
When a financial institution joins the PULSE network, debit cards issued by that institution can
be used at all of the ATMs and PIN POS debit terminals that participate in the PULSE network,
and the PULSE mark can be used on that institution's debit cards and ATMs. In addition,
financial institution participants may sponsor merchants, direct processors and independent
sales organizations to participate in the PULSE PIN POS and ATM debit service. A participating
financial institution assumes liability for transactions initiated through the use of debit cards
issued by that institution, as well as for ensuring compliance with PULSE's operating rules and
policies applicable to that institution's debit cards, ATMs and, if applicable, sponsored
merchants, direct processors and independent sales organizations.
When PULSE enters into a network-to-network agreement with another debit network, the
other networks participating financial institutions debit cards can be used at terminals in the
PULSE network. PULSE does not have a direct relationship with these financial institutions and
the other network bears the financial responsibility for transactions of those financial
institutions' cardholders and for ensuring compliance with PULSEs operating rules.

RED FINANCIAL GROUP

Diners Club
Diners Club business maintains an acceptance network in over 185 countries and territories
through its relationships with over 80 licensees, which are generally financial institutions.
Discover does not directly issue Diners Club credit cards to consumers, but grant licensees the
right to issue Diners Club branded credit cards and/or provide card acceptance services.
Licensees pay royalties for the right to use the Diners Club brand, which is primary source of
Diners Club revenues. Discover also earn revenue from providing various support services to
our Diners Club licensees, including processing and settlement of cross border transactions.
Discover also provide a centralized service center and internet services to our licensees.
When Diners Club cardholders use their cards outside the host country or territory of the
issuing licensee, transactions are routed and settled over the Diners Club network through its
centralized service center. In order to increase merchant acceptance in certain targeted
countries and territories, we are working with merchant acquirers to offer Diners Club and
Discover acceptance to their merchants. These acquirers are granted licenses to market the
Diners Club brands to existing and new merchants. As we continue to work toward achieving
full card acceptance across our networks, Discover customers have begun to use their cards at
an increasing number of merchant and ATM locations that accept Diners Club cards around the
world. Diners Club cardholders with cards issued by licensees outside of North America are now
able to use their cards on the Discover Network in North America and on the PULSE network
domestically and internationally.
RED FINANCIAL GROUP

Third-Party Issuing Business
Discover has agreements related to issuing credit, debit and prepaid cards with a number of
other financial institutions for issuance of card products on the Discover Network. We refer to
these financial institutions as third-party issuers. Earn merchant discount and acquirer
interchange revenue, net of issuer interchange paid, plus assessments and fees for processing
transactions for third-party issuers of signature cards on the Discover Network.
The discussion below provides additional detail concerning the supporting functions of our two
segments. The credit card, student loan, personal loan and deposit products issued through our
Direct Banking segment require significant investments in credit risk management, marketing,
customer service and technology; whereas the operation of the Discover Network and our
Payment Services business requires that we invest in technology as well as relationships with
issuers, merchants and merchant acquirers.
Credit Risk Management
Credit risk management is a critical component of management and growth strategy. Credit risk
refers to the risk of loss arising from borrower default when borrowers are unable or unwilling
to meet their financial obligations to us. Credit risk is generally highly diversified across millions
of accounts without significant individual exposures. Discover manage risk primarily according
to customer segments and product types.


RED FINANCIAL GROUP

Account Acquisition (New Customers)
Discover acquire new credit card customers through our marketing efforts, including direct
mail, internet, media advertising and merchant relationships, or through unsolicited individual
applications. Discover also use targeted marketing efforts to prospective student loan and
personal loan customers, although student loan customers may also submit unsolicited
individual applications. In all cases, we believe that we have a rigorous process for screening
applicants.
To identify credit-worthy prospective customers, credit risk management team uses proprietary
targeting and analytical models and marketing team matches them with product offerings.
Discover consider the prospective customer's financial stability, as well as ability and willingness
to pay. In order to make the best use of resources to acquire new accounts, seek production
efficiencies, conduct creative testing and aim to continuously improve our product offerings
and enhance our targeting and analytical models.
Discover assess the creditworthiness of each consumer loan applicant through underwriting
process. Discover evaluate prospective customers' applications using credit information
provided by the credit bureaus and other sources. We use credit scoring systems, both
externally developed and proprietary, to evaluate consumer and credit bureau data. When
appropriate, also use experienced credit underwriters to supplement our automated decision-
making processes.
Upon approval of a customer's application, assign a specific annual percentage rate (APR)
using an analytical pricing strategy that provides competitive pricing for customers and seeks to
RED FINANCIAL GROUP

