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

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8-K - DISCOVER FINANCIAL SERVICES 8-K - Discover Financial Services	a50209549.htm
EX-99.1 - EXHIBIT 99.1 - Discover Financial Services	a50209549ex99_1.htm

Exhibit 99.2

DISCOVER FINANCIAL SERVICES
EARNINGS SUMMARY
(unaudited, in millions, except per share statistics)
	Quarter Ended
	Feb 29, 2012			Nov 30, 2011			Aug 31, 2011			May 31, 2011			Feb 28, 2011			February 29, 2012 vs. February 28, 2011
EARNINGS SUMMARY
Interest Income		$1,646			$1,620			$1,599			$1,573			$1,553			$93			6	%
Interest Expense		353			360			362			380			383			(30	)		(8	%)
Net Interest Income		1,293			1,260			1,237			1,193			1,170			123			11	%

Discount/Interchange Revenue		500			489			517			489			468			32			7	%
Rewards		236			215			234			223			207			29			14	%
Discount and Interchange Revenue, net		264			274			283			266			261			3			1	%
Fee Products Revenue		105			107			108			105			108			(3	)		(3	%)
Loan Fee Income		85			87			84			81			86			(1	)		(1	%)
Transaction Processing Revenue		53			48			44			45			43			10			23	%
Other Income		43			30			33			47			65			(22	)		(34	%)
Total Other Income		550			546			552			544			563			(13	)		(2	%)

Revenue Net of Interest Expense		1,843			1,806			1,789			1,737			1,733			110			6	%

Provision for Loan Losses		152			319			100			176			418			(266	)		(64	%)

Employee Compensation and Benefits		247			229			242			230			213			34			16	%
Marketing and Business Development		131			144			133			124			136			(5	)		(4	%)
Information Processing & Communications		70			69			64			66			65			5			8	%
Professional Fees		100			114			106			105			90			10			11	%
Premises and Equipment		17			18			18			18			17			0			0	%
Other Expense		112			95			79			92			74			38			51	%
Total Other Expense		677			669			642			635			595			82			14	%

Income Before Income Taxes		1,014			818			1,047			926			720			294			41	%
Tax Expense		383			305			398			326			255			128			50	%
Net Income		$631			$513			$649			$600			$465			$166			36	%

Net Income Allocated to Common Stockholders		$624			$508			$642			$593			$459			$165			36	%

Effective Tax Rate		37.8	%		37.3	%		38.0	%		35.2	%		35.4	%

Net Interest Margin		9.03	%		9.10	%		9.26	%		9.15	%		9.22	%		(19	)	bps
ROE		29	%		25	%		33	%		33	%		28	%

Ending Common Shares Outstanding		530			529			538			546			545			(15	)		(3	%)
Weighted Average Common Shares Outstanding		530			532			544			546			545			(15	)		(3	%)
Weighted Average Common Shares Outstanding (fully diluted)		531			533			545			546			546			(15	)		(3	%)

PER SHARE STATISTICS
Basic EPS		$1.18			$0.95			$1.18			$1.09			$0.84			$0.34			40	%
Diluted EPS		$1.18			$0.95			$1.18			$1.09			$0.84			$0.34			40	%
Common Stock Price (period end)		$30.01			$23.82			$25.16			$23.84			$21.75			$8.26			38	%
Book Value per share		$16.66			$15.59			$14.88			$13.79			$12.65			$4.01			32	%

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

DISCOVER FINANCIAL SERVICES
EARNINGS SUMMARY
(unaudited, in millions)
	Quarter Ended
	Feb 29, 2012		Nov 30, 2011		Aug 31, 2011		May 31, 2011		Feb 28, 2011		February 29, 2012 vs. February 28, 2011
SEGMENT- INCOME BEFORE INCOME TAXES
Direct Banking		$962		$776		$1,009		$883		$677		$285	42	%
Payment Services		52		42		38		43		43		9	21	%
Total		$1,014		$818		$1,047		$926		$720		$294	41	%

TRANSACTIONS PROCESSED ON NETWORKS
Discover Network		444		439		451		422		410		34	8	%
PULSE Network		996		939		950		1,006		929		67	7	%
Total		1,440		1,378		1,401		1,428		1,339		101	8	%

