Discover 2014 Annual Report Download - page 45

-31-
Our ability to manage credit risk and avoid high charge-off rates may be adversely affected by economic
conditions that may be difficult to predict as explained in our economic conditions risk factor at the beginning of this
section. The full-year net charge-off rate for total loan receivables was 2.04% in 2014, up from 1.98% in 2013. At
December 31, 2014 and 2013, $660 million, or 0.94%, and $634 million, or 0.96%, of our loan receivables were
non-performing (defined as loans over 90 days delinquent and accruing interest plus loans not accruing interest). We
are experiencing a period of historical lows in our delinquency and charge-off rates and we expect that these rates will
be increasing over time. There can be no assurance that our underwriting and portfolio management strategies will
permit us to avoid high charge-off levels, or that our allowance for loan losses will be sufficient to cover actual losses.
A customer's ability and willingness to repay us can be negatively impacted by increases in their payment
obligations to other lenders and by restricted availability of credit to consumers generally. Our collection operations
may not compete effectively to secure more of customers' diminished cash flow than our competitors. In addition, we
may fail to quickly identify customers who are likely to default on their payment obligations 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
restrictions on collections, bankruptcy laws, minimum payment regulations and re-age guidance), competitors' actions
and consumer behavior, as well as inadequate collections staffing, techniques and models.
We continue to expand our marketing of our personal, private student loan and home loan products, including
the launch of a new home equity loan product in late 2013. We have less experience in these areas as compared to
our traditional credit card lending business, and there can be no assurance that we will be able to grow these products
in accordance with our strategies, manage our credit and other risks associated with these products, or generate
sufficient revenue to cover our expenses in these markets. Our failure to manage our credit and other 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 loan receivables, deposits, 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 portfolio had a balance of approximately $10.8 billion as
of December 31, 2014, compared to $11.1 billion as of December 31, 2013. Our total contingent liquidity sources as
of December 31, 2014 amounted to $34.3 billion (consisting of $10.8 billion in our liquidity portfolio, $16.0 billion in
incremental Federal Reserve discount window capacity, and $7.5 billion of undrawn capacity in private securitizations),
compared to $32.6 billion at December 31, 2013.
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, new regulatory restrictions and requirements, and our
credit ratings. Disruptions, uncertainty or volatility in the capital, credit or deposit markets, such as the volatility
experienced in the capital and credit markets during the financial crisis of 2007, may limit our ability to repay or
replace maturing liabilities in a timely manner. As such, we may be forced to delay raising funding or be forced to issue
or raise funding at undesirable terms and/or costs, which could decrease profitability and significantly reduce financial
flexibility. Regulations such as the liquidity coverage ratio (LCR), as part of the Basel III accord, may increase the cost of
funding and impact funding availability and are described more fully in "Management's Discussion and Analysis of
Financial Condition and Results of Operations — Regulatory Environment and Developments." 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.
While market conditions have stabilized and, in many cases, improved, there can be no assurance that
significant disruption and volatility in the financial markets will not occur in the future. Likewise, adverse developments
with respect to financial institutions and other third parties with whom we maintain important financial relationships
could negatively impact our funding and liquidity. If we are unable to continue to fund our assets through deposits or
access capital markets on favorable terms, or if we experience an increase in our borrowing costs or otherwise fail to