Discover Financial Services - FORM 8-K - EX-99.2 - EXHIBIT 99.2

Attached files

file	filename
EX-99.3 - EXHIBIT 99.3 - Discover Financial Services	a1q17earningspresentatio.htm
EX-99.1 - EXHIBIT 99.1 - Discover Financial Services	dfs-earningsreleasex1q17ex.htm
8-K - 8-K - Discover Financial Services	a1q178k.htm



DISCOVER FINANCIAL SERVICES																					Exhibit 99.2
EARNINGS SUMMARY
(unaudited, in millions, except per share statistics)
	Quarter Ended
	Mar 31, 2017			Dec 31, 2016			Sep 30, 2016			Jun 30, 2016			Mar 31, 2016			Mar 31, 2017 vs. Mar 31, 2016
EARNINGS SUMMARY
Interest Income		$2,278			$2,258			$2,184			$2,090			$2,084			$194		9	%
Interest Expense	386			366			359			339			334			52			16	%
Net Interest Income	1,892			1,892			1,825			1,751			1,750			142			8	%
Discount/Interchange Revenue	596			665			631			636			565			31			5	%
Rewards Cost	363			411			368			371			292			71			24	%
Discount and Interchange Revenue, net	233			254			263			265			273			(40		)	(15	%)
Protection Products Revenue	58			59			60			59			61			(3		)	(5	%)
Loan Fee Income	89			93			91			79			80			9			11	%
Transaction Processing Revenue	39			40			40			39			36			3			8	%
Other Income	28			20			22			23			24			4			17	%
Total Other Income	447			466			476			465			474			(27		)	(6	%)

Revenue Net of Interest Expense	2,339			2,358			2,301			2,216			2,224			115			5	%

Provision for Loan Losses	586			578			445			412			424			162			38	%

Employee Compensation and Benefits	363			352			342			340			345			18			5	%
Marketing and Business Development	168			176			195			198			162			6			4	%
Information Processing & Communications	80			81			81			89			88			(8		)	(9	%)
Professional Fees	147			152			143			150			160			(13		)	(8	%)
Premises and Equipment	25			23			25			23			24			1			4	%
Other Expense	102			113			109			106			107			(5		)	(5	%)
Total Other Expense	885			897			895			906			886			(1		)	—	%

Income Before Income Taxes	868			883			961			898			914			(46		)	(5	%)
Tax Expense	304			320			322			282			339			(35		)	(10	%)
Net Income		$564			$563			$639			$616			$575			($11	)	(2	%)

Net Income Allocated to Common Stockholders		$551			$550			$625			$602			$562			($11	)	(2	%)

Effective Tax Rate	35.0		%	36.3		%	33.5		%	31.4		%	37.1		%

Net Interest Margin	10.07		%	10.07		%	9.99		%	9.94		%	9.94		%	13			bps
Operating Efficiency	37.9		%	38.0		%	38.9		%	40.9		%	39.8		%	(190		)	bps
ROE	20		%	20		%	23		%	22		%	21		%
Capital Returned to Common Stockholders		$620			$581			$689			$523			$513			$107		21	%
Payout Ratio	113		%	106		%	110		%	87		%	91		%

Ending Common Shares Outstanding	382			389			396			407			414			(32		)	(8	%)
Weighted Average Common Shares Outstanding	386			392			402			410			417			(31		)	(7	%)
Weighted Average Common Shares Outstanding (fully diluted)	386			393			402			411			417			(31		)	(7	%)

PER SHARE STATISTICS
Basic EPS		$1.43			$1.40			$1.56			$1.47			$1.35			$0.08		6	%
Diluted EPS		$1.43			$1.40			$1.56			$1.47			$1.35			$0.08		6	%
Common Stock Price (period end)		$68.39			$72.09			$56.55			$53.59			$50.92			$17.47		34	%
Book Value per share		$29.46			$29.13			$28.62			$28.03			$27.32			$2.14		8	%

Note: See Glossary of Financial Terms for definitions of financial terms



DISCOVER FINANCIAL SERVICES
EARNINGS SUMMARY
(unaudited, in millions)
	Quarter Ended
	Mar 31, 2017		Dec 31, 2016		Sep 30, 2016		Jun 30, 2016		Mar 31, 2016		Mar 31, 2017 vs. Mar 31, 2016
SEGMENT- INCOME BEFORE INCOME TAXES
Direct Banking		$824		$868		$931		$868		$882		($58	)	(7	%)
Payment Services	44		15		30		30		32		12			38	%
Total		$868		$883		$961		$898		$914		($46	)	(5	%)

