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	a3q18earningspresentatio.htm
EX-99.1 - EXHIBIT 99.1 - Discover Financial Services	dfs-earningsreleasex3q18ex.htm
8-K - 8-K - Discover Financial Services	a3q188k.htm



DISCOVER FINANCIAL SERVICES																											Exhibit 99.2
EARNINGS SUMMARY
(unaudited, in millions, except per share statistics)
	Quarter Ended																				Nine Months Ended
	Sep 30, 2018			Jun 30, 2018			Mar 31, 2018			Dec 31, 2017			Sep 30, 2017			Sep 30, 2018 vs. Sep 30, 2017					Sep 30, 2018			Sep 30, 2017			2018 vs. 2017
EARNINGS SUMMARY
Interest Income		$2,781			$2,636			$2,569			$2,556			$2,476			$305		12	%		$7,986			$7,092			$894		13	%
Interest Expense	558			507			469			436			426			132			31	%	1,534			1,212			322			27	%
Net Interest Income	2,223			2,129			2,100			2,120			2,050			173			8	%	6,452			5,880			572			10	%
Discount/Interchange Revenue	753			724			646			717			675			78			12	%	2,123			1,937			186			10	%
Rewards Cost	473			461			392			434			417			56			13	%	1,326			1,168			158			14	%
Discount and Interchange Revenue, net	280			263			254			283			258			22			9	%	797			769			28			4	%
Protection Products Revenue	51			50			53			54			55			(4		)	(7	%)	154			169			(15		)	(9	%)
Loan Fee Income	103			95			96			96			95			8			8	%	294			267			27			10	%
Transaction Processing Revenue	47			42			43			43			43			4			9	%	132			124			8			6	%
Other Income	20			24			29			18			24			(4		)	(17	%)	73			74			(1		)	(1	%)
Total Other Income	501			474			475			494			475			26			5	%	1,450			1,403			47			3	%

Revenue Net of Interest Expense	2,724			2,603			2,575			2,614			2,525			199			8	%	7,902			7,283			619			8	%

Provision for Loan Losses	742			742			751			679			674			68			10	%	2,235			1,900			335			18	%

Employee Compensation and Benefits	408			400			405			411			371			37			10	%	1,213			1,101			112			10	%
Marketing and Business Development	218			224			185			213			203			15			7	%	627			563			64			11	%
Information Processing & Communications	89			86			82			80			78			11			14	%	257			235			22			9	%
Professional Fees	166			161			155			189			163			3			2	%	482			466			16			3	%
Premises and Equipment	26			24			26			26			25			1			4	%	76			73			3			4	%
Other Expense	108			89			115			117			108			—			—	%	312			307			5			2	%
Total Other Expense	1,015			984			968			1,036			948			67			7	%	2,967			2,745			222			8	%

Income Before Income Taxes	967			877			856			899			903			64			7	%	2,700			2,638			62			2	%
Tax Expense	247			208			190			512			301			(54		)	(18	%)	645			926			(281		)	(30	%)
Net Income		$720			$669			$666			$387			$602			$118		20	%		$2,055			$1,712			$343		20	%

Net Income Allocated to Common Stockholders		$699			$663			$646			$359			$589			$110		19	%		$2,008			$1,672			$336		20	%

Effective Tax Rate	25.5		%	23.7		%	22.2		%	57.0		%	33.3		%						23.9		%	35.1		%

Net Interest Margin	10.28		%	10.21		%	10.23		%	10.28		%	10.28		%	—			bps		10.24		%	10.16		%	8			bps
Operating Efficiency	37.2		%	37.8		%	37.6		%	39.7		%	37.5		%	(30		)	bps		37.5		%	37.7		%	(20		)	bps
ROE	26		%	25		%	25		%	14		%	22		%						25		%	20		%
Capital Returned to Common Stockholders		$580			$656			$684			$657			$667			($87	)	(13	%)		$1,920			$1,835			$85		5	%
Payout Ratio	83		%	99		%	106		%	183		%	113		%						96		%	110		%	(1,400		)	bps