maximize revenue on a risk-adjusted basis. For credit card loans, we also assign a revolving
credit line based on risk level and income.
Portfolio Management (Existing Customers)
The revolving nature of credit card loans requires that regularly assess the credit risk exposure
of such accounts. This assessment reflects information relating to the performance of the
individual's Discover account as well as information from credit bureaus relating to the
customer's broader credit performance. Discover utilize statistical evaluation models to support
the measurement and management of credit risk. At the individual customer level, we use
custom risk models together with generic industry models as an integral part of the credit
decision-making process. Depending on the duration of the customer's account, risk profile and
other performance metrics, the account may be subject to a range of account management
treatments, including limits on transaction authorization and increases or decreases in purchase
and cash credit limits. Our installment loans are billed according to an amortization schedule
that is fixed at the time of the disbursement of the loan.
Customer Assistance
Discover provides customers with a variety of tools to proactively manage their accounts,
including electronic payment reminders and a website dedicated to customer education, as
further discussed under the heading "-Customer Service." These tools are designed to limit a
customer's risk of becoming delinquent. When a customer's account becomes delinquent or is
at risk of becoming delinquent, they employ a variety of strategies to assist customers in
RED FINANCIAL GROUP

becoming current on their accounts. All monthly billing statements of accounts with past due
amounts include a request for payment of such amounts.
Customer assistance personnel generally initiate contact with customers within 30 days after
any portion of their balance becomes past due. The nature and the timing of the initial contact,
typically a personal call or letter, are determined by a review of the customer's prior account
activity and payment habits. We re-evaluate our collection efforts and consider the
implementation of other techniques, including internal collection activities and use of external
vendors, as a customer becomes increasingly delinquent. We limit our exposure to
delinquencies through controls within our process for authorizing transactions and credit limits
and criteria-based account suspension and revocation. In situations involving customers with
financial difficulties, we may enter into arrangements to extend or otherwise change payment
schedules, lower interest rates and/or waive fees to aid customers in becoming current on their
obligations to us.
Marketing Discover:
In addition to working with credit risk management personnel on account acquisition and
portfolio management, our marketing group provides other key functions, including product
development, management of our Cashback Bonus and other rewards programs, fee product
management, and brand and advertising management.


RED FINANCIAL GROUP

Product Development
In order to attract and retain customers and merchants, Discover continue to develop new
programs, features, and benefits and market them through a variety of channels, including
mail, phone and online. Targeted marketing efforts may include balance transfer offers, fee
product offers and reinforcement of our Cashback Bonus and other rewards programs. Through
the development of a large prospect database, use of credit bureau data and use of a customer
contact strategy and management system, we have been able to improve our modeling and
customer engagement capabilities, which helps optimize product, pricing and channel
selection.
Rewards / Cashback Bonus
Under Cashback Bonus program, we provide our credit card customers with up to 1% Cashback
Bonus, based upon their spending level and type of purchases. Customers earn 0.25% on their
first $3,000 in annual purchases and 1% once their total annual purchases exceed $3,000.
Warehouse purchases (those made at select warehouse clubs, wholesale distributors,discount
stores and their affiliates) earn 0.25%.
Customers can choose from several card products that allow them to earn their rewards based
on how they want to use credit, as set forth below.
Discover More card offers 5% Cash back Bonus on purchases up to a specified amount,
subject to certain limitations, in large retail categories such as gasoline, restaurants and
RED FINANCIAL GROUP