TRANSACTIONS PROCESSED ON NETWORKS
Discover Network	503		566		535		538		486		17			3	%
PULSE Network	870		891		871		853		841		29			3	%
Total	1,373		1,457		1,406		1,391		1,327		46			3	%

NETWORK VOLUME
PULSE Network		$36,066		$35,554		$33,913		$33,856		$34,680		$1,386		4	%
Network Partners	3,661		3,235		3,313		3,713		3,572		89			2	%
Diners Club International¹	7,382		7,334		7,331		7,198		6,738		644			10	%
Total Payment Services	47,109		46,123		44,557		44,767		44,990		2,119			5	%
Discover Network - Proprietary	29,859		34,029		31,759		31,780		28,576		1,283			4	%
Total		$76,968		$80,152		$76,316		$76,547		$73,566		$3,402		5	%


¹ Volume is derived from data provided by licensees for Diners Club branded cards issued outside of North America and is subject to subsequent revision or amendment
Note: See Glossary of Financial Terms for definitions of financial terms



DISCOVER FINANCIAL SERVICES
BALANCE SHEET SUMMARY
(unaudited, in millions)
	Quarter Ended
	Mar 31, 2017			Dec 31, 2016			Sep 30, 2016			Jun 30, 2016			Mar 31, 2016			Mar 31, 2017 vs. Mar 31, 2016
BALANCE SHEET SUMMARY
Assets
Cash and Investment Securities		$17,981			$13,766			$15,728			$14,236			$16,101			$1,880		12	%
Total Loan Receivables	75,853			77,254			73,551			71,924			70,320			5,533			8	%
Allowance for Loan Losses	(2,264		)	(2,167		)	(2,024		)	(1,949		)	(1,921		)	(343		)	(18	%)
Net Loan Receivables	73,589			75,087			71,527			69,975			68,399			5,190			8	%
Premises and Equipment, net	750			734			722			708			706			44			6	%
Goodwill and Intangible Assets, net	420			421			421			422			422			(2		)	—	%
Other Assets	2,055			2,300			2,143			2,170			2,465			(410		)	(17	%)
Total Assets		$94,795			$92,308			$90,541			$87,511			$88,093			$6,702		8	%

Liabilities & Stockholders' Equity
Direct to Consumer and Affinity Deposits		$37,094			$36,002			$35,323			$34,101			$32,818			$4,276		13	%
Brokered Deposits and Other Deposits	16,428			15,990			13,922			14,426			15,647			781			5	%
Deposits	53,522			51,992			49,245			48,527			48,465			5,057			10	%
Borrowings	26,823			25,443			26,830			24,681			24,752			2,071			8	%
Accrued Expenses and Other Liabilities	3,185			3,550			3,119			2,906			3,560			(375		)	(11	%)
Total Liabilities	83,530			80,985			79,194			76,114			76,777			6,753			9	%
Total Equity	11,265			11,323			11,347			11,397			11,316			(51		)	—	%
Total Liabilities and Stockholders' Equity		$94,795			$92,308			$90,541			$87,511			$88,093			$6,702		8	%

LIQUIDITY
Liquidity Portfolio		$16,213			$12,635			$14,017			$13,455			$14,556			$1,657		11	%
Undrawn Credit Facilities ¹	30,823			30,194			29,048			30,777			30,077			746			2	%
Total Liquidity		$47,036			$42,829			$43,065			$44,232			$44,633			$2,403		5	%


¹ Excludes investments pledged to the Federal Reserve, which is included within the liquidity portfolio

Note: See Glossary of Financial Terms for definitions of financial terms



DISCOVER FINANCIAL SERVICES
BALANCE SHEET STATISTICS
(unaudited, in millions)
	Quarter Ended
	Mar 31, 2017			Dec 31, 2016			Sep 30, 2016			Jun 30, 2016			Mar 31, 2016			Mar 31, 2017 vs. Mar 31, 2016
BALANCE SHEET STATISTICS
Total Common Equity		$10,705			$10,763			$10,787			$10,837			$10,756			($51	)	—	%
Total Common Equity/Total Assets	11.3		%	11.7		%	11.9		%	12.4		%	12.2		%
Total Common Equity/Net Loans	14.5		%	14.3		%	15.1		%	15.5		%	15.7		%

