Document
false0001393612 0001393612 2020-07-22 2020-07-22


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): July 22, 2020
  
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:
 
☐
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Securities registered pursuant to Section 12(b) of the Act
Title of each class
Trading symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.01 per share
DFS
New York Stock Exchange
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐






Item 2.02.     Results of Operations and Financial Condition.
 
On July 22, 2020, Discover Financial Services (the “Company”) released financial information with respect to the quarter ended June 30, 2020. 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
 
Press Release of the Company dated July 22, 2020 containing financial information for the quarter ended June 30, 2020
 
Financial Data Supplement of the Company for the quarter and the Six Months Ended June 30, 2020
 
Financial Results Presentation of the Company for the quarter ended June 30, 2020
104
 
Cover Page Interactive Data File — the cover page from this Current Report on Form 8-K, formatted as Inline XBRL (included as Exhibit 101)







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
 
 
 

 
By:
 
/s/ D. Christopher Greene
 
 
 
 
Name: D. Christopher Greene
 
 
 
 
Title: Vice President, Secretary and Deputy General Counsel



 Exhibit
     Exhibit 99.1    

     
DISCOVER FINANCIAL SERVICES REPORTS SECOND QUARTER NET LOSS OF $368 MILLION
OR ($1.20) PER DILUTED SHARE

Second Quarter Results
 
2020
2019
YOY Change
Total loans, end of period (in billions)
$88.9
$90.2
(1%)
Total revenue net of interest expense (in millions)
$2,662
$2,852
(7%)
Total net charge-off rate
3.44%
3.22%
22 bps
Net income/(loss) (in millions)
($368)
$753
(149%)
Diluted EPS
($1.20)
$2.32
(152%)


Riverwoods, IL, July 22, 2020 - Discover Financial Services (NYSE: DFS) today reported a net loss of $368 million or ($1.20) per diluted share for the second quarter of 2020, as compared to net income of $753 million or $2.32 per diluted share for the second quarter of 2019. The current quarter results included a $1.3 billion addition to the allowance for credit losses.

“Given the unprecedented environment, I am pleased with our execution this quarter.” Said Roger Hochschild, CEO and President of Discover.  “The increase in reserves reflects economic deterioration since the first quarter, and we continue to be conservative in our credit management.   We are also remaining disciplined in expense management but continuing the investments in capabilities that will allow us to return to growth once the economic outlook improves.”

Segment Results:

Direct Banking

Direct Banking pretax loss of $484 million for the quarter was $1.4 billion lower than pretax income for the prior year period driven by an increase in the provision for credit losses and lower net interest income partially offset by lower operating expenses.

Total loans ended the quarter at $88.9 billion, down 1% year-over-year. Credit card loans ended the quarter at $70.2 billion, down 3% year-over-year. Personal loans decreased $98 million, or 1%, year-over-year. Private student loans increased $355 million, or 4%, year-over-year. The organic student loan portfolio, which excludes purchased loans, increased $692 million, or 9% year-over-year.

Net interest income for the quarter decreased $141 million, or 6%, from the prior year period, primarily driven by net interest margin compression. Net interest margin was 9.81%, down 66 basis points versus the prior year period. Card yield was 12.34%, a decrease of 110 basis points from the prior year period primarily driven by prime rate decreases partially offset by favorable portfolio mix. Interest expense as a percent of total loans decreased 73 basis points from the prior year period, primarily as a result of lower market rates.

The overall net charge-off rate was higher primarily due to the seasoning of recent years' loan growth. The credit card net charge-off rate was 3.90%, up 41 basis points from the prior year and up 25 basis points from the prior quarter. The 30+ day delinquency rate for credit card loans was 2.17%, down 17 basis points year-over year and down 45 basis points from the prior quarter. The student loan net charge-off rate was 0.62%, up 1 basis point from the prior year and down 6 basis points from the prior quarter. The personal loans net charge-off rate of 3.43% was down 90 basis points from the prior year and down 16 basis points from the prior quarter.

Provision for credit losses of $2.0 billion increased $1.3 billion from the prior year period driven by the impact of a higher reserve build and higher net charge-offs. The reserve build for the second quarter of 2020 was $1.3 billion, compared to a reserve build




of $69 million in the second quarter of 2019. This quarter’s reserve build reflects an updated macroeconomic outlook which assumes peak unemployment of 16% recovering to 11% by the end of 2020.

Total operating expenses were down $57 million year-over year primarily driven by decreased marketing expense, partially offset by higher employee compensation and information processing. Marketing decreased driven by reductions in brand and acquisition expense. Employee compensation increased as a result of higher average salaries and headcount. Information processing increased reflecting ongoing investments in technology capabilities and infrastructure.

Payment Services

Payment Services pretax income was $23 million in the quarter, down $23 million year-over-year. Higher revenue driven by a $44 million one-time gain on the sale of equity investments was partially offset by increased expenses, reflecting a $59 million intangible impairment charge resulting from a steep reduction in T&E spend impacting the Diners business.

Payment Services volume was $64.5 billion, up 4% year-over-year. PULSE dollar volume was up 12% year-over-year driven by higher average spend per transaction related to the pandemic, the impact of stimulus funds available to consumers and growth in e-commerce transactions. Network Partners volume increased by 22% year-over-year driven by AribaPay.

Share Repurchases

The company suspended its share repurchase program in March 2020 in response to the economic environment at that time. The share repurchase program remains suspended. Shares of common stock outstanding were flat to the prior quarter.

Adoption of Accounting Standard for Measurement of Credit Losses

The company’s results for the second quarter of 2020 reflect the January 1, 2020 adoption of Accounting Standards Update No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments for the Company (the “ASU”). For purposes of calculating the company’s regulatory capital, the company has elected to defer recognition of the estimated impact of the ASU on regulatory capital for two years in accordance with the interim final rule adopted by federal bank regulatory agencies on March 27, 2020. Pursuant to the interim final rule, the estimated impact of the ASU on regulatory capital will be phased in over a three year period beginning in 2022.

Conference Call and Webcast Information

The company will host a conference call to discuss its second quarter results on Thursday, July 23, 2020, at 7:00 a.m. Central time. Interested parties can listen to the conference call via a live audio webcast at https://investorrelations.discover.com.

About Discover

Discover Financial Services (NYSE: DFS) is a digital 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 and certificates of deposit through its banking business. It operates the Discover Global Network comprised of 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 around the world. For more information, visit www.discover.com/company.
Contacts:
Investors:
Craig Streem, 224-405-5923
craigstreem@discover.com
Media:
Jon Drummond, 224-405-1888
jondrummond@discover.com




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 (https://investorrelations.discover.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: the effect of the coronavirus disease 2019 ("COVID-19") pandemic and measures taken to mitigate the pandemic, including their impact on our credit quality and business operations as well as their impact on general economic and financial markets, 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 tax reform, 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 non-card products; 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, 2019, "Risk Factors" and “Management's Discussion & Analysis of Financial Condition and Results of Operations” in the company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, which is filed with the SEC and available at the SEC's internet site (http://www.sec.gov) and subsequent reports on Forms 8-K and 10-Q, including the company's Current Report on Form 8-K filed today with the SEC.


Exhibit


DISCOVER FINANCIAL SERVICES
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Exhibit 99.2
 
 
EARNINGS SUMMARY
 
 
 
 
 
 
 
 
(unaudited, in millions, except per share statistics)
 
 
 
 
 
 
 
 
 
Quarter Ended
 
 
 
 
 
Six Months Ended
 
 
 
 
 
Jun 30, 2020
 
Mar 31, 2020
 
Dec 31, 2019
 
Sep 30, 2019
 
Jun 30, 2019
 
Jun 30, 2020 vs. Jun 30, 2019
 
Jun 30, 2020
 
Jun 30, 2019
 
2020 vs. 2019
 
EARNINGS SUMMARY
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Income

$2,672

 

$2,982

 

$3,039

 

$3,040

 

$2,977

 

($305
)
 
(10
%)
 

$5,654

 

$5,914

 

($260
)
(4
%)
 
Interest Expense
482

 
584

 
615

 
638

 
645

 
(163
)
 
(25
%)
 
1,066

 
1,277

 
(211
)
(17
%)
 
Net Interest Income
2,190

 
2,398

 
2,424

 
2,402

 
2,332

 
(142
)
 
(6
%)
 
4,588

 
4,637

 
(49
)
(1
%)
 
Discount/Interchange Revenue
622

 
694

 
800

 
775

 
759

 
(137
)
 
(18
%)
 
1,316

 
1,436

 
(120
)
(8
%)
 
Rewards Cost
385

 
478

 
519

 
520

 
460

 
(75
)
 
(16
%)
 
863

 
906

 
(43
)
(5
%)
 
Discount and Interchange Revenue, net
237

 
216

 
281

 
255

 
299

 
(62
)
 
(21
%)
 
453

 
530

 
(77
)
(15
%)
 
Protection Products Revenue
44

 
47

 
48

 
48

 
49

 
(5
)
 
