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April 21, 2015 4:08 PM EDT


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
Form 8-K
 
 
Current Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): April 21, 2015
 
 
DISCOVER FINANCIAL SERVICES
(Exact name of registrant as specified in its charter)
 
 
Commission File Number: 001-33378
 
 
 
 
Delaware
 
36-2517428
(State or other jurisdiction
of incorporation)
 
(IRS Employer
Identification No.)
2500 Lake Cook Road, Riverwoods, Illinois 60015
(Address of principal executive offices, including zip code)
(224) 405-0900
(Registrant's telephone number, including area code)
N/A
(Former name or former address, if changed since last report)
 
 
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
 
o
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
 
o
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
 
o
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
 
o
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))






Item 2.02.     Results of Operations and Financial Condition.
 
On April 21, 2015, Discover Financial Services (the “Company”) released financial information with respect to the quarter ended March 31, 2015. Copies of the press release, financial data supplement and financial results presentation containing this information are attached hereto as exhibits and incorporated herein by reference.

The information contained in this Item 2.02 of this Current Report on Form 8-K, including the exhibits, is furnished pursuant to Item 2.02 of Form 8-K and shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except as shall be expressly stated by specific reference in such filing.
 
 
 
 
 
 
 


 








Item 9.01.     Financial Statements and Exhibits.
  
(d) Exhibits  
 
 
 
Exhibit No.
 
Description
99.1
 
Press Release of the Company dated April 21, 2015 containing financial information for the quarter ended March 31, 2015
99.2
 
Financial Data Supplement of the Company for the quarter ended March 31, 2015
99.3
 
Financial Results Presentation of the Company for the quarter ended March 31, 2015







SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
 
 
 
 
 
 
 
 
DISCOVER FINANCIAL SERVICES
 
 
 
Dated: April 21, 2015
 
By:
 
/s/ D. Christopher Greene
 
 
 
 
Name: D. Christopher Greene
 
 
 
 
Title: Vice President, Deputy General Counsel and Assistant Secretary





EXHIBIT INDEX
 
 
 
 
Exhibit No.
 
Description
99.1
 
Press Release of the Company dated April 21, 2015 containing financial information for the quarter ended March 31, 2015
99.2
 
Financial Data Supplement of the Company for the quarter ended March 31, 2015
99.3
 
Financial Results Presentation of the Company for the quarter ended March 31, 2015



Exhibit 99.1


DISCOVER FINANCIAL SERVICES REPORTS FIRST QUARTER NET INCOME OF $586 MILLION
OR $1.28 PER DILUTED SHARE

Riverwoods, IL, April 21, 2015 - Discover Financial Services (NYSE: DFS) today reported net income of $586 million or $1.28 per diluted share for the first quarter of 2015, as compared to $631 million or $1.31 per diluted share for the first quarter of 2014. The company's return on equity for the first quarter of 2015 was 21%.

First Quarter Highlights

•
Total loans grew $3.8 billion, or 5.9%, from the prior year to $67.6 billion.

•
Credit card loans grew $2.6 billion, or 5.1%, to $53.5 billion and Discover card sales volume increased 2.7% from the prior year.

•
Net charge-off rate for credit card loans increased 8 basis points from the prior year to 2.40% and the delinquency rate for loans over 30 days past due decreased 8 basis points to 1.64%.

•
Payment Services transaction dollar volume for the segment was $50.2 billion, down 1% from the prior year.

"We achieved solid loan growth and recently launched our new Discover it Miles card leveraging our strengths in rewards and service," said David Nelms, chairman and CEO of Discover. "We continue to generate a strong return on equity and announced plans to increase share repurchases and dividends."

Segment Results:

Direct Banking

Direct Banking pretax income of $881 million in the quarter was down $113 million, or 11%, driven primarily by higher provisioning for loan losses due to growth.

Total loans ended the quarter at $67.6 billion, up 6.0% compared to the prior year. Credit card loans ended the quarter at $53.5 billion, up 5.1% from the prior year. Personal loans increased $755 million, or 17.5%, from the prior year and private student loans increased $324 million, or 3.9%, from the prior year. Excluding purchased student loans, private student loans grew $851 million, or 19.7%, from the prior year.

Revenue net of interest expense increased $98 million, up 5% from the prior year.

Net interest income increased $66 million, or 4%, from the prior year, benefiting from loan growth partially offset by margin compression. Net interest margin was 9.70%, down 18 basis points from the prior year primarily due to a decline in card yield and an increase in funding costs. Credit card yield was 12.05%, a decrease of 9 basis points from the prior year due to portfolio mix. Interest expense as a percent of total loans increased 8 basis points from the prior year as the company continues to extend funding duration.

Other income increased $32 million, or 7%, from the prior year as higher direct mortgage related income and interchange revenue were partially offset by lower protection products revenue.

The delinquency rate for credit card loans over 30 days past due was 1.64%, down 8 basis points from the prior year and down 9 basis points from the prior quarter. Credit card net charge-off rate for the first quarter was 2.40%, up 8 basis points from the prior year and up 14 basis points from the prior quarter. The student loan net charge-off rate excluding purchased credit-impaired ("PCI") loans was 1.03%, down 28 basis points from the prior year. The personal loans net charge-off rate of 2.22% increased by 15 basis points from the prior year.

Provision for loan losses of $388 million increased $118 million from the prior year. Net charge-offs increased $31 million due primarily to several years of consistent loan growth. The reserve build for the first quarter of 2015 was $28 million due mainly to seasoning of loan growth, versus a $59 million reserve release in the prior year.

Expenses increased $93 million, or 13%, from the prior year. Professional fees increased in part due to costs associated with anti-money laundering and related compliance program enhancements. Employee compensation and marketing also contributed to the increase in expenses, as well as higher legal reserves.

Payment Services





Payment Services pretax income was $27 million in the quarter, down $1 million from the prior year. Payment Services dollar volume was $50.2 billion, down 1% from the prior year. PULSE transaction dollar volume was down 3% year-over-year. Network Partners volume was up $568 million, or 24% from the prior year as AribaPay volume more than offset the previously communicated loss of volume from a third party payments partner.

Share Repurchases

During the first quarter of 2015, the company repurchased approximately 6 million shares of common stock for $360 million. Shares of common stock outstanding declined by 1% from the prior quarter.

Conference Call and Webcast Information

The company will host a conference call to discuss its first quarter results on Tuesday, April 21, 2015, at 4:00 p.m. Central time. Interested parties can listen to the conference call via a live audio webcast at
http://investorrelations.discoverfinancial.com.

About Discover

Discover Financial Services (NYSE: DFS) is a direct banking and payment services company with one of the most recognized brands in U.S. financial services. Since its inception in 1986, the company has become one of the largest card issuers in the United States. The company issues the Discover card, America's cash rewards pioneer, and offers private student loans, personal loans, home loans, checking and savings accounts, certificates of deposit and money market accounts through its direct banking business. It operates the Discover Network, with millions of merchant and cash access locations; PULSE, one of the nation's leading ATM/debit networks; and Diners Club International, a global payments network with acceptance in more than 185 countries and territories. For more information, visit www.discover.com/company.

Contacts:

Investors:
Bill Franklin, 224-405-1902

Media:
Jon Drummond, 224-405-1888



A financial summary follows. Financial, statistical, and business related information, as well as information regarding business and segment trends, is included in the financial supplement filed as Exhibit 99.2 to the company's Current Report on Form 8-K filed today with the Securities and Exchange Commission (“SEC”). Both the earnings release and the financial supplement are available online at the SEC's website (http://www.sec.gov) and the company's website (http://investorrelations.discoverfinancial.com).