Tangible Assets		$94,375			$91,887			$90,120			$87,089			$87,671			$6,704		8	%
Tangible Common Equity ¹		$10,285			$10,342			$10,366			$10,415			$10,334			($49	)	—	%
Tangible Common Equity/Tangible Assets ¹	10.9		%	11.3		%	11.5		%	12.0		%	11.8		%
Tangible Common Equity/Net Loans ¹	14.0		%	13.8		%	14.5		%	14.9		%	15.1		%
Tangible Common Equity per share¹		$26.90			$26.60			$26.15			$25.62			$24.95			$1.95		8	%

REGULATORY CAPITAL RATIOS	Basel III Transition
Total Risk Based Capital Ratio	15.7		%	15.5		%	16.3		%	16.7		%	16.8		%
Tier 1 Risk Based Capital Ratio	14.1		%	13.9		%	14.6		%	15.0		%	15.0		%
Tier 1 Leverage Ratio	11.8		%	12.3		%	12.6		%	12.8		%	12.8		%
Common Equity Tier 1 Capital Ratio	13.4		%	13.2		%	13.9		%	14.3		%	14.3		%
	Basel III Fully Phased-in
Common Equity Tier 1 Capital Ratio²	13.4		%	13.2		%	13.8		%	14.2		%	14.2		%

RATIO OF EARNINGS TO FIXED CHARGES
Ratio of Earnings to Fixed Charges ^{3, 4}	3.3			3.6			3.7			3.7			3.8

¹ Tangible Common Equity ("TCE") is a non-GAAP measure. The Company believes TCE is a more meaningful measure to investors of the net asset value of the Company. For corresponding reconciliation of TCE to a GAAP financial measure see Reconciliation of GAAP to non-GAAP Data schedule

²Common Equity Tier 1 Capital Ratio (Basel III Fully Phased-in) is calculated using Basel III Fully Phased-in Common Equity Tier 1 Capital, a non-GAAP measure. The Company believes that the Common Equity Tier 1 Capital Ratio based on Fully Phased-in Basel III rules is an important complement to the existing capital ratios and for comparability to other financial institutions. For the corresponding reconciliation of Common Equity Tier 1 Capital and Risk Weighted Assets calculated under Fully Phased-in Basel III rules to Common Equity Tier 1 Capital and Risk Weighted Assets calculated under Basel III transition rules see the Reconciliation of GAAP to non-GAAP data schedule

³Fixed charges are the sum of interest expense, amortized premiums, discounts and capitalized expenses related to indebtedness and an estimate of interest within rental expense

⁴ The Ratio of Earnings to Fixed Charges is a year-to-date statistic. The periods reported reflect the three months ended March 31, 2017, the twelve months ended December 31, 2016, the nine months ended September 30, 2016, the six months ended June 30, 2016 and the three months ended March 31, 2016

Note: See Glossary of Financial Terms for definitions of financial terms.



DISCOVER FINANCIAL SERVICES
AVERAGE BALANCE SHEET
(unaudited, in millions)
	Quarter Ended
	Mar 31, 2017			Dec 31, 2016			Sep 30, 2016			Jun 30, 2016			Mar 31, 2016			Mar 31, 2017 vs. Mar 31, 2016
AVERAGE BALANCES
Assets
Cash and Investment Securities		$15,424			$13,567			$13,761			$14,299			$13,452			$1,972		15	%
Restricted Cash	819			473			621			263			801			18			2	%
Credit Card Loans	60,122			59,121			57,561			56,124			56,124			3,998			7	%
Private Student Loans	9,197			8,954			8,795			8,816			8,967			230			3	%
Personal Loans	6,582			6,425			6,036			5,608			5,503			1,079			20	%
Other Loans	284			275			276			262			243			41			17	%
Total Loans	76,185			74,775			72,668			70,810			70,837			5,348			8	%
Total Interest Earning Assets	92,428			88,815			87,050			85,372			85,090			7,338			9	%
Allowance for Loan Losses	(2,166		)	(2,021		)	(1,947		)	(1,918		)	(1,866		)	(300		)	(16	%)
Other Assets	4,166			4,162			4,282			4,502			4,453			(287		)	(6	%)
Total Assets		$94,428			$90,956			$89,385			$87,956			$87,677			$6,751		8	%