(10
%)
 
91

 
98

 
(7
)
(7
%)
 
Loan Fee Income
85

 
119

 
123

 
120

 
102

 
(17
)
 
(17
%)
 
204

 
206

 
(2
)
(1
%)
 
Transaction Processing Revenue
49

 
44

 
51

 
52

 
48

 
1

 
2
%
 
93

 
94

 
(1
)
(1
%)
 
Other Income
57

 
64

 
17

 
23

 
22

 
35

 
159
%
 
121

 
50

 
71

142
%
 
Total Non-Interest Income
472

 
490

 
520

 
498

 
520

 
(48
)
 
(9
%)
 
962

 
978

 
(16
)
(2
%)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue Net of Interest Expense
2,662

 
2,888

 
2,944

 
2,900

 
2,852

 
(190
)
 
(7
%)
 
5,550

 
5,615

 
(65
)
(1
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Provision for Credit Losses
2,046

 
1,807

 
836

 
799

 
787

 
1,259

 
160
%
 
3,853

 
1,596

 
2,257

141
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Employee Compensation and Benefits
452

 
467

 
447

 
439

 
427

 
25

 
6
%
 
919

 
852

 
67

8
%
 
Marketing and Business Development
129

 
231

 
234

 
230

 
224

 
(95
)
 
(42
%)
 
360

 
419

 
(59
)
(14
%)
 
Information Processing & Communications
117

 
114

 
113

 
96

 
101

 
16

 
16
%
 
231

 
200

 
31

16
%
 
Professional Fees
181

 
193

 
214

 
189

 
183

 
(2
)
 
(1
%)
 
374

 
350

 
24

7
%
 
Premises and Equipment
27

 
30

 
27

 
26

 
26

 
1

 
4
%
 
57

 
54

 
3

6
%
 
Other Expense
171

 
124

 
149

 
127

 
117

 
54

 
46
%
 
295

 
227

 
68

30
%
 
Total Operating Expense
1,077

 
1,159

 
1,184

 
1,107

 
1,078

 
(1
)
 
—
%
 
2,236

 
2,102

 
134

6
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income/ (Loss) Before Income Taxes
(461
)
 
(78
)
 
924

 
994

 
987

 
(1,448
)
 
(147
%)
 
(539
)
 
1,917

 
(2,456
)
(128
%)
 
Tax Expense
(93
)
 
(17
)
 
216

 
224

 
234

 
(327
)
 
(140
%)
 
(110
)
 
438

 
(548
)
(125
%)
 
Net Income/ (Loss)

($368
)
 

($61
)
 

$708

 

$770

 

$753

 

($1,121
)
 
(149
%)
 

($429
)
 

$1,479

 

($1,908
)
(129
%)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income/ (Loss) Allocated to Common Stockholders

($369
)
 

($78
)
 

$704

 

$749

 

$747

 

($1,116
)
 
(149
%)
 

($446
)
 

$1,452

 

($1,898
)
(131
%)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Effective Tax Rate
20.2
 %
 
22.0
 %
 
23.4
%
 
22.5
%
 
23.8
%
 
 
 
 
 
20.4
 %
 
22.9
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Interest Margin
9.81
 %
 
10.21
 %
 
10.29
%
 
10.43
%
 
10.47
%
 
(66
)
 
bps
 
10.01
 %
 
10.47
%
 
(46
)
bps
 
Operating Efficiency
40.5
 %
 
40.1
 %
 
40.2
%
 
38.2
%
 
37.8
%
 
270

 
bps
 
40.3
 %
 
37.4
%
 
290

bps
 
ROE
(15
)%
 
(2
)%
 
24
%
 
26
%
 
26
%
 
 
 
 
 
(9
)%
 
26
%
 
 
 
 
Capital Returned to Common Stockholders

$136

 

$468

 

$521

 

$540

 

$571

 

($435
)
 
(76
%)
 

$604

 

$1,172

 

($568
)
(48
%)
 
Payout Ratio
(37
)%
 
(604
)%
 
74
%
 
72
%
 
76
%
 


 


 
(135
)%
 
81
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending Common Shares Outstanding
306

 
306

 
310

 
315

 
319

 
(13
)
 
(4
%)
 
306

 
319

 
(13
)
(4
%)
 
Weighted Average Common Shares Outstanding
306

 
308

 
312

 
317

 
322

 
(16
)
 
(5
%)
 
307

 
325

 
(18
)
(6
%)
 
Weighted Average Common Shares Outstanding (fully diluted)
306

 
308

 
313

 
317

 
323

 
(17
)
 
(5
%)
 
307

 
326

 
(19
)
(6
%)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PER SHARE STATISTICS
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Basic EPS

($1.20
)
 

($0.25
)
 

$2.25

 

$2.36

 

$2.32

 

($3.52
)
 
(152
%)
 

($1.45
)
 

$4.46

 

($5.91
)
(133
%)
 
Diluted EPS

($1.20
)
 

($0.25
)
 

$2.25

 

$2.36

 

$2.32

 

($3.52
)
 
(152
%)
 

($1.45
)
 

$4.46

 

($5.91
)
(133
%)
 
Common Dividends Declared Per Share

$0.44

 

$0.44

 

$0.44

 

$0.44

 

$0.40

 

$0.04

 
10
%
 

$0.88

 

$0.80

 

$0.08

10
%
 
Common Stock Price (period end)

$50.09

 

$35.67

 

$84.82

 

$81.09

 

$77.59

 

($27.50
)
 
(35
%)
 

$50.09

 

$77.59

 

($27.50
)
(35
%)
 
Book Value per share

$31.47

 

$31.55

 

$38.24

 

$37.20

 

$35.97

 

($4.50
)
 
(13
%)
 

$31.47

 

$35.97

 

($4.50
)
(13
%)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Note: See Glossary of Financial Terms for definitions of financial terms
 
 
 
 
 
 
 
 




DISCOVER FINANCIAL SERVICES
 
BALANCE SHEET SUMMARY
 
(unaudited, in millions)
 
 
Quarter Ended
 
 
 
 
 
 
Jun 30, 2020
 
Mar 31, 2020
 
Dec 31, 2019
 
Sep 30, 2019
 
Jun 30, 2019
 
Jun 30, 2020 vs. Jun 30, 2019
 
BALANCE SHEET SUMMARY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and Investment Securities

$28,201

 

$21,993

 

$17,559

 

$17,761

 

$19,934

 

$8,267

 
41
%
 
Total Loan Receivables
88,927

 
92,963

 
95,894

 
92,493

 
90,229

 
(1,302
)
 
(1
%)
 
Allowance for Credit Losses
(8,184
)
 
(6,913
)
 
(3,383
)
 
(3,299
)
 
(3,202
)
 
(4,982
)
 
(156
%)
 
Net Loan Receivables
80,743

 
86,050

 
92,511

 
89,194

 
87,027

 
(6,284
)
 
(7
%)
 
Premises and Equipment, net
1,115

 
1,070

 
1,057

 
1,028

 
1,008

 
107

 
11
%
 
Goodwill and Intangible Assets, net
351

 
410

 
410

 
414

 
415

 
(64
)
 
(15
%)
 
Other Assets
3,382

 
3,134

 
2,459

 
2,389

 
2,323

 
1,059

 
46
%
 
Total Assets

$113,792

 

$112,657

 

$113,996

 

$110,786

 

$110,707

 

$3,085

 
3
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities & Stockholders' Equity
 

 
 

 
 

 
 

 
 

 
 

 
 

 
           Certificates of Deposits 1
$20,848
 

$20,703

 

$19,168

 

$18,313

 

$16,679

 

$4,169

 
25
%
 
           Savings, Money Market, and Other Deposits 1
40,266

 
36,003

 
35,241

 
33,985

 
33,007

 
7,259

 
22
%
 
Direct to Consumer Deposits 1
61,114

 
56,706

 
54,409

 
52,298

 
49,686

 
11,428

 
23
%
 
Brokered Deposits and Other Deposits
16,250

 
16,712

 
18,337

 
18,723

 
20,048

 
(3,798
)
 
(19
%)
 
Deposits
77,364

 
73,418

 
72,746

 
71,021

 
69,734

 
7,630

 
11
%
 
   Securitized Borrowings
12,766

 
13,939

 
14,284

 
12,820

 
14,214

 
(1,448
)
 
(10
%)
 
   Other Borrowings
10,428

 
12,159

 
11,417

 
11,634

 
10,949

 
(521
)
 
(5
%)
 
Borrowings
23,194

 
26,098

 
25,701

 
24,454

 
25,163

 
(1,969
)
 
(8
%)
 
Accrued Expenses and Other Liabilities
3,591

 
3,476

 
3,690

 
3,594

 
4,317

 
(726
)
 
(17
%)
 
Total Liabilities
104,149

 
102,992

 
102,137

 
99,069

 
99,214

 
4,935

 
5
%
 
Total Equity
9,643

 
9,665

 
11,859

 
11,717

 
11,493

 
(1,850
)
 