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements, which speak to our expected business and financial performance, among other matters, contain words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “aim,” “will,” “may,” “should,” “could,” “would,” “likely,” and similar expressions. Such statements are based upon the current beliefs and expectations of the company's management and are subject to significant risks and uncertainties. Actual results may differ materially from those set forth in the forward-looking statements. These forward-looking statements speak only as of the date of this press release, and there is no undertaking to update or revise them as more information becomes available.

The following factors, among others, could cause actual results to differ materially from those set forth in the forward-looking statements: changes in economic variables, such as the availability of consumer credit, the housing market, energy costs, the number and size of personal bankruptcy filings, the rate of unemployment, the levels of consumer confidence and consumer debt, and investor sentiment; the impact of current, pending and future legislation, regulation, supervisory guidance, and regulatory and legal actions, including, but not limited to, those related to financial regulatory reform, consumer financial services practices, anti-corruption, and funding, capital and liquidity; the actions and initiatives of current and potential competitors; the company's ability to manage its expenses; the company's ability to successfully achieve card




acceptance across its networks and maintain relationships with network participants; the company's ability to sustain and grow its private student loan portfolio and mortgage loan products; losses as a result of mortgage loan repurchase and indemnification obligations to secondary market purchasers; difficulty obtaining regulatory approval for, financing, closing, transitioning, integrating or managing the expenses of acquisitions of or investments in new businesses, products or technologies; the company's ability to manage its credit risk, market risk, liquidity risk, operational risk, compliance and legal risk, and strategic risk; the availability and cost of funding and capital; access to deposit, securitization, equity, debt and credit markets; the impact of rating agency actions; the level and volatility of equity prices, commodity prices and interest rates, currency values, investments, other market fluctuations and other market indices; losses in the company's investment portfolio; limits on the company's ability to pay dividends and repurchase its common stock; limits on the company's ability to receive payments from its subsidiaries; fraudulent activities or material security breaches of key systems; the company's ability to remain organizationally effective; the company's ability to increase or sustain Discover card usage or attract new customers; the company's ability to maintain relationships with merchants; the effect of political, economic and market conditions, geopolitical events and unforeseen or catastrophic events; the company's ability to introduce new products or services; the company's ability to manage its relationships with third-party vendors; the company's ability to maintain current technology and integrate new and acquired systems; the company's ability to collect amounts for disputed transactions from merchants and merchant acquirers; the company's ability to attract and retain employees; the company's ability to protect its reputation and its intellectual property; and new lawsuits, investigations or similar matters or unanticipated developments related to current matters. The company routinely evaluates and may pursue acquisitions of or investments in businesses, products, technologies, loan portfolios or deposits, which may involve payment in cash or the company's debt or equity securities.

Additional factors that could cause the company's results to differ materially from those described in the forward-looking statements can be found under “Risk Factors,” “Business - Competition,” “Business - Supervision and Regulation” and “Management's Discussion and Analysis of Financial Condition and Results of Operations” in the company's Annual Report on Form 10-K for the year ended December 31, 2014 which is filed with the SEC and available at the SEC's internet site (http://www.sec.gov).





DISCOVER FINANCIAL SERVICES
Exhibit 99.2
EARNINGS SUMMARY
 
(unaudited, in millions, except per share statistics)
 
 
Quarter Ended
 
 
 
 
 
 
Mar 31, 2015
 
Dec 31, 2014
 
Sep 30, 2014
 
Jun 30, 2014
 
Mar 31, 2014
 
March 31, 2015 vs.
March 31, 2014
 
EARNINGS SUMMARY
 
 
 
 
 
 
 

 
 
 
 
 
 
 
Interest Income

$1,929

 

$1,974

 

$1,926

 

$1,863

 

$1,833

 

$96

 
5
%
 
Interest Expense
300

 
302

 
288

 
274

 
270

 
30

 
11
%
 
Net Interest Income
1,629

 
1,672

 
1,638

 
1,589

 
1,563

 
66

 
4
%
 
Discount/Interchange Revenue
536

 
620

 
599

 
595

 
519

 
17

 
3
%
 
Rewards Cost
268

 
517

 
304

 
268

 
265

 
3

 
1
%
 
Discount and Interchange Revenue, net
268

 
103

 
295

 
327

 
254

 
14

 
6
%
 
Protection Products Revenue
71

 
75

 
78

 
78

 
83

 
(12
)
 
(14
%)
 
Loan Fee Income
81

 
86

 
85

 
80

 
83

 
(2
)
 
(2
%)
 
Transaction Processing Revenue
42

 
46

 
46

 
46

 
44

 
(2
)
 
(5
%)
 
Other Income
80

 
55

 
48

 
52

 
51

 
29

 
57
%
 
Total Other Income
542

 
365

 
552

 
583

 
515

 
27

 
5
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue Net of Interest Expense
2,171

 
2,037

 
2,190

 
2,172

 
2,078

 
93

 
4
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Provision for Loan Losses
390

 
457

 
354

 
360

 
272

 
118

 
43
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Employee Compensation and Benefits
331

 
314

 
320

 
301

 
307

 
24

 
8
%
 
Marketing and Business Development
182

 
216

 
182

 
168

 
169

 
13

 
8
%
 
Information Processing & Communications
88

 
88

 
87

 
87

 
84

 
4

 
5
%
 
Professional Fees
127

 
128

 
111

 
112

 
99

 
28

 
28
%
 
Premises and Equipment
24

 
24

 
23

 
22

 
23

 
1

 
4
%
 
Other Expense
121

 
162

 
104

 
107

 
102

 
19

 
19
%
 
Total Other Expense
873

 
932

 
827

 
797

 
784

 
89

 
11
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income Before Income Taxes
908

 
648

 
1,009

 
1,015

 
1,022

 
(114
)
 
(11
%)
 
Tax Expense
322

 
244

 
365

 
371

 
391

 
(69
)
 
(18
%)
 
Net Income

$586

 

$404

 

$644

 

$644

 

$631

 

($45
)
 
(7
%)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income Allocated to Common Stockholders

$573

 

$392

 

$630

 

$630

 

$618

 

($45
)
 
(7
%)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Effective Tax Rate
35.5
%
 
37.7
%
 
36.2
%
 
36.6
%
 
38.3
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Interest Margin
9.69
%
 
9.76
%
 
9.78
%
 
9.84
%
 
9.87
%
 
(18
)
 
bps
 
Operating Efficiency
40.2
%
 
45.8
%
 
37.8
%
 
36.7
%
 
37.7
%
 
248

 
bps
 
ROE
21
%
 
14
%
 
23
%
 
23
%
 
23
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending Common Shares Outstanding
445

 
449

 
455

 
465

 
468

 
(23
)
 
(5
%)
 
Weighted Average Common Shares Outstanding
448

 
452

 
460

 
466

 
471

 
(23
)
 
(5
%)
 
Weighted Average Common Shares Outstanding (fully diluted)
448

 
453

 
461

 
467

 
472

 
(24
)
 
(5
%)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PER SHARE STATISTICS
 

 
 

 
 

 
 

 
 

 
 

 
 

 
Basic EPS

$1.28

 

$0.87

 

$1.37

 

$1.35

 

$1.31

 

($0.03
)
 
(2
%)
 
Diluted EPS

$1.28

 

$0.87

 

$1.37

 

$1.35

 

$1.31

 

($0.03
)
 
(2
%)
 
Common Stock Price (period end)

$56.35

 

$65.49

 

$64.39

 

$61.98

 

$58.19

 

($1.84
)
 
(3
%)
 
Book Value per share

$25.22

 

$24.79

 

$24.82

 

$24.46

 

$23.53

 

$1.69

 
7
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Note: See Glossary of Financial Terms for definitions of financial terms
 




DISCOVER FINANCIAL SERVICES
 
EARNINGS SUMMARY
 
(unaudited, in millions)
 