Liabilities and Stockholders' Equity
Direct to Consumer and Affinity Deposits		$36,316			$35,396			$34,488			$33,215			$31,529			$4,787		15	%
Brokered Deposits and Other Deposits	16,242			14,355			14,267			14,740			15,982			260			2	%
Total Interest-bearing Deposits	52,558			49,751			48,755			47,955			47,511			5,047			11	%
Short-term Borrowings	1			1			2			2			2			(1		)	(50	%)
Securitized Borrowings	16,960			16,817			16,736			16,635			16,950			10			—	%
Other Long-term Borrowings	9,600			9,042			8,746			7,984			7,934			1,666			21	%
Total Interest-bearing Liabilities	79,119			75,611			74,239			72,576			72,397			6,722			9	%
Other Liabilities & Stockholders' Equity	15,309			15,345			15,146			15,380			15,280			29			—	%
Total Liabilities and Stockholders' Equity		$94,428			$90,956			$89,385			$87,956			$87,677			$6,751		8	%

AVERAGE RATES
Assets
Cash and Investment Securities	0.90		%	0.72		%	0.70		%	0.71		%	0.72		%	18			bps
Restricted Cash	0.70		%	0.37		%	0.32		%	0.41		%	0.40		%	30			bps
Credit Card Loans	12.65		%	12.62		%	12.53		%	12.42		%	12.42		%	23			bps
Private Student Loans	7.29		%	7.06		%	7.13		%	7.13		%	7.02		%	27			bps
Personal Loans	12.18		%	12.09		%	12.23		%	12.25		%	12.20		%	(2		)	bps
Other Loans	5.39		%	4.88		%	4.96		%	5.04		%	5.18		%	21			bps
Total Loans	11.94		%	11.88		%	11.82		%	11.72		%	11.69		%	25			bps
Total Interest Earning Assets	9.99		%	10.12		%	9.98		%	9.84		%	9.85		%	14			bps

Liabilities and Stockholders' Equity
Direct to Consumer and Affinity Deposits	1.25		%	1.26		%	1.26		%	1.22		%	1.22		%	3			bps
Brokered Deposits and Other Deposits	1.98		%	1.93		%	1.90		%	1.78		%	1.68		%	30			bps
Total Interest-bearing Deposits	1.48		%	1.45		%	1.45		%	1.39		%	1.37		%	11			bps
Short-term Borrowings	0.67		%	0.60		%	0.62		%	0.64		%	0.64		%	3			bps
Securitized Borrowings	2.17		%	2.09		%	2.07		%	2.06		%	2.04		%	13			bps
Other Long-term Borrowings	4.38		%	4.26		%	4.27		%	4.40		%	4.38		%	—			bps
Total Interest-bearing Liabilities	1.98		%	1.93		%	1.92		%	1.88		%	1.86		%	12			bps

Net Interest Margin	10.07		%	10.07		%	9.99		%	9.94		%	9.94		%	13			bps
Net Yield on Interest-earning Assets	8.30		%	8.47		%	8.34		%	8.25		%	8.27		%	3			bps

Note: See Glossary of Financial Terms for definitions of financial terms



DISCOVER FINANCIAL SERVICES
LOAN STATISTICS
(unaudited, in millions)
	Quarter Ended
	Mar 31, 2017			Dec 31, 2016			Sep 30, 2016			Jun 30, 2016			Mar 31, 2016			Mar 31, 2017 vs. Mar 31, 2016
TOTAL LOAN RECEIVABLES
Ending Loans ^{1, 2}		$75,853			$77,254			$73,551			$71,924			$70,320			$5,533	8	%
Average Loans ^{1, 2}		$76,185			$74,775			$72,668			$70,810			$70,837			$5,348	8	%