department stores that change throughout the year, and up to 1% unlimited Cash back Bonus
on all other purchases.
Discover Motiva card provides customers with Cash back Bonus for making on-time payments
and up to 1% unlimited Cash back Bonus on all purchases.
Miles by Discover customers receive two miles for every $1 on the first $3,000 in travel and
restaurant purchases each year and one mile for every $1 on all other purchases.
Escape by Discover customers earn two miles for every $1 on all purchases. This card has a
$60 annual fee.
Discover Open Road card customers can earn 2% Cash back Bonus on the first $250 in gas and
restaurant purchases each billing period and up to 1% Cash back Bonus on all other purchases.
Discover Business card offers 5% Cash back Bonus on the first $2,000 in office supply
purchases, 2% Cash back Bonus on the first $2,000 in gas purchases each year and up to 1%
unlimited Cash back Bonus on all other purchases.
Card members can earn 5-20% Cash back Bonus at over 200 top online retailers when they shop
directly through our online shopping portal. Miles by Discover customers earn double miles for
their purchases through our online shopping portal. Customers who are not delinquent or
otherwise disqualified may pay with Cash back Bonus at select online retailers in any amount.
They can redeem their Cash back Bonus in any dollar amount for (i) brand-name merchandise
with free shipping at point-of-sale at select merchants such as Amazon, (ii) merchant partner
gift cards (starting at $20) that turn their Cash back
RED FINANCIAL GROUP

Bonus into larger rewards, (iii) Discover gift cards or (iv) charitable donations to select charities.
For customers who prefer cash, Cash back Bonus can be redeemed starting at and in
increments of $50 in the form of a statement credit or direct deposit to a bank account.
Miles by Discover customers who are not delinquent or otherwise disqualified may pay with
miles at select online retailers in any amount. Miles can also be redeemed for brand-name
merchandise with free shipping at point-of-sale at select merchants such as Amazon, travel
credits starting at 10,000 miles, partner gift cards starting at 1,000 miles, Discover gift cards
starting at 5,000 miles, cash in the form of statement credits or direct deposit to a bank account
starting at 5,000 miles or charitable donations starting at 5,000 miles.
Fee Products
Discover markets several fee-based products to our credit card customers, including the
following:
Identity Theft Protection. The most comprehensive identity theft monitoring product we offer
includes an initial credit report, credit bureau report monitoring, prompt alerts that help
customers spot possible identity theft quickly, identity theft insurance up to $25,000 to cover
certain out-of-pocket expenses due to identity theft, and access to knowledgeable
professionals who can provide information about identity theft issues.
Payment Protection. This product allows customers to suspend their payments for up to two
years, depending on the product, in the event of certain covered events. Different products
cover different events, such as unemployment, disability, natural disasters or other life events,
RED FINANCIAL GROUP

such as marriage or birth of a child. Depending on the product and availability under state laws,
outstanding balances up to certain amounts are cancelled in the event of death. A similar
product is also offered to our personal loan customers upon request.
Wallet Protection. This product offers one-call convenience if a customer's wallet is lost or
stolen, including requesting cancellation and replacement of the customer's credit and debit
cards, monitoring the customer's credit bureau reports for 90 days, providing up to $100 to
replace the customer's wallet and, if needed, giving the customer up to a $1,000 cash advance
on his or her Discover card account.
Credit Score Tracker. This product offers customers resources that help them understand and
monitor their credit scores. Credit Score Tracker is specifically designed for score monitoring by
alerting customers when their score changes, allowing customers to set a target score and
providing resources to help customers understand the factors that may be influencing their
scores.
Extended Warranties. Discover customers can purchase online service warranties from our
extended warranty provider to protect purchases of new electronics and appliances as well as
certain other purchases.
Brand and Advertising Management
Discover maintain a full-service, in-house direct marketing department charged with delivering
integrated communications to foster customer engagement with our products and services in
addition to supervising external agencies. Our brand team utilizes consumer insights to define
RED FINANCIAL GROUP