 
Quarter Ended
 
 
 
 
 
 
Mar 31, 2015
 
Dec 31, 2014
 
Sep 30, 2014
 
Jun 30, 2014
 
Mar 31, 2014
 
March 31, 2015 vs.
March 31, 2014
 
SEGMENT- INCOME BEFORE INCOME TAXES
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Direct Banking

$881

 

$646

 

$981

 

$984

 

$994

 

($113
)
 
(11
%)
 
Payment Services
27

 
2

 
28

 
31

 
28

 
(1
)
 
(4
%)
 
Total

$908

 

$648

 

$1,009

 

$1,015

 

$1,022

 

($114
)
 
(11
%)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
TRANSACTIONS PROCESSED ON NETWORKS
 

 
 

 
 

 
 

 
 

 
 

 
 

 
Discover Network
456

 
523

 
522

 
514

 
461

 
(5
)
 
(1
%)
 
PULSE Network
1,024

 
1,085

 
1,071

 
1,090

 
1,037

 
(13
)
 
(1
%)
 
Total
1,480

 
1,608

 
1,593

 
1,604

 
1,498

 
(18
)
 
(1
%)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
NETWORK VOLUME
 

 
 

 
 

 
 

 
 

 
 

 
 

 
PULSE Network

$40,814

 

$41,788

 

$40,636

 

$41,500

 

$41,927

 

($1,113
)
 
(3
%)
 
Network Partners 
2,949

 
2,263

 
2,185

 
2,617

 
2,381

 
568

 
24
%
 
Diners Club International 1
6,474

 
6,933

 
6,777

 
6,733

 
6,527

 
(53
)
 
(1
%)
 
Total Payment Services
50,237

 
50,984

 
49,598

 
50,850

 
50,835

 
(598
)
 
(1
%)
 
Discover Network - Proprietary  
27,324

 
32,005

 
30,577

 
30,342

 
26,547

 
777

 
3
%
 
Total

$77,561

 

$82,989

 

$80,175

 

$81,192

 

$77,382

 

$179

 
0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 STATISTICS
 
(unaudited, in millions)
 
 
Quarter Ended
 
 
 
 
 
 
Mar 31, 2015
 
Dec 31, 2014
 
Sep 30, 2014
 
Jun 30, 2014
 
Mar 31, 2014
 
March 31, 2015 vs.
March 31, 2014
 
BALANCE SHEET SUMMARY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and Investment Securities

$14,701

 

$11,339

 

$11,480

 

$11,254

 

$13,858

 

$843

 
6
%
 
Total Loan Receivables
67,648

 
69,969

 
67,366

 
65,875

 
63,852

 
3,796

 
6
%
 
Allowance for Loan Losses
(1,776
)
 
(1,746
)
 
(1,644
)
 
(1,614
)
 
(1,591
)
 
(185
)
 
(12
%)
 
Net Loan Receivables
65,872

 
68,223

 
65,722

 
64,261

 
62,261

 
3,611

 
6
%
 
Premises and Equipment, net
678

 
670

 
661

 
665

 
668

 
10

 
1
%
 
Goodwill and Intangible Assets, net
432

 
433

 
461

 
463

 
466

 
(34
)
 
(7
%)
 
Other Assets
2,495

 
2,461

 
2,272

 
2,294

 
2,331

 
164

 
7
%
 
Total Assets

$84,178

 

$83,126

 

$80,596

 

$78,937

 

$79,584

 

$4,594

 
6
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities & Stockholders' Equity
 

 
 

 
 

 
 

 
 

 
 

 
 

 
Direct to Consumer and Affinity Deposits

$29,303

 

$28,766

 

$28,830

 

$28,739

 

$28,711

 

$592

 
2
%
 
Brokered Deposits and Other Deposits
17,124

 
17,323

 
16,552

 
15,706

 
16,273

 
851

 
5
%
 
Deposits
46,427

 
46,089

 
45,382

 
44,445

 
44,984

 
1,443

 
3
%
 
Borrowings
23,090

 
22,657

 
21,057

 
20,177

 
20,306

 
2,784

 
14
%
 
Accrued Expenses and Other Liabilities
3,450

 
3,246

 
2,856

 
2,934

 
3,273

 
177

 
5
%
 
Total Liabilities
72,967

 
71,992

 
69,295

 
67,556

 
68,563

 
4,404

 
6
%
 
Total Equity
11,211

 
11,134

 
11,301

 
11,381

 
11,021

 
190

 
2
%
 
Total Liabilities and Stockholders' Equity

$84,178

 

$83,126

 

$80,596

 

$78,937

 

$79,584

 

$4,594

 
6
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
LIQUIDITY
 

 
 

 
 

 
 

 
 

 
 

 
 

 
Liquidity Portfolio

$14,162

 

$10,752

 

$10,944

 

$10,337

 

$12,141

 

$2,021

 
17
%
 
Undrawn Credit Facilities 1
24,340

 
23,524

 
22,877

 
22,964

 
22,284

 
2,056

 
9
%
 
Total Liquidity

$38,502

 

$34,276

 

$33,821

 

$33,301

 

$34,425

 

$4,077

 
12
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE SHEET STATISTICS
 

 
 

 
 

 
 

 
 

 
 

 
 

 
Total Common Equity

$10,651

 

$10,574

 

$10,741

 

$10,821

 

$10,461

 

$190

 
2
%
 
Total Common Equity/Total Assets
12.7
%
 
12.7
%
 
13.3
%
 
13.7
%
 
13.1
%
 
 
 
 
 
Total Common Equity/Net Loans
16.2
%
 
15.5
%
 
16.3
%
 
16.8
%
 
16.8
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tangible Assets

$83,746

 

$82,693

 

$80,135

 

$78,474

 

$79,118

 

$4,628

 
6
%
 
Tangible Common Equity 2

$10,219

 

$10,141

 

$10,280

 

$10,358

 

$9,995

 

$224

 
2
%
 
Tangible Common Equity/Tangible Assets 2
12.2
%
 
12.3
%
 
12.8
%
 
13.2
%
 
12.6
%
 
 
 
 
 
Tangible Common Equity/Net Loans 2
15.5
%
 
14.9
%
 
15.6
%
 
16.1
%
 
16.1
%
 
 
 
 
 
Tangible Common Equity per share  2

$22.99

 

$22.58

 

$22.57

 

$22.26

 

$21.34

 

$1.65

 
8
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
REGULATORY CAPITAL RATIOS
Basel III Transition
 
Basel I
 
 

 
 

 
Total Risk Based Capital Ratio 3
17.6
%
 
17.0
%
 
17.8
%
 
18.3
%
 
18.1
%
 
 

 
 

 
Tier 1 Risk Based Capital Ratio 3
15.6
%
 
14.9
%
 
15.6
%
 
16.0
%
 
15.8
%
 
 

 
 

 
Tier 1 Common Capital Ratio 3,4
N/A

 
14.1
%
 
14.8
%
 
15.2
%
 
14.9
%
 
 

 
 

 
Tier 1 Leverage Ratio 3
13.3
%
 
13.2
%
 
13.7
%
 
14.0
%
 
13.4
%
 
 
 
 
 
Common Equity Tier 1 Capital Ratio 3
14.8
%
 
N/A

 
N/A

 
N/A

 
N/A

 
 

 
 

 
 
Basel III Fully Phased-in
 
 
 
 
 
