Discover 2011 Annual Report Download - page 43

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Interest rates may also adversely impact our delinquency and charge-off rates. Many consumer lending products bear
interest rates that fluctuate with certain base lending rates published in the market, such as the prime rate and LIBOR. As a
result, higher interest rates often lead to higher payment requirements by consumers under obligations to us and other lenders,
which may reduce their ability to remain current on their obligations to us and thereby lead to loan delinquencies and additions
to our loan loss provision, which could materially adversely affect our earnings.
We regularly monitor interest rates and have entered into interest rate derivative agreements in an effort to manage our
interest rate risk exposure. Changes in market assumptions regarding future interest rates could significantly impact the
valuation of our derivative instruments and, accordingly, impact our financial position and results of operations. If our hedging
activities are not appropriately monitored or executed, these activities may not effectively mitigate our interest rate sensitivity
or have the desired impact on our results of operations or financial condition. For information related to interest rate risk
sensitivities, see "-Quantitative and Qualitative Disclosures About Market Risk."
We may be limited in our ability to pay dividends and repurchase our common stock.
We increased our quarterly common stock dividend from $0.02 per share to $0.06 per share in the second quarter of
2011 and then to $0.10 per share in the first quarter of 2012. In addition, we approved a new two-year $1.0 billion share
repurchase program in June 2011, and repurchased 18 million shares, or approximately 3%, of our common stock, for $425
million during the remainder of the 2011 fiscal year. The declaration and payment of future dividends, as well as the amount
thereof, are subject to the discretion of our Board of Directors. The amount and size of any future dividends and share
repurchases will depend upon our results of operations, financial condition, capital levels, cash requirements, future prospects
and other factors. In addition, banking laws and regulations and our banking regulators may limit our ability to pay dividends
and make share repurchases. For example, our ability to make capital distributions, including our ability to pay dividends or
repurchase shares of our common stock, is subject to the Federal Reserve's review and non-objection of our annual capital plan.
In certain circumstances, we will not be able to make a capital distribution unless the Federal Reserve has approved such
distribution. Further, current or future regulatory initiatives may require us to hold more capital in the future.
For additional information regarding capital, dividends and share repurchases, see "Business - Supervision and
Regulation - Capital, Dividends and Share Repurchases," "Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities," "Management's Discussion and Analysis of Financial Condition and Results
of Operations - Regulatory Environment and Developments - Capital and Liquidity," "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital Resources - Capital" and Note 19: Capital Adequacy
to our consolidated financial statements. There can be no assurance that we will declare and pay any dividends or repurchase
any shares of our common stock in the future.
If our security systems, or those of merchants, merchant acquirers or other third parties containing information about
customers, are compromised, we may be subject to liability and damage to our reputation.
Our security protection measures or the security protections of third parties participating in our networks may not be
sufficient to protect the confidentiality of information relating to customers or transactions processed on our networks.
Customer data also may be stored on systems of third-party service providers and merchants whose security protections
measures may not be adequate. Third-party carriers regularly transport customer data, and may lose sensitive customer
information. Unauthorized access to our networks or any of our other information systems potentially could jeopardize the
security of confidential information stored in our computer systems or transmitted by our customers or others. As we increase
acceptance of the Discover card internationally and expand our suite of direct banking products, we may experience additional
risks related to security systems. If our security systems or those of merchants, processors or other third-party service providers
are compromised such that this confidential information is disclosed to unauthorized parties, we may be subject to liability. For
example, in the event of a security breach, we may incur losses related to fraudulent use of cards issued by us as well as the
operational costs associated with reissuing cards. Although we take preventive measures to address these factors, such
measures are costly and may become more costly in the future. Moreover, these measures may not protect us from liability,
which may not be adequately covered by insurance, or from damage to our reputation.
We may be unable to increase or sustain Discover card usage, which could impair growth in, or lead to diminishing, average
balances and total revenue.
A key element of our business strategy is to increase the usage of the Discover card by our customers, including making
it their primary card, and thereby increase our revenue from transaction and service fees and interest income. However, our
customers' use and payment patterns may change because of social, legal and economic factors, and customers may decide to
use debit cards or other payment products instead of credit cards, not to increase card usage, or to pay the balances within the
grace period to avoid finance charges. We face challenges from competing card products in our attempts to increase credit card
usage by our existing customers. Our ability to increase card usage also is dependent on customer satisfaction, which may be
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