Ending Common Shares Outstanding	338			344			351			358			366			(28		)	(8	%)	338			366			(28		)	(8	%)
Weighted Average Common Shares Outstanding	341			348			355			362			371			(30		)	(8	%)	348			379			(31		)	(8	%)
Weighted Average Common Shares Outstanding (fully diluted)	342			348			355			362			371			(29		)	(8	%)	348			379			(31		)	(8	%)

PER SHARE STATISTICS
Basic EPS		$2.05			$1.91			$1.82			$0.99			$1.59			$0.46		29	%		$5.77			$4.42			$1.35		31	%
Diluted EPS		$2.05			$1.91			$1.82			$0.99			$1.59			$0.46		29	%		$5.77			$4.42			$1.35		31	%
Common Stock Price (period end)		$76.45			$70.41			$71.93			$76.92			$64.48			$11.97		19	%		$76.45			$64.48			$11.97		19	%
Book Value per share		$32.60			$31.66			$30.93			$30.43			$30.56			$2.04		7	%		$32.60			$30.56			$2.04		7	%

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



DISCOVER FINANCIAL SERVICES
EARNINGS SUMMARY
(unaudited, in millions)
	Quarter Ended														Nine Months Ended
	Sep 30, 2018		Jun 30, 2018		Mar 31, 2018		Dec 31, 2017		Sep 30, 2017		Sep 30, 2018 vs. Sep 30, 2017				Sep 30, 2018		Sep 30, 2017		2018 vs. 2017
SEGMENT- INCOME BEFORE INCOME TAXES
Direct Banking		$923		$837		$811		$870		$867		$56	6	%		$2,571		$2,522		$49	2	%
Payment Services	44		40		45		29		36		8		22	%	129		116		13		11	%
Total		$967		$877		$856		$899		$903		$64	7	%		$2,700		$2,638		$62	2	%

TRANSACTIONS PROCESSED ON NETWORKS
Discover Network	642		614		550		607		579		63		11	%	1,806		1,633		173		11	%
PULSE Network	1,151		1,055		989		1,029		996		155		16	%	3,195		2,827		368		13	%
Total	1,793		1,669		1,539		1,636		1,575		218		14	%	5,001		4,460		541		12	%

NETWORK VOLUME
PULSE Network		$45,244		$44,308		$43,158		$42,386		$39,828		$5,416	14	%		$132,710		$114,742		$17,968	16	%
Network Partners	5,113		4,602		4,553		3,280		3,811		1,302		34	%	14,268		10,933		3,335		31	%
Diners Club International¹	8,370		8,417		8,390		8,373		7,989		381		5	%	25,177		23,171		2,006		9	%
Total Payment Services	58,727		57,327		56,101		54,039		51,628		7,099		14	%	172,155		148,846		23,309		16	%
Discover Network - Proprietary	36,642		36,339		32,382		36,267		33,576		3,066		9	%	105,363		96,777		8,586		9	%
Total		$95,369		$93,666		$88,483		$90,306		$85,204		$10,165	12	%		$277,518		$245,623		$31,895	13	%


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
	Sep 30, 2018			Jun 30, 2018			Mar 31, 2018			Dec 31, 2017			Sep 30, 2017			Sep 30, 2018 vs. Sep 30, 2017
BALANCE SHEET SUMMARY
Assets
Cash and Investment Securities		$18,410			$17,441			$18,641			$14,955			$16,155			$2,255		14	%
Total Loan Receivables	86,894			84,789			82,744			84,248			80,443			6,451			8	%
Allowance for Loan Losses	(2,927		)	(2,828		)	(2,736		)	(2,621		)	(2,531		)	(396		)	(16	%)
Net Loan Receivables	83,967			81,961			80,008			81,627			77,912			6,055			8	%
Premises and Equipment, net	896			874			848			825			800			96			12	%
Goodwill and Intangible Assets, net	417			417			417			418			418			(1		)	—	%
Other Assets	2,152			2,058			2,053			2,262			2,323			(171		)	(7	%)
Total Assets		$105,842			$102,751			$101,967			$100,087			$97,608			$8,234		8	%