Common Equity Tier 1 Capital Ratio 5
14.7
%
 
14.1
%
 
14.7
%
 
N/A

 
N/A

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1  Excludes investments pledged to the Federal Reserve, which is included within the liquidity portfolio
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2   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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3 As of January 1, 2015 regulatory capital ratios are calculated under Basel III rules subject to transition provisions. The Company reported under Basel I at December 31, 2014, September 30, 2014, June 30, 2014 and March 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4 Tier 1 Common Capital Ratio (under Basel I) is calculated using tier 1 common capital, a non-GAAP measure. The Company believes the tier 1 common capital ratio is meaningful to investors to assess the quality and composition of the Company’s capital. For corresponding reconciliation of tier 1 common capital to a GAAP financial measure see Reconciliation of GAAP to non-GAAP Data schedule
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
5 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
Note: See Glossary of Financial Terms for definitions of financial terms
 
 
 
 
 
 
 
 
 
 
 
 
 
 




DISCOVER FINANCIAL SERVICES
AVERAGE BALANCE SHEET
(unaudited, in millions)
 
Quarter Ended
 
 

 
 

 
Mar 31, 2015
 
Dec 31, 2014
 
Sep 30, 2014
 
Jun 30, 2014
 
Mar 31, 2014
 
March 31, 2015 vs.
March 31, 2014
AVERAGE BALANCES
 

 
 

 
 

 
 

 
 

 
 

 
 

Assets
 

 
 

 
 

 
 

 
 

 
 

 
 

Cash and Investment Securities

$12,148

 

$11,886

 

$10,742

 

$11,037

 

$11,244

 

$904

 
8
%
Restricted Cash
605

 
242

 
498

 
563

 
1,768

 
(1,163
)
 
(66
%)
Credit Card Loans
54,038

 
54,169

 
53,130

 
51,718

 
51,347

 
2,691

 
5
%
Private Student Loans
8,721

 
8,478

 
8,310

 
8,301

 
8,377

 
344

 
4
%
Personal Loans
5,047

 
4,954

 
4,718

 
4,426

 
4,259

 
788

 
19
%
Other Loans
342

 
329

 
323

 
283

 
244

 
98

 
40
%
Total Loans
68,148

 
67,930

 
66,481

 
64,728

 
64,227

 
3,921

 
6
%
Total Interest Earning Assets
80,901

 
80,058

 
77,721

 
76,328

 
77,239

 
3,662

 
5
%
Allowance for Loan Losses
(1,753
)
 
(1,676
)
 
(1,625
)
 
(1,599
)
 
(1,678
)
 
(75
)
 
(4
%)
Other Assets
4,439

 
4,303

 
4,289

 
4,253

 
4,271

 
168

 
4
%
Total Assets

$83,587

 

$82,685

 

$80,385

 

$78,982

 

$79,832

 

$3,755

 
5
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Stockholders' Equity
 

 
 

 
 

 
 

 
 

 
 

 
 

Direct to Consumer and Affinity Deposits

$28,891

 

$28,828

 

$28,835

 

$28,752

 

$28,572

 

$319

 
1
%
Brokered Deposits and Other Deposits
17,096

 
16,755

 
15,810

 
15,638

 
16,280

 
816

 
5
%
Total Interest-bearing Deposits
45,987

 
45,583

 
44,645

 
44,390

 
44,852

 
1,135

 
3
%
Short-term Borrowings
126

 
107

 
129

 
113

 
93

 
33

 
35
%
Securitized Borrowings
17,220

 
17,219

 
16,535

 
15,976

 
17,014

 
206

 
1
%
Other Long-term Borrowings
5,307

 
4,950

 
4,341

 
3,889

 
3,572

 
1,735

 
49
%
Total Interest-bearing Liabilities
68,640

 
67,859

 
65,650

 
64,368

 
65,531

 
3,109

 
5
%
Other Liabilities & Stockholders' Equity
14,947

 
14,826

 
14,735

 
14,614

 
14,301

 
646

 
5
%
Total Liabilities and Stockholders' Equity

$83,587

 

$82,685

 

$80,385

 

$78,982

 

$79,832

 

$3,755

 
5
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
AVERAGE RATES
 

 
 

 
 

 
 

 
 

 
 

 
 

Assets
 

 
 

 
 

 
 

 
 

 
 

 
 

Cash and Investment Securities
0.62
%
 
0.72
%
 
0.80
%
 
0.76
%
 
0.75
%
 
(13
)
 
bps
Restricted Cash
0.11
%
 
0.10
%
 
0.09
%
 
0.08
%
 
0.08
%
 
3

 
bps
Credit Card Loans
12.05
%
 
12.08
%
 
12.04
%
 
12.10
%
 
12.14
%
 
(9
)
 
bps
Private Student Loans
6.95
%
 
6.85
%
 
6.82
%
 
6.84
%
 
6.85
%
 
10

 
bps
Personal Loans
12.19
%
 
12.25
%
 
12.21
%
 
12.49
%
 
12.54
%
 
(35
)
 
bps
Other Loans
4.23
%
 
3.78
%
 
3.83
%
 
3.69
%
 
3.27
%
 
96

 
bps
Total Loans
11.37
%
 
11.40
%
 
11.36
%
 
11.42
%
 
11.44
%
 
(7
)
 
bps
Total Interest Earning Assets
9.67
%
 
9.78
%
 
9.83
%
 
9.79
%
 
9.62
%
 
5

 
bps
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Stockholders' Equity
 

 
 

 
 

 
 

 
 

 
 

 
 

Direct to Consumer and Affinity Deposits
1.25
%
 
1.26
%
 
1.26
%
 
1.27
%
 
1.29
%
 
(4
)
 
bps
Brokered Deposits and Other Deposits
1.50
%
 
1.53
%
 
1.54
%
 
1.54
%
 
1.54
%
 
(4
)
 
bps
Total Interest-bearing Deposits
1.34
%
 
1.36
%
 
1.36
%
 
1.37
%
 
1.38
%
 
(4
)
 
bps
Short-term Borrowings
1.43
%
 
1.54
%
 
1.42
%
 
1.60
%
 
1.90
%
 
(47
)
 
bps
Securitized Borrowings
1.89
%
 
1.88
%
 
1.82
%
 
1.74
%
 
1.67
%
 
22

 
bps
Other Long-term Borrowings
5.11
%
 
5.09
%
 
5.28
%
 
5.54
%
 
5.24
%
 
(13
)
 
bps
Total Interest-bearing Liabilities
1.77
%
 
1.77
%
 
1.74
%
 
1.71
%
 
1.67
%
 
10

 
bps
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Interest Margin
9.69
%
 
9.76
%
 
9.78
%
 
9.84
%
 
9.87
%
 
(18
)
 
bps
Net Yield on Interest-earning Assets
8.17
%
 
8.28
%
 
8.36
%
 
8.35
%
 
8.21
%
 
(4
)
 
bps
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Note: See Glossary of Financial Terms for definitions of financial terms




DISCOVER FINANCIAL SERVICES
LOAN STATISTICS
(unaudited, in millions)
 
Quarter Ended
 
 

 
 

 
Mar 31, 2015
 
Dec 31, 2014
 
Sep 30, 2014
 
Jun 30, 2014
 
Mar 31, 2014
 
March 31, 2015 vs.
March 31, 2014
TOTAL LOAN RECEIVABLES
 

 
 

 
 

 
 

 
 

 
 

 
 

Ending Loans 1, 2

$67,648

 

$69,969

 

$67,366

 

$65,875

 

$63,852

 

$3,796

 
6
%
Average Loans 1, 2

$68,148

 

$67,930

 

$66,481

 

$64,728

 

$64,227

 

