Discover Financial Services - FORM 8-K - EX-99.2 - January 20, 2021

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EX-99.3 - EX-99.3 - Discover Financial Servicesa4q20earningspresentatio.htm
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DISCOVER FINANCIAL SERVICES Exhibit 99.2
EARNINGS SUMMARY
(unaudited, in millions, except per share statistics)
 Quarter EndedTwelve Months Ended
 Dec 31,
2020		Sep 30,
2020		Jun 30,
2020		Mar 31,
2020		Dec 31,
2019		Dec 31, 2020 vs. Dec 31, 2019Dec 31,
2020		Dec 31,
2019		2020 vs. 2019
EARNINGS SUMMARY       
Interest Income$2,760 $2,681 $2,672 $2,982 $3,039 ($279)(9 %)$11,095 $11,993 ($898)(7 %)
Interest Expense383 416 482 584 615 (232)(38 %)1,865 2,530 (665)(26 %)
Net Interest Income2,377 2,265 2,190 2,398 2,424 (47)(2 %)9,230 9,463 (233)(2 %)
Discount/Interchange Revenue811 752 622 694 800 11 1 %2,879 3,011 (132)(4 %)
Rewards Cost569 514 385 478 519 50 10 %1,946 1,945 1 0 %
Discount and Interchange Revenue, net242 238 237 216 281 (39)(14 %)933 1,066 (133)(12 %)
Protection Products Revenue45 44 44 47 48 (3)(6 %)180 194 (14)(7 %)
Loan Fee Income110 100 85 119 123 (13)(11 %)414 449 (35)(8 %)
Transaction Processing Revenue52 50 49 44 51 1 2 %195 197 (2)(1 %)
Other Income(2)17 57 64 17 (19)(112 %)136 90 46 51 %
Total Non-Interest Income447 449 472 490 520 (73)(14 %)1,858 1,996 (138)(7 %)
Revenue Net of Interest Expense2,824 2,714 2,662 2,888 2,944 (120)(4 %)11,088 11,459 (371)(3)%
Provision for Credit Losses531 750 2,046 1,807 836 (305)(36 %)5,134 3,231 1,903 59 %
Employee Compensation and Benefits504 471 452 467 447 57 13 %1,894 1,738 156 9 %
Marketing and Business Development159 140 129 231 234 (75)(32 %)659 883 (224)(25 %)
Information Processing & Communications198 111 117 114 113 85 75 %540 409 131 32 %
Professional Fees192 151 181 193 214 (22)(10 %)717 753 (36)(5 %)
Premises and Equipment30 26 27 30 27 3 11 %113 107 6 6 %
Other Expense195 106 171 124 149 46 31 %596 503 93 18 %
Total Operating Expense1,278 1,005 1,077 1,159 1,184 94 8 %4,519 4,393 126 3 %
Income/ (Loss) Before Income Taxes1,015 959 (461)(78)924 91 10 %1,435 3,835 (2,400)(63 %)
Tax Expense216 188 (93)(17)216 — — %294 878 (584)(67 %)
Net Income/ (Loss)$799 $771 ($368)($61)$708 $91 13 %$1,141 $2,957 ($1,816)(61 %)
Net Income/ (Loss) Allocated to Common Stockholders$794 $751 ($369)($78)$704 $90 13 %$1,104 $2,908 ($1,804)(62 %)
Effective Tax Rate21.3 %19.6 %20.2 %22.0 %23.4 %20.5 %22.9 %
Net Interest Margin10.63 %10.19 %9.81 %10.21 %10.29 %34 bps10.21 %10.41 %(20)bps
Operating Efficiency45.2 %37.0 %40.5 %40.1 %40.2 %500 bps40.8 %38.3 %250 bps
ROE30 %31 %(15)%(2)%24 %11 %26 %
ROCE33 %34 %(16)%(3)%25 %12 %27 %
Capital Returned to Common Stockholders$119 $117 $136 $468 $521 ($402)(77 %)$840 $2,233 ($1,393)(62 %)
Payout Ratio15 %16 %(37)%(604)%74 %76 %77 %
Ending Common Shares Outstanding307 306 306 306 310 (3)(1 %)307 310 (3)(1 %)