Liabilities & Stockholders' Equity
Direct to Consumer and Affinity Deposits		$43,411			$42,256			$41,321			$39,367			$38,703			$4,708		12	%
Brokered Deposits and Other Deposits	20,263			19,427			19,809			19,397			17,432			2,831			16	%
Deposits	63,674			61,683			61,130			58,764			56,135			7,539			13	%
Borrowings	26,998			26,252			26,244			26,326			26,737			261			1	%
Accrued Expenses and Other Liabilities	4,154			3,927			3,722			4,105			3,549			605			17	%
Total Liabilities	94,826			91,862			91,096			89,195			86,421			8,405			10	%
Total Equity	11,016			10,889			10,871			10,892			11,187			(171		)	(2	%)
Total Liabilities and Stockholders' Equity		$105,842			$102,751			$101,967			$100,087			$97,608			$8,234		8	%

LIQUIDITY
Liquidity Portfolio		$16,370			$15,703			$17,550			$13,560			$13,906		2,464			18	%
Undrawn Credit Facilities ¹	36,257			36,422			35,099			35,153			33,696			2,561			8	%
Total Liquidity		$52,627			$52,125			$52,649			$48,713			$47,602			$5,025		11	%


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
	Sep 30, 2018			Jun 30, 2018			Mar 31, 2018			Dec 31, 2017			Sep 30, 2017			Sep 30, 2018 vs. Sep 30, 2017
BALANCE SHEET STATISTICS
Total Common Equity		$10,453			$10,326			$10,308			$10,329			$10,627			($174	)	(2	%)
Total Common Equity/Total Assets	9.9		%	10.1		%	10.1		%	10.3		%	10.9		%
Total Common Equity/Net Loans	12.4		%	12.6		%	12.9		%	12.7		%	13.6		%

Tangible Assets		$105,425			$102,334			$101,550			$99,669			$97,190			$8,235		8	%
Tangible Common Equity ¹		$10,036			$9,909			$9,891			$9,911			$10,209			($173	)	(2	%)
Tangible Common Equity/Tangible Assets ¹	9.5		%	9.7		%	9.7		%	9.9		%	10.5		%
Tangible Common Equity/Net Loans ¹	12.0		%	12.1		%	12.4		%	12.1		%	13.1		%
Tangible Common Equity per share¹		$29.70			$28.82			$28.15			$27.69			$27.89			$1.81		6	%

REGULATORY CAPITAL RATIOS	Basel III Transition
Total Risk Based Capital Ratio	13.9		%	13.6		%	14.0		%	13.8		%	14.7		%
Tier 1 Risk Based Capital Ratio	12.1		%	12.3		%	12.5		%	12.3		%	13.2		%
Tier 1 Leverage Ratio	10.4		%	10.5		%	10.6		%	10.8		%	11.4		%
Common Equity Tier 1 Capital Ratio ²	11.4		%	11.6		%	11.9		%	11.6		%	12.5		%

RATIO OF EARNINGS TO FIXED CHARGES
Ratio of Earnings to Fixed Charges ^{3, 4}	2.8			2.8			2.8			3.2			3.2

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

² At September 30, 2018, there was no difference between the Company's CET1 capital ratio calculated under Basel III transition rules and the Company's CET1 capital ratio calculated under Basel III fully phased-in rules

³ 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

⁴ The Ratio of Earnings to Fixed Charges is a year-to-date statistic. The periods reported reflect the nine months ended September 30, 2018, the six months ended June 30, 2018, the three months ended March 31, 2018, the twelve months ended December 31, 2017, and the nine months ended September 30, 2017

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



DISCOVER FINANCIAL SERVICES
AVERAGE BALANCE SHEET
(unaudited, in millions)
	Quarter Ended
	Sep 30, 2018			Jun 30, 2018			Mar 31, 2018			Dec 31, 2017			Sep 30, 2017			Sep 30, 2018 vs. Sep 30, 2017
AVERAGE BALANCES
Assets
Cash and Investment Securities		$16,474			$16,395			$15,058			$15,290			$14,547			$1,927		13	%
Restricted Cash	638			466			821			276			848			(210		)	(25	%)
Credit Card Loans	68,613			66,594			65,983			64,791			62,647			5,966			10	%
Private Student Loans	9,158			9,219			9,432			9,158			8,986			172			2	%
Personal Loans	7,460			7,304			7,387			7,455			7,208			252			3	%
Other Loans	624			531			452			398			348			276			79	%
Total Loans	85,855			83,648			83,254			81,802			79,189			6,666			8	%
Total Interest Earning Assets	102,967			100,509			99,133			97,368			94,584			8,383			9	%
Allowance for Loan Losses	(2,827		)	(2,731		)	(2,615		)	(2,530		)	(2,379		)	(448		)	(19	%)
Other Assets	4,377			4,170			4,221			4,252			4,192			185			4	%
Total Assets		$104,517			$101,948			$100,739			$99,090			$96,397			$8,120		8	%

