Discover 2009 Annual Report Download - page 38

our competitors. In addition, we may not identify customers who are likely to default on their payment obligations to us
quickly and reduce our exposure by closing credit lines and restricting authorizations, which could adversely impact our
financial condition and results of operations.
Our ability to manage credit risk also may be adversely affected by legal or regulatory changes (such as bankruptcy
laws, minimum payment regulations and re-age guidance), competitors’ actions and consumer behavior, as well as
inadequate collections staffing, techniques, models and vendor performance.
We continue to add to our personal and student lending products and have expanded our marketing of these products.
Our personal and student loan portfolios grew to $1.4 billion and $1.9 billion, respectively, at November 30, 2009,
compared to $1.0 billion and $300 million, respectively, at November 30, 2008. We have less experience in these areas
as compared to our traditional products and segments, and there can be no assurance that we will be able to grow these
products in accordance with our strategies, manage our credit risk or generate sufficient revenue to cover our expenses in
these markets. Our failure to manage our credit risks may materially adversely affect our profitability and our ability to
grow these products, limiting our ability to further diversify our business.
Adverse market conditions or an inability to effectively manage our liquidity risk could negatively impact our ability to
meet our liquidity and funding needs, which could materially adversely impact our business operations and overall
financial condition.
We must effectively manage the liquidity risk to which we are exposed. We require liquidity in order to meet cash
requirements such as day-to-day operating expenses, extensions of credit on our consumer loans and required payments
of principal and interest on our borrowings. Our primary sources of liquidity and funding are payments on our credit
card loan receivables, deposits, cash flow from our investment portfolio and assets (consisting mainly of cash or cash
equivalents) and proceeds from securitization transactions and securities offerings. We may maintain too much liquidity,
which can be costly and limit financial flexibility, or we may be too illiquid, which could result in financial distress during
a liquidity stress event.
Our liquidity reserve had a balance of approximately $14.2 billion as of November 30, 2009, compared to $9.4
billion as of November 30, 2008. We have increased our liquidity reserve in anticipation of approximately $12.5 billion
of asset-backed securities and deposit maturities in the first half of 2010. Our total contingent liquidity sources as of
November 30, 2009 amounted to $22.9 billion, consisting of $14.2 billion in our liquidity reserve, $4.8 billion Federal
discount window capacity, $2.4 billion in a revolving credit facility, and $1.5 billion in asset-backed conduit capacity.
In the event that our current sources of liquidity do not satisfy our needs, we would be required to seek additional
financing. The availability of additional financing will depend on a variety of factors such as market conditions, the
general availability of credit to the financial services industry and our credit ratings. Disruptions, uncertainty or volatility
in the capital, credit or deposit markets may limit our ability to replace maturing liabilities in a timely manner and satisfy
other funding requirements. As such, we may be forced to delay raising funding, issue shorter-term securities than
desired, or bear an unattractive cost of funding, which could decrease profitability and significantly reduce financial
flexibility. Further, in disorderly financial markets or for other reasons, it may be difficult or impossible to liquidate some
of our investments to meet our liquidity needs.
An inability to accept or maintain deposits in the future could materially adversely affect our liquidity position and our
ability to fund our business.
We obtain deposits from consumers either directly or through affinity relationships (“direct-to-consumer deposits”) and
through third-party brokers who offer our deposits to their customers (“brokered deposits”). We have increased and plan
to continue to increase our direct-to-consumer deposit funding. We had $12.6 billion in direct-to-consumer deposits and
$19.5 billion in brokered deposits as of November 30, 2009, compared to $6.2 billion in direct-to-consumer deposits
and $22.3 billion in brokered deposits as of November 30, 2008.
Many other financial services firms are increasing their use of deposit funding, including recently-formed bank holding
companies, and as such we may experience increased competition in the deposit markets. We cannot predict how this
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