$3,921

 
6
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Yield
11.37
%
 
11.40
%
 
11.36
%
 
11.42
%
 
11.44
%
 
(7
)
 
bps
Gross Principal Charge-off Rate
2.82
%
 
2.70
%
 
2.63
%
 
2.82
%
 
2.82
%
 
—

 
bps
Gross Principal Charge-off Rate excluding PCI Loans 3
2.98
%
 
2.86
%
 
2.79
%
 
3.01
%
 
3.01
%
 
(3
)
 
bps
Net Principal Charge-off Rate
2.14
%
 
2.06
%
 
1.94
%
 
2.08
%
 
2.08
%
 
6

 
bps
Net Principal Charge-off Rate excluding PCI Loans 3
2.26
%
 
2.18
%
 
2.06
%
 
2.22
%
 
2.22
%
 
4

 
bps
Delinquency Rate (over 30 days) excluding PCI Loans 3,4
1.57
%
 
1.66
%
 
1.64
%
 
1.56
%
 
1.65
%
 
(8
)
 
bps
Delinquency Rate (over 90 days) excluding PCI Loans 3,4
0.78
%
 
0.78
%
 
0.75
%
 
0.73
%
 
0.80
%
 
(2
)
 
bps
Gross Principal Charge-off Dollars

$474

 

$463

 

$440

 

$455

 

$447

 

$27

 
6
%
Net Principal Charge-off Dollars

$360

 

$355

 

$324

 

$337

 

$329

 

$31

 
9
%
Net Interest and Fee Charge-off Dollars

$95

 

$91

 

$85

 

$87

 

$89

 

$6

 
7
%
Loans Delinquent Over 30 Days 3,4

$1,006

 

$1,100

 

$1,043

 

$964

 

$985

 

$21

 
2
%
Loans Delinquent Over 90 Days 3,4

$500

 

$517

 

$476

 

$451

 

$478

 

$22

 
5
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for Loan Loss (period end)

$1,776

 

$1,746

 

$1,644

 

$1,614

 

$1,591

 

$185

 
12
%
Change in Loan Loss Reserves

$30

 

$102

 

$30

 

$23

 

($57
)
 

$87

 
153
%
Reserve Rate
2.63
%
 
2.50
%
 
2.44
%
 
2.45
%
 
2.49
%
 
14

 
bps
Reserve Rate Excluding PCI Loans 3
2.72
%
 
2.59
%
 
2.54
%
 
2.56
%
 
2.61
%
 
11

 
bps
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CREDIT CARD LOANS
 

 
 

 
 

 
 

 
 

 
 

 
 

Ending Loans

$53,499

 

$56,128

 

$53,699

 

$52,742

 

$50,879

 

$2,620

 
5
%
Average Loans

$54,038

 

$54,168

 

$53,130

 

$51,718

 

$51,347

 

$2,691

 
5
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Yield
12.05
%
 
12.08
%
 
12.04
%
 
12.10
%
 
12.14
%
 
(9
)
 
bps
Gross Principal Charge-off Rate
3.21
%
 
3.03
%
 
2.99
%
 
3.22
%
 
3.22
%
 
(1
)
 
bps
Net Principal Charge-off Rate
2.40
%
 
2.26
%
 
2.16
%
 
2.33
%
 
2.32
%
 
8

 
bps
Delinquency Rate (over 30 days) 4
1.64
%
 
1.73
%
 
1.71
%
 
1.63
%
 
1.72
%
 
(8
)
 
bps
Delinquency Rate (over 90 days) 4
0.86
%
 
0.85
%
 
0.82
%
 
0.80
%
 
0.87
%
 
(1
)
 
bps
Gross Principal Charge-off Dollars

$428

 

$413

 

$400

 

$415

 

$408

 

$20

 
5
%
Net Principal Charge-off Dollars

$319

 

$309

 

$289

 

$300

 

$294

 

$25

 
9
%
Loans Delinquent Over 30 Days 4

$879

 

$971

 

$920

 

$860

 

$876

 

$3

 
0
%
Loans Delinquent Over 90 Days 4

$458

 

$480

 

$440

 

$420

 

$442

 

$16

 
4
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for Loan Loss (period end)

$1,492

 

$1,474

 

$1,388

 

$1,359

 

$1,342

 

$150

 
11
%
Change in Loan Loss Reserves

$18

 

$86

 

$29

 

$17

 

($64
)
 

$82

 
128
%
Reserve Rate
2.79
%
 
2.63
%
 
2.58
%
 
2.58
%
 
2.64
%
 
15

 
bps
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Discover Card Volume

$28,725

 

$33,211

 

$32,091

 

$31,732

 

$28,077

 

$648

 
2
%
Discover Card Sales Volume

$26,379

 

$30,871

 

$29,609

 

$29,341

 

$25,697

 

$682

 
3
%
Rewards Rate
1.02
%
 
1.67
%
 
1.03
%
 
0.91
%
 
1.03
%
 
(1
)
 
bps
1 Total Loans includes mortgages 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 During the first quarter of 2015, a payment processing change was implemented which had the effect of contributing favorably to the delinquencies of certain accounts. These changes partially contributed to the decline in the delinquency rate
 
Note: See Glossary of Financial Terms for definitions of financial terms




DISCOVER FINANCIAL SERVICES
LOAN STATISTICS
(unaudited, in millions)
 
Quarter Ended
 
 

 
 

 
Mar 31, 2015
 
Dec 31, 2014
 
Sep 30, 2014
 
Jun 30, 2014
 
Mar 31, 2014
 
March 31, 2015 vs.
March 31, 2014
PRIVATE STUDENT LOANS
 

 
 

 
 

 
 

 
 

 
 

 
 

Ending Loans

$8,696

 

$8,510

 

$8,494

 

$8,251

 

$8,372

 

$324

 
4
%
Ending PCI Loans 1

$3,519

 

$3,660

 

$3,788

 

$3,915

 

$4,046

 

($527
)
 
(13
%)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Yield
6.95
%
 
6.85
%
 
6.82
%
 
6.84
%
 
6.85
%
 
10

 
bps
Net Principal Charge-off Rate
0.61
%
 
0.79
%
 
0.61
%
 
0.68
%
 
0.67
%
 
(6
)
 
bps
Net Principal Charge-off Rate excluding PCI Loans 2
1.03
%
 
1.40
%
 
1.14
%
 
1.30
%
 
1.31
%
 
(28
)
 
bps
Delinquency Rate (over 30 days) excluding PCI Loans 2
1.66
%
 
1.80
%
 
1.78
%
 
1.66
%
 
1.79
%
 
(13
)
 
bps
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reserve Rate
1.63
%
 
1.59
%
 
1.56
%
 
1.55
%
 
1.45
%
 
18

 
bps
Reserve Rate excluding PCI Loans 2
2.18
%
 
2.20
%
 
2.21
%
 
2.29
%
 
2.16
%
 
2

 
bps
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PERSONAL LOANS
 

 
 

 
 

 
 

 
 

 
 

 
 

Ending Loans

$5,065

 

$5,007

 

$4,830

 

$4,579

 

$4,310

 

$755

 
18
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Yield
12.19
%
 
12.25
%
 
12.21
%
 
12.49
%
 
12.54
%
 
(35
)
 
bps
Net Principal Charge-off Rate
2.22
%
 
2.20
%
 
1.92
%
 
1.95
%
 
2.07
%
 
15

 
bps
Delinquency Rate (over 30 days)
0.76
%
 
0.79
%
 
0.75
%
 
0.66
%
 
0.68
%
 
8

 
bps
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reserve Rate
2.43
%
 
2.40
%
 
2.23
%
 
2.37
%
 
2.52
%
 
(9
)
 
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, 2015
 
Dec 31, 2014
 
Sep 30, 2014
 
Jun 30, 2014
 
Mar 31, 2014
 
March 31, 2015 vs.
March 31, 2014
DIRECT BANKING
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Income

$1,929

 

$1,974

 

$1,926

 

$1,863

 

$1,833

 

