DISCOVER FINANCIAL SERVICESd18rn0p25nwr6d.cloudfront.net/CIK-0001393612/80... · 2 1 Purchases of treasury stock (584 ) (520 ) Net increase in deposits 2,338 1,529 Dividends paid

UNITED STATES

SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-Q(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934

For the quarterly period ended March 31, 2018

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934

For the transition period from to

Commission File Number 001-33378

DISCOVER FINANCIAL SERVICES(Exact name of registrant as specified in its charter)

Delaware 36-2517428(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)

2500 Lake Cook Road,

Riverwoods, Illinois 60015 (224) 405-0900

(Address of principal executive offices, including zip code) (Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File requiredto be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that theregistrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or anemerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" inRule 12b-2 of the Exchange Act.

Large accelerated filer xAccelerated filer o

Non-accelerated filer o (Do not check if a smaller reporting company) Smaller reporting company o

Emerging growth company o

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 orrevised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of April 27, 2018 , there were 348,977,139 shares of the registrant’s Common Stock, par value $0.01 per share, outstanding.

DISCOVER FINANCIAL SERVICESQuarterly Report on Form 10-Q for the quarterly period ended March 31, 2018

TABLE OF CONTENTS

Part I FINANCIAL INFORMATION Item 1 . Financial Statements 1Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 43Item 3. Quantitative and Qualitative Disclosures about Market Risk 64Item 4. Controls and Procedures 66

Part II OTHER INFORMATION Item 1. Legal Proceedings 67Item 1A. Risk Factors 67Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 67Item 3. Defaults Upon Senior Securities 67Item 4. Mine Safety Disclosures 67Item 5. Other Information 67Item 6. Exhibits 67

Except as otherwise indicated or unless the context otherwise requires, “Discover Financial Services,” “Discover,” “DFS,” “we,” “us,” “our,” and “theCompany” refer to Discover Financial Services and its subsidiaries.

We own or have rights to use the trademarks, trade names and service marks that we use in conjunction with the operation of our business, including, but notlimited to: Discover ® , PULSE ® , Cashback Bonus ® , Discover Cashback Checking ® , Discover it ® , Freeze It SM , College Covered ® , and Diners ClubInternational ® . All other trademarks, trade names and service marks included in this quarterly report on Form 10-Q are the property of their respective owners.

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Part I. FINANCIAL INFORMATIONItem 1. Financial Statements

DISCOVER FINANCIAL SERVICESCondensed Consolidated Statements of Financial Condition

March 31,

2018 December 31,

2017

(unaudited)(dollars in millions,

except share amounts)Assets Cash and cash equivalents $ 17,011 $ 13,306Restricted cash 87 81Investment securities (includes $1,340 and $1,395 at fair value at March 31, 2018 and December 31, 2017, respectively) 1,543 1,568Loan receivables Loan receivables 82,744 84,248Allowance for loan losses (2,736) (2,621)Net loan receivables 80,008 81,627

Premises and equipment, net 848 825Goodwill 255 255Intangible assets, net 162 163Other assets 2,053 2,262

Total assets $ 101,967 $ 100,087Liabilities and Stockholders’ Equity Deposits: Interest-bearing deposit accounts $ 60,530 $ 58,165Non-interest bearing deposit accounts 600 599Total deposits 61,130 58,764

Long-term borrowings 26,244 26,326Accrued expenses and other liabilities 3,722 4,105

Total liabilities 91,096 89,195Commitments, contingencies and guarantees (Notes 8, 11 and 12) Stockholders’ Equity: Common stock, par value $0.01 per share; 2,000,000,000 shares authorized; 564,510,213 and 563,497,702 shares issued at March 31, 2018 andDecember 31, 2017, respectively 6 6Preferred stock, par value $0.01 per share; 200,000,000 shares authorized; 5,700 shares issued and outstanding and aggregate liquidation preferenceof $570 at March 31, 2018 and December 31, 2017 563 563Additional paid-in capital 4,068 4,042Retained earnings 17,211 16,687Accumulated other comprehensive loss (139) (152)Treasury stock, at cost; 213,093,774 and 205,577,507 shares at March 31, 2018 and December 31, 2017, respectively (10,838) (10,254)

Total stockholders’ equity 10,871 10,892Total liabilities and stockholders’ equity $ 101,967 $ 100,087

The table below presents the carrying amounts of certain assets and liabilities of Discover Financial Services’ consolidated variable interest entities ("VIEs"), which are included in the condensed consolidated statements of financialcondition above. The assets in the table below include those assets that can only be used to settle obligations of the consolidated VIEs. The liabilities in the table below include third-party liabilities of consolidated VIEs only and excludeintercompany balances that eliminate in consolidation. The liabilities also exclude amounts for which creditors have recourse to the general credit of Discover Financial Services.

March 31,

2018 December 31,

2017

(unaudited)

(dollars in millions)Assets Restricted cash $ 87 $ 81Loan receivables $ 29,894 $ 31,781Allowance for loan losses allocated to securitized loan receivables $ (1,006) $ (998)Other assets $ 6 $ 5Liabilities Long-term borrowings $ 16,385 $ 16,536

Accrued expenses and other liabilities $ 17 $ 16

See Notes to the Condensed Consolidated Financial Statements.1

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DISCOVER FINANCIAL SERVICESCondensed Consolidated Statements of Income

For the Three Months Ended March 31,

2018 2017

(unaudited)(dollars in millions, except per share

amounts)Interest income Credit card loans $ 2,090 $ 1,876Other loans 417 367Investment securities 7 7Other interest income 55 28Total interest income 2,569 2,278

Interest expense Deposits 262 191Long-term borrowings 207 195Total interest expense 469 386Net interest income 2,100 1,892

Provision for loan losses 751 586Net interest income after provision for loan losses 1,349 1,306

Other income Discount and interchange revenue, net 254 233Protection products revenue 53 58Loan fee income 96 89Transaction processing revenue 43 39Other income 29 28Total other income 475 447

Other expense Employee compensation and benefits 405 363Marketing and business development 185 168Information processing and communications 82 80Professional fees 155 147Premises and equipment 26 25Other expense 115 102Total other expense 968 885Income before income tax expense 856 868

Income tax expense 190 304Net income $ 666 $ 564Net income allocated to common stockholders $ 646 $ 551

Basic earnings per common share $ 1.82 $ 1.43Diluted earnings per common share $ 1.82 $ 1.43Dividends declared per common share $ 0.35 $ 0.30


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DISCOVER FINANCIAL SERVICESCondensed Consolidated Statements of Comprehensive Income


2018 2017

(unaudited)

(dollars in millions)

Net income $ 666 $ 564

Other comprehensive income, net of taxes

Unrealized (loss) gain on available-for-sale investment securities, net of tax (7) 1

Unrealized gain on cash flow hedges, net of tax 19 5

Unrealized pension and post-retirement plan gain, net of tax 1 —

Other comprehensive income 13 6

Comprehensive income $ 679 $ 570


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DISCOVER FINANCIAL SERVICESCondensed Consolidated Statements of Changes in Stockholders’ Equity

AdditionalPaid-inCapital

RetainedEarnings

Accumulated OtherComprehensive Loss

TreasuryStock

TotalStockholders’

Equity

Preferred Stock Common Stock

Shares Amount Shares Amount

(unaudited)

(dollars in millions, shares in thousands)Balance at December 31, 2016 575 $ 560 562,414 $ 5 $ 3,962 $ 15,130 $ (161) $ (8,173) $ 11,323Net income — — — — — 564 — — 564Other comprehensive income — — — — — — 6 — 6Purchases of treasury stock — — — — — — — (520) (520)Common stock issued underemployee benefit plans — — 20 — 1 — — — 1Common stock issued and stock-based compensation expense — — 968 1 16 — — — 17Dividends — common stock — — — — — (117) — — (117)Dividends — preferred stock — — — — — (9) — — (9)Balance at March 31, 2017 575 $ 560 563,402 $ 6 $ 3,979 $ 15,568 $ (155) $ (8,693) $ 11,265

Balance at December 31, 2017 6 $ 563 563,498 $ 6 $ 4,042 $ 16,687 $ (152) $ (10,254) $ 10,892

Net income — — — — — 666 — — 666

Other comprehensive income — — — — — — 13 — 13

Purchases of treasury stock — — — — — — — (584) (584)Common stock issued underemployee benefit plans — — 23 — 2 — — — 2Common stock issued and stock-based compensation expense — — 989 — 24 — — — 24Dividends — common stock — — — — — (126) — — (126)Dividends — preferred stock — — — — — (16) — — (16)Balance at March 31, 2018 6 $ 563 564,510 $ 6 $ 4,068 $ 17,211 $ (139) $ (10,838) $ 10,871


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DISCOVER FINANCIAL SERVICESCondensed Consolidated Statements of Cash Flows


2018 2017

(unaudited)

(dollars in millions)Cash flows from operating activities Net income $ 666 $ 564Adjustments to reconcile net income to net cash provided by (used for) operating activities: Provision for loan losses 751 586Depreciation and amortization 107 93Amortization of deferred revenues and accretion of accretable yield on acquired loans (101) (98)Net loss on investments and other assets 11 14Other, net (96) 11Changes in assets and liabilities: Decrease in other assets 251 181Decrease in accrued expenses and other liabilities (351) (338)

Net cash provided by operating activities 1,238 1,013 Cash flows from investing activities

Maturities of available-for-sale investment securities 44 52Maturities of held-to-maturity investment securities 4 4Purchases of held-to-maturity investment securities (33) (17)Net principal disbursed on loans originated for investment 959 1,010Purchases of other investments — (14)Purchases of premises and equipment (58) (47)

Net cash used for investing activities 916 988 Cash flows from financing activities

Proceeds from issuance of securitized debt 1,666 1,290Maturities and repayment of securitized debt (1,794) (925)Proceeds from issuance of other long-term borrowings 822 1,005Maturities and repayment of other long-term borrowings (751) —Proceeds from issuance of common stock 2 1Purchases of treasury stock (584) (520)Net increase in deposits 2,338 1,529Dividends paid on common and preferred stock (142) (127)

Net cash provided by financing activities 1,557 2,253Net increase in cash, cash equivalents and restricted cash 3,711 4,254Cash, cash equivalents and restricted cash, at beginning of period 13,387 12,009Cash, cash equivalents and restricted cash, at end of period $ 17,098 $ 16,263

Reconciliation of cash, cash equivalents and restricted cash: Cash and cash equivalents $ 17,011 $ 15,163Restricted cash 87 1,100Cash, cash equivalents and restricted cash, at end of period $ 17,098 $ 16,263


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Notes to the Condensed Consolidated Financial Statements(unaudited)

1. Background and Basis of Presentation

Description of BusinessDiscover Financial Services (“DFS” or the “Company”) is a direct banking and payment services company. The Company is a bank holding company under

the Bank Holding Company Act of 1956 as well as a financial holding company under the Gramm-Leach-Bliley Act and therefore is subject to oversight,regulation and examination by the Board of Governors of the Federal Reserve System (the “Federal Reserve”). The Company provides direct banking products andservices and payment services through its subsidiaries. The Company offers its customers credit card loans, private student loans, personal loans, home equityloans and deposit products. The Company also operates the Discover Network, the PULSE network (“PULSE”) and Diners Club International (“Diners Club”).The Discover Network processes transactions for Discover-branded credit and debit cards and provides payment transaction processing and settlement services.PULSE operates an electronic funds transfer network, providing financial institutions issuing debit cards on the PULSE network with access to ATMs domesticallyand internationally, as well as point-of-sale terminals at retail locations throughout the U.S. for debit card transactions. Diners Club is a global payments networkof licensees, which are generally financial institutions, that issue Diners Club branded charge cards and/or provide card acceptance services.