Weighted Average Common Shares Outstanding307 306 306 308 312 (5)(2 %)307 320 (13)(4 %)
Weighted Average Common Shares Outstanding (fully diluted)307 306 306 308 313 (6)(2 %)307 320 (13)(4 %)
PER SHARE STATISTICS       
Basic EPS$2.59 $2.45 ($1.20)($0.25)$2.25 $0.34 15 %$3.60 $9.09 ($5.49)(60 %)
Diluted EPS$2.59 $2.45 ($1.20)($0.25)$2.25 $0.34 15 %$3.60 $9.08 ($5.48)(60 %)
Common Dividends Declared Per Share$0.44 $0.44 $0.44 $0.44 $0.44 $— — %$1.76 $1.68 $0.08 5 %
Common Stock Price (period end)$90.53 $57.78 $50.09 $35.67 $84.82 $5.71 7 %$90.53 $84.82 $5.71 7 %
Book Value per share $35.50 $33.45 $31.47 $31.55 $38.24 ($2.74)(7 %)$35.50 $38.24 ($2.74)(7 %)
  Note: See Glossary of Financial Terms for definitions of financial terms


DISCOVER FINANCIAL SERVICES
BALANCE SHEET SUMMARY
(unaudited, in millions)
 Quarter Ended  
 Dec 31, 2020Sep 30, 2020Jun 30, 2020Mar 31, 2020Dec 31, 2019Dec 31, 2020 vs. Dec 31, 2019
BALANCE SHEET SUMMARY       
Assets       
Cash and Investment Securities 1
$25,703 $38,991 $28,201 $21,993 $17,559 $8,144 46 %
Total Loan Receivables90,449 88,660 88,927 92,963 95,894 (5,445)(6 %)
Allowance for Credit Losses(8,226)(8,226)(8,184)(6,913)(3,383)(4,843)(143 %)
Net Loan Receivables82,223 80,434 80,743 86,050 92,511 (10,288)(11 %)
Premises and Equipment, net1,027 1,121 1,115 1,070 1,057 (30)(3 %)
Goodwill and Intangible Assets, net350 350 351 410 410 (60)(15 %)
Other Assets3,586 3,453 3,382 3,134 2,459 1,127 46 %
Total Assets$112,889 $124,349 $113,792 $112,657 $113,996 ($1,107)(1 %)
Liabilities & Stockholders' Equity       
           Certificates of Deposits 2
$18,526$19,661 $20,848 $20,703 $19,168 ($642)(3 %)
           Savings, Money Market, and Other Deposits 2
44,971 43,282 40,266 36,003 35,241 9,730 28 %
Direct to Consumer Deposits 2
63,497 62,943 61,114 56,706 54,409 9,088 17 %
Brokered Deposits and Other Deposits13,407 15,072 16,250 16,712 18,337 (4,930)(27 %)
Deposits76,904 78,015 77,364 73,418 72,746 4,158 6 %
   Short-term Borrowings 3
— 10,700 — — — — NM
   Securitized Borrowings10,840 11,425 12,766 13,939 14,284 (3,444)(24 %)
   Other Borrowings10,401 10,416 10,428 12,159 11,417 (1,016)(9 %)
Borrowings21,241 32,541 23,194 26,098 25,701 (4,460)(17 %)
Accrued Expenses and Other Liabilities3,860 3,541 3,591 3,476 3,690 170 5 %
Total Liabilities102,005 114,097 104,149 102,992 102,137 (132)0 %
Total Equity10,884 10,252 9,643 9,665 11,859 (975)(8 %)
Total Liabilities and Stockholders' Equity$112,889 $124,349 $113,792 $112,657 $113,996 ($1,107)(1 %)
LIQUIDITY       
Liquidity Portfolio 4
$24,411 $25,759 $26,853 $19,430 $16,608 $7,803 47 %
Private Asset-backed Securitizations6,000 6,000 6,000 6,000 5,500 500 9 %
Federal Reserve Discount Window  5
32,930 32,635 32,830 34,712 34,220 (1,290)(4 %)
Undrawn Credit Facilities 5
38,930 38,635 38,830 40,712 39,720 (790)(2 %)
Total Liquidity$63,341$64,394$65,683$60,142$56,328$7,01312 %