$96

 
5
%
Interest Expense
300

 
302

 
288

 
274

 
270

 
30

 
11
%
Net Interest Income
1,629

 
1,672

 
1,638

 
1,589

 
1,563

 
66

 
4
%
Other Income
468

 
286

 
475

 
503

 
436

 
32

 
7
%
Revenue Net of Interest Expense
2,097

 
1,958

 
2,113

 
2,092

 
1,999

 
98

 
5
%
Provision for Loan Losses
388

 
454

 
356

 
360

 
270

 
118

 
44
%
Total Other Expense
828

 
858

 
776

 
748

 
735

 
93

 
13
%
Income Before Income Taxes

$881

 

$646

 

$981

 

$984

 

$994

 

($113
)
 
(11
%)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Interest Margin
9.70
%
 
9.77
%
 
9.79
%
 
9.85
%
 
9.88
%
 
(18
)
 
bps
Pretax Return on Loan Receivables
5.24
%
 
3.78
%
 
5.86
%
 
6.10
%
 
6.29
%
 
(105
)
 
bps
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PAYMENT SERVICES
 

 
 

 
 

 
 

 
 

 
 

 
 

Interest Income

$—

 

$—

 

$—

 

$—

 

$—

 

$—

 
NM

Interest Expense
—

 
—

 
—

 
—

 
—

 
—

 
NM

Net Interest Income
—

 
—

 
—

 
—

 
—

 
—

 
NM

Other Income
74

 
79

 
77

 
80

 
79

 
(5
)
 
(6
%)
Revenue Net of Interest Expense
74

 
79

 
77

 
80

 
79

 
(5
)
 
(6
%)
Provision for Loan Losses
2

 
3

 
(2
)
 
—

 
2

 
—

 
0%

Total Other Expense
45

 
74

 
51

 
49

 
49

 
(4
)
 
(8
%)
Income Before Income Taxes

$27

 

$2

 

$28

 

$31

 

$28

 

($1
)
 
(4
%)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 
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)
 
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
 
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
 
Regulatory Capital Ratios are regulatory measures used to evaluate capital adequacy. Under Basel I, to be considered "well-capitalized," total risk-based, tier 1 risk-based, and tier 1 leverage ratios of 10%, 6% and 5% respectively must be maintained. Under Basel III, to be considered "well-capitalized," total risk-based, tier 1 risk-based, tier 1 leverage, and common equity tier 1 ratios of 10%, 8%, 5%, and 6.5% respectively must be maintained. As of January 1, 2015 regulatory capital ratios are calculated under Basel III rules subject to transition provisions. Prior to January 1, 2015 regulatory capital ratios are calculated under Basel I. 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. Tier 1 Common Capital Ratio calculated under Basel I represents tier 1 common capital, a non-GAAP measure, divided by risk-weighted assets. For corresponding reconciliation of tier 1 common capital (Basel I) to a GAAP financial measure, see Reconciliation of GAAP to Non-GAAP Data schedule
 
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
 
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, 2015
 
Dec 31, 2014
 
Sep 30, 2014
 
Jun 30, 2014
 
Mar 31, 2014
GAAP total common equity

$10,651

 

$10,574

 

$10,741

 

$10,821

 

$10,461

Less: Goodwill
(257
)
 
(257
)
 
(284
)
 
(284
)
 
(284
)
Less: Intangibles
(175
)
 
(176
)
 
(177
)
 
(179
)
 
(182
)
Tangible common equity 1

$10,219

 

$10,141

 

$10,280

 

$10,358

 

$9,995

Effect of certain items in accumulated other comprehensive income (loss) excluded from tier 1 common capital
 
 
138

 
70

 
73

 
71

Total tier 1 common capital (Basel I) 2


 

$10,279

 

$10,350

 

$10,431

 

$10,066

Add: Adjustments related to capital components 3


 
26

 
21

 
N/A

 
N/A

Common equity Tier 1 capital (Basel III fully phased-in)

 

$10,305

 

$10,371

 
N/A

 
N/A

 


 


 


 


 


Common equity Tier 1 capital (Basel III transition)

$10,495

 
 
 
 
 
 
 
 
Adjustments related to capital components during transition 4
(88
)
 
 
 
 
 
 
 
 
Common equity Tier 1 capital (Basel III fully phased-in)

$10,407

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Risk weighted assets (Basel I)
N/A

 

$72,889

 

$70,132

 

$68,755

 

$67,365

Risk weighted assets (Basel III transition)

$70,864

 
N/A

 
N/A

 
N/A

 
N/A

Risk weighted assets (Basel III fully phased-in) 5

$70,757

 

$73,315

 

$70,560

 
N/A

 
N/A

 


 


 


 


 


Tier 1 common capital ratio (Basel I) 6,7
N/A

 
14.1
%
 
14.8
%
 
15.2
%
 
14.9
%
Common equity Tier 1 capital ratio (Basel III transition) 6
14.8
%
 
N/A

 
N/A

 
N/A

 
N/A

Common equity Tier 1 capital ratio (Basel III fully phased-in) 6,8
14.7
%
 
14.1
%
 
14.7
%
 
N/A

 
N/A

 
 
 
 
 
 
 
 
 
 
GAAP book value per share

$25.22

 

$24.79

 

$24.82

 

$24.46

 

$23.53

Less: Goodwill
(0.58
)
 
(0.57
)
 
(0.62
)
 
(0.62
)
 
(0.60
)
Less: Intangibles
(0.39
)
 
(0.39
)
 
(0.39
)
 
(0.38
)
 
(0.39
)
   Less: Preferred Stock
(1.26
)
 
(1.25
)
 
(1.23
)
 
(1.20
)
 
(1.20
)
Tangible common equity per share

$22.99

 

$22.58

 

$22.58

 

$22.26

 

$21.34

 
 
 
 
 
 
 
 
 
 
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 Tier 1 common capital (under Basel I), a non-GAAP financial measure, represents common equity and the effect of certain items in accumulated other comprehensive income (loss) excluded from tier 1 common capital, less goodwill and intangibles. A reconciliation of tier 1 common capital to common equity, a GAAP financial measure, is shown above. Other financial services companies may also use tier 1 common capital and definitions may vary, so users of this information are advised to exercise caution in comparing tier 1 common capital of different companies. Tier 1 common capital is included to support the tier 1 common capital ratio which is meaningful to investors to assess the quality and composition of the Company’s capital
 
 
 
 
 
 
 
 
 
 
3 Adjustments related to capital components for fully phased-in Basel III include deferred tax liabilities related to intangible assets and deduction for deferred tax assets
 
 
 
 
 
 
 
 
 
 
4 Adjustments related to capital components for fully phased-in Basel III include the phase-in of the intangible asset exclusion
 
 
 
 
 
 
 
 
 
 
5 Key differences under fully phased-in Basel III rules in the calculation of risk-weighted assets include higher risk weighting for past due loans and unfunded commitments
 
 
 
 
 
 
 
 
 
 
6 As of January 1, 2015 regulatory capital ratios are calculated under Basel III rules subject to transition provisions. The Company reported under Basel I at December 31, 2014, September 30, 2014, June 30, 2014 and March 31, 2014
 
 
 
 
 
 
 
 
 
 
7 Tier 1 common capital ratio is calculated using tier 1 common capital (Basel I), a non-GAAP measure, divided by risk weighted assets (Basel I)
 
 
 
 
 
 
 
 
 
 
8 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
 
 
 
 
 
 
 
 
 


April 21, 2015 ©2015 DISCOVER FINANCIAL SERVICES 1Q15 Financial Results Exhibit 99.3

