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

Attached files

file	filename
8-K - 8-K - Discover Financial Services	a3q158k.htm
EX-99.3 - EXHIBIT 99.3 - Discover Financial Services	dfspres3q15ex9932.htm
EX-99.1 - EXHIBIT 99.1 - Discover Financial Services	dfs-earningsreleasex3q15ex.htm



DISCOVER FINANCIAL SERVICES																											Exhibit 99.2
EARNINGS SUMMARY
(unaudited, in millions, except per share statistics)
	Quarter Ended																				Nine Months Ended
	Sep 30, 2015			Jun 30, 2015			Mar 31, 2015			Dec 31, 2014			Sep 30, 2014			Sep 30, 2015 vs. Sep 30, 2014					Sep 30, 2015			Sep 30, 2014			2015 vs. 2014
EARNINGS SUMMARY
Interest Income		$2,008			$1,947			$1,929			$1,974			$1,926			$82		4	%		$5,884			$5,622			$262		5	%
Interest Expense	323			311			300			302			288			35			12	%	934			832			102			12	%
Net Interest Income	1,685			1,636			1,629			1,672			1,638			47			3	%	4,950			4,790			160			3	%
Discount/Interchange Revenue	614			612			536			620			598			16			3	%	1,762			1,712			50			3	%
Rewards Cost	326			314			268			517			303			23			8	%	908			836			72			9	%
Discount and Interchange Revenue, net	288			298			268			103			295			(7		)	(2	%)	854			876			(22		)	(3	%)
Protection Products Revenue	62			68			71			75			78			(16		)	(21	%)	201			239			(38		)	(16	%)
Loan Fee Income	87			80			81			86			85			2			2	%	248			248			0			0	%
Transaction Processing Revenue	39			40			42			46			46			(7		)	(15	%)	121			136			(15		)	(11	%)
Other Income	27			53			80			55			48			(21		)	(44	%)	160			151			9			6	%
Total Other Income	503			539			542			365			552			(49		)	(9	%)	1,584			1,650			(66		)	(4	%)

Revenue Net of Interest Expense	2,188			2,175			2,171			2,037			2,190			(2		)	—	%	6,534			6,440			94			1	%

Provision for Loan Losses	332			306			390			457			354			(22		)	(6	%)	1,028			986			42			4	%

Employee Compensation and Benefits	337			326			331			314			320			17			5	%	994			928			66			7	%
Marketing and Business Development	168			199			182			216			182			(14		)	(8	%)	549			519			30			6	%
Information Processing & Communications	84			90			88			88			87			(3		)	(3	%)	262			258			4			2	%
Professional Fees	160			153			127			128			111			49			44	%	440			322			118			37	%
Premises and Equipment	24			23			24			24			23			1			4	%	71			68			3			4	%
Other Expense	109			136			121			162			104			5			5	%	366			313			53			17	%
Total Other Expense	882			927			873			932			827			55			7	%	2,682			2,408			274			11	%

Income Before Income Taxes	974			942			908			648			1,009			(35		)	(3	%)	2,824			3,046			(222		)	(7	%)
Tax Expense	362			343			322			244			365			(3		)	(1	%)	1,027			1,127			(100		)	(9	%)
Net Income		$612			$599			$586			$404			$644			($32	)	(5	%)		$1,797			$1,919			($122	)	(6	%)

Net Income Allocated to Common Stockholders		$599			$586			$573			$392			$630			($31	)	(5	%)		$1,758			$1,878			($120	)	(6	%)

Effective Tax Rate	37.2		%	36.4		%	35.5		%	37.7		%	36.2		%						36.4		%	37.0		%

Net Interest Margin	9.62		%	9.63		%	9.69		%	9.76		%	9.78		%	(16		)	bps		9.65		%	9.83		%	(18		)	bps
Operating Efficiency	40.3		%	42.6		%	40.2		%	45.8		%	37.8		%	255			bps		41		%	37.4		%	365			bps
ROE	22		%	21		%	21		%	14		%	23		%						21		%	23		%

Ending Common Shares Outstanding	430			437			445			449			455			(25		)	(5	%)	430			455			(25		)	(5	%)
Weighted Average Common Shares Outstanding	433			441			448			452			460			(27		)	(6	%)	440			466			(26		)	(6	%)
Weighted Average Common Shares Outstanding (fully diluted)	434			442			448			453			461			(27		)	(6	%)	441			467			(26		)	(6	%)

