Discover 2014 Annual Report Download - page 48

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Changes in the level of interest rates could materially adversely affect our earnings.
Changes in interest rates cause our net interest income to increase or decrease, as certain of our assets and
liabilities carry interest rates that fluctuate with market benchmarks. External factors may cause interest rates to increase.
The inability of the Federal Reserve to adjust monetary policy in a timely manner after a prolonged period of injecting
liquidity into the economy as well as other market factors could result in a steep increase in domestic inflation and a
resulting need to rapidly increase interest rates. Tighter Federal Reserve monetary policy and rising interest rates would
increase the cost of borrowing for consumers, businesses and governments. Higher interest rates could negatively
impact Discover’s customers as total debt service payments would increase, impede Discover’s ability to grow its
consumer lending businesses, and increase the cost of funding, which would put Discover at a disadvantage as
compared to competitors that have less expensive funding sources.
Some of our consumer loan receivables bear interest at a fixed rate or do not earn interest, and we are not able
to increase the rate on those loans to offset any higher cost of funds, which could materially reduce earnings. At the
same time, our variable rate loan receivables, which are based on the prime market benchmark rate, may not change
at the same rate as our floating-rate borrowings or may be subject to a cap, subjecting us to basis risk. The majority of
our floating-rate borrowings and interest rate derivatives are generally based on the one-month LIBOR rate. If the one-
month LIBOR rate were to increase without a corresponding increase in the prime rate, our earnings would be
negatively impacted. While the majority of our existing certificates of deposit bear interest at fixed rates that do not
fluctuate with market benchmarks, we use derivative instruments to hedge the fixed rates associated with some of these
certificates of deposit. However, new deposit issuances are subject to fluctuations in interest rates. Moreover, although
certificates of deposit we issue directly to consumers are subject to early withdrawal penalties, these penalties may not
fully mitigate early withdrawal behavior in a rising interest rate environment.
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 continually monitor interest rates and have a number of tools, including the composition of our investments,
liability terms and interest rate derivatives, to manage our interest rate risk exposure. Changes in market assumptions
regarding future interest rates could significantly impact our interest rate risk strategy, our financial position and results
of operations. If our interest rate risk management strategies 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 on and repurchase our stock.
In the year ended December 31, 2014, we increased our quarterly common stock dividend to $0.24 per share
and repurchased approximately 5% of our outstanding common stock under our share repurchase program. The
declaration and payment of future dividends, as well as the amount thereof, are subject to the discretion of our board of
directors and the Federal Reserve’s non-objection to our annual capital plan. 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, regulatory review and other factors as further described in "Business — Supervision and
Regulation — Capital, Dividends and Share Repurchases." Holders of our shares of common stock are subject to the
prior dividend rights of holders of our preferred stock or the depositary shares representing such preferred stock
outstanding, and if full dividends have not been declared and paid on all outstanding shares of our preferred stock in
any dividend period, no dividend may be declared or paid on or set aside for payment on our common stock. Banking
laws and regulations and our banking regulators may limit or prohibit our payment of dividends on or our repurchase
of our stock at any time. There can be no assurance that we will declare and pay any dividends on or repurchase our
stock in the future.
We are a holding company and depend on payments from our subsidiaries.
Discover Financial Services, our parent holding company, depends on dividends, distributions and other
payments from its subsidiaries, particularly Discover Bank, to fund dividend payments, share repurchases, payments on
its obligations, including debt obligations, and to provide funding and capital as needed to its operating subsidiaries.