The Company’s business activities are managed in two segments, Direct Banking and Payment Services, based on the products and services provided. For adetailed description of the operations of each segment, as well as the allocation conventions used in business segment reporting, see Note 15: Segment Disclosures.

Basis of PresentationThe accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the

United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do notinclude all of the information and footnotes required by GAAP for complete consolidated financial statements. In the opinion of management, the financialstatements reflect all adjustments which are necessary for a fair presentation of the results for the interim period. All such adjustments are of a normal, recurringnature. The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the amountsreported in the condensed consolidated financial statements and related disclosures. These estimates are based on information available as of the date of thecondensed consolidated financial statements. The Company believes that the estimates used in the preparation of the condensed consolidated financial statementsare reasonable. Actual results could differ from these estimates. These interim condensed consolidated financial statements should be read in conjunction with theCompany’s 2017 audited consolidated financial statements filed with the Company’s annual report on Form 10-K for the year ended December 31, 2017 .

Recently Issued Accounting PronouncementsIn February 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-02, Reclassification of

Certain Tax Effects from Accumulated Other Comprehensive Income. The ASU permits, but does not require, issuers to reclassify into retained earnings any taxeffects that are stranded in accumulated other comprehensive income (“AOCI”) as a result of the change in the statutory federal tax rate enacted by the Tax Cutsand Jobs Act of 2017 (“TCJA”). Tax effects that are stranded in AOCI for other reasons, such as prior changes in tax law or changes in a valuation allowance, maynot be reclassified directly through retained earnings. The guidance is effective for fiscal years beginning after December 15, 2018. The Company is permitted toearly adopt the guidance in any interim or annual period and apply it either (1) in the period of adoption, or (2) retrospectively to each period in which the effect ofthe change in the federal corporate income tax rate is recognized. The Company has not elected to early adopt the ASU as of March 31, 2018. The reclassificationof stranded tax effects from AOCI to retained earnings will not be material to the Company’s consolidated statements of financial condition and will have noimpact on the Company’s cash flows or consolidated statements of income.

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for HedgingActivities. The amendments of ASU 2017-12 are intended to improve the financial reporting of hedging relationships to better reflect the economic results of anentity’s risk management activities through changes to both the designation and measurement guidance for qualifying hedges and improvements to the presentationof hedge results. The amendments expand an entity’s ability to apply hedge accounting for both financial and non-financial risk components and

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allow for a simplified approach for fair value hedging of interest rate risk. ASU 2017-12 eliminates the requirement to separately measure and report hedgeineffectiveness and generally requires the entire change in fair value of a hedging instrument to be presented in the same income statement line as the hedged item.Additionally, the standard simplifies the hedge documentation and effectiveness assessment requirements under the previous guidance and amends the disclosuresabout hedging activities.

The Company early adopted ASU 2017-12 effective January 1, 2018. Accordingly, the Company is no longer required to separately measure andimmediately recognize ineffectiveness related to cash flow hedges. The Company has also elected to measure changes in the fair value of hedged items designatedunder certain existing fair value hedges transitioned at adoption using the benchmark rate component of the contractual rate cash flows. As a result, the Companyrecorded separate cumulative-effect adjustments to (a) AOCI with respect to cash flow hedges and (b) the basis adjustment for certain hedged items with respect tofair value hedges. This resulted in an immaterial adjustment to the opening balance of retained earnings as of January 1, 2018, and thus did not have a materialimpact to the Company’s financial statements.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. Thepurpose of this ASU is to simplify the test for goodwill impairment by eliminating Step 2 of the current impairment test. Under the current rules, if the reportingunit’s carrying value exceeds its fair value (Step 1), goodwill impairment is measured as the difference between the carrying value of goodwill and its implied fairvalue. To compute the implied fair value of goodwill under Step 2, an entity has to perform procedures to determine the fair value at the impairment testing date ofits assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assetsacquired and liabilities assumed in a business combination. Under the new standard, the Company will perform its annual goodwill impairment test by comparingthe fair value of a reporting unit with its carrying amount. The Company should recognize an impairment charge for the amount by which the carrying amountexceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Theamendments in this ASU apply to the Company’s annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Earlyadoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The amendments in this ASU apply on aprospective basis. All of the Company’s recorded goodwill is associated with its PULSE debit business. This ASU has no impact on cash flows, and its adoption isnot expected to have any impact on the Company’s condensed consolidated financial condition or results of operations because the estimated fair value of thePULSE reporting unit is well in excess of its carrying value. The Company did not early adopt this standard, but is still evaluating whether it will prior to the 2020effective date.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. Whereas restricted cash balances havetraditionally been excluded from the statement of cash flows, this ASU requires restricted cash and restricted cash equivalents to be included within the beginningand ending totals of cash, cash equivalents and restricted cash presented on the statement of cash flows for all periods presented. Restricted cash and restricted cashequivalent inflows and outflows with external parties are required to be classified within the operating, investing, and/or financing activity sections of the statementof cash flows whereas transfers between cash and cash equivalents and restricted cash and restricted cash equivalents should no longer be presented on thestatement of cash flows. ASU 2016-18 also requires the nature of the restrictions to be disclosed to help provide information about the sources and uses of thesebalances during a reporting period and a reconciliation of the cash, cash equivalents and restricted cash totals on the statement of cash flows to the related balancesheet line items when cash, cash equivalents, and restricted cash are presented in more than one line item on the balance sheet. The reconciliation can be presentedeither on the face of the statement of cash flows or in the notes to the financial statements and must be provided for each period that a balance sheet is presented.The ASU became effective for the Company on January 1, 2018 and did not have a material impact to the Company’s statement of cash flows.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on FinancialInstruments. This ASU replaces the incurred loss model with the current expected credit loss ("CECL") approach. For loans carried at amortized cost, theallowance for loan losses will be based on management’s current estimate of all expected credit losses over the remaining contractual term of the loans. Upon theorigination of a loan, the Company will have to record its estimate of all expected credit losses on that loan through an immediate charge to earnings. Updates tothat estimate each period will be recorded through provision expense. The CECL estimate is to be based on historical experience, current conditions and reasonableand supportable forecasts. No specific method for estimating credit loss is mandated, permitting companies to use judgment in selecting the approach that is mostappropriate in their circumstances.

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The CECL approach is expected to affect the Company’s allowance for loan losses as a result of: (1) encompassing expected losses, not simply thosedeemed to be already incurred, (2) extending the loss estimate period over the entire life of the loan, and (3) reclassification of the credit loss component of thepurchased credit-impaired ("PCI") loan portfolio out of loan carrying value and into the allowance for loan losses. All loans carried at amortized cost, includingPCI loans and loans modified in a troubled debt restructuring ("TDR") will be measured under the CECL approach. Existing specialized measurement guidance forPCI loans, which the ASU refers to as purchased credit-deteriorated ("PCD"), and TDRs will be eliminated, although certain separate disclosure guidance will beretained. Measurement of credit impairment of available-for-sale debt securities will generally remain unchanged under the new rules, but any such impairmentwill be recorded through an allowance, rather than a direct write-down of the security.

The ASU is effective beginning January 1, 2020, with early adoption permitted no sooner than January 1, 2019. Management is not considering earlyadoption at this time. On the date of adoption, the allowance for loan losses will be adjusted to the CECL estimate for loans held at that date with an offsettingadjustment to retained earnings. Additionally, the carrying value of PCD loans will be increased through an offsetting addition to the allowance for loan losses forthe CECL estimate on those loans. The CECL allowance will be re-evaluated in subsequent periods and adjusted through provision expense as needed. TheCompany is actively engaged in cross-functional implementation efforts and planning for loss modeling requirements consistent with lifetime expected lossestimates. The Company has also been involved in efforts to identify and resolve various implementation issues specific to the application of the standard to creditcard receivables. Adoption of the standard has the potential to materially impact stockholders' equity and regulatory capital as well as the Company's financialcondition and results of operations. The extent of the impact upon adoption will likely depend on the characteristics of the Company's loan portfolio and economicconditions at that date, as well as forecasted conditions thereafter.

In March 2016, the FASB issued ASU No. 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net). This guidance becameeffective for the Company on January 1, 2018, along with ASU 2014-09, Revenue from Contracts with Customers (Topic 606), discussed below. This ASU did notresult in a change to the accounting or reporting of the Company's revenue arrangements that involve a principal-agent relationship. Therefore, its adoption has hadno impact on the Company's condensed consolidated financial condition, results of operations or cash flows. The guidance in this ASU provides clarification on theprincipal versus agent concept in relation to revenue recognition guidance issued as part of ASU 2014-09. Topic 606 requires a company to determine whether it isa principal or an agent in a transaction in which another party is involved in providing goods or services to a customer by evaluating the nature of its promise to thecustomer. ASU 2016-08 provides clarification for identifying the good, service or right being transferred in a revenue transaction and identifies the principal as theparty that controls the good, service or right prior to its transfer to the customer. The ASU provides further clarity on how to evaluate control in this context.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The guidance will require lessees to capitalize most leases on their balance sheetwhereas under current GAAP only capital leases are recognized on the lessee’s balance sheet. Leases which today are identified as capital leases will generally beidentified as financing leases under the new guidance but otherwise their accounting treatment will remain relatively unchanged. Leases identified today asoperating leases will generally remain in that category under the new standard, but both a right-of-use asset and a liability for remaining lease payments will nowbe required to be recognized on the balance sheet for this type of lease. The manner in which expenses associated with all leases are reported on the incomestatement will remain mostly unchanged. Lessor accounting also remains substantially unchanged by the new standard. The new guidance will become effectivefor the Company on January 1, 2019, and management does not expect it to have a material impact on the condensed consolidated financial statements.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assetsand Financial Liabilities. This ASU became effective for the Company on January 1, 2018 and has not had a material impact to the financial statements. The ASUhas had limited impact on the Company since it does not change the guidance for classifying and measuring investments in debt securities or loans. The standardrequires entities to measure certain cost-method equity investments at fair value with changes in value recognized in net income. Equity investments that do nothave readily determinable fair values are carried at cost, less any impairment, plus or minus changes resulting from any observable price changes in orderlytransactions for an identical or similar investment of the same issuer. This ASU requires public entities to use the exit price notion when measuring the fair value offinancial instruments for disclosure purposes and requires separate presentation of financial assets and financial liabilities by measurement category and form offinancial asset (i.e., securities or loans) on the balance sheet or the accompanying notes to the financial statements.