PER SHARE STATISTICS
Basic EPS		$1.38			$1.33			$1.28			$0.87			$1.37			$0.01		1	%		$3.99			$4.03			($0.04	)	(1	%)
Diluted EPS		$1.38			$1.33			$1.28			$0.87			$1.37			$0.01		1	%		$3.98			$4.02			($0.04	)	(1	%)
Common Stock Price (period end)		$51.99			$57.62			$56.35			$65.49			$64.39			($12.40	)	(19	%)		$51.99			$64.39			($12.40	)	(19	%)
Book Value per share		$26.32			$25.75			$25.22			$24.79			$24.82			$1.50		6	%		$26.32			$24.82			$1.50		6	%

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



DISCOVER FINANCIAL SERVICES
EARNINGS SUMMARY
(unaudited, in millions)
	Quarter Ended															Nine Months Ended
	Sep 30, 2015		Jun 30, 2015		Mar 31, 2015		Dec 31, 2014		Sep 30, 2014		Sep 30, 2015 vs. Sep 30, 2014					Sep 30, 2015		Sep 30, 2014		2015 vs. 2014
SEGMENT- INCOME BEFORE INCOME TAXES
Direct Banking		$950		$914		$881		$646		$981		($31	)	(3	%)		$2,745		$2,959		($214	)	(7	%)
Payment Services	24		28		27		2		28		(4		)	(14	%)	79		87		(8		)	(9	%)
Total		$974		$942		$908		$648		$1,009		($35	)	(3	%)		$2,824		$3,046		($222	)	(7	%)

TRANSACTIONS PROCESSED ON NETWORKS
Discover Network	519		512		456		523		522		(3		)	(1	%)	1,487		1,497		(10		)	(1	%)
PULSE Network	972		989		1,024		1,085		1,071		(99		)	(9	%)	2,985		3,198		(213		)	(7	%)
Total	1,491		1,501		1,480		1,608		1,593		(102		)	(6	%)	4,472		4,695		(223		)	(5	%)

NETWORK VOLUME
PULSE Network		$36,267		$37,162		$40,814		$41,788		$40,636		($4,369	)	(11	%)		$114,243		$124,063		($9,820	)	(8	%)
Network Partners	3,206		3,536		2,949		2,263		2,185		1,021			47	%	9,691		7,183		2,508			35	%
Diners Club International¹	6,560		6,773		6,474		6,933		6,777		(217		)	(3	%)	19,807		20,037		(230		)	(1	%)
Total Payment Services	46,033		47,471		50,237		50,984		49,598		(3,565		)	(7	%)	143,741		151,283		(7,542		)	(5	%)
Discover Network - Proprietary	31,408		31,084		27,324		32,005		30,577		831			3	%	89,816		87,466		2,350			3	%
Total		$77,441		$78,555		$77,561		$82,989		$80,175		($2,734	)	(3	%)		$233,557		$238,749		($5,192	)	(2	%)


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



DISCOVER FINANCIAL SERVICES
BALANCE SHEET SUMMARY
(unaudited, in millions)
	Quarter Ended
	Sep 30, 2015			Jun 30, 2015			Mar 31, 2015			Dec 31, 2014			Sep 30, 2014			Sep 30, 2015 vs. Sep 30, 2014
BALANCE SHEET SUMMARY
Assets
Cash and Investment Securities		$13,650			$14,050			$14,701			$11,339			$11,480			$2,170		19	%
Total Loan Receivables	70,078			69,028			67,648			69,969			67,366			2,712			4	%
Allowance for Loan Losses	(1,743		)	(1,735		)	(1,776		)	(1,746		)	(1,644		)	(99		)	(6	%)
Net Loan Receivables	68,335			67,293			65,872			68,223			65,722			2,613			4	%
Premises and Equipment, net	684			688			678			670			661			23			3	%
Goodwill and Intangible Assets, net	424			425			432			433			461			(37		)	(8	%)
Other Assets	2,518			2,455			2,495			2,461			2,272			246			11	%
Total Assets		$85,611			$84,911			$84,178			$83,126			$80,596			$5,015		6	%