NETWORK VOLUME
PULSE Network		$37,577		$33,911		$35,109		$36,719		$34,380		$3,197	9	%
Third-Party Issuers		2,037		1,939		1,984		1,838		1,772		265	15	%
Diners Club International 1		7,100		7,469		7,428		7,380		6,998		102	1	%
Total Payment Services		46,714		43,319		44,521		45,937		43,150		3,564	8	%
Discover Network - Proprietary		26,482		25,926		27,133		25,684		24,784		1,698	7	%
Total		$73,196		$69,245		$71,654		$71,621		$67,934		$5,262	8	%

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
	Feb 29, 2012			Nov 30, 2011			Aug 31, 2011			May 31, 2011			Feb 28, 2011			February 29, 2012 vs. February 28, 2011

BALANCE SHEET SUMMARY
Assets
Cash and Investment Securities		$12,946			$10,342			$10,847			$10,344			$11,463			$1,483		13	%
Total Loan Receivables		56,299			57,337			54,082			52,510			51,663			4,636		9	%
Allowance for Loan Losses		(1,979	)		(2,205	)		(2,273	)		(2,632	)		(3,033	)		1,054		35	%
Net Loan Receivables		54,320			55,132			51,809			49,878			48,630			5,690		12	%
Premises and Equipment, net		487			483			466			471			459			28		6	%
Goodwill and Intangible Assets, net		442			443			445			447			449			(7	)	(2	%)
Other Assets		2,291			2,384			2,159			2,298			2,506			(215	)	(9	%)
Total Assets		$70,486			$68,784			$65,726			$63,438			$63,507			$6,979		11	%

Liabilities & Stockholders' Equity
Direct to Consumer and Affinity Deposits		$27,346			$26,177			$24,493			$22,923			$21,795			$5,551		25	%
Brokered Deposits and Other Deposits		12,802			13,401			13,094			12,296			13,065			(263	)	(2	%)
Deposits		40,148			39,578			37,587			35,219			34,860			5,288		15	%
Borrowings		18,754			18,337			17,818			18,039			19,090			(336	)	(2	%)
Accrued Expenses and Other Liabilities		2,755			2,627			2,315			2,657			2,658			97		4	%
Total Liabilities		61,657			60,542			57,720			55,915			56,608			5,049		9	%
Total Equity		8,829			8,242			8,006			7,523			6,899			1,930		28	%
Total Liabilities and Stockholders' Equity		$70,486			$68,784			$65,726			$63,438			$63,507			$6,979		11	%

BALANCE SHEET STATISTICS
Total Common Equity		$8,829			$8,242			$8,006			$7,523			$6,899			$1,930		28	%
Total Common Equity/Total Assets		12.5	%		12.0	%		12.2	%		11.9	%		10.9	%
Total Common Equity/Net Loans		16.3	%		15.0	%		15.5	%		15.1	%		14.2	%

Tangible Assets		$70,044			$68,341			$65,281			$62,991			$63,058			$6,986		11	%
Tangible Common Equity 1		$8,387			$7,799			$7,561			$7,076			$6,450			$1,937		30	%
Tangible Common Equity/Tangible Assets 1		12.0	%		11.4	%		11.6	%		11.2	%		10.2	%
Tangible Common Equity/Net Loans 1		15.4	%		14.1	%		14.6	%		14.2	%		13.3	%
Tangible Common Equity per share 1		$15.82			$14.75			$14.05			$12.97			$11.83			$3.99		34	%

REGULATORY CAPITAL RATIOS
Total Risk Based Capital Ratio		17.6	%		16.5	%		17.0	%		16.8	%		16.0	%
Tier 1 Risk Based Capital Ratio		14.3	%		13.2	%		13.6	%		13.2	%		12.4	%
Tier 1 Common Capital Ratio 2		14.3	%		13.2	%		13.6	%		13.2	%		12.4	%
Tier 1 Leverage Ratio		12.1	%		11.5	%		11.7	%		11.3	%		10.2	%

LIQUIDITY
Liquidity Portfolio		$12,097			$8,548			$9,394			$8,724			$10,232			$1,865		18	%
Undrawn Credit Facilities 3		15,634			17,602			16,880			15,532			14,414			1,220		8	%
Total Liquidity		$27,731			$26,150			$26,274			$24,256			$24,646			$3,085		13	%

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 Tier 1 Common Capital Ratio 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.