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In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The guidance in this ASU supersedes existingrevenue recognition requirements in Topic 605, Revenue Recognition, including an assortment of transaction-specific and industry-specific rules. The new revenuerecognition model became effective for the Company on January 1, 2018. The model generally results in the same revenue recognition patterns as have historicallybeen applied to the Company’s revenues that are subject to this guidance. The timing and measurement of fee revenues associated with the Company’s credit cardarrangements and costs associated with the Company’s credit card reward programs have not been affected as a result of the adoption of Accounting StandardsCodification ("ASC") 606. Accounting and reporting for the Company’s transaction processing services, including discount and interchange revenue and othertransaction processing fees, remains substantially unchanged from treatments under GAAP in effect prior to 2018. As permitted by the ASU, management haselected to adopt this standard using a modified retrospective approach, which means that the cumulative effect of initially applying the standard is recognized at thedate of initial application through an adjustment to beginning retained earnings, but no restatement of prior periods is made. Based on its evaluations, managementhas concluded that no adjustment to beginning retained earnings is required as of January 1, 2018, the date of adoption. See Note 16: Revenue from Contracts withCustomers for additional information resulting from this standard.

2. Investments

The Company’s investment securities consist of the following (dollars in millions):

March 31,

2018 December 31,

2017U.S. Treasury securities (1) $ 672 $ 672States and political subdivisions of states — 1Residential mortgage-backed securities - Agency (2) 871 895Total investment securities $ 1,543 $ 1,568

(1) Includes $38 million and $48 million of U.S. Treasury securities pledged as swap collateral as of March 31, 2018 and December 31, 2017 , respectively.(2) Consists of residential mortgage-backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae.

The amortized cost, gross unrealized gains and losses, and fair value of available-for-sale and held-to-maturity investment securities are as follows (dollarsin millions):

Amortized

Cost

GrossUnrealized

Gains

GrossUnrealized

Losses Fair ValueAt March 31, 2018

Available-for-Sale Investment Securities (1)

U.S. Treasury securities$ 675 $ — $ (3) $ 672

Residential mortgage-backed securities - Agency683 — (15) 668

Total available-for-sale investment securities$ 1,358 $ — $ (18) $ 1,340

Held-to-Maturity Investment Securities (2)

Residential mortgage-backed securities - Agency (3)$ 203 $ 1 $ (4) $ 200

Total held-to-maturity investment securities$ 203 $ 1 $ (4) $ 200

At December 31, 2017

Available-for-Sale Investment Securities (1)

U.S. Treasury securities$ 675 $ — $ (3) $ 672

Residential mortgage-backed securities - Agency728 1 (6) 723

Total available-for-sale investment securities$ 1,403 $ 1 $ (9) $ 1,395

Held-to-Maturity Investment Securities (2)

States and political subdivisions of states$ 1 $ — $ — $ 1

Residential mortgage-backed securities - Agency (3) 172 1 (1) 172

Total held-to-maturity investment securities$ 173 $ 1 $ (1) $ 173

(1) Available-for-sale investment securities are reported at fair value.(2) Held-to-maturity investment securities are reported at amortized cost.(3) Amounts represent residential mortgage-backed securities that were classified as held-to-maturity as they were entered into as a part of the Company's community reinvestment initiatives.

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The following table provides information about investment securities with aggregate gross unrealized losses and the length of time that individualinvestment securities have been in a continuous unrealized loss position (dollars in millions):

Number ofSecurities in aLoss Position

Less than 12 months More than 12 months

Fair

Value Unrealized

Losses Fair

Value Unrealized

LossesAt March 31, 2018

Available-for-Sale Investment Securities

U.S. Treasury securities 1

$ —

$ —

$ 672

$ (3)

Residential mortgage-backed securities - Agency 31 $ 546

$ (10)

$ 122

$ (5)

Held-to-Maturity Investment Securities


$ (2)

$ 40

$ (2)



U.S. Treasury securities 1

$ —

$ —

$ 672

$ (3)


$ (3)

$ 132

$ (3)

Held-to-Maturity Investment Securities


$ —

$ 38

$ (1)

There were no losses related to other-than-temporary impairments and no proceeds from sales or recognized gains and losses on available-for-sale securitiesduring the three months ended March 31, 2018 and 2017 . See Note 7: Accumulated Other Comprehensive Income for unrealized gains and losses on available-for-sale securities during the three months ended March 31, 2018 and 2017 .

Maturities of available-for-sale debt securities and held-to-maturity debt securities are provided in the table below (dollars in millions):

One Yearor

Less

After OneYear

ThroughFive Years

After FiveYears

ThroughTen Years

After TenYears Total

At March 31, 2018

Available-for-Sale Investment Securities—Amortized Cost

U.S. Treasury securities$ 675 $ — $ — $ — $ 675

Residential mortgage-backed securities - Agency (1)— 78 506 99 683

Total available-for-sale investment securities$ 675 $ 78 $ 506 $ 99 $ 1,358

Held-to-Maturity Investment Securities—Amortized Cost

Residential mortgage-backed securities - Agency (1)$ — $ — $ — $ 203 $ 203

Total held-to-maturity investment securities$ — $ — $ — $ 203 $ 203

Available-for-Sale Investment Securities—Fair Values

U.S. Treasury securities$ 672

$ —

$ —

$ —

$ 672

Residential mortgage-backed securities - Agency (1)— 77 493 98 668

Total available-for-sale investment securities$ 672 $ 77 $ 493 $ 98 $ 1,340

Held-to-Maturity Investment Securities—Fair Values

Residential mortgage-backed securities - Agency (1)$ — $ — $ — $ 200 $ 200

Total held-to-maturity investment securities$ — $ — $ — $ 200 $ 200

(1) Maturities of residential mortgage-backed securities are reflective of the contractual maturities of the investment.

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Other InvestmentsAs a part of the Company's community reinvestment initiatives, the Company has made equity investments in certain limited partnerships and limited

liability companies that finance the construction and rehabilitation of affordable rental housing, as well as stimulate economic development in low to moderateincome communities. These investments are accounted for using the equity method of accounting and are recorded within other assets. The related commitment forfuture investments is recorded in accrued expenses and other liabilities within the condensed consolidated statements of financial condition. The portion of eachinvestment's operating results allocable to the Company is recorded in other expense within the condensed consolidated statements of income. The Companyreduces the carrying value of the investments by recognizing any amounts that are in excess of future net tax benefits in other expense. The Company earns a returnprimarily through the receipt of tax credits allocated to the affordable housing projects and the community revitalization projects. These investments are notconsolidated as the Company does not have a controlling financial interest in the entities. As of March 31, 2018 and December 31, 2017 , the Company hadoutstanding investments in these entities of $286 million and $297 million , respectively, and related contingent liabilities of $66 million . Of the above outstandingequity investments, the Company had $279 million and $288 million of investments related to affordable housing projects as of March 31, 2018 and December 31,2017 , respectively, which had $66 million related contingent liabilities.

3. Loan ReceivablesThe Company has three loan portfolio segments: credit card loans, other loans and PCI loans.

The Company's classes of receivables within the three portfolio segments are depicted in the table below (dollars in millions):

March 31,

2018 December 31,

2017Loan receivables

Credit card loans (1) $ 65,577 $ 67,291Other loans

Personal loans 7,307 7,374

Private student loans 7,416 7,076

Other 488 423

Total other loans 15,211 14,873PCI loans (2) 1,956 2,084

Total loan receivables 82,744 84,248Allowance for loan losses (2,736) (2,621)

Net loan receivables $ 80,008 $ 81,627

(1) Amounts include $21.1 billion and $21.2 billion underlying investors’ interest in trust debt at March 31, 2018 and December 31, 2017 , respectively, and $8.1 billion and $9.9 billion in seller's interest at March 31, 2018 and

December 31, 2017 , respectively. See Note 4: Credit Card and Student Loan Securitization Activities for additional information.(2) Amounts include $712 million and $762 million of loans pledged as collateral against the notes issued from the Student Loan Corporation ("SLC") securitization trusts at March 31, 2018 and December 31, 2017 , respectively. See

Note 4: Credit Card and Student Loan Securitization Activities for additional information.

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Credit Quality IndicatorsThe Company regularly reviews its collection experience (including delinquencies and net charge-offs) in determining its allowance for loan losses.

Information related to the delinquent and non-accruing loans in the Company’s loan portfolio is shown below by each class of loan receivables except forPCI student loans, which is shown under the heading “— Purchased Credit-Impaired Loans” (dollars in millions):

30-89 DaysDelinquent

90 orMore DaysDelinquent

Total PastDue

90 orMore DaysDelinquent

andAccruing

TotalNon-accruing (1)

At March 31, 2018

Credit card loans (2)$ 752 $ 777 $ 1,529 $ 719 $ 209

Other loans

Personal loans (3)73 28 101 26 11

Private student loans (excluding PCI) (4)118 49 167 48 10

Other2 1 3 — 19

Total other loans (excluding PCI)193 78 271 74 40

Total loan receivables (excluding PCI)$ 945 $ 855 $ 1,800 $ 793 $ 249


Credit card loans (2)$ 781 $ 751 $ 1,532 $ 693 $ 203

Other loans

Personal loans (3)73 30 103 28 10

Private student loans (excluding PCI) (4)134 33 167 33 2

Other3 1 4 — 18

Total other loans (excluding PCI)210 64 274 61 30

Total loan receivables (excluding PCI)$ 991 $ 815 $ 1,806 $ 754 $ 233

(1) The Company estimates that the gross interest income that would have been recorded in accordance with the original terms of non-accruing credit card loans was $9 million and $8 million for the three months ended March 31,

2018 and 2017 , respectively. The Company does not separately track the amount of gross interest income that would have been recorded in accordance with the original terms of loans. This amount was estimated based oncustomers' current balances and most recent interest rates.