Liabilities & Stockholders' Equity
Direct to Consumer and Affinity Deposits		$29,801			$29,498			$29,303			$28,766			$28,830			$971		3	%
Brokered Deposits and Other Deposits	16,804			16,818			17,124			17,323			16,552			252			2	%
Deposits	46,605			46,316			46,427			46,089			45,382			1,223			3	%
Borrowings	23,800			24,243			23,090			22,657			21,057			2,743			13	%
Accrued Expenses and Other Liabilities	3,903			3,089			3,450			3,246			2,856			1,047			37	%
Total Liabilities	74,308			73,648			72,967			71,992			69,295			5,013			7	%
Total Equity	11,303			11,263			11,211			11,134			11,301			2			0	%
Total Liabilities and Stockholders' Equity		$85,611			$84,911			$84,178			$83,126			$80,596			$5,015		6	%

LIQUIDITY
Liquidity Portfolio		$12,354			$12,781			$14,162			$10,752			$10,944			$1,410		13	%
Undrawn Credit Facilities ¹	31,008			25,029			24,340			23,524			22,877			8,131			36	%
Total Liquidity		$43,362			$37,810			$38,502			$34,276			$33,821			$9,541		28	%


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

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



DISCOVER FINANCIAL SERVICES
BALANCE SHEET STATISTICS
(unaudited, in millions)
	Quarter Ended
	Sep 30, 2015			Jun 30, 2015			Mar 31, 2015			Dec 31, 2014			Sep 30, 2014			Sep 30, 2015 vs. Sep 30, 2014
BALANCE SHEET STATISTICS
Total Common Equity		$10,743			$10,703			$10,651			$10,574			$10,741			$2	0	%
Total Common Equity/Total Assets	12.5		%	12.6		%	12.7		%	12.7		%	13.3		%
Total Common Equity/Net Loans	15.7		%	15.9		%	16.2		%	15.5		%	16.3		%

Tangible Assets		$85,187			$84,486			$83,746			$82,693			$80,135			$5,052	6	%
Tangible Common Equity ¹		$10,319			$10,278			$10,219			$10,141			$10,280			$39	0	%
Tangible Common Equity/Tangible Assets ¹	12.1		%	12.2		%	12.2		%	12.3		%	12.8		%
Tangible Common Equity/Net Loans ¹	15.1		%	15.3		%	15.5		%	14.9		%	15.6		%
Tangible Common Equity per share¹		$24.02			$23.50			$22.99			$22.58			$22.57			$1.45	6	%

REGULATORY CAPITAL RATIOS	Basel III Transition						Basel I
Total Risk Based Capital Ratio ²	17.1		%	17.2		%	17.6		%	17.0		%	17.8		%
Tier 1 Risk Based Capital Ratio ²	15.2		%	15.3		%	15.6		%	14.9		%	15.6		%
Tier 1 Common Capital Ratio ^2,3	N/A			N/A			N/A			14.1		%	14.8		%
Tier 1 Leverage Ratio ²	13.1		%	13.2		%	13.3		%	13.2		%	13.7		%
Common Equity Tier 1 Capital Ratio ²	14.4		%	14.5		%	14.8		%	N/A			N/A
	Basel III Fully Phased-in
Common Equity Tier 1 Capital Ratio ⁴	14.3		%	14.4		%	14.7		%	14.1		%	14.7		%

RATIO OF EARNINGS TO FIXED CHARGES
Ratio of Earnings to Fixed Charges ⁵	4.0			4.0			4.1			4.3			4.7

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

²As of January 1, 2015 regulatory capital ratios are calculated under Basel III rules subject to transition provisions. The Company reported under Basel I at December 31, 2014 and September 30, 2014

³ Tier 1 Common Capital Ratio (under Basel I) is calculated using tier 1 common capital, a non-GAAP measure. The Company believes the tier 1 common capital ratio is meaningful to investors to assess the quality and composition of the Company’s capital. For corresponding reconciliation of tier 1 common capital to a GAAP financial measure see Reconciliation of GAAP to non-GAAP Data schedule

⁴ Common Equity Tier 1 Capital Ratio (Basel III fully phased-in) is calculated using Basel III fully phased-in common equity tier 1 capital, a non-GAAP measure. The Company believes that the common equity tier 1 capital ratio based on fully phased-in Basel III rules is an important complement to the existing capital ratios and for comparability to other financial institutions. For the corresponding reconciliation of common equity tier 1 capital and risk weighted assets calculated under fully phased-in Basel III rules to common equity tier 1 capital and risk weighted assets calculated under Basel III transition rules see the Reconciliation of GAAP to non-GAAP data schedule

