Discover 2010 Annual Report Download - page 33

Item 1A. Risk Factors
You should carefully consider each of the following risks described below and all of the other information in this annual
report on Form 10-K in evaluating us. Our business, financial condition, cash flows and/or results of operations could be
materially adversely affected by any of these risks. The trading price of our common stock could decline due to any of
these risks.
This annual report on Form 10-K also contains forward-looking statements that involve risks and uncertainties. Our
actual results could differ materially from those anticipated in these forward-looking statements as a result of certain
factors, including the risks faced by us described below and elsewhere in this annual report on Form 10-K. See “Special
Note Regarding Forward-Looking Statements,” which immediately follows the risks below.
Certain historical numbers from 2009 in this section are shown on an “as adjusted” basis. The as-adjusted basis
assumes that the trusts used in our securitization activities were consolidated into our financial results and excludes from
results income received in connection with the antitrust litigation settlement in 2009. For an explanation as to why
management believes that the “as adjusted” numbers are useful to investors and for a reconciliation of these numbers, see
“Management’s Discussion and Analysis of Financial Condition and Results of Operations – Reconciliation of GAAP to As
Adjusted Data.”
Economic conditions could have a material adverse effect on our business, results of operations, financial condition
and stock price.
Economic conditions have adversely affected unemployment rates, home values, consumer spending and the
availability of consumer credit. These factors, along with an already high level of consumer indebtedness, have adversely
affected the ability and willingness of customers to pay amounts owed to us. Although delinquencies and charge-offs
have improved in 2010, they remain higher than pre-recession levels. The over 30 days delinquent rate was 3.89% at
November 30, 2010, down from 5.31% at November 30, 2009 as adjusted, and the full-year net charge-off rate was
7.57% for 2010, down from 7.77% for 2009, as adjusted. Our business is always influenced by economic conditions.
Poor economic conditions not only affect the ability and willingness of customers to pay amounts owed to us, increasing
our provision for loan losses and charge-offs, but can also reduce the usage of our cards, the number of transactions on
our cards and the average purchase amount of transactions on our cards, which reduces transaction fees and interest
income. We rely heavily on our credit card business to generate earnings. Our interest income from credit card loans was
$5.8 billion for the 2010 fiscal year, which was 88% of revenues (defined as net interest income plus other income). Our
interest income from credit card loans was $6.2 billion in the 2009 fiscal year, as adjusted. Economic conditions may
also cause our earnings to fluctuate and diverge from expectations of analysts and investors, who may have differing
assumptions regarding their impact on our business and, therefore, may impact the trading price of our common stock.
Recent legislative and regulatory reforms may have a significant impact on our business, results of operations and
financial condition.
In July 2010, the President signed into law the “Dodd-Frank Wall Street Reform and Consumer Protection Act” (the
“Reform Act”), which contains a comprehensive set of provisions designed to govern the practices and oversight of
financial institutions and other participants in the financial markets. For example, the Reform Act addresses risks to the
economy and the payments system posed by large systemically significant financial firms, including us, through a variety
of measures, including increased capital and liquidity requirements, limits on leverage and enhanced supervisory
authority. A more comprehensive description of the Reform Act and other recent legislative and regulatory initiatives that
may affect us is contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations –
Legislative and Regulatory Developments.”
The full impact of the Reform Act is difficult to assess because many provisions require federal agencies to adopt
implementing regulations. In addition, the Reform Act mandates multiple studies, which could result in additional
legislative or regulatory action. The Reform Act, as well as other legislative and regulatory changes, could have a
significant impact on us by, for example, requiring us to change our business practices, requiring us to meet more
stringent capital, liquidity and leverage ratio requirements (including those under Basel III), limiting our ability to pursue
business opportunities, imposing additional costs on us, limiting fees we can charge for services, impacting the value of
our assets, or otherwise adversely affecting our businesses. The effect of the Reform Act on our business and operations
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