1 Numbers for the quarter ending September 30, 2020 includes $10.7 billion of agency pass-through residential mortgage-backed securities (RMBS) received in connection with a securities lending transaction entered into in September 2020
2 Includes Affinity relationships
3 Represents the obligation to return the agency pass-through RMBS received from the counterparty of the securities lending transaction. The Company returned the RMBS when the securities lending transaction expired in November 2020
4 Excludes U.S. Treasury securities that have been pledged as collateral in the securities lending transaction
5 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  
 Dec 31, 2020Sep 30, 2020Jun 30, 2020Mar 31, 2020Dec 31, 2019Dec 31, 2020 vs. Dec 31, 2019
BALANCE SHEET STATISTICS       
Total Common Equity$9,828 $9,196 $8,587 $9,102 $11,296 ($1,468)(13 %)
Total Common Equity/Total Assets8.7 %7.4 %7.5 %8.1 %9.9 %
Total Common Equity/Net Loans12.0 %11.4 %10.6 %10.6 %12.2 %
Tangible Assets$112,539 $123,999 $113,441 $112,247 $113,586 ($1,047)(1 %)
Tangible Common Equity 1
$9,478 $8,846 $8,236 $8,692 $10,886 ($1,408)(13 %)
Tangible Common Equity/Tangible Assets 1
8.4 %7.1 %7.3 %7.7 %9.6 %
Tangible Common Equity/Net Loans 1
11.5 %11.0 %10.2 %10.1 %11.8 %
Tangible Common Equity per share  1
$30.91 $28.86 $26.88 $28.38 $35.10 ($4.19)(12 %)
Basel III
Quarter Ended
REGULATORY CAPITAL RATIOS 2
Dec 31, 2020 2Sep 30, 2020 2Jun 30, 2020 2Mar 31, 2020 2Dec 31, 2019  
Total Risk Based Capital Ratio16.1 %15.2 %14.7 %13.7 %13.5 %  
Tier 1 Risk Based Capital Ratio14.3 %13.3 %12.9 %11.9 %11.8 %  
Tier 1 Leverage Ratio 10.9 %10.6 %10.0 %9.9 %10.3 %  
Common Equity Tier 1 Capital Ratio 13.1 %12.2 %11.7 %11.3 %11.2 %
1 Tangible Common Equity ("TCE") is a non-GAAP measure. The Company believes TCE is a more meaningful measure to investors of the net asset value of the Company. For corresponding reconciliation of TCE to a GAAP financial measure see Reconciliation of GAAP to non-GAAP Data schedule
2 Based on the final rule published September 30, 2020. Capital ratios reflect delay in the recognition of the impact of CECL reserves on regulatory capital for two years in accordance with the final rule
  Note: See Glossary of Financial Terms for definitions of financial terms



DISCOVER FINANCIAL SERVICES
AVERAGE BALANCE SHEET
(unaudited, in millions)
 Quarter Ended  
 Dec 31, 2020Sep 30, 2020Jun 30, 2020Mar 31, 2020Dec 31, 2019Dec 31, 2020 vs. Dec 31, 2019
AVERAGE BALANCES       
Assets       
Cash and Investment Securities$30,245 $27,841 $25,681 $17,977 $17,579 $12,666 72 %
Restricted Cash121 775 226 627 58 63 109 %
Credit Card Loans69,997 69,643 70,848 75,337 74,814 (4,817)(6 %)
Private Student Loans9,952 9,790 9,826 9,992 9,660 292 3 %
Personal Loans7,197 7,255 7,475 7,704 7,675 (478)(6 %)
Other Loans1,814 1,734 1,622 1,468 1,288 526 41 %
