Discover 2010 Annual Report Download - page 39

increase their card usage and ultimately default on their payment obligations to us, resulting in higher credit losses in our
portfolio. Our collection operations may not compete effectively to secure more of customers’ diminished cash flow than
our competitors. In addition, we may not identify customers who are likely to default on their payment obligations to us
quickly 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 bankruptcy
laws, minimum payment regulations and re-age guidance), competitors’ actions and consumer behavior, as well as
inadequate collections staffing, techniques, models and performance of vendors such as collection agencies.
We have expanded our marketing of our personal and private student lending products. Our personal and private
student loan portfolios grew to $1.9 billion and $1.0 billion, respectively, at November 30, 2010, compared to $1.4
billion and $0.6 billion, respectively, at November 30, 2009. In addition, we acquired approximately $4.0 billion in
private student loans (before the application of purchase accounting) in connection with our acquisition of The Student
Loan Corporation on December 31, 2010. 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 risk or generate sufficient revenue to cover our expenses in these markets. Our failure to
manage our credit 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 credit
card 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 investment portfolio had a balance of approximately $10.1 billion as of November 30, 2010, compared
to $14.5 billion as of November 30, 2009. We decreased our liquidity investment portfolio following an elevated level of
asset-backed securities and deposit maturities in the first half of 2010. Our total contingent liquidity sources as of
November 30, 2010 amounted to $22.5 billion, consisting of $10.1 billion in our liquidity investment portfolio, $6.7
billion in incremental Federal Reserve discount window capacity, $2.4 billion in a revolving credit facility, and $3.3
billion of undrawn capacity in private securitizations. Our total contingent liquidity sources as of November 30, 2009
were $23.2 billion.
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 and our credit ratings. Disruptions, uncertainty or volatility
in the capital, credit or deposit markets may limit our ability to replace maturing liabilities in a timely manner and satisfy
other funding requirements. As such, we may be forced to delay raising funding, issue shorter-term securities than
desired, or bear an unattractive cost of funding, which could decrease profitability and significantly reduce financial
flexibility. 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.
An inability to accept or maintain deposits in the future could materially adversely affect our liquidity position and our
ability to fund our business.
We obtain deposits from consumers either directly or through affinity relationships (“direct-to-consumer deposits”) and
through third-party securities brokerage firms that offer our deposits to their customers (“brokered deposits”). We have
increased and plan to continue to increase our direct-to-consumer deposit funding. We had $20.6 billion in
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