3 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
LOAN STATISTICS
(unaudited, in millions)
	Quarter Ended
	Feb 29, 2012			Nov 30, 2011			Aug 31, 2011			May 31, 2011			Feb 28, 2011			February 29, 2012 vs. February 28, 2011
TOTAL LOAN RECEIVABLES
Ending Loans 1, 2		$56,299			$57,337			$54,082			$52,510			$51,663			$4,636			9	%
Average Loans 1, 2		$57,606			$55,539			$53,013			$51,727			$51,488			$6,118			12	%

Interest Yield		11.36	%		11.56	%		11.83	%		11.93	%		12.10	%		(74	)	bps
Net Principal Charge-off Rate		2.64	%		2.81	%		3.43	%		4.42	%		5.42	%		(278	)	bps
Net Principal Charge-off Rate excluding PCI Loans 3		2.90	%		3.05	%		3.63	%		4.69	%		5.64	%		(274	)	bps
Delinquency Rate (over 30 days) 3		2.08	%		2.30	%		2.35	%		2.68	%		3.44	%		(136	)	bps
Delinquency Rate (over 90 days) 3		1.08	%		1.14	%		1.17	%		1.44	%		1.88	%		(80	)	bps
Net Principal Charge-off Dollars		$378			$387			$459			$577			$689			($311	)		(45	%)
Interest and Fee Charge-off Dollars		$123			$128			$151			$192			$224			($101	)		(45	%)
Loans Delinquent Over 30 Days 3		$1,066			$1,200			$1,203			$1,329			$1,673			($607	)		(36	%)
Loans Delinquent Over 90 Days 3		$554			$596			$599			$715			$915			($361	)		(39	%)

Allowance for Loan Loss (period end)		$1,979			$2,205			$2,273			$2,632			$3,033			($1,054	)		(35	%)
Change in Loan Loss Reserves		($226	)		($68	)		($359	)		($401	)		($271	)		$45			17	%
Reserve Rate 4		3.51	%		3.85	%		4.20	%		5.01	%		5.87	%		(236	)	bps
Reserve Rate Excluding PCI Loans 3, 4		3.87	%		4.23	%		4.44	%		5.31	%		6.23	%		(236	)	bps

CREDIT CARD LOANS
Ending Loans		$45,918			$46,639			$46,178			$44,961			$44,317			$1,601			4	%
Average Loans		$46,919			$45,756			$45,343			$44,288			$45,443			$1,476			3	%

Interest Yield		12.21	%		12.36	%		12.46	%		12.57	%		12.65	%		(44	)	bps
Net Principal Charge-off Rate		3.07	%		3.24	%		3.85	%		5.01	%		5.96	%		(289	)	bps
Delinquency Rate (over 30 days)		2.22	%		2.39	%		2.43	%		2.79	%		3.59	%		(137	)	bps
Delinquency Rate (over 90 days)		1.18	%		1.20	%		1.22	%		1.51	%		1.99	%		(81	)	bps
Net Principal Charge-off Dollars		$358			$370			$440			$559			$668			($310	)		(46	%)
Loans Delinquent Over 30 Days		$1,019			$1,117			$1,121			$1,256			$1,590			($571	)		(36	%)
Loans Delinquent Over 90 Days		$540			$560			$565			$681			$882			($342	)		(39	%)

Allowance for Loan Loss (period end)		$1,835			$2,070			$2,154			$2,519			$2,939			($1,104	)		(38	%)
Change in Loan Loss Reserves		($235	)		($84	)		($365	)		($420	)		($270	)		$35			13	%
Reserve Rate		4.00	%		4.44	%		4.66	%		5.60	%		6.63	%		(263	)	bps

Total Discover Card Volume		$27,370			$26,946			$28,455			$26,927			$25,759			$1,611			6	%
Discover Card Sales Volume		$25,604			$25,033			$26,271			$24,844			$23,990			$1,614			7	%


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 The Reserve Rate includes federal student loans held for sale.