Total Loans88,960 88,422 89,771 94,501 93,437 (4,477)(5 %)
Total Interest Earning Assets119,326 117,038 115,678 113,105 111,074 8,252 7 %
Allowance for Credit Losses(8,222)(8,183)(6,927)(5,851)(3,294)(4,928)(150 %)
Other Assets6,050 5,981 5,717 5,661 4,835 1,215 25 %
Total Assets$117,154 $114,836 $114,468 $112,915 $112,615 $4,539 4 %
Liabilities and Stockholders' Equity       
                       Certificates of Deposits 1
$19,032 $20,295 $20,939 $19,688 $18,879 $153 1 %
                       Savings, Money Market, and Other Deposits 1
43,489 41,256 37,874 35,534 34,113 9,376 27 %
Direct to Consumer Deposits 1
62,521 61,551 58,813 55,222 52,992 9,529 18 %
Brokered Deposits and Other Deposits13,711 15,271 16,429 16,756 17,865 (4,154)(23 %)
Total Interest-bearing Deposits76,232 76,822 75,242 71,978 70,857 5,375 8 %
Short-term Borrowings3,722 350 — 1 — 3,722 NM
Securitized Borrowings10,945 12,115 12,960 14,087 13,562 (2,617)(19 %)
Other Long-term Borrowings10,409 10,426 11,375 11,790 11,542 (1,133)(10 %)
Total Interest-bearing Liabilities101,308 99,713 99,577 97,856 95,961 5,347 6 %
Other Liabilities & Stockholders' Equity15,846 15,123 14,891 15,059 16,654 (808)(5 %)
Total Liabilities and Stockholders' Equity$117,154 $114,836 $114,468 $112,915 $112,615 $4,539 4 %
AVERAGE YIELD       
Assets       
Cash and Investment Securities1.14 %0.90 %0.94 %1.80 %2.05 %(91)bps
Restricted Cash0.05 %0.09 %0.25 %1.06 %1.39 %(134)bps
Credit Card Loans12.65 %12.40 %12.34 %12.90 %13.08 %(43)bps
Private Student Loans7.40 %7.40 %7.46 %8.24 %8.43 %(103)bps
Personal Loans13.01 %13.03 %12.40 %13.27 %13.23 %(22)bps
Other Loans6.02 %6.25 %6.49 %6.73 %6.27 %(25)bps
Total Loans11.96 %11.78 %11.70 %12.34 %12.52 %(56)bps
Total Interest Earning Assets9.20 %9.11 %9.29 %10.60 %10.86 %(166)bps
AVERAGE RATES
Liabilities and Stockholders' Equity       
                       Certificates of Deposits 1
1.80 %2.02 %2.22 %2.36 %2.45 %(65)bps
                       Savings, Money Market, and Other Deposits 1
0.57 %0.86 %1.29 %1.64 %1.80 %(123)bps
Direct to Consumer Deposits 1
0.94 %1.25 %1.62 %1.90 %2.03 %(109)bps
Brokered Deposits and Other Deposits2.38 %2.47 %2.52 %2.71 %2.72 %(34)bps
Total Interest-bearing Deposits1.20 %1.49 %1.81 %2.09 %2.20 %(100)bps
Short-term Borrowings3.10 %3.10 %0.25 %1.71 %1.72 %138 bps
Securitized Borrowings1.06 %1.04 %1.24 %2.28 %2.62 %(156)bps
Other Long-term Borrowings3.60 %3.60 %3.63 %4.45 %4.53 %(93)bps
Total Interest-bearing Liabilities1.50 %1.66 %1.95 %2.40 %2.54 %(104)bps
Net Interest Margin10.63 %10.19 %9.81 %10.21 %10.29 %34 bps
Net Yield on Interest-earning Assets7.93 %7.70 %7.61 %8.53 %8.66 %(73)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  Twelve Months Ended
 Dec 31,
2020		Sep 30,
2020		Jun 30,
2020		Mar 31,
2020		Dec 31,
2019		Dec 31, 2020 vs. Dec 31, 2019Dec 31,
2020		Dec 31,
2019		2020 vs. 2019
TOTAL LOAN RECEIVABLES       
Ending Loans 1