(16
%)
 
Total Liabilities and Stockholders' Equity

$113,792

 

$112,657

 

$113,996

 

$110,786

 

$110,707

 

$3,085

 
3
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
LIQUIDITY
 

 
 

 
 

 
 

 
 

 
 

 
 

 
Liquidity Portfolio

$26,853

 

$19,430

 

$16,608

 

$16,732

 

$17,283

 

$9,570

 
55
%
 
Private Asset-backed Securitizations
6,000

 
6,000

 
5,500

 
6,000

 
6,000

 
—

 
—
%
 
Federal Reserve Discount Window 2
32,830

 
34,712

 
34,220

 
33,355

 
32,466

 
364

 
1
%
 
Undrawn Credit Facilities 2
38,830

 
40,712

 
39,720

 
39,355

 
38,466

 
364

 
1
%
 
Total Liquidity
$65,683
 
$60,142
 
$56,328
 
$56,087
 
$55,749
 
$9,934
 
18
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1  Includes Affinity relationships
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2  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
 
 
 
 
 
 
Jun 30, 2020
 
Mar 31, 2020
 
Dec 31, 2019
 
Sep 30, 2019
 
Jun 30, 2019
 
Jun 30, 2020 vs. Jun 30, 2019
 
BALANCE SHEET STATISTICS
 

 
 

 
 

 
 

 
 

 
 

 
 

 
Total Common Equity

$8,587

 

$9,102

 

$11,296

 

$11,154

 

$10,930

 

($2,343
)
 
(21
%)
 
Total Common Equity/Total Assets
7.5
%
 
8.1
%
 
9.9
%
 
10.1
%
 
9.9
%
 
 
 
 
 
Total Common Equity/Net Loans
10.6
%
 
10.6
%
 
12.2
%
 
12.5
%
 
12.6
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tangible Assets

$113,441

 

$112,247

 

$113,586

 

$110,372

 

$110,292

 

$3,149

 
3
%
 
Tangible Common Equity 1

$8,236

 

$8,692

 

$10,886

 

$10,740

 

$10,515

 

($2,279
)
 
(22
%)
 
Tangible Common Equity/Tangible Assets 1
7.3
%
 
7.7
%
 
9.6
%
 
9.7
%
 
9.5
%
 
 
 
 
 
Tangible Common Equity/Net Loans 1
10.2
%
 
10.1
%
 
11.8
%
 
12.0
%
 
12.1
%
 
 
 
 
 
Tangible Common Equity per share  1

$26.88

 

$28.38

 

$35.10

 

$34.10

 

$32.91

 

($6.03
)
 
(18
%)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basel III
 
 
 
 
 
 
Quarter Ended
 
 
 
 
 
REGULATORY CAPITAL RATIOS  2
Jun 30, 2020 2
 
Mar 31, 2020 2
 
Dec 31, 2019
 
Sep 30, 2019
 
Jun 30, 2019
 
 

 
 

 
Total Risk Based Capital Ratio
14.7
%
 
13.7
%
 
13.5
%
 
13.7
%
 
13.7
%
 
 

 
 

 
Tier 1 Risk Based Capital Ratio
12.9
%
 
11.9
%
 
11.8
%
 
12.0
%
 
12.0
%
 
 

 
 

 
Tier 1 Leverage Ratio
10.0
%
 
9.9
%
 
10.3
%
 
10.3
%
 
10.2
%
 
 

 
 

 
Common Equity Tier 1 Capital Ratio
11.7
%
 
11.3
%
 
11.2
%
 
11.4
%
 
11.4
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 Based on interim final rule as of March 27, 2020. Capital ratios reflect delay in the recognition of the impact of CECL reserves on regulatory capital for two years in accordance with the interim final rule
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Note: See Glossary of Financial Terms for definitions of financial terms
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





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

 
 

 
Jun 30, 2020
 
Mar 31, 2020
 
Dec 31, 2019
 
Sep 30, 2019
 
Jun 30, 2019
 
Jun 30, 2020 vs. Jun 30, 2019
AVERAGE BALANCES
 

 
 

 
 

 
 

 
 

 
 

 
 

Assets
 

 
 

 
 

 
 

 
 

 
 

 
 

Cash and Investment Securities

$25,681

 

$17,977

 

$17,579

 

$17,215

 

$18,906

 

$6,775

 
36
%
Restricted Cash
226

 
627

 
58

 
737

 
888

 
(662
)
 
(75
%)
Credit Card Loans
70,848

 
75,337

 
74,814

 
73,248

 
71,492

 
(644
)
 
(1
%)
Private Student Loans
9,826

 
9,992

 
9,660

 
9,459

 
9,464

 
362

 
4
%
Personal Loans
7,475

 
7,704

 
7,675

 
7,522

 
7,419

 
56

 
1
%
Other Loans
1,622

 
1,468

 
1,288

 
1,116

 
983

 
639

 
65
%
Total Loans
89,771

 
94,501

 
93,437

 
91,345

 
89,358

 
413

 
—
%
Total Interest Earning Assets
115,678

 
113,105

 
111,074

 
109,297

 
109,152

 
6,526

 
6
%
Allowance for Credit Losses
(6,927
)
 
(5,851
)
 
(3,294
)
 
(3,198
)
 
(3,133
)
 
(3,794
)
 
(121
%)
Other Assets
5,717

 
5,661

 
4,835

 
4,674

 
4,539

 
1,178

 
26
%
Total Assets

$114,468

 

$112,915

 

$112,615

 

$110,773

 

$110,558

 

$3,910

 
4
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Stockholders' Equity
 

 
 

 
 

 
 

 
 

 
 

 
 

                       Certificates of Deposits 1

$20,939

 

$19,688

 

$18,879

 

$17,435

 

$16,138

 

$4,801

 
30
%
                       Savings, Money Market, and Other Deposits 1
37,874

 
35,534

 
34,113

 
33,062

 
32,073

 
5,801

 
18
%
Direct to Consumer Deposits 1
58,813

 
55,222

 
52,992

 
50,497

 
48,211

 
10,602

 
22
%
Brokered Deposits and Other Deposits
16,429

 
16,756

 
17,865

 
19,132

 
20,213

 
(3,784
)
 
(19
%)
Total Interest-bearing Deposits
75,242

 
71,978

 
70,857

 
69,629

 
68,424

 
6,818

 
10
%
Short-term Borrowings
—

 
1

 
—

 
1

 
—

 
—

 
NM

Securitized Borrowings
12,960

 
14,087

 
13,562

 
13,719

 
15,179

 
(2,219
)
 
(15
%)
Other Long-term Borrowings
11,375

 
11,790

 
11,542

 
11,047

 
10,932

 
443

 
4
%
Total Interest-bearing Liabilities
99,577

 
97,856

 
95,961

 
94,396

 
94,535

 
5,042

 
5
%
Other Liabilities & Stockholders' Equity
14,891

 
15,059

 
16,654

 
16,377

 
16,023

 
(1,132
)
 
(7
%)
Total Liabilities and Stockholders' Equity

$114,468

 

$112,915

 

$112,615

 

$110,773

 

$110,558

 

$3,910

 
4
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
AVERAGE YIELD
 

 
 

 
 

 
 

 
 

 
 

 
 

Assets
 

 
 

 
 

 
 

 
 

 
 

 
 

Cash and Investment Securities
0.94
%
 
1.80
%
 
2.05
%
 
2.26
%
 
2.46
%
 
(152
)
 
bps
Restricted Cash
0.25
%
 
1.06
%
 
1.39
%
 
2.11
%
 
2.32
%
 
(207
)
 
bps
Credit Card Loans
12.34
%
 
12.90
%
 
13.08
%
 
13.35
%
 
13.44
%
 
(110
)
 
bps
Private Student Loans
7.46
%
 
8.24
%
 
8.43
%
 
8.54
%
 
8.59
%
 
(113
)
 
bps
Personal Loans
12.40
%
 
13.27
%
 
13.23
%
 
13.17
%
 
13.02
%
 
(62
)
 
bps
Other Loans
6.49
%
 
6.73
%
 
6.27
%
 
6.72
%
 
6.83
%
 
(34
)
 
bps
Total Loans
11.70
%
 
12.34
%
 
12.52
%
 
12.76
%
 
12.82
%
 
(112
)
 
bps
Total Interest Earning Assets
9.29
%
 
10.60
%
 
10.86
%
 
11.03
%
 
10.94
%
 
(165
)
 
bps
 
 
 
 
 
 
 
 
 
 
 
 
 
 
AVERAGE RATES
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Stockholders' Equity
 

 
 

 
 

 
 

 
 

 
 

 
 