(2) Credit card loans that are 90 or more days delinquent and accruing interest include $83 million and $72 million of loans accounted for as TDRs at March 31, 2018 and December 31, 2017 , respectively.(3) Personal loans that are 90 or more days delinquent and accruing interest include $4 million and $5 million of loans accounted for as TDRs at March 31, 2018 and December 31, 2017 , respectively.(4) Private student loans that are 90 or more days delinquent and accruing interest include $7 million and $5 million of loans accounted for as TDRs at March 31, 2018 and December 31, 2017 , respectively.

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Information related to the net charge-offs in the Company's loan portfolio is shown below by each class of loan receivables except for PCI student loans,which is shown under the heading "— Purchased Credit-Impaired Loans" (dollars in millions): For the Three Months Ended March 31,

2018 2017

Net

Charge-offs

Net Charge-off

Rate (1) Net

Charge-offs

Net Charge-off

Rate (1)

Credit card loans $ 540 3.32% $ 422 2.84%Other loans Personal loans 73 4.03% 51 3.16%Private student loans (excluding PCI) 22 1.17% 14 0.83%Other — —% 2 3.45%Total other loans 95 2.52% 67 2.02%Net charge-offs (excluding PCI) $ 635 3.17% $ 489 2.69%Net charge-offs (including PCI) $ 635 3.09% $ 489 2.60%

(1) Net charge-off rate represents net charge-off dollars (annualized) divided by average loans for the reporting period.

As part of credit risk management activities, on an ongoing basis, the Company reviews information related to the performance of a customer’s account withthe Company as well as information from credit bureaus, such as FICO or other credit scores, relating to the customer’s broader credit performance. FICO scoresare generally obtained at origination of the account and are refreshed monthly or quarterly thereafter to assist in predicting customer behavior. Historically, theCompany has noted that a significant portion of delinquent accounts have FICO scores below 660.

The following table provides the most recent FICO scores available for the Company’s customers as a percentage of each class of loan receivables:

Credit Risk Profile

by FICO Score

660 and Above

Less than 660or No Score

At March 31, 2018 Credit card loans 81% 19%Personal loans 95% 5%Private student loans (excluding PCI) (1) 95% 5% At December 31, 2017 Credit card loans 82% 18%Personal loans 95% 5%Private student loans (excluding PCI) (1) 95% 5% (1) PCI loans are discussed under the heading "— Purchased Credit-Impaired Loans."

For private student loans, additional credit risk management activities include monitoring the amount of loans in forbearance. Forbearance allowsborrowers experiencing temporary financial difficulties and willing to make payments, the ability to temporarily suspend payments. Eligible borrowers have alifetime cap on forbearance of 12 months . At March 31, 2018 and December 31, 2017 , there were $40 million and $29 million , respectively, of private studentloans, including PCI, in forbearance, representing 0.7% and 0.5% , respectively, of total student loans in repayment and forbearance.

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Allowance for Loan Losses

The following tables provide changes in the Company’s allowance for loan losses (dollars in millions): For the Three Months Ended March 31, 2018

Credit Card Personal Loans Student Loans (1) Other Total

Balance at beginning of period $ 2,147 $ 301 $ 162 $ 11 $ 2,621

Additions

Provision for loan losses 645 73 31 2 751

Deductions

Charge-offs (663) (81) (25) — (769)

Recoveries 123 8 3 — 134

Net charge-offs (540) (73) (22) — (635)

Other (2) — — (1) — (1)

Balance at end of period $ 2,252 $ 301 $ 170 $ 13 $ 2,736

For the Three Months Ended March 31, 2017



Additions

Provision for loan losses 524 58 12 (8) 586

Deductions

Charge-offs (535) (57) (17) (2) (611)


Net charge-offs (422) (51) (14) (2) (489)


(1) Includes both PCI and non-PCI private student loans.(2) Net change in reserves on PCI pools having no remaining non-accretable difference.

Net charge-offs of principal are recorded against the allowance for loan losses, as shown in the preceding table. Information regarding net charge-offs ofinterest and fee revenues on credit card and other loans is as follows (dollars in millions): For the Three Months Ended March 31,

2018 2017

Interest and fees accrued subsequently charged off, net of recoveries (recorded as a reduction of interest income)$ 109 $ 84

Fees accrued subsequently charged off, net of recoveries (recorded as a reduction to other income)$ 27 $ 22

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The following tables provide additional detail of the Company’s allowance for loan losses and recorded investment in its loan portfolio by impairmentmethodology (dollars in millions):

Credit Card Personal

Loans StudentLoans (1)

OtherLoans Total

At March 31, 2018

Allowance for loans evaluated for impairment as

Collectively evaluated for impairment in accordance with ASC 450-20$ 2,007 $ 266 $ 122 $ 5 $ 2,400

Evaluated for impairment in accordance withASC 310-10-35 (2)(3) 245 35 21 8 309

Acquired with deteriorated credit quality, evaluated in accordance withASC 310-30

— — 27 — 27

Total allowance for loan losses$ 2,252 $ 301 $ 170 $ 13 $ 2,736

Recorded investment in loans evaluated for impairment as

Collectively evaluated for impairment in accordance with ASC 450-20$ 64,054 $ 7,186 $ 7,271 $ 435 $ 78,946

Evaluated for impairment in accordance withASC 310-10-35 (2)(3) 1,523 121 145 53 1,842


— — 1,956 — 1,956

Total recorded investment$ 65,577 $ 7,307 $ 9,372 $ 488 $ 82,744


Allowance for loans evaluated for impairment as

Collectively evaluated for impairment in accordance with ASC 450-20$ 1,921 $ 269 $ 112 $ 4 $ 2,306

Evaluated for impairment in accordance withASC 310-10-35 (2)(3) 226 32 21 7 286


— — 29 — 29

Total allowance for loan losses$ 2,147 $ 301 $ 162 $ 11 $ 2,621

Recorded investment in loans evaluated for impairment as

Collectively evaluated for impairment in accordance with ASC 450-20$ 65,975 $ 7,263 $ 6,939 $ 370 $ 80,547

Evaluated for impairment in accordance withASC 310-10-35 (2)(3) 1,316 111 137 53 1,617


— — 2,084 — 2,084

Total recorded investment$ 67,291 $ 7,374 $ 9,160 $ 423 $ 84,248

(1) Includes both PCI and non-PCI private student loans.(2) Loan receivables evaluated for impairment in accordance with ASC 310-10-35 include credit card loans, personal loans and student loans collectively evaluated for impairment in accordance with ASC Subtopic 310-40,

Receivables,which consists of modified loans accounted for as TDRs. Other loans are individually evaluated for impairment and generally do not represent TDRs.(3) The unpaid principal balance of credit card loans was $1.3 billion and $1.1 billion at March 31, 2018 and December 31, 2017 , respectively. The unpaid principal balance of personal loans was $121 million and $109 million at

March 31, 2018 and December 31, 2017 , respectively. The unpaid principal balance of student loans was $145 million and $135 million at March 31, 2018 and December 31, 2017 , respectively. All loans accounted for as TDRshave a related allowance for loan losses.

Troubled Debt RestructuringsThe Company has internal loan modification programs that provide relief to credit card, personal loan and student loan borrowers who may be experiencing

financial hardship. The Company continually evaluates new programs to determine which of them meet the definition of a TDR. The internal loan modificationprograms include both temporary and permanent programs which vary by product. External loan modification programs are also available for credit card andpersonal loans. Temporary and permanent modifications on credit card and personal loans, as well as temporary modifications on student loans and certain grantsof student loan forbearance, result in the loans being considered individually impaired. In addition, loans that defaulted or graduated from modification programsor forbearance are considered to be individually impaired.

For credit card customers, the Company offers temporary hardship programs consisting of an interest rate reduction and in some cases a reduced minimumpayment, both lasting for a period no longer than 12 months . The permanent workout program involves changing the structure of the loan to a fixed payment loan

with a maturity no longer than 60 months and reducing the interest rate on the loan. The permanent modification program does not normally provide for theforgiveness of

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unpaid principal, but may allow for the reversal of certain unpaid interest or fee assessments. The Company also makes permanent loan modifications forcustomers who request financial assistance through external sources, such as a consumer credit counseling agency program. These loans typically receive areduced interest rate but continue to be subject to the original minimum payment terms and do not normally include waiver of unpaid principal, interest or fees.Modified credit card loans that are deemed to meet the definition of TDRs includes loans in both temporary and permanent programs.

For personal loan customers, in certain situations the Company offers various payment programs, including temporary and permanent programs. Thetemporary programs normally consist of a reduction of the minimum payment for a period of no longer than 12 months with the option of a final balloon paymentrequired at the end of the loan term or an extension of the maturity date with the total term not exceeding nine years . Further, in certain circumstances the interestrate on the loan is reduced. The permanent program involves changing the terms of the loan in order to pay off the outstanding balance over a longer term and alsoin certain circumstances reducing the interest rate on the loan. Similar to the temporary programs, the total term may not exceed nine years . The Company alsoallows permanent loan modifications for customers who request financial assistance through external sources, similar to the credit card customers discussed above.Payments are modified based on the new terms agreed upon with the credit counseling agency. Personal loans included in temporary and permanent programs areaccounted for as TDRs.

To assist student loan borrowers who are experiencing temporary financial difficulties but are willing to resume making payments, the Company may offerhardship forbearance or programs that include payment deferral, temporary payment reduction, temporary interest rate reduction or extended terms. A modifiedloan typically meets the definition of a TDR based on the cumulative length of the concession period and an evaluation of the credit quality of the borrower, basedon FICO scores.

The Company monitors borrower performance after using payment programs or forbearance and the Company believes the programs help to preventdefaults and are useful in assisting customers experiencing financial difficulties. The Company plans to continue to use payment programs and forbearance and, asa result, expects to have additional loans classified as TDRs in the future.

Additional information about modified loans classified as TDRs is shown below (dollars in millions):

Average recorded

investment in loans

Interest incomerecognized duringperiod loans were

impaired (1)

Gross interest incomethat would have beenrecorded with original

terms (2)


Credit card loans (3) $ 1,413 $ 34 $ 26

Personal loans $ 117 $ 3 $ 1

Private student loans $ 142 $ 3 $ —


Credit card loans (3) $ 1,108 $ 25 $ 20

Personal loans $ 84 $ 2 $ 1

Private student loans $ 94 $ 2 $ — (1) The Company does not separately track interest income on loans in modification programs. Amounts shown are estimated by applying an average interest rate to the average loans in the various modification programs.(2) The Company does not separately track the amount of additional gross interest income that would have been recorded if the loans in modification programs had not been restructured and interest had instead been recorded in

accordance with the original terms. Amounts shown are estimated by applying the difference between the average interest rate earned on non-impaired loans and the average interest rate earned on loans in the modificationprograms to the average loans in the modification programs.