$90,449 $88,660 $88,927 $92,963 $95,894 ($5,445)(6 %)$90,449 $95,894 ($5,445)(6 %)
Average Loans 1
$88,960 $88,422 $89,771 $94,501 $93,437 ($4,477)(5 %)$90,403 $90,886 ($483)(1 %)
Interest Yield11.96 %11.78 %11.70 %12.34 %12.52 %(56)bps11.95 %12.72 %(77)bps
Gross Principal Charge-off Rate 2
3.17 %3.78 %4.26 %4.15 %4.00 %(83)bps3.85 %3.98 %(13)bps
Net Principal Charge-off Rate 2
2.38 %3.00 %3.44 %3.27 %3.19 %(81)bps3.03 %3.17 %(14)bps
Delinquency Rate (30 or more days)1.89 %1.77 %1.98 %2.39 %2.41 %(52)bps
Delinquency Rate (30 or more days) excluding Purchased Loans 3
1.88 %1.76 %1.98 %2.38 %2.40 %(52)bps1.88 %2.40 %(52)bps
Delinquency Rate (90 or more days)0.88 %0.80 %1.03 %1.18 %1.15 %(27)bps
Delinquency Rate (90 or more days) excluding Purchased Loans 3
0.88 %0.80 %1.04 %1.19 %1.15 %(27)bps0.88 %1.15 %(27)bps
Gross Principal Charge-off Dollars 2
$709 $842 $950 $975 $941 ($232)(25 %)$3,476 $3,617 ($141)(4 %)
Net Principal Charge-off Dollars 2
$531 $668 $767 $769 $751 ($220)(29 %)$2,735 $2,886 ($151)(5 %)
Net Interest and Fee Charge-off Dollars$113 $141 $169 $178 $166 ($53)(32 %)$601 $638 ($37)(6 %)
Loans Delinquent 30 or more days$1,705 $1,567 $1,763 $2,218 $2,312 ($607)(26 %)
Loans Delinquent 30 or more days excluding Purchased Loans 3
$1,687 $1,544 $1,739 $2,189 $2,276 ($589)(26 %)$1,687 $2,276 ($589)(26 %)
Loans Delinquent 90 or more days$795 $708 $916 $1,095 $1,098 ($303)(28 %)
Loans Delinquent 90 or more days excluding Purchased Loans 3
$791 $702 $911 $1,088 $1,089 ($298)(27 %)$791 $1,089 ($298)(27 %)
Allowance for Credit Losses (period end) 4
$8,226 $8,226 $8,184 $6,913 $3,383 $4,843 143 %$8,226 $3,383 $4,843 143 %
Reserve Change Build/ (Release) 5, 6, 7
$— $42 $1,271 $1,069 $85 ($85)$2,382 $345 $2,037 
Reserve Rate9.09 %9.28 %9.20 %7.44 %3.53 %556 bps9.09 %3.53 %556 bps
CREDIT CARD LOANS       
Ending Loans$71,472 $69,656 $70,201 $73,811 $77,181 ($5,709)(7 %)$71,472 $77,181 ($5,709)(7 %)
Average Loans$69,997 $69,643 $70,848 $75,337 $74,814 ($4,817)(6 %)$71,447 $72,740 ($1,293)(2 %)
Interest Yield12.65 %12.40 %12.34 %12.90 %13.08 %(43)bps12.58 %13.32 %(74)bps
Gross Principal Charge-off Rate3.53 %4.33 %4.84 %4.64 %4.34 %(81)bps4.34 %4.35 %(1)bps
Net Principal Charge-off Rate2.63 %3.45 %3.90 %3.65 %3.41 %(78)bps3.41 %3.43 %(2)bps
Delinquency Rate (30 or more days) 2.07 %1.91 %2.17 %2.62 %2.62 %(55)bps2.07 %2.62 %(55)bps
Delinquency Rate (90 or more days) 1.03 %0.93 %1.21 %1.38 %1.32 %(29)bps1.03 %1.32 %(29)bps
Gross Principal Charge-off Dollars$621 $759 $852 $869 $818 ($197)(24 %)$3,101 $3,165 ($64)(2 %)
Net Principal Charge-off Dollars$463 $604 $688 $683 $644 ($181)(28 %)$2,438 $2,494 ($56)(2 %)
Loans Delinquent 30 or more days$1,478 $1,328 $1,523 $1,935 $2,019 ($541)(27 %)$1,478 $2,019 ($541)(27 %)
Loans Delinquent 90 or more days$739 $650 $846 $1,016 $1,020 ($281)(28 %)$739 $1,020 ($281)(28 %)
Allowance for Credit Losses (period end) 4