                       Certificates of Deposits 1
2.22
%
 
2.36
%
 
2.45
%
 
2.45
%
 
2.37
%
 
(15
)
 
bps
                       Savings, Money Market, and Other Deposits 1
1.29
%
 
1.64
%
 
1.80
%
 
2.01
%
 
2.11
%
 
(82
)
 
bps
Direct to Consumer Deposits 1
1.62
%
 
1.90
%
 
2.03
%
 
2.16
%
 
2.20
%
 
(58
)
 
bps
Brokered Deposits and Other Deposits
2.52
%
 
2.71
%
 
2.72
%
 
2.73
%
 
2.71
%
 
(19
)
 
bps
Total Interest-bearing Deposits
1.81
%
 
2.09
%
 
2.20
%
 
2.32
%
 
2.35
%
 
(54
)
 
bps
Short-term Borrowings
0.25
%
 
1.71
%
 
1.72
%
 
2.18
%
 
2.59
%
 
(234
)
 
bps
Securitized Borrowings
1.24
%
 
2.28
%
 
2.62
%
 
2.95
%
 
3.01
%
 
(177
)
 
bps
Other Long-term Borrowings
3.63
%
 
4.45
%
 
4.53
%
 
4.64
%
 
4.75
%
 
(112
)
 
bps
Total Interest-bearing Liabilities
1.95
%
 
2.40
%
 
2.54
%
 
2.68
%
 
2.73
%
 
(78
)
 
bps
Net Interest Margin
9.81
%
 
10.21
%
 
10.29
%
 
10.43
%
 
10.47
%
 
(66
)
 
bps
Net Yield on Interest-earning Assets
7.61
%
 
8.53
%
 
8.66
%
 
8.72
%
 
8.57
%
 
(96
)
 
bps
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1  Includes Affinity relationships
Note: See Glossary of Financial Terms for definitions of financial terms




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

 
 

 
Six Months Ended
 
 
 
 
 
 
 
 
Jun 30, 2020
 
Mar 31, 2020
 
Dec 31, 2019
 
Sep 30, 2019
 
Jun 30, 2019
 
Jun 30, 2020 vs. Jun 30, 2019
 
Jun 30, 2020
 
Jun 30, 2019
 
2020 vs. 2019
 
 
 
 
TOTAL LOAN RECEIVABLES
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
Ending Loans 1

$88,927

 

$92,963

 

$95,894

 

$92,493

 

$90,229

 

($1,302
)
 
(1
%)
 

$88,927

 

$90,229

 

($1,302
)
(1
%)
 
 
 
 
Average Loans 1

$89,771

 

$94,501

 

$93,437

 

$91,345

 

$89,358

 

$413

 
—
%
 

$92,135

 

$89,356

 

$2,779

3
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Yield
11.70
%
 
12.34
%
 
12.52
%
 
12.76
%
 
12.82
%
 
(112
)
 
bps
 
12.03
%
 
12.81
%
 
(78
)
bps
 
 
 
 
Gross Principal Charge-off Rate 2
4.26
%
 
4.15
%
 
4.00
%
 
3.87
%
 
4.03
%
 
23

 
bps
 
4.20
%
 
4.03
%
 
17

bps
 
 
 
 
Net Principal Charge-off Rate 2
3.44
%
 
3.27
%
 
3.19
%
 
3.05
%
 
3.22
%
 
22

 
bps
 
3.35
%
 
3.23
%
 
12

bps
 
 
 
 
Delinquency Rate (30 or more days)
1.98
%
 
2.39
%
 
2.41
%
 
2.33
%
 
2.19
%
 
(21
)
 
bps
 
 
 
 
 
 
 
 
 
 
 
Delinquency Rate (30 or more days) excluding Purchased Loans 3
1.98
%
 
2.38
%
 
2.40
%
 
2.32
%
 
2.18
%
 
(20
)
 
bps
 
1.98
%
 
2.18
%
 
(20
)
bps
 
 
 
 
Delinquency Rate (90 or more days)
1.03
%
 
1.18
%
 
1.15
%
 
1.06
%
 
1.03
%
 
—

 
bps
 
 
 
 
 
 
 
 
 
 
 
Delinquency Rate (90 or more days) excluding Purchased Loans 3
1.04
%
 
1.19
%
 
1.15
%
 
1.06
%
 
1.04
%
 
—

 
bps
 
1.04
%
 
1.04
%
 
—

bps
 
 
 
 
Gross Principal Charge-off Dollars

$950

 

$975

 

$941

 

$891

 

$898

 

$52

 
6
%
 

$1,925

 

$1,785

 

$140

8
%
 
 
 
 
Net Principal Charge-off Dollars

$767

 

$769

 

$751

 

$702

 

$718

 

$49

 
7
%
 

$1,536

 

$1,433

 

$103

7
%
 
 
 
 
Net Interest and Fee Charge-off Dollars

$169

 

$178

 

$166

 

$156

 

$158

 

$11

 
7
%
 

$347

 

$316

 

$31

10
%
 
 
 
 
Loans Delinquent 30 or more days

$1,763

 

$2,218

 

$2,312

 

$2,153

 

$1,976

 

($213
)
 
(11
%)
 
 
 
 
 
 
 
 
 
 
 
Loans Delinquent 30 or more days excluding Purchased Loans 3

$1,739

 

$2,189

 

$2,276

 

$2,114

 

$1,939

 

($200
)
 
(10
%)
 

$1,739

 

$1,939

 

($200
)
(10
%)
 
 
 
 
Loans Delinquent 90 or more days

$916

 

$1,095

 

$1,098

 

$978

 

$931

 

($15
)
 
(2
%)
 
 
 
 
 
 
 
 
 
 
 
Loans Delinquent 90 or more days excluding Purchased Loans 3

$911

 

$1,088

 

$1,089

 

$968

 

$922

 

($11
)
 
(1
%)
 

$911

 

$922

 

($11
)
(1
%)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for Credit Losses (period end) 4

$8,184

 

$6,913

 

$3,383

 

$3,299

 

$3,202

 

$4,982

 
156
%
 

$8,184

 

$3,202

 

$4,982

156
%
 
 
 
 
Reserve Change Build/ (Release)  5, 6, 7

$1,271

 

$1,069

 

$85

 

$97

 

$69

 

$1,202

 


 

$2,340

 

$163

 

$2,177



 
 
 
 
Reserve Rate
9.20
%
 
7.44
%
 
3.53
%
 
3.57
%
 
3.55
%
 
565

 
bps
 
9.20
%
 
3.55
%
 
565

bps
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CREDIT CARD LOANS
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
Ending Loans

$70,201

 

$73,811

 

$77,181

 

$73,968

 

$72,393

 

($2,192
)
 
(3
%)
 

$70,201

 

$72,393

 

($2,192
)
(3
%)
 
 
 
 
Average Loans

$70,848

 

$75,337

 

$74,814

 

$73,248

 

$71,492

 

($644
)
 
(1
%)
 

$73,092

 

$71,428

 

$1,664

2
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Yield
12.34
%
 
12.90
%
 
13.08
%
 
13.35
%
 
13.44
%
 
(110
)
 
bps
 
12.63
%
 
13.43
%
 
(80
)
bps
 
 
 
 
Gross Principal Charge-off Rate
4.84
%
 
4.64
%
 
4.34
%
 
4.25
%
 
4.43
%
 
41

 
bps
 
4.74
%
 
4.41
%
 
33

bps
 
 
 
 
Net Principal Charge-off Rate
3.90
%
 
3.65
%
 
3.41
%
 
3.32
%
 
3.49
%
 
41

 
bps
 
3.77
%
 
3.50
%
 
27

bps
 
 
 
 
Delinquency Rate (30 or more days)
2.17
%
 
2.62
%
 
2.62
%
 
2.50
%
 
2.34
%
 
(17
)
 
bps
 
2.17
%
 
2.34
%
 
(17
)
bps
 
 
 
 
Delinquency Rate (90 or more days)
1.21
%
 
1.38
%
 
1.32
%
 
1.21
%
 
1.18
%
 
3

 
bps
 
1.21
%
 
1.18
%
 
3

bps
 
 
 
 
Gross Principal Charge-off Dollars

$852

 

$869

 

$818

 

$784

 

$789

 

$63

 
8
%
 

$1,721

 

$1,563

 

$158

10
%
 
 
 
 
Net Principal Charge-off Dollars

$688

 

$683

 

$644

 

$611

 

$623

 

$65

 
10
%
 

$1,371

 

$1,239

 

$132

11
%
 
 
 
 
Loans Delinquent 30 or more days

$1,523

 

$1,935

 

$2,019

 

$1,847

 

$1,692

 

($169
)
 
(10
%)
 

$1,523

 

$1,692

 

($169
)
(10
%)
 
 
 
 
Loans Delinquent 90 or more days

$846

 

$1,016

 

$1,020

 

$897

 

$857

 

($11
)
 
(1
%)
 

$846

 

$857

 

($11
)
(1
%)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for Credit Losses (period end) 4

$6,491

 

$5,306

 

$2,883

 

$2,799

 

$2,691

 

$3,800

 
141
%
 

$6,491

 

$2,691

 

$3,800

141
%
 
 
 
 
Reserve Change Build/ (Release)  5, 6

$1,185

 

$756

 