(3) Includes credit card loans that were modified in TDRs, but are no longer enrolled in a TDR program due to noncompliance with the terms of the modification or due to successful completion of a program after which chargingprivileges may be reinstated based on customer-level evaluation. The average balance of credit card loans that were no longer enrolled in a TDR program was $399 million and $311 million , respectively, for the three monthsended March 31, 2018 and 2017 .

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In order to evaluate the primary financial effects that resulted from credit card loans entering into a loan modification program during the three monthsended March 31, 2018 and 2017 , the Company quantified the amount by which interest and fees were reduced during the periods. During the three months endedMarch 31, 2018 and 2017 , the Company forgave approximately $12 million and $11 million , respectively, of interest and fees as a result of accounts enteringinto a credit card loan modification program.

The following table provides information on loans that entered a loan modification program during the period (dollars in millions): For the Three Months Ended March 31,

2018 2017

Number ofAccounts Balances

Number ofAccounts Balances

Accounts that entered a loan modification program during the period

Credit card loans60,055 $ 380 30,893 $ 181

Personal loans2,128 $ 29 1,563 $ 18

Private student loans906 $ 16 1,017 $ 17

The following table presents the carrying value of loans that experienced a payment default during the period that had been modified in a TDR during the15 months preceding the end of each period (dollars in millions): For the Three Months Ended March 31,

2018 2017

Number ofAccounts

AggregatedOutstanding

Balances UponDefault

Number ofAccounts

AggregatedOutstanding Balances

Upon Default

TDRs that subsequently defaulted

Credit card loans (1)(2) 8,814 $ 47 8,166 $ 44

Personal loans (2) 575 $ 8 307 $ 4

Private student loans (3) 271 $ 5 185 $ 3

(1) Terms revert back to the pre-modification terms for customers who default from a temporary program and charging privileges remain revoked in most cases.(2) For credit card loans and personal loans, a customer defaults from a modification program after two consecutive missed payments. The outstanding balance upon default is generally the loan balance at the end of the month prior to

default.(3) For student loans, defaults have been defined as loans that are 60 or more days delinquent. The outstanding balance upon default is generally the loan balance at the end of the month prior to default.

Of the account balances that defaulted as shown above for the three months ended March 31, 2018 and 2017 , approximately 37% and 38% , respectively,of the total balances were charged off at the end of the month in which they defaulted. For accounts that have defaulted from a loan modification program andhave not been subsequently charged off, the balances are included in the allowance for loan loss analysis discussed above under "— Allowance for Loan Losses."

Purchased Credit-Impaired LoansPurchased loans with evidence of credit deterioration since origination for which it is probable that not all contractually required payments will be collected

are considered impaired at acquisition and are reported as PCI loans. The private student loans acquired in the SLC transaction, as well as the additional acquiredprivate student loan portfolio comprise the Company’s only PCI loans at March 31, 2018 and December 31, 2017 . Total PCI student loans had an outstandingbalance of $2.0 billion and $2.2 billion , including accrued interest, and a related carrying amount of $2.0 billion and $2.1 billion as of March 31, 2018 andDecember 31, 2017 , respectively.

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The following table provides changes in accretable yield for the acquired loans during each period (dollars in millions): For the Three Months Ended March 31,

2018 2017Balance at beginning of period $ 669 $ 796Accretion into interest income (36) (41)

Balance at end of period $ 633 $ 755

Periodically, the Company updates the estimate of cash flows expected to be collected based on management's latest expectations of future credit losses,borrower prepayments and certain other assumptions that affect cash flows. No provision expense was recorded during the three months ended March 31, 2018 and2017 . The allowance for PCI loan losses at March 31, 2018 and December 31, 2017 was $27 million and $29 million , respectively. For the three months endedMarch 31, 2018 and 2017 , there were no changes in cash flow assumptions. Changes to accretable yield are recognized prospectively as an adjustment to yieldover the remaining life of the pools.

At March 31, 2018 , the 30 or more days delinquency and 90 or more days delinquency rates on PCI student loans (which include loans not yet inrepayment) were 2.92% and 0.83% , respectively. At December 31, 2017 , the 30 or more days delinquency and 90 or more days delinquency rates on PCI studentloans (which include loans not yet in repayment) were 3.24% and 0.93% , respectively. These rates include private student loans that are greater than 120 daysdelinquent that are covered by an indemnification agreement or insurance arrangements through which the Company expects to recover a substantial portion of theloan. The net charge-off rate on PCI student loans was 0.99% and 0.53% for the three months ended March 31, 2018 and 2017 , respectively.

4. Credit Card and Student Loan Securitization ActivitiesThe Company’s securitizations are accounted for as secured borrowings and the related trusts are treated as consolidated subsidiaries of the Company. For a

description of the Company’s principles of consolidation with respect to VIEs, see Note 1: Background and Basis of Presentation of the Company’s annual reporton Form 10-K for the year ended December 31, 2017 .

Credit Card Securitization ActivitiesThe Company accesses the term asset securitization market through the Discover Card Master Trust I (“DCMT”) and the Discover Card Execution Note

Trust (“DCENT”). Credit card loan receivables are transferred into DCMT and beneficial interests in DCMT are transferred into DCENT. DCENT issues debtsecurities to investors that are reported in long-term borrowings.

The DCENT debt structure consists of four classes of securities (DiscoverSeries Class A, B, C and D notes), with the most senior class generally receiving atriple-A rating. In order to issue senior, higher rated classes of notes, it is necessary to obtain the appropriate amount of credit enhancement, generally through theissuance of junior, lower rated or more highly subordinated classes of notes. The subordinated classes are held by wholly-owned subsidiaries of Discover Bank.The Company is exposed to credit-related risk of loss associated with trust assets as of the balance sheet date through the retention of these subordinated interests.The estimated probable incurred loss is included in the allowance for loan losses estimate.

The Company’s retained interests in the assets of the trusts, consisting of investments in DCENT notes held by subsidiaries of Discover Bank, constituteintercompany positions which are eliminated in the preparation of the Company’s condensed consolidated statements of financial condition.

Upon transfer of credit card loan receivables to the trust, the receivables and certain cash flows derived from them become restricted for use in meetingobligations to the trusts’ creditors. Further, the transferred credit card loan receivables are owned by the trust and are not available to third-party creditors of theCompany. The trusts have ownership of cash balances, the amounts of which are reported in restricted cash. With the exception of the seller’s interest in trustreceivables, the Company’s interests in trust assets are generally subordinate to the interests of third-party investors and, as such, may not be realized by theCompany if needed to absorb deficiencies in cash flows that are allocated to the investors in the trusts’ debt. Apart from the restricted assets related tosecuritization activities, the investors and the securitization trusts have no recourse to the Company’s other assets or the Company's general credit for a shortage incash flows.

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The carrying values of these restricted assets, which are presented on the Company’s condensed consolidated statements of financial condition as relating tosecuritization activities, are shown in the table below (dollars in millions):

March 31,

2018 December 31,

2017Restricted cash $ 29 $ 26 Investors’ interests held by third-party investors 15,950 16,025Investors’ interests held by wholly-owned subsidiaries of Discover Bank 5,126 5,133Seller’s interest 8,106 9,861Loan receivables (1) 29,182 31,019

Allowance for loan losses allocated to securitized loan receivables (1)(1,006) (998)

Net loan receivables 28,176 30,021Other 6 5Carrying value of assets of consolidated variable interest entities $ 28,211 $ 30,052

(1) The Company maintains its allowance for loan losses at an amount sufficient to absorb probable losses inherent in all loan receivables, which includes all loan receivables in the trusts. Therefore, credit risk associated with the

transferred receivables is fully reflected on the Company’s balance sheet in accordance with GAAP.

The debt securities issued by the consolidated trusts are subject to credit, payment and interest rate risks on the transferred credit card loan receivables. Toprotect investors in the securities, there are certain features or triggering events that could cause an early amortization of the debt securities, including triggersrelated to the impact of the performance of the trust receivables on the availability and adequacy of cash flows to meet contractual requirements. As of March 31,2018 , no economic or other early amortization events have occurred.

The Company continues to own and service the accounts that generate the loan receivables held by the trusts. Discover Bank receives servicing fees fromthe trusts based on a percentage of the monthly investor principal balance outstanding. Although the fee income to Discover Bank offsets the fee expense to thetrusts and thus is eliminated in consolidation, failure to service the transferred loan receivables in accordance with contractual requirements could lead to atermination of the servicing rights and the loss of future servicing income, net of related expenses.

Student Loan Securitization ActivitiesStudent loan trust receivables underlying third-party investors’ interests are recorded in PCI loans and the related debt issued by the trusts is reported in

long-term borrowings. The assets of the trusts are restricted from being sold or pledged as collateral for other borrowings and the cash flows from these restrictedassets may be used only to pay obligations of the trusts. With the exception of the trusts’ restricted assets, the trusts and investors have no recourse to theCompany’s other assets or the Company's general credit for a shortage in cash flows.

Currently there are two trusts from which securities were issued to investors. Principal payments on the long-term secured borrowings are made as cash iscollected on the underlying loans that are used as collateral on the secured borrowings. The Company does not have access to cash collected by the securitizationtrusts until cash is released in accordance with the trust indenture agreements. Similar to the credit card securitizations, the Company continues to own and servicethe accounts that generate the student loan receivables held by the trusts and receives servicing fees from the trusts based on either a percentage of the principalbalance outstanding or a flat fee per borrower. Although the servicing fee income offsets the fee expense related to the trusts and thus is eliminated inconsolidation, failure to service the transferred loan receivables in accordance with contractual requirements could lead to a termination of the servicing rights andthe loss of future servicing income, net of related expenses.

Under terms of all the trust arrangements, the Company has the option, but not the obligation, to provide financial support to the trusts, but has neverprovided such support. A substantial portion of the credit risk associated with the securitized loans has been transferred to third parties under private creditinsurance or indemnification arrangements.