⁵ Fixed charges are the sum of interest expense, amortized premiums, discounts and capitalized expenses related to indebtedness and an estimate of interest within rental expense

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



DISCOVER FINANCIAL SERVICES
AVERAGE BALANCE SHEET
(unaudited, in millions)
	Quarter Ended
	Sep 30, 2015			Jun 30, 2015			Mar 31, 2015			Dec 31, 2014			Sep 30, 2014			Sep 30, 2015 vs. Sep 30, 2014
AVERAGE BALANCES
Assets
Cash and Investment Securities		$12,609			$13,219			$12,148			$11,886			$10,742			$1,867		17	%
Restricted Cash	703			686			605			242			498			205			41	%
Credit Card Loans	55,281			53,987			54,038			54,169			53,130			2,151			4	%
Private Student Loans	8,580			8,597			8,721			8,478			8,310			270			3	%
Personal Loans	5,307			5,131			5,047			4,954			4,718			589			12	%
Other Loans	294			385			342			329			323			(29		)	(9	%)
Total Loans	69,462			68,100			68,148			67,930			66,481			2,981			4	%
Total Interest Earning Assets	82,774			82,005			80,901			80,058			77,721			5,053			7	%
Allowance for Loan Losses	(1,776		)	(1,807		)	(1,753		)	(1,676		)	(1,625		)	(151		)	(9	%)
Other Assets	4,474			4,466			4,439			4,303			4,289			185			4	%
Total Assets		$85,472			$84,664			$83,587			$82,685			$80,385			$5,087		6	%

Liabilities and Stockholders' Equity
Direct to Consumer and Affinity Deposits		$29,477			$29,194			$28,891			$28,828			$28,835			$642		2	%
Brokered Deposits and Other Deposits	16,923			16,904			17,096			16,755			15,810			1,113			7	%
Total Interest-bearing Deposits	46,400			46,098			45,987			45,583			44,645			1,755			4	%
Short-term Borrowings	60			153			126			107			129			(69		)	(53	%)
Securitized Borrowings	16,479			17,351			17,220			17,219			16,535			(56		)	—	%
Other Long-term Borrowings	7,446			6,028			5,307			4,950			4,341			3,105			72	%
Total Interest-bearing Liabilities	70,385			69,630			68,640			67,859			65,650			4,735			7	%
Other Liabilities & Stockholders' Equity	15,087			15,034			14,947			14,826			14,735			352			2	%
Total Liabilities and Stockholders' Equity		$85,472			$84,664			$83,587			$82,685			$80,385			$5,087		6	%

AVERAGE RATES
Assets
Cash and Investment Securities	0.55		%	0.59		%	0.62		%	0.72		%	0.80		%	(25		)	bps
Restricted Cash	0.15		%	0.13		%	0.11		%	0.10		%	0.09		%	6			bps
Credit Card Loans	12.03		%	12.04		%	12.05		%	12.08		%	12.04		%	(1		)	bps
Private Student Loans	6.88		%	6.91		%	6.95		%	6.85		%	6.82		%	6			bps
Personal Loans	12.08		%	12.12		%	12.19		%	12.25		%	12.21		%	(13		)	bps
Other Loans	4.44		%	4.62		%	4.23		%	3.78		%	3.83		%	61			bps
Total Loans	11.37		%	11.35		%	11.37		%	11.40		%	11.36		%	1			bps
Total Interest Earning Assets	9.62		%	9.52		%	9.67		%	9.78		%	9.83		%	(21		)	bps

Liabilities and Stockholders' Equity
Direct to Consumer and Affinity Deposits	1.23		%	1.23		%	1.25		%	1.26		%	1.26		%	(3		)	bps
Brokered Deposits and Other Deposits	1.55		%	1.55		%	1.50		%	1.53		%	1.54		%	1			bps
Total Interest-bearing Deposits	1.34		%	1.35		%	1.34		%	1.36		%	1.36		%	(2		)	bps
Short-term Borrowings	1.49		%	1.37		%	1.43		%	1.54		%	1.42		%	7			bps
Securitized Borrowings	1.98		%	1.91		%	1.89		%	1.88		%	1.82		%	16			bps
Other Long-term Borrowings	4.42		%	4.90		%	5.11		%	5.09		%	5.28		%	(86		)	bps
Total Interest-bearing Liabilities	1.82		%	1.80		%	1.77		%	1.77		%	1.74		%	8			bps