our mass communication strategy, create multi-channel advertising messages and develop
marketing partnerships with sponsorship properties.
Customer Service
Discovers customers can contact our customer service personnel by calling 1-800-Discover.
Credit card customers also can manage their accounts online or through applications for certain
mobile devices. Internet and mobile solutions offer a range of benefits, including:
Online account services that allow customers to customize their accounts, choose how and
when they pay their bills, create annual account summaries that assist them with budgeting
and taxes, research transaction details, initiate transaction disputes, and chat with or email a
customer representative;
Email and mobile text reminders to help customers avoid fees and track big purchases or
returns;
Money management tools like the Spend Analyzer, Pay down Planner and Purchase Planner;
Secure online account numbers that let customers shop online without ever revealing their
actual account numbers;
An online portal where customers automatically earn 5-20% Cash back Bonus when they shop
at well-known online merchants using their Discover card.
RED FINANCIAL GROUP

Our personal and student loan customers can utilize our online account services to manage
their accounts. Our student loan website also includes interactive tools that provide customers
with advice on paying for college and calculators to help them utilize student loans responsibly.
Processing Services
Processing services cover four functional areas: card personalization/embossing, print/mail,
remittance processing and document processing. Card personalization/embossing is
responsible for the embossing and mailing of plastic credit cards for new accounts,
replacements and reissues, as well as gift cards. Print/mail specializes in statement and letter
printing and mailing for merchants and customers. Remittance processing, currently a function
outsourced to a third-party vendor, handles account payments and check processing.
Document processing handles hard-copy forms, including product enrollments and new
account applications.
Fraud Prevention
Discover monitor customers' accounts to prevent, detect, investigate and resolve fraud. Fraud
prevention processes are designed to protect the security of cards, applications and accounts in
a manner consistent with customers' needs to easily acquire and use products. Prevention
systems handle the authorization of application information, verification of customer identity,
sales, processing of convenience and balance transfer checks, and electronic transactions.
Each credit card transaction is subject to screening, authorization and approval through a
proprietary POS decision system. Discover uses a variety of techniques that help identify and
RED FINANCIAL GROUP

halt fraudulent transactions, including adaptive models, rules based decision-making logic,
report analysis, data integrity checks and manual account reviews. We manage accounts
identified by the fraud detection system through technology that integrates fraud prevention
and customer service. Strategies are subject to regular review and enhancement to enable us to
respond quickly to changing credit conditions as well as to protect our customers and our
business from emerging fraud activity.













RED FINANCIAL GROUP

Valuation
Bank of America (BAC)
PRICE/EARNINGS

PRICE/CASH FLOW

BAC 28.49 Peers 16.54 BAC 3.19 Peers 7.03
Premium. A higher P/E ratio than its peers can signify a
more expensive stock or higher growth expectations.
BAC is trading at a significant premium to its peers.

The P/CF ratio, a stocks price divided by the company's
cash flow from operations, is useful for comparing
companies with different capital requirements or financing
structures.
BAC is trading at a significant discount to its peers.

PRICE/PROJECTED
EARNINGS

PRICE TO
EARNINGS/GROWTH
BAC 10.54 Peers 14.06 BAC NA Peers 0.94
A higher price-to-projected earnings ratio than its peers
can signify a more expensive stock or higher future growth
expectations.
BAC is trading at a significant premium to its peers.

The PEG ratio is the stocks P/E divided by the consensus
estimate of long-term earnings growth. Faster growth can
justify higher price multiples.
Ratio not available.

PRICE/BOOK

EARNINGS GROWTH

BAC 0.48 Peers 1.46 BAC 212.12 Peers 42.34
A lower price-to-book ratio makes a stock more attractive
to investors seeking stocks with lower market values per
dollar of equity on the balance sheet.
BAC is trading at a significant discount to its peers.

Elevated earnings growth rates can lead to capital
appreciation and justify higher price-to-earnings ratios.
BAC is expected to have an earnings growth rate that
significantly exceeds its peers.

PRICE/SALES

SALES GROWTH

BAC 1.04 Peers 1.58 BAC -14.19 Peers -5.20
In the absence of P/E and P/B multiples, the price-to-sales
ratio can display the value investors are placing on each
dollar of sales.
BAC is trading at a significant discount to its industry on
this measurement.