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The carrying values of these restricted assets, which are presented on the Company’s condensed consolidated statements of financial condition as relating tosecuritization activities, are shown in the table below (dollars in millions):

March 31,

2018 December 31,

2017Restricted cash $ 58 $ 55Student loan receivables 712 762Carrying value of assets of consolidated variable interest entities $ 770 $ 817

5. DepositsThe Company offers its deposit products to customers through two channels: (i) through direct marketing, internet origination and affinity relationships

(“direct-to-consumer deposits”); and (ii) indirectly through contractual arrangements with securities brokerage firms (“brokered deposits”). Direct-to-consumerdeposits include certificates of deposit, money market accounts, online savings and checking accounts and IRA certificates of deposit, while brokered depositsinclude certificates of deposit and sweep accounts.

The following table provides a summary of interest-bearing deposit accounts (dollars in millions):

March 31,

2018 December 31,

2017

Certificates of deposit in amounts less than $100,000$ 24,063 $ 23,768

Certificates of deposit in amounts $100,000 or greater (1)6,035 5,984

Savings deposits, including money market deposit accounts 30,432 28,413Total interest-bearing deposits $ 60,530 $ 58,165

(1) Includes $1.4 billion in certificates of deposit greater than $250,000, the Federal Deposit Insurance Corporation ("FDIC") insurance limit, as of March 31, 2018 and December 31, 2017 .

The following table summarizes certificates of deposit in amounts of $100,000 or greater by contractual maturity (dollars in millions):Maturity Period March 31, 2018Three months or less $ 778Over three months through six months 830Over six months through twelve months 1,739Over twelve months 2,688Total $ 6,035

The following table summarizes certificates of deposit maturing over the remainder of this year, over each of the next four years, and thereafter (dollars inmillions):Year March 31, 20182018 $ 10,2632019 7,4082020 4,3702021 2,9122022 2,094Thereafter 3,051Total $ 30,098

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6. Long-Term Borrowings

Long-term borrowings consist of borrowings having original maturities of one year or more. The following table provides a summary of the Company’slong-term borrowings and weighted-average interest rates on outstanding balances (dollars in millions):

March 31, 2018 December 31, 2017

Maturity Interest

Rate Weighted-Average

Interest Rate Outstanding

Amount Outstanding

Amount

Securitized Debt

Fixed-rate asset-backed securities (1) 2018-2024 1.39%-3.03% 1.92% $ 9,478 $ 8,888

Floating-rate asset-backed securities (2)(3) 2018-2024 2.01%-2.59% 2.25% 6,337 7,038Total Discover Card Master Trust I and Discover Card Execution NoteTrust 15,815 15,926

Floating-rate asset-backed securities (4)(5)(6) 2031-2036 1.89%-5.50% 3.45% 570 610

Total SLC Private Student Loan Trusts 570 610

Total long-term borrowings - owed to securitization investors 16,385 16,536

Discover Financial Services (Parent Company)

Fixed-rate senior notes 2019-2027 3.75%-10.25% 4.25% 2,718 2,710

Fixed-rate retail notes 2018-2031 2.85%-4.40% 3.71% 328 302

Discover Bank

Fixed-rate senior bank notes (1) 2018-2026 2.60%-4.25% 3.37% 6,115 6,080

Fixed-rate subordinated bank notes 2019-2020 7.00%-8.70% 7.49% 698 698

Total long-term borrowings $ 26,244 $ 26,326

(1) The Company uses interest rate swaps to hedge portions of these long-term borrowings against changes in fair value attributable to changes in London Interbank Offered Rate ("LIBOR"). Use of these interest rate swaps impacts

carrying value of the debt. See Note 14: Derivatives and Hedging Activities.(2) Discover Card Execution Note Trust floating-rate asset-backed securities include issuances with the following interest rate terms: 1-month LIBOR + 23 to 60 basis points and Commercial paper rate + 55 basis points as of

March 31, 2018 .(3) The Company uses interest rate swaps to manage its exposure to changes in interest rates related to future cash flows resulting from interest payments on a portion of these long-term borrowings. There is no impact on debt

carrying value from use of these interest rate swaps. See Note 14: Derivatives and Hedging Activities.(4) SLC Private Student Loan Trusts floating-rate asset-backed securities include issuances with the following interest rate terms: 3-month LIBOR + 17 to 45 basis points and Prime rate + 100 basis points as of March 31, 2018 .(5) Repayment of this debt is dependent upon the timing of principal and interest payments on the underlying student loans. The dates shown represent final maturity dates.(6) Includes $226 million of senior notes maturing in 2031 and $344 million of senior and subordinated notes maturing in 2036 as of March 31, 2018 .

The following table summarizes long-term borrowings maturing over the remainder of this year, over each of the next four years, and thereafter (dollars inmillions):Year March 31, 20182018 $ 3,2702019 5,9882020 4,6942021 1,0362022 2,776Thereafter 8,480Total $ 26,244

The Company has access to committed borrowing capacity through private securitizations to support the funding of its credit card loan receivables. As ofMarch 31, 2018 , the total commitment of secured credit facilities through private providers was $6.0 billion , $500 million of which was drawn as of March 31,2018 . Access to the unused portions of the secured credit facilities is subject to the terms of the agreements with each of the providers which have variousexpirations in calendar years

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2019 through 2020. Borrowings outstanding under each facility bear interest at a margin above LIBOR or the asset-backed commercial paper costs of eachindividual conduit provider. The terms of each agreement provide for a commitment fee to be paid on the unused capacity and include various affirmative andnegative covenants, including performance metrics and legal requirements similar to those required to issue any term securitization transaction.

7. Accumulated Other Comprehensive Income

Changes in each component of AOCI were as follows (dollars in millions):

Unrealized Loss onAvailable-for-Sale

InvestmentSecurities, Net of

Tax

Gain (Loss) onCash Flow Hedges,

Net of Tax Loss on PensionPlan, Net of Tax AOCI


Balance at December 31, 2017 $ (5) $ 10 $ (157) $ (152)

Net change (7) 19 1 13Balance at March 31, 2018 $ (12) $ 29 $ (156) $ (139)


Balance at December 31, 2016 $ (3) $ (13) $ (145) $ (161)

Net change 1 5 — 6

Balance at March 31, 2017 $ (2) $ (8) $ (145) $ (155)

The table below presents each component of other comprehensive income (loss) ("OCI") before reclassifications and amounts reclassified from AOCI foreach component of OCI before- and after-tax (dollars in millions):

Before Tax Tax Benefit(Expense) Net of Tax



Net unrealized holding loss arising during the period $ (9) $ 2 $ (7)

Net change $ (9) $ 2 $ (7)

Cash Flow Hedges

Net unrealized gain arising during the period $ 24 $ (6) $ 18

Amounts reclassified from AOCI 1 — 1

Net change $ 25 $ (6) $ 19

Pension Plan

Unrealized gain arising during the period $ 1 $ — $ 1

Net change $ 1 $ — $ 1



Net unrealized holding gain arising during the period $ 2 $ (1) $ 1

Net change $ 2 $ (1) $ 1

Cash Flow Hedges

Net unrealized gain arising during the period $ 6 $ (3) $ 3

Amounts reclassified from AOCI 5 (3) 2

Net change $ 11 $ (6) $ 5

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8. Income Taxes

The following table presents the calculation of the Company's effective income tax rate (dollars in millions, except effective income tax rate):

For the Three Months Ended

March 31,

2018 2017Income before income tax expense $ 856 $ 868Income tax expense $ 190 $ 304Effective income tax rate 22.2% 35.0%

Income tax expense and the effective tax rate decreased $114 million and 12.8% , respectively, for the three months ended March 31, 2018 , as compared tothe same period in 2017 as a result of a reduction in the U.S. federal statutory income tax rate from 35% to 21% offset by other provisions of the TCJA. For thethree months ended March 31, 2018, the effective tax rate was also favorably impacted by the resolution of certain tax matters.

The Company is subject to examination by the Internal Revenue Service ("IRS") and tax authorities in various state, local and foreign tax jurisdictions. TheCompany regularly assesses the likelihood of additional assessments or settlements in each of the taxing jurisdictions resulting from these and subsequent years'examinations. The IRS is currently examining the years 2011-2015. At this time, the potential change in unrecognized tax benefits is not expected to be significantover the next 12 months. The Company believes that its reserves are sufficient to cover any tax, penalties and interest that would result from such examinations.

9. Earnings Per Share

The following table presents the calculation of basic and diluted earnings per share ("EPS") (in millions, except per share amounts): For the Three Months Ended March 31,

2018 2017Numerator Net income $ 666 $ 564Preferred stock dividends (16) (9)Net income available to common stockholders 650 555

Income allocated to participating securities (4) (4)Net income allocated to common stockholders $ 646 $ 551

Denominator Weighted-average shares of common stock outstanding 355 386Weighted-average shares of common stock outstanding and common stock equivalents 355 386

Basic earnings per common share $ 1.82 $ 1.43Diluted earnings per common share $ 1.82 $ 1.43

There were no anti-dilutive securities on the computation of diluted EPS for the three months ended March 31, 2018 and 2017 .

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10. Capital AdequacyThe Company is subject to the capital adequacy guidelines of the Federal Reserve, and Discover Bank, the Company’s main banking subsidiary, is subject

to various regulatory capital requirements as administered by the FDIC. Failure to meet minimum capital requirements can result in the initiation of certainmandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial position and results ofthe Company and Discover Bank. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Discover Bankmust meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items, as calculated under regulatoryguidelines. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

In 2013, the Federal Reserve, the Office of the Comptroller of the Currency, and the FDIC issued final capital rules under the Basel Committee’s December2010 framework (referred to as “Basel III”) establishing a new comprehensive capital framework for U.S. banking organizations. The final capital rules ("Basel IIIrules") substantially revise Basel I rules regarding the risk-based capital requirements applicable to bank holding companies and depository institutions, includingthe Company. The Basel III rules became effective for the Company on January 1, 2015. This timing is based on the Company being classified as a "StandardizedApproach" entity.

Among other things, the Basel III rules (i) introduced a new capital measure called Common Equity Tier 1 (“CET1”), (ii) specify that Tier 1 capital consistsof CET1 and additional Tier 1 capital instruments meeting specified requirements, (iii) apply most deductions/adjustments to regulatory capital measures to CET1and not to the other components of capital, thus potentially requiring higher levels of CET1 in order to meet minimum ratios and (iv) expand the scope of thedeductions/adjustments from capital as compared to existing regulations.

The Basel III minimum capital ratios are as follows:

• 8.0% Total capital (i.e., Tier 1 plus Tier 2) to risk-weighted assets;• 6.0% Tier 1 capital (i.e., CET1 plus Additional Tier 1) to risk-weighted assets;• 4.0% Tier 1 capital to average consolidated assets as reported on consolidated financial statements (known as the “leverage ratio”); and• 4.5% CET1 to risk-weighted assets.