Net Interest Margin	9.62		%	9.63		%	9.69		%	9.76		%	9.78		%	(16		)	bps
Net Yield on Interest-earning Assets	8.08		%	8.00		%	8.17		%	8.28		%	8.36		%	(28		)	bps


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



DISCOVER FINANCIAL SERVICES
LOAN STATISTICS
(unaudited, in millions)
	Quarter Ended																				Nine Months Ended
	Sep 30, 2015			Jun 30, 2015			Mar 31, 2015			Dec 31, 2014			Sep 30, 2014			Sep 30, 2015 vs. Sep 30, 2014					Sep 30, 2015			Sep 30, 2014			2015 vs. 2014
TOTAL LOAN RECEIVABLES
Ending Loans ^{1, 2}		$70,078			$69,028			$67,648			$69,969			$67,366			$2,712		4	%		$70,078			$67,366			$2,712		4	%
Average Loans ^{1, 2}		$69,462			$68,100			$68,148			$67,930			$66,481			$2,981		4	%		$68,575			$65,154			$3,421		5	%

Interest Yield	11.37		%	11.35		%	11.37		%	11.40		%	11.36		%	1			bps		11.36		%	11.41		%	(5		)	bps
Gross Principal Charge-off Rate	2.51		%	2.76		%	2.82		%	2.70		%	2.63		%	(12		)	bps		2.70		%	2.75		%	(5		)	bps
Gross Principal Charge-off Rate excluding PCI Loans³	2.64		%	2.91		%	2.98		%	2.86		%	2.79		%	(15		)	bps		2.84		%	2.93		%	(9		)	bps
Net Principal Charge-off Rate	1.85		%	2.05		%	2.14		%	2.06		%	1.94		%	(9		)	bps		2.01		%	2.03		%	(2		)	bps
Net Principal Charge-off Rate excluding PCI Loans ³	1.94		%	2.16		%	2.26		%	2.18		%	2.06		%	(12		)	bps		2.12		%	2.16		%	(4		)	bps
Delinquency Rate (over 30 days) excluding PCI Loans ^3,4	1.60		%	1.49		%	1.57		%	1.66		%	1.64		%	(4		)	bps		1.60		%	1.64		%	(4		)	bps
Delinquency Rate (over 90 days) excluding PCI Loans ^3,4	0.72		%	0.69		%	0.78		%	0.78		%	0.75		%	(3		)	bps		0.72		%	0.75		%	(3		)	bps
Gross Principal Charge-off Dollars		$440			$469			$474			$463			$440			$—		0	%		$1,383			$1,343			$40		3	%
Net Principal Charge-off Dollars		$324			$347			$360			$355			$324			$—		0	%		$1,031			$990			$41		4	%
Net Interest and Fee Charge-off Dollars	$81			$87			$95			$91			$85			($4		)	(5	%)	$263			$261			$3			1	%
Loans Delinquent Over 30 Days ^3,4	$1,070				$980			$1,006			$1,100			$1,043		$27			3	%	$1,070				$1,043		$27			3	%
Loans Delinquent Over 90 Days ^3,4	$481				$450			$500			$517			$476		$5			1	%	$481				$476		$5			1	%

Allowance for Loan Loss (period end)		$1,743			$1,735			$1,776			$1,746			$1,644			$99		6	%		$1,743			$1,644			$99		6	%
Change in Loan Loss Reserves		$8			($41	)		$30			$102			$30			($22	)	(73	%)		($3	)		($4	)		$1		(25	%)
Reserve Rate	2.49		%	2.51		%	2.63		%	2.50		%	2.44		%	5			bps		2.49		%	2.44		%	5			bps
Reserve Rate Excluding PCI Loans ³	2.57		%	2.60		%	2.72		%	2.59		%	2.54		%	3			bps		2.57		%	2.54		%	3			bps

CREDIT CARD LOANS
Ending Loans		$55,655			$54,949			$53,499			$56,128			$53,699			$1,956		4	%		$55,655			$53,699			$1,956		4	%
Average Loans		$55,281			$53,987			$54,038			$54,168			$53,130			$2,151		4	%		$54,440			$52,071			$2,369		5	%

