Discover 2011 Annual Report Download - page 93

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Effective December 16, 2011, Discover and Discover Bank terminated a $2.4 billion unsecured committed credit facility
that was scheduled to expire under its terms in May 2012. The facility was a source of contingent liquidity, and neither
Discover nor Discover Bank had borrowed under the facility during its term. The facility was terminated due to the availability
of other sources of contingent liquidity. The terms of the credit facility included various affirmative and negative covenants,
including financial covenants related to the maintenance of certain capitalization and tangible net worth levels, and certain
double leverage, delinquency and tier 1 capital to loans ratios. The credit facility also included customary events of default with
corresponding grace periods, including, without limitation, payment defaults, cross-defaults to other agreements evidencing
indebtedness for borrowed money and bankruptcy-related defaults.
For information regarding regulatory initiatives related to liquidity management, see "-Regulatory Environment and
Developments - Capital and Liquidity."
Capital
Our primary sources of capital are from the earnings generated by our businesses and issuances in the capital markets.
We seek to manage capital to a level and composition sufficient to support the risks of our businesses, meet regulatory
requirements, adhere to rating agency guidelines and support future business growth. Within these constraints, we are focused
on deploying capital in a manner that provides attractive returns to our stockholders. The level, composition and utilization of
capital are influenced by changes in the economic environment, strategic initiatives, and legislative and regulatory
developments.
Under regulatory capital requirements adopted by the FDIC, the Federal Reserve and other bank regulatory agencies,
we, along with Discover Bank, must maintain minimum levels of capital. 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
limit our business activities and have a direct material effect on our financial position and results. We must meet specific capital
guidelines that involve quantitative measures of assets and liabilities 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.
Our capital adequacy assessment also includes tax and accounting considerations in accordance with regulatory
guidance. We maintain a substantial deferred tax asset on our balance sheet, and we include this asset when calculating our
regulatory capital levels. However, for regulatory capital purposes, deferred tax assets that are dependent on future taxable
income are currently limited to the lesser of: (i) the amount of deferred tax assets we expect to realize within one year of the
calendar quarter-end date, based on our projected future taxable income for that year; or (ii) 10% of the amount of our Tier 1
capital. At November 30, 2011, no portion of our deferred tax asset was disallowed for regulatory capital purposes.
At November 30, 2011, Discover Financial Services and Discover Bank met the requirements for "well-capitalized"
status, exceeding the regulatory minimums to which they were subject under Basel I.
Current or future regulatory initiatives may require us to hold more capital in the future. In December 2011, the Federal
Reserve issued proposed rules to implement heightened prudential standards for large bank holding companies, including us, as
required by the Reform Act, including risk-based capital and leverage standards. In November 2011, the Federal Reserve
issued a final rule requiring the submission of annual capital plans to the Federal Reserve for its review and non-objection. The
instructions accompanying the Federal Reserve's final rule regarding capital plans also indicate that the Federal Reserve
expects covered companies to show that they can achieve “readily and without difficulty the ratios required by the Basel III
framework as they would come into effect in the United States.” For more information regarding these regulatory initiatives,
see “- Regulatory Environment and Developments - Capital and Liquidity.”
In the second quarter of 2011, we increased our quarterly common stock dividend from $.02 per share to $.06 per share
and maintained a $.06 per share dividend in each of the third and fourth quarters of 2011. In the first quarter of 2012, we
increased our dividend to $.10 per share. In addition, on June 15, 2011, our Board of Directors approved a share repurchase
program authorizing the repurchase of up to $1 billion of our outstanding shares of common stock. The program expires on
June 14, 2013, and may be terminated at any time. Through the end of fiscal year 2011, we had repurchased 18 million shares,
or approximately 3%, of our outstanding common stock for $425 million.
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, as noted above, current
or future regulatory initiatives may require us to hold more capital in the future. There can be no assurance that we will declare
and pay any dividends or repurchase any shares of our common stock in the future.
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