Discover 2009 Annual Report Download - page 143

21. Capital Adequacy
The Company became subject to capital adequacy guidelines of the Federal Reserve in the second quarter 2009 upon
becoming a bank holding company. Discover Bank (the “Bank”), the Company’s main banking subsidiary, is subject to
various regulatory capital requirements as administered by the Federal Deposit Insurance Corporation (the “FDIC”). Failure
to meet minimum capital requirements can result in the initiation of certain mandatory and possibly additional discretionary
actions by regulators that, if undertaken, could have a direct material effect on the financial position and results of the
Company and the Bank. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the
Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and
certain off-balance sheet items, as calculated under regulatory accounting practices. Capital amounts and classification are
also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to
maintain minimum amounts and ratios (as defined in the regulations) of total and Tier 1 capital to risk-weighted assets,
and of Tier I capital to average assets. Management believes that, as of November 30, 2009, the Company and the Bank
met all capital adequacy requirements to which they were subject.
Under regulatory capital requirements, the Company and the Bank must maintain minimum levels of capital that are
dependent upon the risk of the financial institution’s assets, specifically (a) 8% to 10% of total capital to risk-weighted
assets (“total risk-based capital ratio”), (b) 4% to 6% of Tier 1 capital to risk-weighted assets (“Tier 1 risk-based capital
ratio”) and (c) 4% to 5% of Tier 1 capital to average assets (“Tier 1 leverage ratio”). To be categorized as “well-
capitalized,” the Company and the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage
ratios as set forth in the table below. The Company and the Bank were “well-capitalized” as of November 30, 2009, and
the Bank was “well-capitalized” as of November 30, 2008, under the regulatory framework for prompt corrective action
established by the FDIC. As of November 30, 2009, there have been no conditions or events that management believes
have changed the Company’s or the Bank’s category.
Effective July 2009, the Company and the Bank began consolidating the trusts for purposes of computing regulatory
capital as a result of actions taken to provide incremental credit enhancement to the trusts, which are discussed in greater
detail in Note 6: Credit Card Securitization Activities. In accordance with regulatory capital requirements, the Company and
the Bank now include the assets of the trusts, exclusive of any retained interests held on-balance sheet, in the Company’s and
the Bank’s regulatory capital calculations. As a result, the Company’s and the Bank’s risk-weighted assets increased, causing
its capital ratios to decrease, but both the Company and the Bank remain above well-capitalized levels.
The following table shows the actual capital amounts and ratios of the Company as of November 30, 2009 and of the
Bank as of November 30, 2009 and 2008 and comparisons of each to the regulatory minimum and “well-capitalized”
requirements (dollars in thousands):
Actual
Minimum Capital
Requirements
Capital Requirements To Be
Classified as
Well-Capitalized
Amount Ratio Amount Ratio Amount Ratio
November 30, 2009:
Total capital (to risk-weighted assets)
Discover Financial Services .................................................................... $9,516,965 17.9% $4,262,230 ≥8.0% $5,327,788 ≥10.0%
Discover Bank ...................................................................................... $8,210,450 15.8% $4,168,103 ≥8.0% $5,210,129 ≥10.0%
Tier I capital (to risk-weighted assets)
Discover Financial Services .................................................................... $8,139,309 15.3% $2,131,115 ≥4.0% $3,196,673 ≥6.0%
Discover Bank ...................................................................................... $6,572,320 12.6% $2,084,052 ≥4.0% $3,126,077 ≥6.0%
Tier I capital (to average assets)
Discover Financial Services .................................................................... $8,139,309 18.1% $1,798,937 ≥4.0% $2,248,672 ≥5.0%
Discover Bank ...................................................................................... $6,572,320 15.9% $1,657,397 ≥4.0% $2,071,746 ≥5.0%
November 30, 2008:
Total capital (to risk-weighted assets)
Discover Bank ...................................................................................... $4,285,345 12.9% $2,663,339 ≥8.0% $3,329,174 ≥10.0%
Tier I capital (to risk-weighted assets)
Discover Bank ...................................................................................... $3,818,428 11.5% $1,331,670 ≥4.0% $1,997,504 ≥6.0%
Tier I capital (to average assets)
Discover Bank ...................................................................................... $3,818,428 11.0% $1,044,248 ≥3.0% $1,740,414 ≥5.0%
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