Interest Yield	12.03		%	12.04		%	12.05		%	12.08		%	12.04		%	(1		)	bps		12.04		%	12.09		%	(5		)	bps
Gross Principal Charge-off Rate	2.83		%	3.14		%	3.21		%	3.03		%	2.99		%	(16		)	bps		3.06		%	3.14		%	(8		)	bps
Net Principal Charge-off Rate	2.04		%	2.28		%	2.40		%	2.26		%	2.16		%	(12		)	bps		2.24		%	2.27		%	(3		)	bps
Delinquency Rate (over 30 days) ⁴	1.65		%	1.55		%	1.64		%	1.73		%	1.71		%	(6		)	bps		1.65		%	1.71		%	(6		)	bps
Delinquency Rate (over 90 days) ⁴	0.78		%	0.75		%	0.86		%	0.85		%	0.82		%	(4		)	bps		0.78		%	0.82		%	(4		)	bps
Gross Principal Charge-off Dollars		$394			$423			$428			$413			$400			($6	)	(2	%)		$1,245			$1,223			$22		2	%
Net Principal Charge-off Dollars		$285			$307			$319			$309			$289			($4	)	(1	%)		$911			$883			$28		3	%
Loans Delinquent Over 30 Days ⁴	$919				$850			$879			$971			$920		($1		)	0	%	$919				$920		($1		)	0	%
Loans Delinquent Over 90 Days ⁴	$437				$414			$458			$480			$440		($3		)	(1	%)	$437				$440		($3		)	(1	%)

Allowance for Loan Loss (period end)		$1,459			$1,441			$1,492			$1,474			$1,388			$71		5	%		$1,459			$1,388			$71		5	%
Change in Loan Loss Reserves		$18			($51	)		$18			$86			$29			($11	)	(38	%)		($15	)		($18	)		$3		(17	%)
Reserve Rate	2.62		%	2.62		%	2.79		%	2.63		%	2.58		%	4			bps		2.62		%	2.58		%	4			bps

Total Discover Card Volume		$32,971			$32,299			$28,725			$33,211			$32,091			$880		3	%		$93,995			$91,900			$2,095		2	%
Discover Card Sales Volume		$30,374			$30,017			$26,379			$30,871			$29,609			$765		3	%		$86,770			$84,647			$2,123		3	%
Rewards Rate	1.07		%	1.05		%	1.02		%	1.67		%	1.02		%	5			bps		1.05		%	0.99		%	6			bps
¹Total 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

⁴During the first quarter of 2015, a payment processing change was implemented which had the effect of contributing favorably to the delinquencies of certain accounts. These changes partially contributed to the decline in the delinquency rate

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



DISCOVER FINANCIAL SERVICES
LOAN STATISTICS
(unaudited, in millions)
	Quarter Ended																				Nine Months Ended
	Sep 30, 2015			Jun 30, 2015			Mar 31, 2015			Dec 31, 2014			Sep 30, 2014			Sep 30, 2015 vs. Sep 30, 2014					Sep 30, 2015			Sep 30, 2014			2015 vs. 2014
PRIVATE STUDENT LOANS
Ending Loans		$8,769			$8,520			$8,696			$8,510			$8,494			$275		3	%		$8,769			$8,494			$275		3	%
Ending PCI Loans ¹		$3,249			$3,381			$3,519			$3,660			$3,788			($539	)	(14	%)		$3,249			$3,788			($539	)	(14	%)

Interest Yield	6.88		%	6.91		%	6.95		%	6.85		%	6.82		%	6			bps		6.91		%	6.84		%	7			bps
Net Principal Charge-off Rate	0.57		%	0.61		%	0.61		%	0.79		%	0.61		%	(4		)	bps		0.60		%	0.65		%	(5		)	bps
Net Principal Charge-off Rate excluding PCI Loans²	0.94		%	1.02		%	1.03		%	1.40		%	1.14		%	(20		)	bps		0.99		%	1.25		%	(26		)	bps
Delinquency Rate (over 30 days) excluding PCI Loans ²	1.88		%	1.78		%	1.66		%	1.80		%	1.78		%	10			bps		1.88		%	1.78		%	10			bps

Reserve Rate	1.48		%	1.68		%	1.63		%	1.59		%	1.56		%	(8		)	bps		1.48		%	1.56		%	(8		)	bps
Reserve Rate excluding PCI Loans ²	1.84		%	2.23		%	2.18		%	2.20		%	2.21		%	(37		)	bps		1.84		%	2.21		%	(37		)	bps

PERSONAL LOANS
Ending Loans		$5,425			$5,183			$5,065			$5,007			$4,830			$595		12	%		$5,425			$4,830			$595		12	%