Interest Yield	11.94		%	11.88		%	11.82		%	11.72		%	11.69		%	25		bps
Gross Principal Charge-off Rate	3.25		%	2.91		%	2.66		%	2.87		%	2.80		%	45		bps
Gross Principal Charge-off Rate excluding PCI Loans³	3.37		%	3.02		%	2.77		%	2.99		%	2.92		%	45		bps
Net Principal Charge-off Rate	2.60		%	2.31		%	2.02		%	2.18		%	2.11		%	49		bps
Net Principal Charge-off Rate excluding PCI Loans ³	2.69		%	2.39		%	2.10		%	2.27		%	2.21		%	48		bps
Delinquency Rate (over 30 days) excluding PCI Loans ³	1.97		%	1.97		%	1.79		%	1.60		%	1.64		%	33		bps
Delinquency Rate (over 90 days) excluding PCI Loans ³	0.92		%	0.87		%	0.77		%	0.71		%	0.79		%	13		bps
Gross Principal Charge-off Dollars		$611			$548			$488			$505			$493			$118	24	%
Net Principal Charge-off Dollars		$489			$435			$370			$384			$372			$117	31	%
Net Interest and Fee Charge-off Dollars		$106			$94			$80			$84			$86			$20	23	%
Loans Delinquent Over 30 Days ³		$1,445			$1,469			$1,269			$1,104			$1,105			$340	31	%
Loans Delinquent Over 90 Days ³		$675			$652			$545			$491			$531			$144	27	%

Allowance for Loan Loss (period end)		$2,264			$2,167			$2,024			$1,949			$1,921			$343	18	%
Change in Loan Loss Reserves		$97			$143			$75			$28			$52			$45
Reserve Rate	2.98		%	2.80		%	2.75		%	2.71		%	2.73		%	25		bps
Reserve Rate Excluding PCI Loans ³	3.04		%	2.86		%	2.81		%	2.77		%	2.80		%	24		bps

CREDIT CARD LOANS
Ending Loans		$59,757			$61,522			$58,006			$57,219			$55,620			$4,137	7	%
Average Loans		$60,122			$59,121			$57,561			$56,124			$56,124			$3,998	7	%

Interest Yield	12.65		%	12.62		%	12.53		%	12.42		%	12.42		%	23		bps
Gross Principal Charge-off Rate	3.61		%	3.19		%	2.93		%	3.21		%	3.15		%	46		bps
Net Principal Charge-off Rate	2.84		%	2.47		%	2.17		%	2.39		%	2.34		%	50		bps
Delinquency Rate (over 30 days)	2.06		%	2.04		%	1.87		%	1.63		%	1.68		%	38		bps
Delinquency Rate (over 90 days)	1.03		%	0.97		%	0.86		%	0.78		%	0.86		%	17		bps
Gross Principal Charge-off Dollars		$535			$474			$425			$448			$439			$96	22	%
Net Principal Charge-off Dollars		$422			$369			$314			$334			$326			$96	29	%
Loans Delinquent Over 30 Days		$1,233			$1,252			$1,086			$933			$934			$299	32	%
Loans Delinquent Over 90 Days		$616			$597			$500			$444			$480			$136	28	%

Allowance for Loan Loss (period end)		$1,892			$1,790			$1,661			$1,603			$1,590			$302	19	%
Change in Loan Loss Reserves		$102			$129			$58			$13			$36			$66
Reserve Rate	3.17		%	2.91		%	2.86		%	2.80		%	2.86		%	31		bps

Total Discover Card Volume		$32,406			$35,440			$33,471			$33,409			$30,004			$2,402	8	%
Discover Card Sales Volume		$29,134			$32,486			$30,683			$30,702			$27,552			$1,582	6	%
Rewards Rate	1.25		%	1.26		%	1.20		%	1.21		%	1.06		%	19		bps
¹Total Loans includes Home Equity and other loans

² Purchased Credit Impaired ("PCI") loans are loans that were acquired in which a deterioration in credit quality occurred between the origination date and the acquisition date. These loans were initially recorded at fair value and accrete interest income over the estimated lives of the loans as long as cash flows are reasonably estimable, even if the loans are contractually past due. PCI loans are private student loans and are included in total loan receivables

³ Excludes PCI loans (described above) which are accounted for on a pooled basis. Since a pool is accounted for as a single asset with a single composite interest rate and aggregate expectation of cash flows, the past-due status of a pool, or that of the individual loans within a pool, is not meaningful. Because the Company is recognizing interest income on a pool of loans, it is all considered to be performing