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

DISCOVER FINANCIAL SERVICES
LOAN STATISTICS
(unaudited, in millions)
	Quarter Ended
	Feb 29, 2012			Nov 30, 2011			Aug 31, 2011			May 31, 2011			Feb 28, 2011			February 29, 2012 vs. February 28, 2011

FEDERAL STUDENT LOANS
Ending Loans		$-			$715			$738			$757			$767			($767	)		(100	%)

PRIVATE STUDENT LOANS
Ending Loans		$7,571			$7,318			$4,715			$4,567			$4,545			$3,026			67	%
Ending PCI Loans 1		$5,124			$5,250			$2,887			$2,947			$3,011			$2,113			70	%

Interest Yield		6.35	%		6.81	%		7.29	%		7.42	%		7.40	%		(105	)	bps
Net Principal Charge-off Rate		0.15	%		0.14	%		0.23	%		0.18	%		0.11	%		4		bps
Net Principal Charge-off Rate excluding PCI Loans 2		0.49	%		0.45	%		0.62	%		0.51	%		0.29	%		20		bps
Delinquency Rate (over 30 days) 2		0.93	%		0.63	%		0.80	%		0.55	%		0.72	%		21		bps


Reserve Rate		0.72	%		0.72	%		0.92	%		0.85	%		0.42	%		30		bps
Reserve Rate Excluding PCI Loans 2		2.23	%		2.55	%		2.37	%		2.38	%		1.25	%		98		bps

PERSONAL LOANS
Ending Loans		$2,784			$2,648			$2,439			$2,213			$2,020			$764			38	%

Interest Yield		12.26	%		12.12	%		11.97	%		11.90	%		11.71	%		55		bps
Net Principal Charge-off Rate		2.59	%		2.58	%		2.73	%		2.88	%		4.10	%		(151	)	bps
Delinquency Rate (over 30 days)		0.81	%		0.87	%		0.85	%		0.96	%		1.20	%		(39	)	bps


Reserve Rate		3.18	%		3.10	%		3.10	%		3.35	%		3.68	%		(50	)	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
	Feb 29, 2012			Nov 30, 2011			Aug 31, 2011			May 31, 2011			Feb 28, 2011			February 29, 2012 vs. February 28, 2011
DIRECT BANKING

Interest Income		$1,646			$1,620			$1,599			$1,573			$1,553			$93			6	%
Interest Expense		353			360			362			380			383			(30	)		(8	%)
Net Interest Income		1,293			1,260			1,237			1,193			1,170			123			11	%
Other Income		464			470			481			470			486			(22	)		(5	%)
Revenue Net of Interest Expense		1,757			1,730			1,718			1,663			1,656			101			6	%
Provision for Loan Losses		152			319			100			176			418			(266	)		(64	%)
Total Other Expense		643			635			609			604			561			82			15	%
Income Before Income Taxes		$962			$776			$1,009			$883			$677			$285			42	%

Net Interest Margin		9.03	%		9.10	%		9.26	%		9.15	%		9.22	%		(19	)	bps
Pretax Return on Loan Receivables		6.72	%		5.60	%		7.55	%		6.78	%		5.33	%		139		bps


PAYMENT SERVICES

Interest Income		$-			$-			$-			$-			$-			$-		NM
Interest Expense		-			-			-			-			-			-		NM
Net Interest Income		-			-			-			-			-			-		NM
Other Income		86			76			71			74			77			9			12	%
Revenue Net of Interest Expense		86			76			71			74			77			9			12	%
Total Other Expense		34			34			33			31			34			-			0	%
Income Before Income Taxes		$52			$42			$38			$43			$43			$9			21	%

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.

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.

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.

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. 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. 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. Tier 1 Common Capital Ratio represents tier 1 common capital, a non-GAAP measure, divided by risk-weighted assets. For corresponding reconciliation of tier 1 common capital 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.

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, committed unsecured credit facility 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
	Feb 29, 2012			Nov 30, 2011			Aug 31, 2011			May 31, 2011			Feb 28, 2011
GAAP total common equity		$8,829			$8,242			$8,006			$7,523			$6,899
Less: Goodwill		(255	)		(255	)		(255	)		(255	)		(255	)
Less: Intangibles		(187	)		(188	)		(190	)		(192	)		(194	)
Tangible common equity 1		$8,387			$7,799			$7,561			$7,076			$6,450
Effect of certain items in accumulated other comprehensive
income (loss) excluded from tier 1 common capital		49			51			20			67			107
Total tier 1 common capital 2		$8,436			$7,850			$7,581			$7,143			$6,557

GAAP book value per share		$16.66			$15.59			$14.88			$13.79			$12.65
Less: Goodwill		(0.48	)		(0.48	)		(0.47	)		(0.47	)		(0.47	)
Less: Intangibles		(0.36	)		(0.36	)		(0.36	)		(0.35	)		(0.35	)
Tangible common equity per share		$15.82			$14.75			$14.05			$12.97			$11.83


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 we advise users of this information 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, 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 we advise users of this information 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.

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