A sales growth rate that trails the industry implies that a
company is losing market share.
BAC significantly trails its peers on the basis of sales
growth




RED FINANCIAL GROUP

Discover Financial Services (DFS)

PRICE/EARNINGS

PRICE/CASH FLOW

DFS 9.30 Peers 11.52 DFS 6.90 Peers 4.74
A lower P/E ratio than its peers can signify a less
expensive stock or lower growth expectations.
DFS is trading at a discount to its peers.

The P/CF ratio, a stocks price divided by the
company's cash flow from operations, is useful for
comparing companies with different capital
requirements or financing structures.
DFS is trading at a significant premium to its peers.

PRICE/PROJECTED
EARNINGS

PRICE TO
EARNINGS/GROWTH
DFS 9.30 Peers 10.98 DFS NA Peers 1.39
A lower price-to-projected earnings ratio than its
peers can signify a less expensive stock or lower
future growth expectations.
DFS is trading at a discount to its peers.

The PEG ratio is the stocks P/E divided by the
consensus estimate of long-term earnings growth.
Faster growth can justify higher price multiples.
Ratio not available.

PRICE/BOOK

EARNINGS GROWTH

DFS 2.24 Peers 2.40 DFS 15.73 Peers 7.91
A lower price-to-book ratio makes a stock more
attractive to investors seeking stocks with lower
market values per dollar of equity on the balance
sheet.
DFS is trading at a valuation on par with its peers.

Elevated earnings growth rates can lead to capital
appreciation and justify higher price-to-earnings
ratios.
DFS is expected to have an earnings growth rate that
significantly exceeds its peers.

PRICE/SALES

SALES GROWTH

DFS 2.32 Peers 1.86 DFS 6.11 Peers 8.40
In the absence of P/E and P/B multiples, the price-
to-sales ratio can display the value investors are
placing on each dollar of sales.
DFS is trading at a premium to its industry on this
measurement.

A sales growth rate that trails the industry implies
that a company is losing market share.
DFS significantly trails its peers on the basis of sales
growth




RED FINANCIAL GROUP

1. Capital Asset Pricing Model - CAPM
Definition of Capital Asset Pricing Model - CAPM
A model that describes the relationship between risk and expected return and that is used in
the pricing of risky securities. The general idea behind CAPM is that investors need to be
compensated in two ways: time value of money and risk. The time value of money is
represented by the risk-free (rf) rate in the formula and compensates the investors for placing
money in any investment over a period of time. The other half of the formula represents risk
and calculates the amount of compensation the investor needs for taking on additional risk.
This is calculated by taking a risk measure (beta) that compares the returns of the asset to the
market over a period of time and to the market premium (Rm-rf).
The CAPM says that the expected return of a security or a portfolio equals the rate on a risk-
free security plus a risk premium. If this expected return does not meet or beat the required
return, then the investment should not be undertaken. The security market line plots the
results of the CAPM for all different risks (betas).
Using the CAPM model and the following assumptions, we can compute the expected return of
a stock in this CAPM example: if the risk-free rate is 3%, the beta (risk measure) of the stock is 2
and the expected market return over the period is 10%, the stock is expected to return 17%
(3%+2(10%-3%)).
RED FINANCIAL GROUP



0
2000
4000
6000
8000
10000
12000
14000
GROWTH TO OPERATIONS
MULTIPLE
VALUE GROWTH
VALUE OPERATIONS
(Billions)
MARKET CAP (Billions)
Free CASH FLOW
ICC
RED FINANCIAL GROUP

2. Triangulation

Bank of America (BAC)











RED FINANCIAL GROUP



Discover Financial Services (DFS)












RED FINANCIAL GROUP

3. Valuation Merger
Financial statements for banks present a different analytical problem than statements
for manufacturing and service companies. As a result, analysis of a bank's financial
statements requires a distinct approach that recognizes a bank's unique risks.
Banks take deposits from savers and pay interest on some of these accounts. They pass
these funds on to borrowers and receive interest on the loans. Their profits are derived
from the spread between the rate they pay for funds and the rate they receive from
borrowers. This ability to pool deposits from many sources that can be lent to many
different borrowers creates the flow of funds inherent in the banking system. By
managing this flow of funds, banks generate profits, acting as the intermediary of
interest paid and interest received, and taking on the risks of offering credit.