$6,491 $6,491 $6,491 $5,306 $2,883 $3,608 125 %$6,491 $2,883 $3,608 125 %
Reserve Change Build/ (Release) 5, 6
$— $— $1,185 $756 $84 ($84)$1,941 $355 $1,586 
Reserve Rate9.08 %9.32 %9.25 %7.19 %3.74 %534 bps9.08 %3.74 %534 bps
Total Discover Card Volume$43,581 $39,783 $33,105 $37,474 $42,794 $787 2 %$153,943 $160,283 ($6,340)(4 %)
Discover Card Sales Volume$40,957 $37,134 $30,721 $33,988 $39,188 $1,769 5 %$142,800 $146,183 ($3,383)(2 %)
Rewards Rate1.38 %1.38 %1.24 %1.40 %1.32 %6 bps1.35 %1.33 %2 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  Twelve Months Ended
 Dec 31, 2020Sep 30, 2020Jun 30, 2020Mar 31, 2020Dec 31, 2019Dec 31, 2020 vs. Dec 31, 2019Dec 31, 2020Dec 31, 20192020 vs. 2019
PRIVATE STUDENT LOANS       
Organic Student Loans$8,989 $8,989 $8,635 $8,790 $8,402 $587 7 %$8,989 $8,402 $587 7 %
Purchased Student Loans965 1,027 1,095 1,167 1,251 (286)(23 %)965 1,251 (286)(23 %)
Total Private Student Loans$9,954 $10,016 $9,730 $9,957 $9,653 $301 3 %$9,954 $9,653 $301 3 %
Interest Yield7.40 %7.40 %7.46 %8.24 %8.43 %(103)bps7.63 %8.55 %(92)bps
Net Principal Charge-off Rate 1
0.71 %0.58 %0.62 %0.68 %1.02 %(31)bps0.65 %0.72 %(7)bps
Delinquency Rate (30 or more days)1.39 %1.49 %1.57 %1.75 %1.88 %(49)bps1.39 %1.88 %(29)bps
Delinquency Rate (30 or more days) excluding Purchased Loans 2
1.32 %1.41 %1.49 %1.64 %1.72 %(40)bps1.32 %1.72 %(40)bps
Reserve Rate8.43 %8.38 %8.21 %7.68 %1.53 %690 bps8.43 %1.53 %690 bps
PERSONAL LOANS       
Ending Loans$7,177 $7,211 $7,316 $7,651 $7,687 ($510)(7 %)$7,177 $7,687 ($510)(7 %)
Interest Yield13.01 %13.03 %12.40 %13.27 %13.23 %(22)bps12.93 %13.07 %(14)bps
Net Principal Charge-off Rate2.79 %2.69 %3.43 %3.59 %4.26 %(147)bps3.13 %4.28 %(115)bps
Delinquency Rate (30 or more days)1.08 %1.10 %1.07 %1.31 %1.37 %(29)bps1.08 %1.37 %(29)bps
Reserve Rate11.94 %11.89 %11.71 %10.55 %4.53 %741 bps11.94 %4.53 %741 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  Twelve Months Ended
 Dec 31, 2020Sep 30, 2020Jun 30, 2020Mar 31, 2020Dec 31, 2019Dec 31, 2020 vs. Dec 31, 2019Dec 31, 2020Dec 31, 20192020 vs. 2019
DIRECT BANKING       
Interest Income$2,760 $2,681 $2,672 $2,982 $3,039 ($279)(9 %)$11,095 $11,992 ($897)(7 %)
Interest Expense383 416 482 584 615 (232)(38 %)1,865 2,530 (665)(26 %)
Net Interest Income2,377 2,265 2,190 2,398 2,424 (47)(2 %)9,230 9,462 (232)(2 %)
Non-Interest Income368 371 354 366 431 (63)(15 %)1,459 1,648 (189)(11 %)
Revenue Net of Interest Expense2,745 2,636 2,544 2,764 2,855 (110)(4 %)10,689 11,110 (421)(4 %)
Provision for Credit Losses531 750 2,046 1,807 838 (307)(37 %)5,134 3,233 1,901 59 %
Total Operating Expense1,223 969 982 1,118 1,134 89 8 %4,292 4,231 61 1 %
Income/ (Loss) Before Income Taxes$991 $917 ($484)($161)$883 $108 12 %$1,263 $3,646 ($2,383)(65 %)
Net Interest Margin10.63 %10.19 %9.81 %10.21 %10.29 %34 bps10.21 %10.41 %(20)bps
Pretax Return on Loan Receivables4.44 %4.13 %(2.17)%(0.69)%3.75 %69 bps1.40 %4.01 %(261)bps