Interest Yield	12.08		%	12.12		%	12.19		%	12.25		%	12.21		%	(13		)	bps		12.13		%	12.41		%	(28		)	bps
Net Principal Charge-off Rate	1.99		%	2.10		%	2.22		%	2.20		%	1.92		%	7			bps		2.10		%	1.98		%	12			bps
Delinquency Rate (over 30 days)	0.80		%	0.71		%	0.76		%	0.79		%	0.75		%	5			bps		0.80		%	0.75		%	5			bps

Reserve Rate	2.49		%	2.54		%	2.43		%	2.40		%	2.23		%	26			bps		2.49		%	2.23		%	26			bps


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

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

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



DISCOVER FINANCIAL SERVICES
SEGMENT RESULTS
(unaudited, in millions)
	Quarter Ended																				Nine Months Ended
	Sep 30, 2015			Jun 30, 2015			Mar 31, 2015			Dec 31, 2014			Sep 30, 2014			Sep 30, 2015 vs. Sep 30, 2014					Sep 30, 2015			Sep 30, 2014			2015 vs. 2014
DIRECT BANKING
Interest Income		$2,008			$1,947			$1,929			$1,974			$1,926			$82		4	%		$5,884			$5,622			$262		5	%
Interest Expense	323			311			300			302			288			35			12	%	934			832			102			12	%
Net Interest Income	1,685			1,636			1,629			1,672			1,638			47			3	%	4,950			4,790			160			3	%
Other Income	435			468			468			286			475			(40		)	(8	%)	1,371			1,414			(43		)	3	%
Revenue Net of Interest Expense	2,120			2,104			2,097			1,958			2,113			7			—	%	6,321			6,204			117			2	%
Provision for Loan Losses	332			306			388			454			356			(24		)	(7	%)	1,026			986			40			4	%
Total Other Expense	838			884			828			858			776			62			8	%	2,550			2,259			291			13	%
Income Before Income Taxes		$950			$914			$881			$646			$981			($31	)	(3	%)		$2,745			$2,959			($214	)	(7	%)

Net Interest Margin	9.63		%	9.63		%	9.70		%	9.77		%	9.79		%	(16		)	bps		9.65		%	9.84		%	(19		)	bps
Pretax Return on Loan Receivables	5.43		%	5.38		%	5.24		%	3.78		%	5.86		%	(43		)	bps		5.35		%	6.08		%	(73		)	bps

PAYMENT SERVICES
Interest Income		$—			$—			$—			$—			$—			$—		NM			$—			$—			$—		NM
Interest Expense	—			—			—			—			—			—			NM		—			—			—			NM
Net Interest Income	—			—			—			—			—			—			NM		—			—			—			NM
Other Income	68			71			74			79			77			(9		)	(12	%)	213			236			(23		)	(10	%)
Revenue Net of Interest Expense	68			71			74			79			77			(9		)	(12	%)	213			236			(23		)	(10	%)
Provision for Loan Losses	—			—			2			3			(2		)	2			(100%)		2			—			2			NM
Total Other Expense	44			43			45			74			51			(7		)	(14	%)	132			149			(17		)	(11	%)
Income Before Income Taxes		$24			$28			$27			$2			$28			($4	)	(14	%)		$79			$87			($8	)	(9	%)

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

DISCOVER FINANCIAL SERVICES

GLOSSARY OF FINANCIAL TERMS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Regulatory Capital Ratios are regulatory measures used to evaluate capital adequacy. Under Basel I, to be considered "well-capitalized," total risk-based, tier 1 risk-based, and tier 1 leverage ratios of 10%, 6% and 5% respectively must be maintained. Under Basel III, to be considered "well-capitalized," total risk-based, tier 1 risk-based, tier 1 leverage, and common equity tier 1 ratios of 10%, 8%, 5%, and 6.5% respectively must be maintained. As of January 1, 2015 regulatory capital ratios are calculated under Basel III rules subject to transition provisions. Prior to January 1, 2015 regulatory capital ratios are calculated under Basel I. Total Risk Based Capital Ratio represents total capital divided by risk-weighted assets. Tier 1 Capital Ratio represents tier 1 capital divided by risk-weighted assets. Tier 1 Leverage Ratio represents tier 1 capital divided by average total assets. The Tier 1 Common Capital Ratio has been replaced by the Common Equity Tier 1 Ratio under Basel III. Tier 1 Common Capital Ratio calculated under Basel I represents tier 1 common capital, a non-GAAP measure, divided by risk-weighted assets. For corresponding reconciliation of tier 1 common capital (Basel I) to a GAAP financial measure, see Reconciliation of GAAP to Non-GAAP Data schedule