RED FINANCIAL GROUP

Comparing BAC & DFS


-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
1 2 3 4 5 6 7 8 9 10 11 12
Bank Of America VS Discover Financial Services
Fixed Asset

BAC US Equity
DFS US Equity
y = 153189x + 265569
R = 0.9499
-
500,000
1,000,000
1,500,000
2,000,000
2,500,000
1 2 3 4 5 6 7 8 9 10 11 12
A
x
i
s

T
i
t
l
e

Bank of America VS Discover Financial Services
Total Liability

BAC US Equity
DFS US Equity
Linear (BAC US Equity)
RED FINANCIAL GROUP










Deal Structure
1
2
3
4
5
6
7
59569
70847
82066
62585 65502
60781
55083
2477.0249
3138.407
2748.518
2972.361
3698.802
3016.057
4728.96
BOA VS DFS
Retained Earnings
BAC US Equity 38,943 43379 49765 47912 55728
DFS US Equity #N/A N.A. #N/A N.A. #N/A N.A. #N/A N.A. #N/A N.A.
RED FINANCIAL GROUP

We have hypothesized that Bank of America could pay $23.7 billion for Discover, a valuation
representing a roughly 20% premium to Discovers current price and a 2.7 multiple over book
value. The acquisition would create the second-largest U.S. credit-card issuer based on number
of cards in circulation and the fifth-largest based on outstanding loans.
Discover is already working to address the its funding costs by increasing its retail deposit base
in its home market. Discover had $46.6 billion in outstanding credit-card loans and its various
network businesses handled $78.4 billion in payments volume during the fiscal second quarter.
The financial crisis led us down a path of developing a very diverse funding strategy
For the credit-card lender since it was spun off from Morgan Stanley in 2007 on the basis it
would significantly boost any buyers loan book and give them access to an extensive
proprietary payments network
$23.7 Billion USD Payable at Closing
20% of premium of Discovers current price and 2.7 multiple over book value
80% cash(USD) ; 20% stock option
80% cash deal includes debt write-off
Stucture:1.2705 shares of BOA for every 1 share of Discover


RED FINANCIAL GROUP

Deal Boundaries
Cash-for-Stock Model


20.00
30.00
40.00
50.00
60.00
70.00
80.00
90.00
100.00
110.00
120.00
130.00
140.00
E
x
c
h
a
n
g
e

R
a
t
i
o

DCF Value of "Newco"
Win-Loss Boundaries: DCF Analysis
Buyer's Maximum ER
Target's Minimum ER
I. Both Win
IV. Buyer Wins
Target Loses
III. Both Lose
II. Buyer Loses,
Target Wins
RED FINANCIAL GROUP


Stock-for-Stock Model

20.00
40.00
60.00
80.00
100.00
120.00
140.00
E
x
c
h
a
n
g
e

R
a
t
i
o

P/E Ratio of "Newco"
Win-Loss Boundaries: P/E Analysis
Buyer's Maximum ER
Target's Minimum ER
I. Both Win
II. Target Wins,
Buyer Loses
III. Both
Lose
IV. Target Loses, Buyer Wins
20.00
30.00
40.00
50.00
60.00
70.00
80.00
90.00
100.00
110.00
120.00
130.00
140.00
E
x
c
h
a
n
g
e

R
a
t
i
o

DCF Value of "Newco"
Win-Loss Boundaries: DCF Analysis
Buyer's Maximum ER
Target's Minimum ER
I. Both Win
IV. Buyer Wins
Target Loses
III. Both Lose
II. Buyer Loses,
Target Wins
RED FINANCIAL GROUP







Synergies
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40.00
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100.00
120.00
140.00
E
x
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e