$84

 

$106

 

$69

 

$1,116

 


 

$1,941

 

$163

 

$1,778



 
 
 
 
Reserve Rate
9.25
%
 
7.19
%
 
3.74
%
 
3.78
%
 
3.72
%
 
553

 
bps
 
9.25
%
 
3.72
%
 
553

bps
 
 
 
 
Total Discover Card Volume

$33,105

 

$37,474

 

$42,794

 

$41,168

 

$39,935

 

($6,830
)
 
(17
%)
 

$70,579

 

$76,321

 

($5,742
)
(8
%)
 
 
 
 
Discover Card Sales Volume

$30,721

 

$33,988

 

$39,188

 

$37,432

 

$36,664

 

($5,943
)
 
(16
%)
 

$64,709

 

$69,563

 

($4,854
)
(7
%)
 
 
 
 
Rewards Rate
1.24
%
 
1.40
%
 
1.32
%
 
1.38
%
 
1.25
%
 
(1
)
 
bps
 
1.33
%
 
1.30
%
 
3

bps
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1  Total Loans includes Home Equity and other loans
 
 
 
 
2  Prior to adoption of ASU No. 2016-13 on January 1, 2020, net charge-offs on Purchased Credit Impaired ("PCI") loans generally did not result in a charge to earnings
 
 
 
 
3  Prior to adoption of ASU No. 2016-13 on January 1, 2020, Purchased loans (formerly referred to as PCI) were accounted for on a pooled basis. Since a pool was 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, was not meaningful. Because the Company was recognizing interest income on a pool of loans, it was all considered to be performing
 
 
 
 
4  Prior to adoption of ASU No. 2016-13 on January 1, 2020, credit losses were estimated using the incurred loss approach. Under the new current expected credit loss (“CECL”) approach, reserves are now recorded for expected losses, not simply those deemed to be already incurred, and the loss estimate period is extended to include the entire life of the loan
 
 
 
 
5  Prior to adoption of ASU No. 2016-13 on January 1, 2020, the allowance for credit loss included the net change in reserves on PCI pools having no remaining non-accretable difference which did not impact the reserve change build/(release) in provision for credit losses
 
 
 
 
 
6  Excludes January 1, 2020 CECL day one impact
 
 
 
 
 
 
 
 
 
 
 
7  Excludes any build/release of the liability for expected credit losses on unfunded commitments as the offset is recorded in accrued expenses and other liabilities in the Company's condensed consolidated statements of financial condition
 
 
 
 
 
 
 
 
 
 
  Note: See Glossary of Financial Terms for definitions of financial terms
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




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

 
 

 
Six Months Ended
 
 
 
 
Jun 30, 2020
 
Mar 31, 2020
 
Dec 31, 2019
 
Sep 30, 2019
 
Jun 30, 2019
 
Jun 30, 2020 vs. Jun 30, 2019
 
Jun 30, 2020
 
Jun 30, 2019
 
2020 vs. 2019
PRIVATE STUDENT LOANS
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
Organic Student Loans

$8,635

 

$8,790

 

$8,402

 

$8,395

 

$7,943

 

$692

 
9
%
 

$8,635

 

$7,943

 

$692

9
%
Purchased Student Loans
1,095

 
1,167

 
1,251

 
1,341

 
1,432

 
(337
)
 
(24
%)
 
1,095

 
1,432

 
(337
)
(24
%)
Total Private Student Loans

$9,730

 

$9,957

 

$9,653

 

$9,736

 

$9,375

 

$355

 
4
%
 

$9,730

 

$9,375

 

$355

4
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Yield
7.46
%
 
8.24
%
 
8.43
%
 
8.54
%
 
8.59
%
 
(113
)
 
bps
 
7.85
%
 
8.61
%
 
(76
)
bps
Net Principal Charge-off Rate  1
0.62
%
 
0.68
%
 
1.02
%
 
0.59
%
 
0.61
%
 
1

 
bps
 
0.65
%
 
0.64
%
 
1

bps
Delinquency Rate (30 or more days)
1.57
%
 
1.75
%
 
1.88
%
 
1.93
%
 
1.82
%
 
(25
)
 
bps
 
0.85
%
 
1.14
%
 
(29
)
bps
Delinquency Rate (30 or more days) excluding Purchased Loans  2
1.49
%
 
1.64
%
 
1.72
%
 
1.78
%
 
1.67
%
 
(18
)
 
bps
 
1.49
%
 
1.67
%
 
(18
)
bps
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reserve Rate
8.21
%
 
7.68
%
 
1.53
%
 
1.51
%
 
1.79
%
 
642

 
bps
 
8.21
%
 
1.79
%
 
642

bps
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PERSONAL LOANS
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
Ending Loans

$7,316

 

$7,651

 

$7,687

 

$7,596

 

$7,414

 

($98
)
 
(1
%)
 

$7,316

 

$7,414

 

($98
)
(1
%)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Yield
12.40
%
 
13.27
%
 
13.23
%
 
13.17
%
 
13.02
%
 
(62
)
 
bps
 
12.84
%
 
12.94
%
 
(10
)
bps
Net Principal Charge-off Rate
3.43
%
 
3.59
%
 
4.26
%
 
3.99
%
 
4.33
%
 
(90
)
 
bps
 
3.51
%
 
4.43
%
 
(92
)
bps
Delinquency Rate (30 or more days)
1.07
%
 
1.31
%
 
1.37
%
 
1.49
%
 
1.49
%
 
(42
)
 
bps
 
1.07
%
 
1.49
%
 
(42
)
bps
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reserve Rate
11.71
%
 
10.55
%
 
4.53
%
 
4.59
%
 
4.56
%
 
715

 
bps
 
11.71
%
 
4.56
%
 
715

bps
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1  Prior to adoption of ASU No. 2016-13 on January 1, 2020, net charge-offs on Purchased Credit Impaired ("PCI") loans generally did not result in a charge to earnings
 
 
 
 
 
 
 
 
2  Prior to adoption of ASU No. 2016-13 on January 1, 2020, Purchased loans (formerly referred to as PCI) were accounted for on a pooled basis. Since a pool was 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, was not meaningful. Because the Company was recognizing interest income on a pool of loans, it was all considered to be performing
 
 
 
 
 
 
 
 
Note: See Glossary of Financial Terms for definitions of financial terms
 
 
 
 
 
 
 





DISCOVER FINANCIAL SERVICES
 
 
 
 
 
 
 
 
 
 
 
 
SEGMENT RESULTS AND VOLUME STATISTICS
 
 
 
 
 
 
 
 
 
 
 
 
(unaudited, in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
Quarter Ended
 
 
 
 
 
Six Months Ended
 
 
 
 
 
 
 
 
 
Jun 30, 2020
 
Mar 31, 2020
 
Dec 31, 2019
 
Sep 30, 2019
 
Jun 30, 2019
 
Jun 30, 2020 vs. Jun 30, 2019
 
Jun 30, 2020
 
Jun 30, 2019
 
2020 vs. 2019
 
 
 
 
 
DIRECT BANKING
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Income

$2,672

 

$2,982

 

$3,039

 

$3,040

 

$2,976

 

($304
)
 
(10
%)
 

$5,654

 

$5,913

 

($259
)
(4
%)
 
 
 
 
 
Interest Expense
482

 
584

 
615

 
638

 
645

 
(163
)
 
(25
%)
 
1,066

 
1,277

 
(211
)
(17
%)
 
 
 
 
 
Net Interest Income
2,190

 
2,398

 
2,424

 
2,402

 
2,331

 
(141
)
 
(6
%)
 
4,588

 
4,636

 
(48
)
(1
%)
 
 
 
 
 
Non-Interest Income
354

 
366

 
431

 
409

 
436

 
(82
)
 
(19
%)
 
720

 
808

 
(88
)
(11
%)
 
 
 
 
 
Revenue Net of Interest Expense
2,544

 
2,764

 
2,855

 
2,811

 
2,767

 
(223
)
 
(8
%)
 
5,308

 
5,444

 
(136
)
(2
%)
 
 
 
 
 
Provision for Credit Losses
2,046

 
1,807

 
838

 
799

 
787

 
1,259

 
160
%
 
3,853

 
1,596

 
2,257

141
%
 
 
 
 
 
Total Operating Expense
982

 
1,118

 
1,134

 
1,069

 
1,039

 
(57
)
 
(5
%)
 
2,100

 
2,028

 
72

4
%
 
 
 
 
 
Income/ (Loss) Before Income Taxes

($484
)
 

($161
)
 

$883

 

$943

 

$941

 

($1,425
)
 
(151
%)
 

($645
)
 

$1,820

 

($2,465
)
(135
%)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Interest Margin
9.81
 %
 
10.21
 %
 
10.29
%
 
10.43
%
 
10.47
%
 
(66
)
 
bps
 
10.01
 %
 
10.47
%
 
(46
)
bps
 
 
 
 
 