As of March 31, 2018 , the Company and Discover Bank met all Basel III minimum capital ratio requirements to which they were subject. The Companyand Discover Bank also met the requirements to be considered "well-capitalized" under Regulation Y and prompt corrective action regulations, respectively, andthere have been no conditions or events that management believes have changed the Company's or Discover Bank's category. To be categorized as “well-capitalized,” the Company and Discover Bank must maintain minimum capital ratios as set forth in the table below.

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The following table shows the actual capital amounts and ratios of the Company and Discover Bank and comparisons of each to the regulatory minimumand “well-capitalized” requirements (dollars in millions):

Actual Minimum Capital

Requirements

Capital RequirementsTo Be Classified asWell-Capitalized

Amount Ratio (1) Amount Ratio Amount (2) Ratio (2)

March 31, 2018 Total capital (to risk-weighted assets) Discover Financial Services $ 11,901 14.0% $ 6,792 ≥8.0% $ 8,490 ≥10.0%Discover Bank $ 12,372 14.7% $ 6,716 ≥8.0% $ 8,395 ≥10.0%

Tier 1 capital (to risk-weighted assets) Discover Financial Services $ 10,644 12.5% $ 5,094 ≥6.0% $ 5,094 ≥6.0%Discover Bank $ 10,563 12.6% $ 5,037 ≥6.0% $ 6,716 ≥8.0%

Tier 1 capital (to average assets) Discover Financial Services $ 10,644 10.6% $ 4,016 ≥4.0% N/A N/ADiscover Bank $ 10,563 10.6% $ 3,973 ≥4.0% $ 4,967 ≥5.0%

CET1 capital (to risk-weighted assets) Discover Financial Services $ 10,081 11.9% $ 3,820 ≥4.5% N/A N/ADiscover Bank $ 10,563 12.6% $ 3,778 ≥4.5% $ 5,457 ≥6.5%

December 31, 2017 Total capital (to risk-weighted assets) Discover Financial Services $ 11,952 13.8% $ 6,946 ≥8.0% $ 8,683 ≥10.0%Discover Bank $ 12,364 14.4% $ 6,872 ≥8.0% $ 8,589 ≥10.0%

Tier 1 capital (to risk-weighted assets) Discover Financial Services $ 10,677 12.3% $ 5,210 ≥6.0% $ 5,210 ≥6.0%Discover Bank $ 10,533 12.3% $ 5,154 ≥6.0% $ 6,872 ≥8.0%

Tier 1 capital (to average assets) Discover Financial Services $ 10,677 10.8% $ 3,949 ≥4.0% N/A N/ADiscover Bank $ 10,533 10.8% $ 3,912 ≥4.0% $ 4,890 ≥5.0%

CET1 capital (to risk-weighted assets) Discover Financial Services $ 10,114 11.6% $ 3,907 ≥4.5% N/A N/ADiscover Bank $ 10,533 12.3% $ 3,865 ≥4.5% $ 5,583 ≥6.5%

(1) Capital ratios are calculated based on the Basel III Standardized Approach rules, subject to applicable transition provisions.(2) The Basel III rules do not establish well-capitalized thresholds for these measures for bank holding companies. Existing well-capitalized thresholds established in the Federal Reserve's Regulation Y have been included where

available.

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11. Commitments, Contingencies and GuaranteesIn the normal course of business, the Company enters into a number of off-balance sheet commitments, transactions and obligations under guarantee

arrangements that expose the Company to varying degrees of risk. The Company's commitments, contingencies and guarantee relationships are described below.

CommitmentsLeaseCommitments

The Company leases various office space and equipment under capital and non-cancelable operating leases, which expire at various dates through 2029.Future minimum payments on capital leases were not material at March 31, 2018. The following table shows future minimum payments on non-cancelableoperating leases with original terms in excess of one year (dollars in millions):

March 31, 20182018 $ 102019 122020 112021 102022 7Thereafter 41Total minimum lease payments $ 91

UnusedCreditArrangementsAt March 31, 2018 , the Company had unused credit arrangements for loans of approximately $190.7 billion . Such arrangements arise primarily from

agreements with customers for unused lines of credit on certain credit cards and certain other loan products, provided there is no violation of conditions in therelated agreements. These arrangements, substantially all of which the Company can terminate at any time and which do not necessarily represent future cashrequirements, are periodically reviewed based on account usage, customer creditworthiness and loan qualification.

ContingenciesSee Note 12: Litigation and Regulatory Matters for a description of potential liability arising from pending litigation or regulatory proceedings involving the

Company.

GuaranteesThe Company has obligations under certain guarantee arrangements, including contracts, indemnification agreements, and representations and warranties,

which contingently require the Company to make payments to the guaranteed party based on changes in an underlying asset, liability or equity security of aguaranteed party, rate or index. Also included as guarantees are contracts that contingently require the Company to make payments to a guaranteed party based onanother entity's failure to perform under an agreement. The Company's use of guarantees is disclosed below by type of guarantee.

SecuritizationsRepresentationsandWarrantiesAs part of the Company’s financing activities, the Company provides representations and warranties that certain assets pledged as collateral in secured

borrowing arrangements conform to specified guidelines. Due diligence is performed by the Company which is intended to ensure that asset guidelinequalifications are met. If the assets pledged as collateral do not meet certain conforming guidelines, the Company may be required to replace, repurchase or sellsuch assets. In its credit card securitization activities, the Company would replace nonconforming receivables through the allocation of excess seller’s interest orfrom additional transfers from the unrestricted pool of receivables. If the Company could not add enough receivables to satisfy the requirement, an earlyamortization (or repayment) of investors’ interests would be triggered. In its student loan securitizations, the Company would generally repurchase the loans fromthe trust at the outstanding principal amount plus interest.

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The maximum potential amount of future payments the Company could be required to make would be equal to the current outstanding balances of third-party investor interests in credit card asset-backed securities, and the principal amount of any student loan secured borrowings, plus any unpaid interest for thecorresponding secured borrowings. The Company has recorded substantially all of the maximum potential amount of future payments in long-term borrowings onthe Company’s condensed consolidated statements of financial condition. The Company has not recorded any incremental contingent liability associated with itssecured borrowing representations and warranties. Management believes that the probability of having to replace, repurchase or sell assets pledged as collateralunder secured borrowing arrangements, including an early amortization event, is low.

MortgageLoansRepresentationsandWarrantiesThe Company sold loans it originated to investors on a servicing-released basis and the risk of loss or default by the borrower is generally transferred to the

investor. However, the Company was required by these investors to make certain representations and warranties relating to credit information, loan documentationand collateral. These representations and warranties may extend through the contractual life of the mortgage loan, even though the Company closed the mortgageorigination business. Subsequent to the sale, if underwriting deficiencies, borrower fraud or documentation defects are discovered in individual mortgage loans, theCompany may be obligated to repurchase the respective mortgage loan or indemnify the investors for any losses from borrower defaults if such deficiency ordefect cannot be cured within the specified period following discovery. The Company has established a repurchase reserve based on expected losses. At March 31,2018 , this amount was not material and was included in accrued expenses and other liabilities on the condensed consolidated statements of financial condition.

CounterpartySettlementGuaranteesDiners Club and DFS Services LLC (on behalf of PULSE) have various counterparty exposures, which are listed below.

• MerchantGuarantee. Diners Club has entered into contractual relationships with certain international merchants, which generally include travel-related businesses, for the benefit of all Diners Club licensees. The licensees hold the primary liability to settle the transactions of their customers withthese merchants. However, Diners Club retains a counterparty exposure if a licensee fails to meet its financial payment obligation to one of thesemerchants.

• ATMGuarantee.PULSE entered into contractual relationships with certain international ATM acquirers in which DFS Services LLC retainscounterparty exposure if an issuer fails to fulfill its settlement obligation.

• NetworkAllianceGuarantee. Discover Network, Diners Club and PULSE have entered into contractual relationships with certain internationalpayment networks in which DFS Services LLC retains the counterparty exposure if a network fails to fulfill its settlement obligation.

The maximum potential amount of future payments related to such contingent obligations is dependent upon the transaction volume processed between thetime a potential counterparty defaults on its settlement and the time at which the Company disables the settlement of any further transactions for the defaultingparty. However, there is no limitation on the maximum amount the Company may be liable to pay. The actual amount of the potential exposure cannot bequantified as the Company cannot determine whether particular counterparties will fail to meet their settlement obligations.

While the Company has some contractual remedies to offset these counterparty settlement exposures (such as letters of credit or pledged deposits), in theevent that all licensees and/or issuers were to become unable to settle their transactions, the Company estimates its maximum potential counterparty exposures tothese settlement guarantees, based on historical transaction volume, would be $164 million for merchant guarantees as of March 31, 2018 . The maximum potentialcounterparty exposures to these settlement guarantees for ATM guarantees would be immaterial as of March 31, 2018 . The maximum potential counterpartyexposures for network alliance guarantees would be $33 million as of March 31, 2018 .

The Company believes that the estimated amounts of maximum potential future payments are not representative of the Company's actual potential lossexposure given Diners Club's and PULSE's insignificant historical losses from these counterparty exposures. As of March 31, 2018 , the Company had notrecorded any contingent liability in the consolidated financial statements for these counterparty exposures, and management believes that the probability of anypayments under these arrangements is low.

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DiscoverNetworkMerchantChargebackGuaranteesThe Company operates the Discover Network, issues payment cards and permits third parties to issue payment cards. The Company is contingently liable

for certain transactions processed on the Discover Network in the event of a dispute between the payment card customer and a merchant. The contingent liabilityarises if the disputed transaction involves a merchant or merchant acquirer with whom the Discover Network has a direct relationship. If a dispute is resolved in thecustomer’s favor, the Discover Network will credit or refund the disputed amount to the Discover Network card issuer, who in turn credits its customer’s account.The Discover Network will then charge back the disputed amount of the payment card transaction to the merchant or merchant acquirer, where permitted by theapplicable agreement, to seek recovery of amounts already paid to the merchant for payment card transactions. If the Discover Network is unable to collect theamount subject to dispute from the merchant or merchant acquirer ( e.g., in the event of merchant default or dissolution or after expiration of the time period forchargebacks in the applicable agreement), the Discover Network will bear the loss for the amount credited or refunded to the customer. In most instances, a loss bythe Discover Network is unlikely to arise in connection with payments on card transactions because most products or services are delivered when purchased andcredits are issued by merchants on returned items in a timely fashion, thus minimizing the likelihood of cardholder disputes with respect to amounts paid by theDiscover Network. However, where the product or service is not scheduled to be provided to the customer until a later date following the purchase, the likelihoodof a contingent payment obligation by the Discover Network increases. Losses related to merchant chargebacks were not material for the three months endedMarch 31, 2018 and 2017 .