 
Notice The following slides are part of a presentation by Discover Financial Services (the "Company") in connection with reporting quarterly financial results and are intended to be viewed as part of that presentation. No representation is made that the information in these slides is complete. For additional financial, statistical, and business related information, as well as information regarding business and segment trends, see the earnings release and financial supplement included as exhibits to the Company’s Current Report on Form 8-K filed today and available on the Company’s website (www.discover.com) and the SEC’s website (www.sec.gov). The information provided herein includes certain non-GAAP financial measures. The reconciliations of such measures to the comparable GAAP figures are included at the end of this presentation, which is available on the Company’s website and the SEC’s website. The presentation contains forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which they are made, which reflect management’s estimates, projections, expectations or beliefs at that time, and which are subject to risks and uncertainties that may cause actual results to differ materially. For a discussion of certain risks and uncertainties that may affect the future results of the Company, please see "Special Note Regarding Forward-Looking Statements," "Risk Factors," "Business – Competition," "Business – Supervision and Regulation" and "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 which is filed with the SEC and available at the SEC's website (www.sec.gov). The Company does not undertake to update or revise forward-looking statements as more information becomes available. 2

 
B / (W) ($MM, except per share data) 1Q15 1Q14 $ Δ % Δ Revenue Net of Interest Expense $2,171 $2,078 $93 4% Provision for Loan Losses 390 272 (118) (43%) Operating Expense 873 784 (89) (11%) Direct Banking 881 994 (113) (11%) Payment Services 27 28 (1) (4%) Total Pre-Tax Income 908 1,022 (114) (11%) Pre-tax, Pre-Provision Income (1) 1,298 1,294 4 0% Income Tax Expense 322 391 69 18% Net Income $586 $631 ($45) (7%) Diluted EPS $1.28 $1.31 ($0.03) (2%) ROE 21% 23% 1Q15 Summary Financial Results • Diluted EPS of $1.28, down 2% YOY • Revenue net of interest expense of $2.2Bn, up 4% YOY primarily due to loan growth, higher direct mortgage related income and higher interchange revenue • Provision for loan losses increased $118MM, or 43% due primarily to a $30MM reserve build versus a reserve release in the prior year • Expenses increased $89MM, or 11% primarily due to higher professional fees including anti-money laundering and related compliance program enhancements as well as increased compensation, marketing spend and legal reserves 3 Note(s) 1. Pre-tax, pre-provision income, which is derived by adding provision for loan losses to pre-tax income, is a non-GAAP financial measure which should be viewed in addition to, and not as a substitute for, the Company’s reported results. Management believes this information helps investors understand the effect of provision for loan losses on reported results and provides an alternate presentation of the Company’s performance; see appendix for a reconciliation

 
1Q14 1Q15 80 70 60 50 40 30 20 10 0 $63.9 $50.9 $8.4 $4.3 $67.6 $53.5 $8.7 $5.1 1Q14 1Q15 50 40 30 20 10 0 $26.5 $41.9 $6.5 $2.4 $27.3 $40.8 $6.5 $2.9 1Q15 Loan and Volume Growth 4 Volume ($Bn)Ending Loans ($Bn) Note(s) 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 Total +5.9% Card +5.1% Student +3.9% Personal +17.5% PULSE -2.7% Diners(1) -0.8% Network Partners +23.9% Proprietary +2.9% Total Payments Volume flat YOY

 
1Q15 Revenue Detail • Net interest income of $1.6Bn, up 4% YOY due primarily to loan growth • Discount and interchange revenue of $536MM, up 3% YOY driven primarily by an increase in card sales • Rewards rate declined by 1bp YOY and decreased significantly from 4Q14 which included the elimination of the rewards forfeiture reserve • Protection products revenue of $71MM, down 14% YOY due to the prior suspension of new product sales • Other income increased by $29MM primarily due to higher direct mortgage related income Note(s) 1. Rewards cost divided by Discover card sales volume 5 B / (W) ($MM) 1Q15 1Q14 $ Δ % Δ Interest Income $1,929 $1,833 $96 5% Interest Expense 300 270 (30) (11%) Net Interest Income 1,629 1,563 66 4% Discount/Interchange Revenue 536 519 17 3% Rewards Cost 268 265 (3) (1%) Net Discount/Interchange Revenue 268 254 14 6% Protection Products Revenue 71 83 (12) (14%) Loan Fee Income 81 83 (2) (2%) Transaction Processing Revenue 42 44 (2) (5%) Other Income 80 51 29 57% Total Non-Interest Income 542 515 27 5% Revenue Net of Interest Expense $2,171 $2,078 $93 4% Direct Banking $2,097 $1,999 $98 5% Payment Services 74 79 (5) (6%) Revenue Net of Interest Expense $2,171 $2,078 $93 4% Change ($MM) 1Q15 1Q14 QOQ YOY Discover Card Sales Volume $26,379 $25,697 (15%) 3% Rewards Rate (1) 1.02% 1.03% -65 bps -1 bps

 
1Q15 Net Interest Margin 6 • Total interest yield of 11.37% decreased 7bps YOY driven primarily by lower card yield • Credit card yield decreased 9bps YOY due to portfolio mix • Funding costs on interest-bearing liabilities increased 10bps YOY to 1.77% due primarily to higher fixed rate debt issuances • Net interest margin on receivables decreased 18bps YOY due to lower total yield and higher funding costs Change (%) 1Q15 QOQ YOY Total Interest Yield 11.37% -3 bps -7 bps NIM on Receivables 9.69% -7 bps -18 bps NIM on Interest-Earning Assets 8.17% -11 bps -4 bps 1Q15 1Q14 ($MM) Average Balance Rate Average Balance Rate Credit Card $54,038 12.05% $51,347 12.14% Private Student 8,721 6.95% 8,377 6.85% Personal 5,047 12.19% 4,259 12.54% Home Loans and Other 342 4.23% 244 3.27% Total Loans 68,148 11.37% 64,227 11.44% Other Interest-Earning Assets 12,753 0.59% 13,012 0.66% Total Interest-Earning Assets $80,901 9.67% $77,239 9.62% Direct to Consumer and Affinity $28,891 1.25% $28,572 1.29% Brokered Deposits and Other 17,096 1.50% 16,280 1.54% Interest Bearing Deposits 45,987 1.34% 44,852 1.38% Borrowings 22,653 2.64% 20,679 2.29% Total Interest-Bearing Liabilities $68,640 1.77% $65,531 1.67%

 
B / (W) ($MM) 1Q15 1Q14 $ Δ % Δ Employee Compensation and Benefits $331 $307 ($24) (8%) Marketing and Business Development 182 169 (13) (8%) Information Processing & Communications 88 84 (4) (5%) Professional Fees 127 99 (28) (28%) Premises and Equipment 24 23 (1) (4%) Other Expense 121 102 (19) (19%) Total Operating Expense $873 $784 ($89) (11%) Direct Banking $828 $735 ($93) (13%) Payment Services 45 49 4 8% Total Operating Expense $873 $784 ($89) (11%) Operating Efficiency (1) 40.2% 37.7% -248 bps Adjusted Operating Efficiency (2) 38.6% 37.7% -87 bps 1Q15 Operating Expense Detail 7 • Employee compensation and benefits of $331MM, up 8% YOY primarily due to higher headcount and higher salaries & commissions • Marketing and business development expense of $182MM, up 8% YOY due to higher advertising and marketing for card and personal loans • Professional fees of $127MM, up 28% YOY due in part to costs related to anti-money laundering and related compliance program enhancements • Other expense of $121MM, up 19% YOY largely due to a $20MM addition to legal reserves Note(s) 1. Defined as reported total operating expense divided by revenue net of interest expense 2. Operating efficiency adjusted for $15 million anti-money laundering and related compliance program expenses and $20 million legal reserve addition in 1Q15; see appendix for a reconciliation. Management believes adjusted operating efficiency, which is a non-GAAP measure, provides investors with a useful metric to evaluate the ongoing operating performance of the company

