Discover 2009 Annual Report Download - page 93

Our liquidity reserve is comprised of cash and cash equivalents and other investments. Cash and cash equivalents are
invested primarily in deposits with the Federal Reserve, highly-rated certificates of deposit, and triple-A rated government
mutual funds with maturities of 90 days or less when purchased. Other investments include certificates of deposit with
maturities greater than 90 days and certain credit card asset-backed securities of other issuers. The level of our liquidity
reserve may fluctuate based upon the level of expected maturities of our funding sources as well as operational
requirements and market conditions.
During 2009, we increased our liquidity reserve by $4.8 billion to $14.2 billion at November 30, 2009, in
anticipation of approximately $19 billion in maturities of asset-backed securities, certificates of deposit and senior
unsecured notes in 2010, of which $12.5 billion are due in the first half of 2010.
November 30,
2009 2008
(dollars in billions)
Liquidity reserve
Cash and cash equivalents(1) ..................................................................................................................................................... $12.7 $ 9.4
Other investments ................................................................................................................................................................... 1.5 —
Total liquidity reserve ........................................................................................................................................................... 14.2 9.4
Undrawn credit facilities
Committed secured credit facilities ............................................................................................................................................. 1.5 1.5
Committed unsecured credit facility ............................................................................................................................................ 2.4 2.4
Federal Reserve discount window .............................................................................................................................................. 4.8 5.2
Total undrawn credit facilities ................................................................................................................................................ 8.7 9.1
Total liquidity reserve and undrawn credit facilities ....................................................................................................................... $22.9 $18.5
(1) Cash-in-process is excluded from cash and cash equivalents for liquidity purposes.
Capital
We seek to manage capital to levels and composition sufficient to support the risks of the business, meet regulatory
requirements and rating agency guidelines, and support future business growth. Our primary sources of capital are from
the earnings generated by the business, proceeds from participating in a government program, and equity raised through
the capital markets.
Under regulatory capital requirements adopted by the FDIC, the Federal Reserve and other bank regulatory agencies,
we must maintain minimum levels of capital. These requirements are more fully described in Note 21: Capital Adequacy
to our consolidated financial statements. At November 30, 2009, Discover Financial Services and our primary banking
subsidiary, Discover Bank, maintained a well-capitalized status, exceeding the regulatory minimums to which they were
subject.
In the third quarter of 2009, we took certain actions to adjust the credit enhancement structure of our securitization
trusts as described in “ – Liquidity and Capital Resources – Funding Sources – Securitization Financing” above. These
actions had the effect of including trust assets in our risk-weighted assets for regulatory capital purposes effective July
2009. As a result, consolidation of the trusts under new accounting guidance effective on December 1, 2009, as
described in “ – Accounting Treatment for Off-Balance Sheet Securitizations,” will have a lesser impact on our regulatory
capital calculations than would have otherwise been the case, because much of this effect has already been reflected as a
result of the trust actions. However, the $1.4 billion charge to retained earnings as a result of adopting new accounting
guidance will reduce our regulatory capital ratios as illustrated in “ – Accounting Treatment for Off-Balance Sheet
Securitizations” above. Nevertheless, both Discover Financial Services and Discover Bank are expected to remain above
well-capitalized levels after the adoption of the new accounting guidance.
Equity Capital. Equity increased to $8.5 billion at November 30, 2009 from $5.9 billion at November 30, 2008. Our
capital level has been positively impacted by the closing of the $1.2 billion CPP transaction with the U.S. Treasury in
March 2009 described below. In addition, in the third quarter 2009, we completed a $534 million common stock
-81-