Note: See Glossary of Financial Terms for definitions of financial terms



DISCOVER FINANCIAL SERVICES
LOAN STATISTICS
(unaudited, in millions)
	Quarter Ended
	Mar 31, 2017			Dec 31, 2016			Sep 30, 2016			Jun 30, 2016			Mar 31, 2016			Mar 31, 2017 vs. Mar 31, 2016
PRIVATE STUDENT LOANS
Ending Loans		$9,138			$8,977			$8,995			$8,725			$8,914			$224		3	%
Ending PCI Loans ¹		$2,449			$2,584			$2,708			$2,834			$2,965			($516	)	(17	%)

Interest Yield	7.29		%	7.06		%	7.13		%	7.13		%	7.02		%	27			bps
Net Principal Charge-off Rate	0.60		%	1.00		%	0.70		%	0.74		%	0.56		%	4			bps
Net Principal Charge-off Rate excluding PCI Loans²	0.83		%	1.42		%	1.02		%	1.10		%	0.85		%	(2		)	bps
Delinquency Rate (over 30 days) excluding PCI Loans ²	2.04		%	2.22		%	1.87		%	1.88		%	1.92		%	12			bps

Reserve Rate	1.70		%	1.74		%	1.74		%	1.73		%	1.65		%	5			bps
Reserve Rate excluding PCI Loans ²	1.80		%	1.91		%	1.92		%	1.95		%	1.86		%	(6		)	bps

PERSONAL LOANS
Ending Loans		$6,663			$6,481			$6,273			$5,708			$5,534			$1,129		20	%

Interest Yield	12.18		%	12.09		%	12.23		%	12.25		%	12.20		%	(2		)	bps
Net Principal Charge-off Rate	3.16		%	2.70		%	2.63		%	2.38		%	2.45		%	71			bps
Delinquency Rate (over 30 days)	1.12		%	1.12		%	0.98		%	1.02		%	0.97		%	15			bps

Reserve Rate	3.10		%	3.09		%	2.98		%	3.07		%	2.99		%	11			bps


¹ Purchased Credit Impaired ("PCI") loans are loans that were acquired in which a deterioration in credit quality occurred between the origination date and the acquisition date. These loans were initially recorded at fair value and accrete interest income over the estimated lives of the loans as long as cash flows are reasonably estimable, even if the loans are contractually past due. PCI loans are private student loans and are included in total loan receivables

² Excludes PCI loans (described above) which are accounted for on a pooled basis. Since a pool is accounted for as a single asset with a single composite interest rate and aggregate expectation of cash flows, the past-due status of a pool, or that of the individual loans within a pool, is not meaningful. Because the Company is recognizing interest income on a pool of loans, it is all considered to be performing

Note: See Glossary of Financial Terms for definitions of financial terms



DISCOVER FINANCIAL SERVICES
SEGMENT RESULTS
(unaudited, in millions)
	Quarter Ended
	Mar 31, 2017			Dec 31, 2016			Sep 30, 2016			Jun 30, 2016			Mar 31, 2016			Mar 31, 2017 vs. Mar 31, 2016
DIRECT BANKING
Interest Income		$2,278			$2,258			$2,184			$2,090			$2,084			$194		9	%
Interest Expense	386			366			359			339			334			52			16	%
Net Interest Income	1,892			1,892			1,825			1,751			1,750			142			8	%
Other Income	375			401			408			396			406			(31		)	(8	%)
Revenue Net of Interest Expense	2,267			2,293			2,233			2,147			2,156			111			5	%
Provision for Loan Losses	594			579			445			411			423			171			40	%
Total Other Expense	849			846			857			868			851			(2		)	—	%
Income Before Income Taxes		$824			$868			$931			$868			$882			($58	)	(7	%)

Net Interest Margin	10.07		%	10.07		%	10.00		%	9.95		%	9.94		%	13			bps
Pretax Return on Loan Receivables	4.39		%	4.62		%	5.10		%	4.93		%	5.01		%	(62		)	bps

Allowance for Loan Loss (period end)		$2,258			$2,151			$2,007			$1,932			$1,905			$353		19	%
Change in Loan Loss Reserves		$107			$144			$75			$27			$51			$56