 
1Q15 Provision for Loan Losses and Credit Quality 8 • Net charge-offs of $360MM, up 9% YOY and reserve build of $30MM both primarily due to loan growth • Card net charge-off rate increased 8bps YOY to 2.40% • Card 30+ day delinquency rate of 1.64% decreased 8bps YOY • Student loan net charge-off rate excluding PCI loans of 1.03%, down 28bps YOY • Personal loan net charge-off rate of 2.22%, up 15bps YOY Note(s) 1. During the first quarter of 2015, a payment processing change was implemented which had the effect of contributing favorably to the delinquencies of certain accounts. These changes partially contributed to the decline in the delinquency rate 2. Excludes PCI loans which are accounted for on a pooled basis. Since a pool is accounted for as a single asset with a single composite interest rate and aggregate expectation of cash flows, the past-due status of a pool, or that of the individual loans within a pool, is not meaningful. Because the Company is recognizing interest income on a pool of loans, it is all considered to be performing B / (W) ($MM) 1Q15 1Q14 $ Δ % Δ Net Principal Charge-Off $360 $329 ($31) (9%) Reserve Changes build/(release) 30 (57) (87) (153%) Total Provision for Loan Loss $390 $272 ($118) (43%) Change (%) 1Q15 QOQ YOY Credit Card Loans Gross Principal Charge-Off Rate 3.21% 18 bps -1 bps Net Principal Charge-Off Rate 2.40% 14 bps 8 bps 30-Day Delinquency Rate (1) 1.64% -9 bps -8 bps Reserve Rate 2.79% 16 bps 15 bps Private Student Loans Net Principal Charge-Off Rate (excl. PCI Loans)(2) 1.03% -37 bps -28 bps 30-Day Delinquency Rate (excl. PCI Loans)(2) 1.66% -14 bps -13 bps Reserve Rate (excl. PCI Loans)(2) 2.18% -2 bps 2 bps Personal Loans Net Principal Charge-Off Rate 2.22% 2 bps 15 bps 30-Day Delinquency Rate 0.76% -3 bps 8 bps Reserve Rate 2.43% 3 bps -9 bps Total Loans Gross Principal Charge-Off Rate (excl. PCI Loans)(2) 2.98% 12 bps -3 bps Net Principal Charge-Off Rate (excl. PCI Loans)(2) 2.26% 8 bps 4 bps 30-Day Delinquency Rate (excl. PCI Loans) (1,2) 1.57% -9 bps -8 bps Reserve Rate (excl. PCI Loans) (2) 2.72% 13 bps 11 bps

 
Capital Position 9 Note(s) 1. As of January 1, 2015 regulatory capital ratios are calculated under Basel III rules subject to transition provisions. The Company reported under Basel I at December 31, 2014 and March 31, 2014 2. Tier 1 Common Capital Ratio (under Basel I) is calculated using tier 1 common capital, a non-GAAP measure. The Company believes the tier 1 common capital ratio is meaningful to investors to assess the quality and composition of the Company’s capital. See appendix for a reconciliation 3. 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 appendix Capital Ratios • Received non-objection from Federal Reserve for proposed capital actions from 4/1/15 through 6/30/16 - Increased quarterly common dividend from $0.24 to $0.28 per share on 4/16/15 - Plan to repurchase up to $2.2Bn of common stock through the five quarters Basel III Transition Basel I 1Q15 4Q14 1Q14 Total Risk Based Capital Ratio (1) 17.6% 17.0% 18.1% Tier 1 Risk Based Capital Ratio (1) 15.6% 14.9% 15.8% Tier 1 Common Capital Ratio(1,2) N/A 14.1% 14.9% Tier 1 Leverage Ratio (1) 13.3% 13.2% 13.4% Common Equity Tier 1 Capital Ratio(1) 14.8% N/A N/A Basel III Fully Phased-in Common Equity Tier 1 Capital Ratio (3) 14.7% 14.1% N/A

 
Appendix

 
Reconciliation of GAAP to Non-GAAP Data Note(s) 1. Pre-tax, pre-provision income, which is derived by adding provision for loan losses to pre-tax income, is a non-GAAP financial measure which should be viewed in addition to, and not as a substitute for, the company's reported results. Management believes this information helps investors understand the effect of provision for loan losses on reported results and provides an alternate presentation of the Company's performance 2. Adjusted operating efficiency is calculated using adjusted operating expense, a non-GAAP measure, divided by revenue net of interest expense. Management believes this information provides investors with a useful metric to evaluate the ongoing operating performance of the Company 11 Quarter Ended (unaudited, in millions) Mar 31, 2015 Mar 31, 2014 Provision for loan losses $390 $272 Income before income taxes 908 1,022 Pre-tax, pre-provision income (1) $1,298 $1,294 Revenue net of interest expense $2,171 $2,078 Total operating expense 873 784 Excluding legal reserve addition 20 — Excluding anti-money laundering and related compliance program expenses 15 — Adjusted operating expense $838 $784 Adjusted operating efficiency (2) 38.6% 37.7%

 
Reconciliation of GAAP to Non-GAAP Data (cont'd) Quarter Ended (unaudited, in millions) Mar 31, 2015 Dec 31, 2014 Mar 31, 2014 Note(s) 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. Tier 1 common capital (under Basel I), a non-GAAP financial measure, represents common equity and the effect of certain items in accumulated other comprehensive income (loss) excluded from tier 1 common capital, less goodwill and intangibles. A reconciliation of tier 1 common capital to common equity, a GAAP financial measure, is shown above. Other financial services companies may also use tier 1 common capital and definitions may vary, so users of this information are advised to exercise caution in comparing tier 1 common capital of different companies. Tier 1 common capital is included to support the tier 1 common capital ratio which is meaningful to investors to assess the quality and composition of the Company’s capital 3. Adjustments related to capital components for fully phased-in Basel III include deferred tax liabilities related to intangible assets and deduction for deferred tax assets 4. Adjustments related to capital components for fully phased-in Basel III include the phase-in of the intangible asset exclusion 5. Key differences under fully phased-in Basel III rules in the calculation of risk-weighted assets include higher risk weighting for past due loans and unfunded commitments 6. As of January 1, 2015 regulatory capital ratios are calculated under Basel III rules subject to transition provisions. The Company reported under Basel I at December 31, 2014 and March 31, 2014 7. Tier 1 common capital ratio is calculated using tier 1 common capital (Basel I), a non-GAAP measure, divided by risk weighted assets (Basel I) 8. 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) 12 GAAP total common equity $10,651 $10,574 $10,461 Less: Goodwill (257) (257) (284) Less: Intangibles (175) (176) (182) Tangible common equity(1) $10,219 $10,141 $9,995 Effect of certain items in accumulated other comprehensive income (loss) excluded from tier 1 common capital 138 71 Total tier 1 common capital (Basel I)(2) $10,279 $10,066 Add: Adjustments related to capital components(3) 26 N/A Common equity Tier 1 capital (Basel III fully phased-in) $10,305 N/A Common equity Tier 1 capital (Basel III transition) $10,495 Adjustments related to capital components during transition(4) (88) Common equity Tier 1 capital (Basel III fully phased-in) $10,407 Risk weighted assets (Basel I) N/A $72,889 $67,365 Risk weighted assets (Basel III transition) $70,864 N/A N/A Risk weighted assets (Basel III fully phased-in) (5) $70,757 $73,315 N/A Tier 1 common capital ratio (Basel I)(6,7) N/A 14.1% 14.9% Common equity Tier 1 capital ratio (Basel III transition)(6) 14.8% N/A N/A Common equity Tier 1 capital ratio (Basel III fully phased-in)(6,8) 14.7% 14.1% N/A

 

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