Pretax Return on Loan Receivables
(2.17
)%
 
(0.69
)%
 
3.75
%
 
4.09
%
 
4.23
%
 
(640
)
 
bps
 
(1.41
)%
 
4.11
%
 
(552
)
bps
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for Credit Losses (period end)  1

$8,184

 

$6,913

 

$3,383

 

$3,298

 

$3,200

 

$4,984

 
156
%
 

$8,184

 

$3,200

 

$4,984

156
%
 
 
 
 
 
Reserve Change Build/ (Release) 2, 3

$1,271

 

$1,069

 

$87

 

$98

 

$69

 

$1,202

 
 
 

$2,340

 

$163

 

$2,177

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PAYMENT SERVICES
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Interest Income

$—

 

$—

 

$—

 

$—

 

$1

 

($1
)
 
(100%)

 

$—

 

$1

 

($1
)
(100
%)
 
 
 
 
 
Interest Expense
—

 
—

 
—

 
—

 
—

 
—

 
NM

 
—

 
—

 
—

NM

 
 
 
 
 
Net Interest Income
—

 
—

 
—

 
—

 
1

 
(1
)
 
(100%)

 
—

 
1

 
(1
)
(100
%)
 
 
 
 
 
Non-Interest Income
118

 
124

 
89

 
89

 
84

 
34

 
40
%
 
242

 
170

 
72

42
%
 
 
 
 
 
Revenue Net of Interest Expense
118

 
124

 
89

 
89

 
85

 
33

 
39
%
 
242

 
171

 
71

42
%
 
 
 
 
 
Provision for Credit Losses
—

 
—

 
(2
)
 
—

 
—

 
—

 
NM

 
—

 
—

 
—

NM

 
 
 
 
 
Total Operating Expense
95

 
41

 
50

 
38

 
39

 
56

 
144
%
 
136

 
74

 
62

84
%
 
 
 
 
 
Income/ (Loss) Before Income Taxes

$23

 

$83

 

$41

 

$51

 

$46

 

($23
)
 
(50
%)
 

$106

 

$97

 

$9

9
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
TRANSACTIONS PROCESSED ON NETWORKS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Discover Network
565

 
645

 
731

 
710

 
671

 
(106
)
 
(16
)%
 
1,210

 
1,276

 
(66
)
(5
)%
 
 
 
 
 
PULSE Network
1,209

 
1,189

 
1,253

 
1,220

 
1,183

 
26

 
2
 %
 
2,398

 
2,315

 
83

4
 %
 
 
 
 
 
Total

$1,774

 

$1,834

 

$1,984

 

$1,930

 

$1,854

 

($80
)
 
(4
)%
 
3,608

 
3,591

 
17

—
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
NETWORK VOLUME
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PULSE Network

$52,859

 

$49,174

 

$50,037

 

$47,535

 

$47,389

 

$5,470

 
12
 %
 

$102,033

 

$94,495

 

$7,538

8
 %
 
 
 
 
 
Network Partners
7,280

 
6,980

 
7,099

 
6,656

 
5,950

 
1,330

 
22
%
 
14,260

 
11,613

 
2,647

23
%
 
 
 
 
 
Diners Club International 4
4,339

 
7,737

 
8,831

 
8,386

 
8,472

 
(4,133
)
 
(49
)%
 
12,076

 
16,750

 
(4,674
)
(28
%)
 
 
 
 
 
Total Payment Services
64,478

 
63,891

 
65,967

 
62,577

 
61,811

 
2,667

 
4
 %
 
128,369

 
122,858

 
5,511

4
 %
 
 
 
 
 
Discover Network - Proprietary
32,349

 
35,180

 
40,579

 
38,722

 
37,891

 
(5,542
)
 
(15
)%
 
67,529

 
71,942

 
(4,413
)
(6
)%
 
 
 
 
 
Total

$96,827

 

$99,071

 

$106,546

 

$101,299

 

$99,702

 

($2,875
)
 
(3
)%
 

$195,898

 

$194,800

 

$1,098

1
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1  Prior to adoption of ASU No. 2016-13 on January 1, 2020, credit losses were estimated using the incurred loss approach. Under the new current expected credit loss (“CECL”) approach, reserves are now recorded for expected losses, not simply those deemed to be already incurred, and the loss estimate period is extended to include the entire life of the loan
 
 
 
 
 
2  Prior to adoption of ASU No. 2016-13 on January 1, 2020, the allowance for credit loss included the net change in reserves on PCI pools having no remaining non-accretable difference which did not impact the reserve change build/(release) in provision for credit losses
 
 
 
 
 
3  Excludes January 1, 2020 CECL day one impact
 
 
 
 
 
4  Volume is derived from data provided by licencees 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 - GLOSSARY OF FINANCIAL TERMS
 
 
 
 
Balance Sheet & Regulatory Capital Terms
Liquidity Portfolio represents cash and cash equivalents (excluding cash-in-process) and other investments
 
 
 
 
Regulatory Capital Ratios are preliminary
•
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
•
Common Equity Tier 1 Capital Ratio represents common equity tier 1 capital divided by risk weighted assets
 
 
 
 
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 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
 
 
 
 
Tangible Common Equity/Net Loans, a non-GAAP measure, represents TCE divided by total loans less the allowance for credit losses (period end)
 
 
 
 
Tangible Common Equity per Share, a non-GAAP measure, represents TCE divided by ending common shares outstanding
 
 
 
 
Tangible Common Equity/Tangible Assets, a non-GAAP measure, represents TCE 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)
 
 
 
 
Credit Related Terms
Delinquency Rate (30 or more days) represents loans delinquent thirty days or more divided by ending loans (total or respective product loans, as appropriate)
 
 
 
 
Delinquency Rate (90 or more days) represents loans delinquent ninety days or more divided by ending loans (total or respective product loans, as appropriate)
 
 
 
 
Gross Principal Charge-off Rate represents gross principal charge-off dollars (annualized) divided by average loans for the reporting period (total or respective product loans, as appropriate)
 
 
 
 
Net Principal Charge-off Rate represents net principal charge-off dollars (annualized) divided by average loans for the reporting period (total or respective product loans, as appropriate)
 
 
 
 
Reserve Rate represents the allowance for credit losses divided by total loans (total or respective product loans, as appropriate)
 
 
 
 
Earnings and Shareholder Return Terms
Book Value per share represents total equity divided by ending common shares outstanding
 
 
 
 
Capital Returned to Common Stockholders represents common stock dividends declared and treasury share repurchases, excluding common stock issued under employee benefit plans and stock based compensation
 
 
 
 
Earnings Per Share represents net income allocated to common stockholders divided by the weighted average common shares outstanding
 
 
 
 
Interest Yield represents interest income on loan receivables (annualized) divided by average loans for the reporting period (total or respective product loans, as appropriate)
 
 
 
 
Net Income Allocated to Common Stockholders represents net income less preferred stock dividends and income allocated to participating securities
 
 
 
 
Net Interest Margin represents net interest income (annualized) divided by average total loans for the period
 
 
 
 
Net Yield on Interest Earning Assets represents net interest income (annualized) divided by average total interest earning assets for the 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
 
 
 
 
Payout Ratio represents capital returned to common stockholders divided by net income allocated to common stockholders
 
 
 
 
Return on Equity represents net income (annualized) divided by average total equity for the reporting period
 
 
 
 
Rewards Rate represents Credit Card rewards cost divided by Discover Card sales volume
 
 
 
 
Volume Terms
Discover Card Sales Volume represents Discover card activity related to sales net of returns
 
 
 
 
Discover Card Volume represents Discover card activity related to sales net of returns, balance transfers, cash advances and other activity
 
 
 
 
Discover Network Proprietary Volume represents gross Discover Card sales volume on the Discover Network




DISCOVER FINANCIAL SERVICES
RECONCILIATION OF GAAP TO NON-GAAP DATA
(unaudited, in millions)
 
Quarter Ended
 
Jun 30, 2020
 
Mar 31, 2020
 
Dec 31, 2019
 
Sep 30, 2019
 
Jun 30, 2019
GAAP Total Common Equity

$8,587

 

$9,102

 

$11,296

 

$11,154

 

$10,930

Less: Goodwill
(255
)
 
(255
)
 
(255
)
 
(255
)
 
(255
)
Less: Intangibles
(96
)
 
(155
)
 
(155
)
 
(159
)
 
(160
)
Tangible Common Equity 1

$8,236

 

$8,692

 

$10,886

 

$10,740

 

$10,515

 
 
 
 
 
 
 
 
 
 
GAAP Book Value Per Share

$31.47

 

$31.55

 

$38.24

 

$37.20

 

$35.97

Less: Goodwill
(0.83
)
 
(0.82
)
 
(0.83
)
 
(0.80
)
 
(0.80
)
Less: Intangibles
(0.31
)
 
(0.51
)
 
(0.50
)
 
(0.51
)
 
(0.50
)
   Less: Preferred Stock
(3.45
)
 
(1.84
)
 
(1.81
)
 
(1.79
)
 