PAYMENT SERVICES
Interest Income		$—			$—			$—			$—			$—			$—		NM
Interest Expense	—			—			—			—			—			—			NM
Net Interest Income	—			—			—			—			—			—			NM
Other Income	72			65			68			69			68			4			6	%
Revenue Net of Interest Expense	72			65			68			69			68			4			6	%
Provision for Loan Losses	(8		)	(1		)	—			1			1			(9		)	NM
Total Other Expense	36			51			38			38			35			1			3	%
Income Before Income Taxes		$44			$15			$30			$30			$32			$12		38	%

Note: See Glossary of Financial Terms for definitions of financial terms

DISCOVER FINANCIAL SERVICES

GLOSSARY OF FINANCIAL TERMS

Book Value per share represents total equity divided by ending common shares outstanding

Capital Returned to Common Stockholders represents common stock dividends declared plus treasury share repurchases minus common stock issued under employee benefit plans and stock based compensation

Common Equity Tier 1 Capital Ratio (Basel III transition) represents common equity tier 1 capital divided by risk weighted assets calculated under Basel III rules subject to transition provisions

Common Equity Tier 1 Capital Ratio (Basel III fully phased-in) represents fully phased-in common equity tier 1 capital divided by risk weighted assets under fully phased-in Basel III rules. The Common Equity Tier 1 Capital Ratio (Basel III fully phased-in) is calculated using Basel III fully phased-in common equity tier 1 capital, a non-GAAP measure. The Company believes that the common equity tier 1 capital ratio based on fully phased-in Basel III rules is an important complement to the existing capital ratios and for comparability to other financial institutions. For the corresponding reconciliation of common equity tier 1 capital and risk weighted assets calculated under fully phased-in Basel III rules to common equity tier 1 capital and risk weighted assets calculated under Basel III transition rules see the Reconciliation of GAAP to non-GAAP data schedule

Delinquency Rate (Over 30 Days) represents loans delinquent over thirty days divided by ending loans (total or respective loans, as appropriate)

Delinquency Rate (Over 90 Days) represents loans delinquent over ninety days divided by ending loans (total or respective loans, as appropriate)

Discover card sales volume represents Discover card activity related to net sales

Discover card volume represents Discover card activity related to net sales, balance transfers, cash advances and other activity

Discover Network proprietary volume represents gross proprietary sales volume on the Discover Network

Earnings Per Share represents net income allocated to common stockholders divided by the weighted average common shares outstanding

Effective Tax Rate represents tax expense divided by income before income taxes

Gross Principal Charge-off Rate represents gross principal charge-off dollars (annualized) divided by average loans for the reporting period

Interest Yield represents interest income on loan receivables (annualized) divided by average loans for the reporting period

Liquidity Portfolio represents cash and cash equivalents (excluding cash-in-process) and other investments

Net Income Allocated to Common Stockholders represents net income less (i) dividends and accretion of discount on shares of preferred stock and (ii) income allocated to participating securities

Net Interest Margin represents net interest income (annualized) divided by average total loans for the period.

Net Principal Charge-off Rate represents net principal charge-off dollars (annualized) divided by average loans for the reporting period

Operating Efficiency represents total other expense divided by revenue net of interest expense

Payout Ratio represents capital returned to common stockholders divided by net income allocated to common stockholders

Pretax Return on Loan Receivables represents income before income taxes (annualized) divided by total average loans for the period

Proprietary Network Volume represents gross proprietary sales volume on the Discover Network

Ratio of Earnings to Fixed Charges is a year-to-date statistic and represents income before income tax expense and fixed charges divided by fixed charges for the reporting period. Fixed charges are the sum of interest expense, amortized premiums, discounts and capitalized expenses related to indebtedness and an estimate of interest within rental expense for the reporting period

Regulatory Capital Ratios are regulatory measures used to evaluate capital adequacy. Under Basel III, for a Bank Holding Company to be considered "well-capitalized," total risk-based and tier 1 risk-based capital ratios of 10% and 6% respectively must be maintained. Under Basel III, to meet the regulatory minimum a Bank Holding Company must maintain total risk-based, tier 1 risk-based, tier 1 leverage, and common equity tier 1 ratios of 8%, 6%, 4%, and 4.5% respectively. As of January 1, 2015 regulatory capital ratios are calculated under Basel III rules subject to transition provisions. Total Risk Based Capital Ratio represents total capital divided by risk-weighted assets. Tier 1 Capital Ratio represents tier 1 capital divided by risk-weighted assets. Tier 1 Leverage Ratio represents tier 1 capital divided by average total assets. The Tier 1 Common Capital Ratio has been replaced by the Common Equity Tier 1 Ratio under Basel III

