Discover 2015 Annual Report Download - page 47

-31-
Credit, Market and Liquidity Risk
Our business depends on our ability to manage our credit risk, and failing to manage this risk successfully may
result in high charge-off rates, which would materially adversely affect our business, profitability and financial
condition.
We seek to grow our loan receivables while maintaining quality credit performance. Our success depends on our
ability to manage our credit risk while attracting new customers with profitable usage patterns. We select our
customers, manage their accounts and establish terms and credit limits using proprietary scoring models and other
analytical techniques that are designed to set terms and credit limits to appropriately compensate us for the credit risk
we accept, while encouraging customers to use their available credit. The models and approaches we use may not
accurately predict future charge-offs due to, among other things, inaccurate assumptions. While we continually seek to
improve our assumptions and models, we may make modifications that unintentionally cause them to be less predictive
or we may incorrectly interpret the data produced by these models in setting our credit policies.
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. At December 31, 2015 and 2014, $684 million, or 0.94%, and $660
million, or 0.94%, of our loan receivables were non-performing (defined as loans over 90 days delinquent and
accruing interest plus loans not accruing interest). We are continuing to experience 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 loan, private student loan and home equity loan products.
A customer's ability and willingness to repay personal loans, private student loans and home equity loans may be more
significantly impacted than other consumer loans by other debts or increases in their payment obligations to other
lenders and by restricted availability of credit to consumers generally. 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 $12.1 billion as
of December 31, 2015, compared to $10.8 billion as of December 31, 2014. Our total contingent liquidity sources as
of December 31, 2015 amounted to $42.8 billion (consisting of $12.1 billion in our liquidity portfolio, $23.9 billion in
incremental Federal Reserve discount window capacity, and $6.8 billion of undrawn capacity in private securitizations),
compared to $34.3 billion at December 31, 2014.
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