(1.76
)
Tangible Common Equity Per Share

$26.88

 

$28.38

 

$35.10

 

$34.10

 

$32.91

 
 
 
 
 
 
 
 
 
 
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


a2q20earningspresentatio
Exhibit 99.3 2Q20 Financial Results July 22, 2020 ©2020 DISCOVER FINANCIAL SERVICES

 
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 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, 2019, "Risk Factors" and "Management’s Discussion & Analysis of Financial Condition and Results of Operations" in the company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, which is filed with the SEC and available at the SEC's website (www.sec.gov) and subsequent reports on Forms 8-K and 10-Q, including the Company's Current Report on Form 8-K filed today with the SEC. The Company does not undertake to update or revise forward-looking statements as more information becomes available. 2

 
2Q20 Highlights • Our principal focus continues to be protecting employees, supporting customers, and strengthening the value of the Discover franchise • 2Q20 results reflect a $1.3Bn reserve build in recognition of further deterioration in the economic outlook • Continuing to invest in core capabilities while aligning expenses with the current environment ◦ Operating expenses down YOY excluding a 1-time item ◦ Remain on track for $400MM expense reduction in 2020 • Maintaining disciplined approach to capital management and liquidity ◦ CET1 of 11.7% ◦ $26.9Bn liquidity portfolio; $38.8Bn additional contingency liquidity sources ◦ Stable and diversified funding model; consumer deposits nearly 60% of total funding • Remain conservative due to economic outlook; franchise remains strong and positioned for profitable growth as conditions warrant • 2Q20 Net loss of $368MM; diluted EPS of $(1.20) 3 TAken Stronin

 
2Q20 Summary Financial Results Year-Over-Year Net Income/(Loss) & EPS ($MM, except EPS) $753 $(142) $(48) $327 $1 $(368) $(1,259) 2Q19 Net Total Provision for Operating Income Tax/ 2Q20 Net Interest Non-Interest Credit Losses Expense Capital Action Net Income Income Income Loss 2Q20 $ 2,190 $ 472 $ 2,046 $ 1,077 $ (93) 2Q19 $ 2,332 $ 520 $ 787 $ 1,078 $ 234 B/(W) $ (142) $ (48) $ (1,259) $ 1 $ 327 EPS $ 2.32 $ (0.33) $ (0.11) $ (2.97) $ — $ (0.11) $ (1.20) Highlights • Revenue net of interest expense was $2.7Bn, down 7%, primarily driven by NIM compression and lower net discount and interchange revenue due to the decline in sales volume, partially offset by a $44MM one-time gain on the sale of equity investments • Net interest margin was 9.81% down 66 bps as lower loan yields driven by prime rate decreases were partially offset by lower funding costs • Provision for credit losses increased $1.3Bn reflecting a higher reserve build primarily due to changes in the macroeconomic outlook, and higher net charge-offs • Expenses were flat year-over-year as lower marketing expense was offset by a $59MM intangible impairment charge resulting from a steep reduction in T&E spend impacting the Diners business, as well as higher compensation expense and investments in technology • Net loss of $368MM; diluted EPS of $(1.20) 4

 
2Q20 Key Credit Metrics Highlights Change 2Q19 1Q20 2Q20 QOQ YOY • Credit card net charge-offs up Credit Card Loans 41bps YOY mainly due to Ending Loan Balance ($MM) $72,393 $73,811 $70,201 (4.9)% (3.0)% seasoning of loan growth from Net Principal Charge-off Rate 3.49% 3.65% 3.90% 25 bps 41 bps recent years 30-Day Delinquency Rate 2.34% 2.62% 2.17% (45) bps (17) bps Private Student Loans • Credit card 30-Day delinquency rate down 17bps Ending Loan Balance ($MM) $9,375 $9,957 $9,730 (2.3)% 3.8% YOY due to stable portfolio Net Principal Charge-off Rate 0.61% 0.68% 0.62% (6) bps 1 bps performance and modest (1) 30-Day Delinquency Rate 1.67% 1.64% 1.49% (15) bps (18) bps impact from Skip-a-Pay program Personal Loans Ending Loan Balance ($MM) $7,414 $7,651 $7,316 (4.4)% (1.3)% Net Principal Charge-off Rate 4.33% 3.59% 3.43% (16) bps (90) bps • Personal loan net charge-offs 30-Day Delinquency Rate 1.49% 1.31% 1.07% (24) bps (42) bps down 90bps YOY reflecting underwriting approach and Total Loans portfolio performance Ending Loan Balance ($MM) $90,229 $92,963 $88,927 (4.3)% (1.4)% Net Principal Charge-off Rate 3.22% 3.27% 3.44% 17 bps 22 bps • Student loan credit 30-Day Delinquency Rate (1) 2.18% 2.38% 1.98% (40) bps (20) bps performance remains stable Note(s) 1. 30-Day Delinquency Rate excludes purchased loans 5

 
Allowance for Credit Losses Student Personal ($MM) Credit Card Loans Loans Other Total Loans Balance at January 1, 2020 4,550 653 613 28 5,844 Reserve rate 5.90% 6.76% 7.97% N/A 6.09% Balance at March 31, 2020 5,306 765 807 35 6,913 Reserve rate 7.19% 7.68% 10.55% N/A 7.44% Provision for credit losses(1) 1,873 49 114 2 2,038 Net Charge-offs (688) (15) (64) 0 767 Balance at June 30, 2020 $6,491 $799 $857 $37 $8,184 Reserve rate 9.25% 8.21% 11.71% N/A 9.20% Note(s) 1. Excludes $8MM release of the liability for expected credit losses on unfunded commitments for the six months ended June 30, 2020 as the liability is recorded in accrued expenses and other liabilities 6

 
Sales Volume Trend Weekly Sales Volume Trend (%) Comments 95% • 2Q20 sales volume down 16% YOY 45% ◦ Trends in key categories -5% continue to improve -55% ◦ First half of July down 3% compared to first half of April -105% down 29% Mar Mar Mar Mar Apr Apr Apr Apr May May May May May Jun Jun Jun Jun Jul Jul Jul 7 14 21 28 4 11 18 25 2 9 16 23 30 6 13 20 27 4 11 18 Week Ending • Grocery spending remains strong reflecting a shift in consumer Gas Groceries Retail Restaurants behavior. Services Travel Total Sales Volume Year-Over-Year Sales Volume Trend (%) • Home improvement remains bright MTD spot in retail up 19% for 2Q20 1Q20 2Q20 July 19th Gas —% (48)% (26)% Grocery 14% 14% 14% Retail 6% 7% 15% Restaurants (2)% (43)% (26)% • The most adversely impacted Services (1)% (25)% (5)% categories continued to be travel, Travel (20)% (85)% (69)% All Other 6% (6)% 10% restaurants and gas Total Sales Volume 3% (16)% (3)% Category Definitions • Services includes entertainment, auto, education, medical, and other service providers • All Other includes discount stores, drug stores, wholesale clubs, telecommunication, utilities, insurance, financial services and government 7 keyrends in

 
Skip-a-Payment Programs (1) Weekly Credit Card Balance Enrollments Total Portfolio Balance ($MM) $5.3Bn cumulative balances enrolled $800 since inception of program $700 $673 • Credit card: $3.4Bn; ~ 70% no longer enrolled, of which ~ 80% have made a payment $600 $578 • Student loans(2): $1.2Bn; ~ 35% no $500 $483 longer enrolled, of which ~ 90% have made a payment $400 $368 $340 • Personal loans: $691MM; ~ 65% no $300 longer enrolled, of which ~ 65% have $230 $202 made a payment $200 $142 $119 • Home loans: $70MM; ~ 25% no longer $85 $100 $65 $61 enrolled, of which ~ 80% have made a $50 $40 $33 $36 $35 payment $0 3/22 3/29 4/5 4/12 4/19 4/26 5/3 5/10 5/17 5/24 5/31 6/7 6/14 6/21 6/28 7/5 7/12 Note(s) 1. Total Portfolio Balance data as of July 13, 2020 2. Student loan accounts requiring payment; repay, interest only, and immediate repay 8

 
Capital and Funding Funding Trends Capital Trends ($Bn, Average Balance) 94.5 94.4 96.0 97.9 99.6 11.4 11.5 11.8 11.7 10.9 11.0 11.6 11.5 13.0 11.4 11.4 11.4 11.3 15.2 13.7 13.6 14.1 11.1 11.2 16.4 165 17.9 16.8 20.2 19.1 118 109 55.2 58.8 48.2 50.5 53.0 99 93 88 82 79 77 2Q19 3Q19 4Q19 1Q20 2Q20 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 Direct to Consumer Deposits (1) Securitized Borrowings Common Equity Tier 1 Payout Ratio(2) (%) Brokered & Other Deposits Other Borrowings (CET1) Capital Ratio(1) (%) 2Q19 3Q19 4Q19 1Q20 2Q20 (1) Note(s) Direct to Consumer Deposits 51% 53% 55% 56% 59% 1. Common Equity Tier 1 Capital Ratio (Basel III Transition) Brokered & Other Deposits 21% 20% 19% 17% 16% 2. Payout Ratio is displayed on a trailing twelve month basis. This represents the trailing Securitized Borrowings 16% 15% 14% 14% 14% twelve months’ Capital Return to Common Stockholders divided by the trailing twelve Other Borrowings 12% 12% 12% 12% 11% months’ Net Income Allocated to Common Stockholders Note(s) 1. Includes Affinity relationships 9