Liabilities and Stockholders' Equity
Direct to Consumer and Affinity Deposits		$42,498			$41,459			$39,825			$38,807			$37,900			$4,598		12	%
Brokered Deposits and Other Deposits	19,939			19,166			19,638			18,244			16,192			3,747			23	%
Total Interest-bearing Deposits	62,437			60,625			59,463			57,051			54,092			8,345			15	%
Short-term Borrowings	3			1			1			2			1			2			200	%
Securitized Borrowings	16,141			16,121			16,180			16,676			17,206			(1,065		)	(6	%)
Other Long-term Borrowings	10,351			9,866			9,945			9,768			9,721			630			6	%
Total Interest-bearing Liabilities	88,932			86,613			85,589			83,497			81,020			7,912			10	%
Other Liabilities & Stockholders' Equity	15,585			15,335			15,150			15,593			15,377			208			1	%
Total Liabilities and Stockholders' Equity		$104,517			$101,948			$100,739			$99,090			$96,397			$8,120		8	%

AVERAGE RATES
Assets
Cash and Investment Securities	2.01		%	1.82		%	1.57		%	1.34		%	1.31		%	70			bps
Restricted Cash	1.92		%	1.85		%	1.68		%	1.34		%	1.15		%	77			bps
Credit Card Loans	13.06		%	12.88		%	12.85		%	12.79		%	12.83		%	23			bps
Private Student Loans	8.19		%	8.05		%	7.89		%	7.69		%	7.56		%	63			bps
Personal Loans	12.66		%	12.55		%	12.43		%	12.27		%	12.33		%	33			bps
Other Loans	6.38		%	6.02		%	5.98		%	5.66		%	5.56		%	82			bps
Total Loans	12.45		%	12.28		%	12.21		%	12.14		%	12.15		%	30			bps
Total Interest Earning Assets	10.72		%	10.52		%	10.51		%	10.41		%	10.39		%	33			bps

Liabilities and Stockholders' Equity
Direct to Consumer and Affinity Deposits	1.88		%	1.71		%	1.59		%	1.44		%	1.37		%	51			bps
Brokered Deposits and Other Deposits	2.51		%	2.33		%	2.19		%	2.12		%	2.12		%	39			bps
Total Interest-bearing Deposits	2.08		%	1.90		%	1.79		%	1.65		%	1.59		%	49			bps
Short-term Borrowings	2.09		%	1.89		%	1.75		%	1.31		%	1.33		%	76			bps
Securitized Borrowings	2.71		%	2.67		%	2.43		%	2.19		%	2.37		%	34			bps
Other Long-term Borrowings	4.56		%	4.57		%	4.49		%	4.30		%	4.30		%	26			bps
Total Interest-bearing Liabilities	2.49		%	2.35		%	2.22		%	2.07		%	2.08		%	41			bps

Net Interest Margin	10.28		%	10.21		%	10.23		%	10.28		%	10.28		%	—			bps
Net Yield on Interest-earning Assets	8.57		%	8.50		%	8.59		%	8.64		%	8.60		%	(3		)	bps

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



DISCOVER FINANCIAL SERVICES
LOAN STATISTICS
(unaudited, in millions)
	Quarter Ended																				Nine Months Ended
	Sep 30, 2018			Jun 30, 2018			Mar 31, 2018			Dec 31, 2017			Sep 30, 2017			Sep 30, 2018 vs. Sep 30, 2017					Sep 30, 2018			Sep 30, 2017			2018 vs. 2017
TOTAL LOAN RECEIVABLES
Ending Loans ^{1, 2}		$86,894			$84,789			$82,744			$84,248			$80,443			$6,451		8	%		$86,894			$80,443			$6,451		8	%
Average Loans ^{1, 2}		$85,855			$83,648			$83,254			$81,802			$79,189			$6,666		8	%		$84,262			$77,420			$6,842		9	%

