Discover 2009 Annual Report Download - page 34

and credit risk. The CARD Act will restrict our ability to manage market and individual risk in this manner. Restrictions on
our ability to reprice accounts will limit our ability to extend credit to new customers and provide additional credit to
current customers. The provisions related to complying with restrictions on over-limit fees and payment allocation will also
significantly change our business as we have already advised our customers that we will no longer be charging over-limit
fees and have made changes to our payment allocation practices. Several provisions of the CARD Act became effective in
August 2009, but most of the requirements will become effective in February 2010 and others will become effective in
August 2010. Legislation has been proposed to accelerate the effective date of all of the CARD Act provisions effective as
soon as the legislation is enacted, but prospects for enactment are uncertain. Although the Federal Reserve has issued
final rules implementing most of the provisions of the CARD Act, it has yet to issue rules implementing the provisions that
take effect in August 2010. Accordingly, it is difficult to assess the impact of those provisions at this time.
The CARD Act’s restrictions on finance charges and fees are expected to result in reduced interest income and loan fee
income for us. We rely heavily on interest income. Our interest income from credit card loans was $2.8 billion for the
2009 fiscal year, which was 59% of revenues (defined as net interest income plus other income), excluding settlement
payments received from Visa. Our loan fee income was $247.3 million for the 2009 fiscal year, which was 5% of
revenues excluding the Visa payments. For the 2008 fiscal year, our interest income from credit card loans was $2.2
billion and our loan fee income was $262.6 million.
While we have already made, and anticipate making additional, changes to our pricing, credit and marketing
practices that are designed to lessen the impact of the changes required by the CARD Act, there is no assurance that we
will be successful. The long-term impact of the CARD Act on credit card industry profitability generally, and on our
business practices and revenues, will depend upon consumer behavior and the actions of our competitors, which are
difficult to predict at this time. Consumers may choose to use credit cards less frequently or for smaller dollar amounts.
We may have to reconsider certain strategies in order to remain competitive. If we are not able to lessen the impact of the
changes required by the CARD Act, the changes will have a material adverse effect on our results of operations.
As a participant in the U.S. Treasury’s Capital Purchase Program, we are subject to restrictions and obligations,
including limitations on our ability to pay dividends and repurchase our capital stock.
We issued and sold to the U.S. Department of the Treasury (the “U.S. Treasury”) senior preferred stock and a ten-year
warrant to purchase our common stock for an aggregate purchase price of approximately $1.2 billion in March 2009.
The issuance was part of the U.S. Treasury’s Capital Purchase Program (“CPP”). Participation in the CPP subjects us to
specific restrictions under the terms of the CPP, including limits on our ability to pay dividends (quarterly dividends on our
common stock are limited to $0.06 per share or less) and repurchase our capital stock, limitations on executive
compensation, and increased oversight by the U.S. Treasury, regulators and Congress under the Emergency Economic
Stabilization Act of 2008, as amended (“EESA”). For details regarding these restrictions and other potential restrictions
affecting the financial services industry generally, see “Management’s Discussion and Analysis of Financial Condition and
Results of Operations – Legislative and Regulatory Developments” and “– Liquidity and Capital Resources – U.S. Treasury
Capital Purchase Program.”
The relatively recent withdrawal of several of our banking competitors from the CPP may leave us at a competitive
disadvantage as those institutions are no longer subject to the restrictions imposed under the CPP. Withdrawing from the
CPP requires approval of banking regulators and we may not be able to obtain such approval, or a condition of
obtaining such approval may require us to raise additional capital. Unanticipated consequences of participation in the
CPP could materially and adversely affect our business, results of operations, financial condition, access to funding and
the trading price of our common stock.
Our business, financial condition and results of operations could be adversely affected by new regulations and
supervision to which we are subject as a result of becoming a bank holding company.
We became a bank holding company in March 2009. As a bank holding company, we are required to meet certain
risk-based capital and leverage ratio requirements and submit financial and other reports to the Federal Reserve. Further,
we are subject to organization-wide oversight and examination by the Federal Reserve, including scrutiny of our risk
management program; business strategy, earnings, capital and cash flow; anti-money laundering program; and
examination of our non-bank businesses, including Discover Network, PULSE and Diners Club, and their relationships
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