 
Appendix

 
2Q20 Loan Growth ($Bn) Total Card YOY YOY Highlights (1)% (3)% $95.9 • Card receivables decreased $92.5 $93.0 $77.2 $90.2 $88.9 $74.0 $73.8 reflecting the drop in sales in $72.4 $70.2 the quarter and lower BT/promo activity 2Q19 3Q19 4Q19 1Q20 2Q20 2Q19 3Q19 4Q19 1Q20 2Q20 • Organic student loan growth on track with seasonal trends Organic Student Personal YOY YOY • Personal loans decreased +9% (1)% reflecting lower originations due to recent credit tightening $8.8 $8.4 $8.4 $8.6 $7.6 $7.7 $7.7 actions and higher paydowns $7.9 $7.4 $7.3 2Q19 3Q19 4Q19 1Q20 2Q20 2Q19 3Q19 4Q19 1Q20 2Q20 11

 
2Q20 Payments Volume ($Bn) Discover Network PULSE Highlights YOY YOY • Discover Network volume (15)% +12% declined 15%; deceleration in- line with slowdown in Discover $40.6 $37.9 $38.7 $52.9 card sales volume $50.0 $49.2 $35.2 $47.4 $47.5 $32.3 • PULSE volume up 12% year- over-year driven by higher average spend per transaction 2Q19 3Q19 4Q19 1Q20 2Q20 2Q19 3Q19 4Q19 1Q20 2Q20 related to the pandemic, the impact of stimulus funds available to consumers and Diners (1) Network Partners growth in e-commerce transactions YOY YOY +22% (49)% $8.5 $8.4 $8.8 • Diners Club volume down 49% $7.7 $7.3 $7.1 $7.0 $6.7 from the prior year resulting $6.0 from steep decline in T&E $4.3 spending 2Q19 3Q19 4Q19 1Q20 2Q20 2Q19 3Q19 4Q19 1Q20 2Q20 • Network Partners up 22% driven primarily by AribaPay Total Network Volume down 3% YOY 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 12

 
2Q20 Revenue Inc / (Dec) Highlights ($MM) 2Q20 2Q19 $ % • 6% decrease in net interest income Interest Income $2,672 $2,977 $(305) (10%) driven primarily by NIM compression Interest Expense 482 645 (163) (25%) Net Interest Income 2,190 2,332 (142) (6%) Discount/Interchange Revenue 622 759 (137) (18%) • Net discount and interchange Rewards Cost 385 460 (75) (16%) revenue was down 21% driven by Net Discount/Interchange Revenue 237 299 (62) (21%) the decline in sales volume Protection Products Revenue 44 49 (5) (10%) Loan Fee Income 85 102 (17) (17%) Transaction Processing Revenue 49 48 1 2% • Decrease in loan fee income reflects Other Income 57 22 35 159% lower cash advance fees and lower Total Non-Interest Income 472 520 (48) (9%) late fees Revenue Net of Interest Expense $2,662 $2,852 $(190) (7%) • Other Income up $35MM primarily Change driven by a $44MM one-time gain on 2Q20 2Q19 QOQ YOY the sale of equity investments Discover Card Sales Volume ($MM) $30,721 $36,664 (10)% (16)% Rewards Rate (1) 1.24% 1.25% -16bps -1bps NIM on Loans 9.81% 10.47% -40bps -66bps • Rewards rate was down 1bps YOY reflecting the impact of lower sales Note(s) on Cashback Match and lower 1. Rewards cost divided by Discover card sales volume engagement in the rotating 5% category due to the pandemic 13

 
2Q20 Net Interest Margin Drivers 2Q20 2Q19 Highlights Average Average Interest-Earning Assets ($MM) Balance Yield Balance Yield • Credit card yield of 12.34% was Credit Card $70,848 12.34% $71,492 13.44% down 110 bps YOY primarily driven Private Student 9,826 7.46% 9,464 8.59% by prime rate decreases partially Personal 7,475 12.40% 7,419 13.02% Other 1,622 6.49% 983 6.83% offset by a favorable revolve rate and Total Loans 89,771 11.70% 89,358 12.82% portfolio mix Other Interest-Earning Assets 25,907 0.95% 19,794 2.45% Total Interest-Earning Assets $115,678 9.29% $109,152 10.94% • Average consumer deposits of $58.8Bn grew 22% and composed 2Q20 2Q19 Average Average 59% of total funding Interest-Bearing Liabilities ($MM) Balance Rate Balance Rate Direct to Consumer Deposits (1) $58,813 1.62% $48,211 2.20% Brokered Deposits and Other 16,429 2.52% 20,213 2.71% • The rate on average interest-bearing Interest Bearing Deposits 75,242 1.81% 68,424 2.35% liabilities was 1.95%, down 78bps Borrowings 24,335 2.36% 26,111 3.74% Total Interest-Bearing Liabilities $99,577 1.95% $94,535 2.73% from prior year, primarily driven by lower market rates Change (%) 2Q20 QOQ YOY • Net interest margin on loans was Total Interest Yield on Loans 11.70% -64bps -112bps 9.81% down 66 bps as lower loan NIM on Loans 9.81% -40bps -66bps yields were partially offset by lower NIM on Interest-Earning Assets 7.61% -92bps -96bps funding costs Note(s) 1. Includes Affinity relationships 14

 
2Q20 Operating Expense Highlights Year-Over-Year Expense ($MM) • Employee compensation increase due to higher average salaries and $25 $55 $1,077 $1,078 $16 headcount $(95) $(2) • Marketing expense decreased in response to the slowdown in the US economy with reductions primarily in 2Q19 Employee Marketing Info Prof All 2Q20 brand and acquisition expense Expense Comp Process Fees Other Expense • Information processing increase Inc / (Dec) driven by investments in technology ($MM) 2Q20 2Q19 $ % capabilities and infrastructure Employee Compensation and Benefits $452 $427 $25 6% Marketing and Business Development 129 224 (95) (42%) Information Processing & Communications 117 101 16 16% • Other expense increase driven by a Professional Fees 181 183 (2) (1%) $59MM intangible impairment charge Premises and Equipment 27 26 1 4% resulting from a steep reduction in Other Expense 171 117 54 46% T&E spend impacting the Diners Total Operating Expense $1,077 $1,078 ($1) —% business Operating Efficiency(1) 40.5% 37.8% 270 bps Note(s) 1. Defined as reported total operating expense divided by revenue net of interest expense 15

 
Credit Performance Trends Total Company Loans Credit Card Loans 3.90 3.65 3.25 3.22 3.19 3.27 3.44 3.50 3.49 3.41 3.09 3.11 2.97 3.08 3.05 3.32 3.34 3.14 3.23 3.32 2.31 2.28 2.32 2.40 2.38 2.23 2.08 2.22 2.18 1.98 2.43 2.45 2.50 2.62 2.62 2.33 2.16 2.32 2.34 2.17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 NCO rate (%) NCO rate (%) 30+ day DQ rate (%) 30+ day DQ rate ex-purchased loans (%) Private Student Loans Personal Loans 4.53 4.49 4.33 4.26 4.03 3.97 4.09 3.99 2.25 2.10 2.13 3.59 3.43 2.00 1.78 1.76 1.67 1.72 1.64 1.49 0.92 0.92 0.96 1.02 0.86 0.66 0.61 0.59 0.68 0.62 1.57 1.60 1.37 1.42 1.51 1.49 1.49 1.37 1.31 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 1.07 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 NCO rate (%) 30+ day DQ rate ex-purchased loans (%) NCO rate (%) 30+ day DQ rate (%) 16

 

 
v3.20.2
Document and Entity Information Document
Jul. 22, 2020
Cover [Abstract]  
Document Type 8-K
Document Period End Date Jul. 22, 2020
Entity Registrant Name DISCOVER FINANCIAL SERVICES
Entity File Number 001-33378
Entity Incorporation, State or Country Code DE
Entity Tax Identification Number 36-2517428
Entity Address, Address Line One 2500 Lake Cook Road
Entity Address, City or Town Riverwoods
Entity Address, State or Province IL
Entity Address, Postal Zip Code 60015
City Area Code 224
Local Phone Number 405-0900
Written Communications false
Soliciting Material false
Pre-commencement Tender Offer false
Pre-commencement Issuer Tender Offer false
Title of 12(b) Security Common Stock, par value $0.01 per share
Trading Symbol DFS
Security Exchange Name NYSE
Entity Emerging Growth Company false
Entity Central Index Key 0001393612
Amendment Flag false