R
a
t
i
o

P/E Ratio of "Newco"
Win-Loss Boundaries: P/E Analysis
Buyer's Maximum ER
Target's Minimum ER
I. Both Win
II. Target Wins,
Buyer Loses
III. Both
Lose
IV. Target Loses, Buyer Wins
RED FINANCIAL GROUP

Discover issues credit cards and also operates a global payments network that competes
against Visa MasterCard Inc and American Express Co to process transactions.
Bank of America would stand to benefit from higher-yielding asset growth opportunities,
particularly in their under-penetrated credit card Discover would benefit from an increase in
cardholders and access to Wells Fargos considerably lower cost of funding.
Credit Cards constitute a small portion of Bank of Americas enormous business model, with the
cards business contributing to less than 7% of its total value, according to our analysis. In
comparison, credit cards contribute to more than a quarter of JPMorgan Chases value. The
business cannot be easily ignored owing to the huge yield margins in credit card loans with
respect to other consumer loans
Financial Synergies

Bank of America had about $21.5 billion in outstanding card loans at the end of 2011. This is but
a fraction of the $189 billion card loan portfolio its biggest rival JPMorgan boasts of. Bank of
America-Discover deal would boost the banks card portfolio by more than $45 billion making
the combined entity the fifth-largest card issuer in terms of card loans outstanding. In fact, in
RED FINANCIAL GROUP

terms of the number of cards in circulation, the combined entity would be second only to
JPMorgan.
As for Discover, the deal would mean an almost complete hold on the credit cards issued by
one of the largest, and arguably the most profitable, of the U.S. financial giants. Not to mention
the nearly limitless low-cost funding that would be made available to the card business from
the banks huge deposits business.
The complementary nature of Bank of Americas credit card business and Discovers business
model allows for a considerable amount of synergies in terms of increased interest margins,
wider geographical reach as well as reduced operating overheads.
Our analysis values Discover at nearly $20 billion close to its current market cap. We would
allow for as much as a 10% increase in this value from faster growth in the loan base, besides
improved margins and costs from a potential acquisition. That would make the Discover
acquisition for Bank of America a profitable one, provided the going price is kept below $22
billion.




Risk
RED FINANCIAL GROUP

Bank of America has numerous lawsuit filed against in various matters. Few of them are related
to bad credit sold to various investors and agencies. Credit Rating given by S&P 500 is A- while
Discover financial has AAA credit rating. This may tarnish Discovers image and reduce its
credibility, hence making it difficult for Discover to get credits at lower rates.
Credit risk, BAC already is facing a huge credit crisis after the housing bubble. Credit risk refers
to the risk of loss arising from borrower default when borrowers are unable or unwilling to
meet their financial obligations to us. Credit risk is generally highly diversified across millions of
accounts without significant individual exposures. BAC already is facing a huge credit crisis after
the housing bubble.






Conclusion
RED FINANCIAL GROUP

When it comes to serving customers in U.S. retail banking, direct banking is the future.
According to an American Bankers Association study, most customers prefer the online channel
over bank branches. In fact, the big move now is not from bricks-and-mortar to online, but from
personal computers to mobile devices for online accessa trend that represents new
opportunities for Discover in both direct banking and payments.
In addition to aligning with consumer preferences, direct banking allows banks to broaden and
deepen their relationships with existing customers, and to attract new customers. We believe
the direct model is also inherently more efficient than the traditional branch-banking model,
which means they can offer consumers better value while still achieving strong financial returns
for Discover.
Our plan for Bank of America for the years ahead is to continue to expand its direct banking
footprint, using Discover card business as the cornerstone, and leveraging its expertise in
customer service, online experience, direct marketing and unsecured lendingas well as the
strength and reputation of the Discover brand.