Allowance for Credit Losses (period end) 1
$8,226 $8,226 $8,184 $6,913 $3,383 $4,843 143 %$8,226 $3,383 $4,843 143 %
Reserve Change Build/ (Release) 2, 3
$0 $42 $1,271 $1,069 $87 ($87)$2,382 $348 $2,034 
PAYMENT SERVICES       
Interest Income$— $— $— $— $— $— NM$— $1 ($1)(100 %)
Interest Expense— — — — — — NM— — — NM
Net Interest Income— — — — — — NM— 1 (1)(100 %)
Non-Interest Income79 78 118 124 89 (10)(11 %)399 348 51 15 %
Revenue Net of Interest Expense79 78 118 124 89 (10)(11 %)399 349 50 14 %
Provision for Credit Losses— — — — (2)2 100 — (2)2 100 
Total Operating Expense55 36 95 41 50 5 10 %227 162 65 40 %
Income/ (Loss) Before Income Taxes$24 $42 $23 $83 $41 ($17)(41 %)$172 $189 ($17)(9 %)
TRANSACTIONS PROCESSED ON NETWORKS
Discover Network735 679 565 645 731 4 1 %2,624 2,717 (93)(3)%
PULSE Network1,286 1,270 1,209 1,189 1,253 33 3 %4,954 4,788 166 3 %
Total$2,021 $1,949 $1,774 $1,834 $1,984 $37 2 %7,578 7,505 73 1 %
NETWORK VOLUME
PULSE Network$55,055 $54,993 $52,859 $49,174 $50,037 $5,018 10 %$212,081 $192,067 $20,014 10 %
Network Partners8,740 8,917 7,280 6,980 7,099 1,641 23 %31,917 25,368 6,549 26 %
Diners Club International 4
6,321 5,839 4,339 7,737 8,831 (2,510)(28)%24,236 33,967 (9,731)(29 %)
Total Payment Services70,116 69,749 64,478 63,891 65,967 4,149 6 %268,234 251,402 16,832 7 %
Discover Network - Proprietary42,526 38,699 32,349 35,180 40,579 1,947 5 %148,754 151,243 (2,489)(2)%
Total$112,642 $108,448 $96,827 $99,071 $106,546 $6,096 6 %$416,988 $402,645 $14,343 4 %
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 operating 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
 Dec 31, 2020Sep 30, 2020Jun 30, 2020Mar 31, 2020Dec 31, 2019
GAAP Total Common Equity$9,828 $9,196 $8,587 $9,102 $11,296 
Less: Goodwill(255)(255)(255)(255)(255)
Less: Intangibles(95)(95)(96)(155)(155)
Tangible Common Equity 1
$9,478 $8,846 $8,236 $8,692 $10,886 
GAAP Book Value Per Share$35.50 $33.45 $31.47 $31.55 $38.24 
Less: Goodwill(0.84)(0.84)(0.83)(0.82)(0.83)
Less: Intangibles(0.31)(0.31)(0.31)(0.51)(0.50)
   Less: Preferred Stock(3.44)(3.44)(3.45)(1.84)(1.81)
Tangible Common Equity Per Share $30.91 $28.86 $26.88 $28.38 $35.10 
1 Tangible Common Equity ("TCE"), a non-GAAP financial measure, represents common equity less goodwill and intangibles. A reconciliation of TCE to common equity, a GAAP financial measure, is shown above. Other financial services companies may also use TCE and definitions may vary, so users of this information are advised to exercise caution in comparing TCE of different companies. TCE is included because management believes that common equity excluding goodwill and intangibles is a more meaningful measure to investors of the true net asset value of the Company
Note: See Glossary of Financial Terms for definitions of financial terms

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