Interest Yield	12.45		%	12.28		%	12.21		%	12.14		%	12.15		%	30			bps		12.32		%	12.03		%	29			bps
Gross Principal Charge-off Rate	3.63		%	3.78		%	3.74		%	3.45		%	3.26		%	37			bps		3.72		%	3.29		%	43			bps
Gross Principal Charge-off Rate excluding PCI Loans³	3.71		%	3.87		%	3.84		%	3.54		%	3.35		%	36			bps		3.80		%	3.40		%	40			bps
Net Principal Charge-off Rate	2.97		%	3.11		%	3.09		%	2.85		%	2.63		%	34			bps		3.06		%	2.65		%	41			bps
Net Principal Charge-off Rate excluding PCI Loans ³	3.03		%	3.18		%	3.17		%	2.92		%	2.71		%	32			bps		3.13		%	2.73		%	40			bps
Delinquency Rate (30 or more days) excluding PCI Loans ³	2.22		%	2.08		%	2.23		%	2.20		%	2.05		%	17			bps		2.22		%	2.05		%	17			bps
Delinquency Rate (90 or more days) excluding PCI Loans ³	1.00		%	0.99		%	1.06		%	0.99		%	0.91		%	9			bps		1.00		%	0.91		%	9			bps
Gross Principal Charge-off Dollars		$785			$789			$769			$711			$651			$134		21	%		$2,343			$1,907			$436		23	%
Net Principal Charge-off Dollars		$642			$649			$635			$583			$527			$115		22	%		$1,926			$1,536			$390		25	%
Net Interest and Fee Charge-off Dollars		$135			$138			$136			$119			$107			$28		26	%		$409			$323			$86		27	%
Loans Delinquent 30 or more days ³		$1,894			$1,725			$1,800			$1,806			$1,605			$289		18	%		$1,894			$1,605			$289		18	%
Loans Delinquent 90 or more days ³		$854			$821			$855			$815			$709			$145		20	%		$854			$709			$145		20	%

Allowance for Loan Loss (period end)		$2,927			$2,828			$2,736			$2,621			$2,531			$396		16	%		$2,927			$2,531			$396		16	%
Reserve Change Build/ (Release) ⁴		$100			$93			$116			$96			$147			($47	)				$309			$364			($55	)
Reserve Rate	3.37		%	3.34		%	3.31		%	3.11		%	3.15		%	22			bps		3.37		%	3.15		%	22			bps
Reserve Rate Excluding PCI Loans ³	3.41		%	3.38		%	3.35		%	3.15		%	3.20		%	21			bps		3.41		%	3.20		%	21			bps

CREDIT CARD LOANS
Ending Loans		$69,253			$67,812			$65,577			$67,291			$63,475			$5,778		9	%		$69,253			$63,475			$5,778		9	%
Average Loans		$68,613			$66,594			$65,983			$64,791			$62,647			$5,966		10	%		$67,073			$61,165			$5,908		10	%

Interest Yield	13.06		%	12.88		%	12.85		%	12.79		%	12.83		%	23			bps		12.93		%	12.72		%	21			bps
Gross Principal Charge-off Rate	3.90		%	4.12		%	4.08		%	3.73		%	3.53		%	37			bps		4.03		%	3.61		%	42			bps
Net Principal Charge-off Rate	3.14		%	3.34		%	3.32		%	3.03		%	2.80		%	34			bps		3.27		%	2.86		%	41			bps
Delinquency Rate (30 or more days)	2.32		%	2.16		%	2.33		%	2.28		%	2.14		%	18			bps		2.32		%	2.14		%	18			bps
Delinquency Rate (90 or more days)	1.12		%	1.09		%	1.18		%	1.12		%	1.02		%	10			bps		1.12		%	1.02		%	10			bps
Gross Principal Charge-off Dollars		$674			$684			$663			$612			$555			$119		21	%		$2,021			$1,651			$370		22	%
Net Principal Charge-off Dollars		$543			$555			$540			$496			$439			$104		24	%		$1,638			$1,306			$332		25	%
Loans Delinquent 30 or more days		$1,608			$1,466			$1,529			$1,532			$1,359			$249		18	%		$1,608			$1,359			$249		18	%
Loans Delinquent 90 or more days		$777			$743			$777			$751			$646			$131		20	%		$777			$646			$131		20	%