Appendix i
RED FINANCIAL GROUP

Bloomberg Terminal
Yahoo Finance: http://finance.yahoo.com/news/Lydians-Preliminary-Economic-iw-
145817121.html
Rueters.com
Thestreet.com











Appendix ii
RED FINANCIAL GROUP

BAC: Balance Sheet
Period Ending Dec 30, 2011 Dec 30, 2010 Dec 30, 2009
Assets
Current Assets

Cash And Cash Equivalents 838,024,000 877,201,000 829,121,000

Short Term Investments - - -

Net Receivables 66,999,000 85,704,000 81,996,000

Inventory - - -

Other Current Assets - - -
Total Current Assets - - -
Long Term Investments 1,467,447,000 1,554,515,000 1,507,845,000
Property Plant and Equipment 13,637,000 14,306,000 15,500,000
Goodwill 69,967,000 73,861,000 86,314,000
Intangible Assets 8,021,000 9,923,000 12,026,000
Accumulated Amortization - - -
Other Assets 145,686,000 182,124,000 191,077,000
Deferred Long Term Asset Charges - - -
Total Assets 2,129,046,000 2,264,909,000 2,230,232,000
Liabilities
Current Liabilities

Accounts Payable 123,049,000 144,580,000 127,854,000

Short/Current Long Term Debt 250,562,000 305,321,000 324,709,000

Other Current Liabilities 1,033,041,000 1,010,430,000 991,611,000
Total Current Liabilities - - -
Long Term Debt 120,028,000 127,899,000 116,093,000
Other Liabilities - - -
Deferred Long Term Liability Charges - - -
Minority Interest - - -
Negative Goodwill - - -
Total Liabilities 1,898,945,000 2,036,661,000 1,998,788,000
Stockholders' Equity
Misc Stocks Options Warrants - - -
Redeemable Preferred Stock - - -
RED FINANCIAL GROUP

Preferred Stock 18,397,000 16,562,000 37,208,000
Common Stock 156,621,000 150,905,000 128,734,000
Retained Earnings 60,520,000 60,849,000 71,233,000
Treasury Stock - - -
Capital Surplus - - -
Other Stockholder Equity (5,437,000) (68,000) (5,731,000)
Total Stockholder Equity 230,101,000 228,248,000 231,444,000
Net Tangible Assets 152,113,000 144,464,000 133,104,000

BAC: Income Statement
Period Ending Dec 30, 2011 Dec 30, 2010 Dec 30, 2009
Assets
Current Assets

Cash And Cash Equivalents 838,024,000 877,201,000 829,121,000

Short Term Investments - - -

Net Receivables 66,999,000 85,704,000 81,996,000

Inventory - - -

Other Current Assets - - -
Total Current Assets - - -
Long Term Investments 1,467,447,000 1,554,515,000 1,507,845,000
Property Plant and Equipment 13,637,000 14,306,000 15,500,000
Goodwill 69,967,000 73,861,000 86,314,000
Intangible Assets 8,021,000 9,923,000 12,026,000
Accumulated Amortization - - -
Other Assets 145,686,000 182,124,000 191,077,000
Deferred Long Term Asset Charges - - -
Total Assets 2,129,046,000 2,264,909,000 2,230,232,000
Liabilities
Current Liabilities

Accounts Payable 123,049,000 144,580,000 127,854,000

Short/Current Long Term Debt 250,562,000 305,321,000 324,709,000

Other Current Liabilities 1,033,041,000 1,010,430,000 991,611,000
RED FINANCIAL GROUP

Total Current Liabilities - - -
Long Term Debt 120,028,000 127,899,000 116,093,000
Other Liabilities - - -
Deferred Long Term Liability Charges - - -
Minority Interest - - -
Negative Goodwill - - -
Total Liabilities 1,898,945,000 2,036,661,000 1,998,788,000
Stockholders' Equity
Misc Stocks Options Warrants - - -
Redeemable Preferred Stock - - -
Preferred Stock 18,397,000 16,562,000 37,208,000
Common Stock 156,621,000 150,905,000 128,734,000
Retained Earnings 60,520,000 60,849,000 71,233,000
Treasury Stock - - -
Capital Surplus - - -
Other Stockholder Equity (5,437,000) (68,000) (5,731,000)
Total Stockholder Equity 230,101,000 228,248,000 231,444,000
Net Tangible Assets 152,113,000 144,464,000 133,104,000