Reserve Rate represents the allowance for loan losses divided by total loans

Return on Equity represents net income (annualized) divided by average total equity for the reporting period

Rewards Rate represents rewards cost divided by Discover Card sales volume

Tangible Assets represents total assets less goodwill and intangibles

Tangible Common Equity ("TCE"), a non-GAAP financial measure, represents total common equity less goodwill and intangibles. The Company believes TCE is a more meaningful measure to investors of the net asset value of the Company. For corresponding reconciliation of TCE to a GAAP financial measure, see Reconciliation of GAAP to Non-GAAP Data schedule

Tangible Common Equity/Net Loans, a non-GAAP measure, represents total common equity less goodwill and intangibles divided by total loans less the allowance for loan loss (period end)

Tangible Common Equity per Share, a non-GAAP measure, represents total common equity less goodwill and intangibles divided by ending common shares outstanding

Tangible Common Equity/Tangible Assets, a non-GAAP measure, represents total common equity less goodwill and intangibles divided by total assets less goodwill and intangibles

Total Volume represents the transaction dollar volume from the PULSE network, Network Partners, Diners Club and proprietary Discover Network

Undrawn Credit Facilities represents asset-backed conduit funding facilities and Federal Reserve discount window (excluding investments pledged to the Federal Reserve, which are included within the liquidity investment portfolio)



DISCOVER FINANCIAL SERVICES
RECONCILIATION OF GAAP TO NON-GAAP DATA
(unaudited, in millions)
	Quarter Ended
	Mar 31, 2017			Dec 31, 2016			Sep 30, 2016			Jun 30, 2016			Mar 31, 2016
GAAP Total Common Equity		$10,705			$10,763			$10,787			$10,837			$10,756
Less: Goodwill	(255		)	(255		)	(255		)	(255		)	(255		)
Less: Intangibles	(165		)	(166		)	(166		)	(167		)	(167		)
Tangible Common Equity ¹		$10,285			$10,342			$10,366			$10,415			$10,334

Common Equity Tier 1 Capital (Basel III Transition)		$10,501			$10,592			$10,618			$10,677			$10,593
Adjustments Related To Capital Components During Transition ²	(26		)	(52		)	(52		)	(53		)	(54		)
Common Equity Tier 1 Capital (Basel III Fully Phased-in)		$10,475			$10,540			$10,566			$10,624			$10,539

Common Equity Tier 1 Capital Ratio (Basel III Transition)	13.4		%	13.2		%	13.9		%	14.3		%	14.3		%
Common Equity Tier 1 Capital Ratio (Basel III Fully Phased-in) ³	13.4		%	13.2		%	13.8		%	14.2		%	14.2		%

GAAP Book Value Per Share		$29.46			$29.13			$28.62			$28.03			$27.32
Less: Goodwill	(0.67		)	(0.67		)	(0.64		)	(0.62		)	(0.62		)
Less: Intangibles	(0.43		)	(0.42		)	(0.42		)	(0.41		)	(0.40		)
Less: Preferred Stock	(1.46		)	(1.44		)	(1.41		)	(1.38		)	(1.35		)
Tangible Common Equity Per Share		$26.90			$26.60			$26.15			$25.62			$24.95

¹ Tangible Common Equity ("TCE"), a non-GAAP financial measure, represents common equity less goodwill and intangibles. A reconciliation of TCE to common equity, a GAAP financial measure, is shown above. Other financial services companies may also use TCE and definitions may vary, so users of this information are advised to exercise caution in comparing TCE of different companies. TCE is included because management believes that common equity excluding goodwill and intangibles is a more meaningful measure to investors of the true net asset value of the Company

² Adjustments related to capital components for fully phased-in Basel III include the phase-in of the intangible asset exclusion

³ Common Equity Tier 1 Capital Ratio (Basel III Fully Phased-in) is calculated using Common Equity Tier 1 Capital (Basel III Fully Phased-in), a non-GAAP measure, divided by Risk Weighted Assets (Basel III Fully Phased-in)

Note: See Glossary of Financial Terms for definitions of financial terms

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