Allowance for Loan Loss (period end)		$2,424			$2,334			$2,252			$2,147			$2,091			$333		16	%		$2,424			$2,091			$333		16	%
Reserve Change Build/ (Release)		$90			$82			$105			$56			$111			($21	)				$277			$301			($24	)
Reserve Rate	3.50		%	3.44		%	3.43		%	3.19		%	3.29		%	21			bps		3.50		%	3.29		%	21			bps

Total Discover Card Volume		$39,414			$38,430			$34,327			$38,574			$35,581			$3,833		11	%		$112,171			$103,284			$8,887		9	%
Discover Card Sales Volume		$35,896			$35,077			$30,850			$35,339			$32,161			$3,735		12	%		$101,823			$93,467			$8,356		9	%
Rewards Rate	1.31		%	1.31		%	1.27		%	1.23		%	1.30		%	1			bps		1.30		%	1.25		%	5			bps
¹ Total 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

⁴ Allowance for loan loss includes the net change in reserves on PCI pools having no remaining non-accretable difference which does not impact the reserve change build/(release) in provision for loan losses

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



DISCOVER FINANCIAL SERVICES
LOAN STATISTICS
(unaudited, in millions)
	Quarter Ended																				Nine Months Ended
	Sep 30, 2018			Jun 30, 2018			Mar 31, 2018			Dec 31, 2017			Sep 30, 2017			Sep 30, 2018 vs. Sep 30, 2017					Sep 30, 2018			Sep 30, 2017			2018 vs. 2017
PRIVATE STUDENT LOANS
Ending Loans (excluding PCI)		$7,668			$7,260			$7,416			$7,076			$6,998			$670		10	%		$7,668			$6,998			$670		10	%
Ending PCI Loans ¹	1,735			1,842			1,956			2,084			2,202			(467		)	(21	%)	1,735			2,202			(467		)	(21	%)
Ending Loans		$9,403			$9,102			$9,372			$9,160			$9,200			$203		2	%		$9,403			$9,200			$203		2	%

Interest Yield	8.19		%	8.05		%	7.89		%	7.69		%	7.56		%	63			bps		8.04		%	7.43		%	61			bps
Net Principal Charge-off Rate	0.96		%	0.92		%	0.92		%	1.03		%	1.14		%	(18		)	bps		0.93		%	0.86		%	7			bps
Net Principal Charge-off Rate excluding PCI Loans²	1.19		%	1.16		%	1.17		%	1.34		%	1.52		%	(33		)	bps		1.17		%	1.17		%	—			bps
Delinquency Rate (30 or more days) excluding PCI Loans ²	2.13		%	2.10		%	2.25		%	2.35		%	2.14		%	(1		)	bps		2.13		%	2.14		%	(1		)	bps

Reserve Rate	1.80		%	1.87		%	1.82		%	1.77		%	1.77		%	3			bps		1.80		%	1.77		%	3			bps
Reserve Rate excluding PCI Loans ²	1.87		%	1.97		%	1.93		%	1.89		%	1.89		%	(2		)	bps		1.87		%	1.89		%	(2		)	bps

PERSONAL LOANS
Ending Loans		$7,545			$7,304			$7,307			$7,374			$7,397			$148		2	%		$7,545			$7,397			$148		2	%

Interest Yield	12.66		%	12.55		%	12.43		%	12.27		%	12.33		%	33			bps		12.55		%	12.24		%	31			bps
Net Principal Charge-off Rate	4.09		%	3.97		%	4.03		%	3.62		%	3.19		%	90			bps		4.03		%	3.18		%	85			bps
Delinquency Rate (30 or more days)	1.57		%	1.42		%	1.37		%	1.40		%	1.27		%	30			bps		1.57		%	1.27		%	30			bps