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

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

Rewards Rate represents rewards cost divided by Discover Card sales volume

Tangible Assets represents total assets less goodwill and intangibles

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

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

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

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

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



DISCOVER FINANCIAL SERVICES
RECONCILIATION OF GAAP TO NON-GAAP DATA
(unaudited, in millions)
	Quarter Ended
	Sep 30, 2015			Jun 30, 2015			Mar 31, 2015			Dec 31, 2014			Sep 30, 2014
GAAP total common equity		$10,743			$10,703			$10,651			$10,574			$10,741
Less: Goodwill	(255		)	(255		)	(257		)	(257		)	(284		)
Less: Intangibles	(169		)	(170		)	(175		)	(176		)	(177		)
Tangible common equity ¹		$10,319			$10,278			$10,219			$10,141			$10,280
Effect of certain items in accumulated other comprehensive income (loss) excluded from tier 1 common capital										138			70
Total tier 1 common capital (Basel I) ²											$10,279			$10,350
Add: Adjustments related to capital components ³										26			21
Common equity Tier 1 capital (Basel III fully phased-in)											$10,305			$10,371

Common equity Tier 1 capital (Basel III transition)	$10,612				$10,552			$10,497
Adjustments related to capital components during transition ⁴	(82		)	(83		)	(87		)
Common equity Tier 1 capital (Basel III fully phased-in)	$10,530				$10,469			$10,410

Risk weighted assets (Basel I)	N/A			N/A			N/A				$72,889			$70,132
Risk weighted assets (Basel III transition)	$73,526				$72,658			$70,868		N/A			N/A
Risk weighted assets (Basel III fully phased-in) ⁵	$73,423				$72,555			$70,762			$73,315			$70,560

Tier 1 common capital ratio (Basel I) ^6,7	N/A			N/A			N/A			14.1		%	14.8		%
Common equity Tier 1 capital ratio (Basel III transition) ⁶	14.4		%	14.5		%	14.8		%	N/A			N/A
Common equity Tier 1 capital ratio (Basel III fully phased-in) ^6,8	14.3		%	14.4		%	14.7		%	14.1		%	14.7		%

GAAP book value per share		$26.32			$25.75			$25.22			$24.79			$24.82
Less: Goodwill	(0.59		)	(0.58		)	(0.58		)	(0.57		)	(0.62		)
Less: Intangibles	(0.39		)	(0.39		)	(0.39		)	(0.39		)	(0.39		)
Less: Preferred Stock	(1.30		)	(1.28		)	(1.26		)	(1.25		)	(1.23		)
Tangible common equity per share		$24.04			$23.50			$22.99			$22.58			$22.58

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

2 Tier 1 common capital (under Basel I), a non-GAAP financial measure, represents common equity and the effect of certain items in accumulated other comprehensive income (loss) excluded from tier 1 common capital, less goodwill and intangibles. A reconciliation of tier 1 common capital to common equity, a GAAP financial measure, is shown above. Other financial services companies may also use tier 1 common capital and definitions may vary, so users of this information are advised to exercise caution in comparing tier 1 common capital of different companies. Tier 1 common capital is included to support the tier 1 common capital ratio which is meaningful to investors to assess the quality and composition of the Company’s capital

3 Adjustments related to capital components for fully phased-in Basel III include deferred tax liabilities related to intangible assets and deduction for deferred tax assets

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

5 Key differences under fully phased-in Basel III rules in the calculation of risk-weighted assets include higher risk weighting for past due loans and unfunded commitments

6 As of January 1, 2015 regulatory capital ratios are calculated under Basel III rules subject to transition provisions. The Company reported under Basel I at December 31, 2014 and September 30, 2014

7 Tier 1 common capital ratio is calculated using tier 1 common capital (Basel I), a non-GAAP measure, divided by risk weighted assets (Basel I)

8 Common equity tier 1 capital ratio (Basel III fully phased-in) is calculated using common equity tier 1 capital (Basel III fully phased-in), a non-GAAP measure, divided by risk weighted assets (Basel III fully phased-in)

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

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