Reserve Rate	4.28		%	4.29		%	4.12		%	4.08		%	3.63		%	65			bps		4.28		%	3.63		%	65			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																				Nine Months Ended
	Sep 30, 2018			Jun 30, 2018			Mar 31, 2018			Dec 31, 2017			Sep 30, 2017			Sep 30, 2018 vs. Sep 30, 2017					Sep 30, 2018			Sep 30, 2017			2018 vs. 2017
DIRECT BANKING
Interest Income		$2,781			$2,636			$2,569			$2,556			$2,476			$305		12	%		$7,986			$7,092			$894		13	%
Interest Expense	558			507			469			436			426			132			31	%	1,534			1,212			322			27	%
Net Interest Income	2,223			2,129			2,100			2,120			2,050			173			8	%	6,452			5,880			572			10	%
Other Income	421			398			394			423			401			20			5	%	1,213			1,184			29			2	%
Revenue Net of Interest Expense	2,644			2,527			2,494			2,543			2,451			193			8	%	7,665			7,064			601			9	%
Provision for Loan Losses	742			742			751			678			675			67			10	%	2,235			1,908			327			17	%
Total Other Expense	979			948			932			995			909			70			8	%	2,859			2,634			225			9	%
Income Before Income Taxes		$923			$837			$811			$870			$867			$56		6	%		$2,571			$2,522			$49		2	%

Net Interest Margin	10.28		%	10.21		%	10.23		%	10.28		%	10.28		%	—			bps		10.24		%	10.16		%	8			bps
Pretax Return on Loan Receivables	4.27		%	4.01		%	3.95		%	4.22		%	4.35		%	(8		)	bps		4.08		%	4.36		%	(28		)	bps

Allowance for Loan Loss (period end)		$2,920			$2,821			$2,728			$2,613			$2,525			$395		16	%		$2,920			$2,525			$395		16	%
Reserve Change Build/ (Release) ¹		$100			$93			$116			$94			$148			($48	)				$309			$374			($65	)

PAYMENT SERVICES
Interest Income		$—			$—			$—			$—			$—			$—		NM			$—			$—			$—		NM
Interest Expense	—			—			—			—			—			—			NM		—			—			—			NM
Net Interest Income	—			—			—			—			—			—			NM		—			—			—			NM
Other Income	80			76			81			71			74			6			8	%	237			219			18			8	%
Revenue Net of Interest Expense	80			76			81			71			74			6			8	%	237			219			18			8	%
Provision for Loan Losses	—			—			—			1			(1		)	1			NM		—			(8		)	8			NM
Total Other Expense	36			36			36			41			39			(3		)	(8	%)	108			111			(3		)	(3	%)
Income Before Income Taxes		$44			$40			$45			$29			$36			$8		22	%		$129			$116			$13		11	%


¹ Allowance for loan loss includes the net change in reserves on PCI pools having no remaining non-accretable difference which does not impact the reserve change build/(release) in provision for loan losses

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 (30 or more days) represents loans delinquent thirty days or more divided by ending loans (total or respective loans, as appropriate)

Delinquency Rate (90 or more days) represents loans delinquent ninety days or more 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
	Sep 30, 2018			Jun 30, 2018			Mar 31, 2018			Dec 31, 2017			Sep 30, 2017
GAAP Total Common Equity		$10,453			$10,326			$10,308			$10,329			$10,627
Less: Goodwill	(255		)	(255		)	(255		)	(255		)	(255		)
Less: Intangibles	(162		)	(162		)	(162		)	(163		)	(163		)
Tangible Common Equity ¹		$10,036			$9,909			$9,891			$9,911			$10,209

GAAP Book Value Per Share		$32.60			$31.66			$30.93			$30.43			$30.56
Less: Goodwill	(0.76		)	(0.73		)	(0.72		)	(0.72		)	(0.69		)
Less: Intangibles	(0.48		)	(0.47		)	(0.46		)	(0.45		)	(0.45		)
Less: Preferred Stock	(1.66		)	(1.64		)	(1.60		)	(1.57		)	(1.53		)
Tangible Common Equity Per Share		$29.70			$28.82			$28.15			$27.69			$27.89

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

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

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