The maximum potential amount of obligations of the Discover Network arising as a result of such contingent obligations is estimated to be the portion of thetotal Discover Network transaction volume processed to date for which timely and valid disputes may be raised under applicable law and relevant issuer andcustomer agreements. There is no limitation on the maximum amount the Company may be liable to pay to issuers. However, the Company believes that suchamount is not representative of the Company’s actual potential loss exposure based on the Company’s historical experience. The actual amount of the potentialexposure cannot be quantified as the Company cannot determine whether the current or cumulative transaction volumes may include or result in disputedtransactions.

The table below summarizes certain information regarding merchant chargeback guarantees (in millions): For the Three Months Ended March 31,

2018 2017

Aggregate sales transaction volume (1)$ 36,017 $ 32,654

(1) Represents period transactions processed on the Discover Network for which a potential liability exists that, in aggregate, can differ from credit card sales volume.

The Company did not record any contingent liability in the condensed consolidated financial statements for merchant chargeback guarantees as ofMarch 31, 2018 or December 31, 2017 . The Company mitigates the risk of potential loss exposure by withholding settlement from merchants, obtaining third-party guarantees, or obtaining escrow deposits or letters of credit from certain merchant acquirers or merchants that are considered higher risk due to variousfactors such as time delays in the delivery of products or services. As of March 31, 2018 and December 31, 2017 , the Company had escrow deposits andsettlement withholdings of $9 million and $10 million , respectively, which are recorded in interest-bearing deposit accounts and accrued expenses and otherliabilities on the Company's condensed consolidated statements of financial condition.

12. Litigation and Regulatory MattersIn the normal course of business, from time to time, the Company has been named as a defendant in various legal actions, including arbitrations, class

actions and other litigation, arising in connection with its activities. Certain of the actual or threatened legal actions include claims for substantial compensatoryand/or punitive damages or claims for indeterminate amounts of damages. The litigation process is not predictable and can lead to unexpected results. TheCompany contests liability and/or the amount of damages as appropriate in each pending matter.

The Company has historically offered its customers an arbitration clause in its customer agreements. The arbitration clause allows the Company and itscustomers to quickly and economically resolve disputes. Additionally, the arbitration clause has in some instances limited the costs of, and the Company’sexposure to, litigation. Future legal and regulatory challenges and prohibitions may cause the Company to discontinue its offering and use of such clauses. Fromtime to time, the Company is involved in legal actions challenging its arbitration clause. Bills may be periodically introduced in Congress to directly or indirectlyprohibit the use of pre-dispute arbitration clauses. On July 10, 2017, the Consumer Financial

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Protection Bureau (the "CFPB") issued a final arbitration rule (the "Arbitration Rule") that would have effectively banned consumer financial companies fromincluding class action waivers in arbitration clauses. On November 1, 2017, a resolution of disapproval of the Arbitration Rule was signed into law and theArbitration Rule was blocked from taking effect and cannot be reissued in substantially the same form, nor can a new rule that is substantially similar be issuedunless specifically authorized by a law enacted after the date of the resolution of disapproval.

The Company is also involved, from time to time, in other reviews, investigations and proceedings (both formal and informal) by governmental agenciesregarding the Company’s business including, among other matters, consumer regulatory, accounting, tax and other operational matters, some of which may resultin significant adverse judgments, settlements, fines, penalties, injunctions, decreases in regulatory ratings, customer restitution or other relief, which couldmaterially impact the Company's condensed consolidated financial statements, increase its cost of operations, or limit its ability to execute its business strategiesand engage in certain business activities. For example, the Company is currently the subject of an action by the Federal Reserve with respect to anti-moneylaundering and related compliance programs as referred to below. This agreement followed the consent order that Discover Bank entered into with the FDIC onJune 13, 2014 related to Discover Bank's anti-money laundering and related compliance programs. This consent order was terminated in August 2017. In addition,certain subsidiaries of the Company are subject to a consent order with the CFPB regarding certain student loan servicing practices, as described below. Pursuant topowers granted under federal banking laws, regulatory agencies have broad and sweeping discretion, and may assess civil money penalties, require changes tocertain business practices or require customer restitution at any time. The existing supervisory action related to anti-money laundering and related laws andregulations will limit for a period of time the Company's ability to enter into certain types of acquisitions and make certain types of investments.

In accordance with applicable accounting guidance, the Company establishes an accrued liability for legal and regulatory matters when those matterspresent loss contingencies which are both probable and estimable. Litigation and regulatory settlement related expense was not material for the three months endedMarch 31, 2018 and 2017 .

There may be an exposure to loss in excess of any amounts accrued. The Company believes the estimate of the aggregate range of reasonably possiblelosses (meaning those losses the likelihood of which is more than remote but less than likely) in excess of the amounts that the Company has accrued for legal andregulatory proceedings is up to $140 million . This estimated range of reasonably possible losses is based upon currently available information for thoseproceedings in which the Company is involved, takes into account the Company’s best estimate of such losses for those matters for which an estimate can be made,and does not represent the Company’s maximum potential loss exposure. Various aspects of the legal proceedings underlying the estimated range will change fromtime to time and actual results may vary significantly from the estimate.

The Company’s estimated range above involves significant judgment, given the varying stages of the proceedings, the existence of numerous yet to beresolved issues, the breadth of the claims (often spanning multiple years and, in some cases, a wide range of business activities), unspecified damages and/or thenovelty of the legal issues presented. The outcome of pending matters could be material to the Company’s condensed consolidated financial condition, operatingresults and cash flows for a particular future period, depending on, among other things, the level of the Company’s income for such period, and could adverselyaffect the Company’s reputation.

On July 5, 2012, the Antitrust Division of the United States Department of Justice (the “Division”) issued a Civil Investigative Demand ("CID") to theCompany seeking information regarding an investigation related to potential violations of Sections 1 and 2 of the Sherman Act, 15 U.S.C. §§1-2, by anunidentified party other than Discover. The CID seeks documents, data and narrative responses to several interrogatories and document requests, related to thedebit card market. A CID is a request for information in the course of a civil investigation and does not constitute the commencement of legal proceedings. TheDivision is permitted by statute to issue a CID to anyone whom it believes may have information relevant to an investigation. The receipt of a CID does notpresuppose that there is probable cause to believe that a violation of the antitrust laws has occurred or that a formal complaint ultimately will be filed. TheCompany is cooperating with the Division in connection with the CID.

On May 26, 2015, the Company entered into a written agreement with the Federal Reserve Bank of Chicago where the Company agreed to enhance theCompany’s enterprise-wide anti-money laundering and related compliance programs. The agreement does not include civil money penalties.

On July 22, 2015, the Company announced that its subsidiaries, Discover Bank, SLC and Discover Products Inc. (the “Discover Subsidiaries”), agreed to aconsent order with the CFPB resolving the agency’s investigation with respect to

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certain student loan servicing practices. The CFPB’s investigation into these practices has been previously disclosed by the Company, initially in February 2014.The order required the Discover Subsidiaries to provide redress of approximately $16 million to consumers who may have been affected by the activities describedin the order related to certain collection calls, overstatements of minimum payment due amounts in billing statements, and provision of interest paid information toconsumers, and provide regulatory disclosures with respect to loans acquired in default. In addition, the Discover Subsidiaries were required to pay a $2.5 millioncivil money penalty to the CFPB. As required by the consent order, on October 19, 2015, the Discover Subsidiaries submitted to the CFPB a redress plan and acompliance plan designed to ensure that the Discover Subsidiaries provide redress and otherwise comply with the terms of the order.

On September 4, 2015, the District Attorney of Trinity County, California filed a protection products lawsuit against the Company in California state court(The People of the State of California Ex Rel, Eric L. Heryford, District Attorney, Trinity County v. Discover Financial Services, et al.). The District Attorneysubsequently dismissed this lawsuit on February 19, 2016 and filed a new complaint in federal court in the Eastern District of California on March 4, 2016 allegingthe same cause of action. An amended complaint was filed on March 25, 2016. The lawsuit asserts various claims under California's Unfair Competition Law withrespect to the Company's marketing and administration of various protection products. Plaintiff seeks declaratory relief, statutory civil penalties, and attorneys’fees. The Company filed a motion to dismiss the first amended complaint on April 26, 2016. The Company is not in a position at this time to assess the likelyoutcome or its exposure, if any, with respect to this matter, but will seek to vigorously defend against all claims asserted by the plaintiff.

On March 8, 2016, a class action lawsuit was filed against the Company, other credit card networks, other issuing banks, and EMVCo in the U.S. DistrictCourt for the Northern District of California (B&R Supermarket, Inc., d/b/a Milam’s Market, et al. v. Visa, Inc. et al.) alleging violations of the Sherman AntitrustAct, California's Cartwright Act, and unjust enrichment. Plaintiffs allege a conspiracy by defendants to shift fraud liability to merchants with the migration to theEMV security standard and chip technology. Plaintiffs assert joint and several liability among the defendants and seek unspecified damages, including trebledamages, attorneys' fees, costs and injunctive relief. On July 15, 2016, plaintiffs filed an amended complaint that includes additional named plaintiffs, reasserts theoriginal claims, and includes additional state law causes of action. The defendants filed motions to dismiss on August 5, 2016. On September 30, 2016, the courtgranted the motions to dismiss for certain issuing banks and EMVCo but denied the motions to dismiss filed by the networks, including the Company. In May2017, while discovery was proceeding and after class certification was fully briefed but not yet ruled upon, the Court entered an order transferring the entire actionto a federal court in New York that is presiding over certain related claims that are pending in the actions consolidated as MDL 1720. In June 2017, the federalcourt in New York declined to consolidate the B&R case with MDL 1720, but ordered the parties to coordinate discovery across the actions to the extent theyinvolved related issues. On July 6, 2017, the Company requested permission to file a motion to dismiss the claims against it in the federal court in New York. OnAugust 24, 2017, the Court held a status conference at which it set a briefing schedule on Discover’s motion to dismiss. In September 2017, Discover filed itsmotion to dismiss. On November 29, 2017, the Court heard argument on class certification and took the motion under advisement. On January 23, 2018, the Courtheard argument on Discover's motion to dismiss. On March 11, 2018, the Court entered an order denying the plaintiffs' motion of class certification withoutprejudice to filing a renewed motion with additional detail on the proposed class period and alleged antitrust injuries. Plaintiffs have requested permission to filesuch a motion on July 16, 2018. Discovery is ongoing, and for most fact issues and defenses is scheduled to conclude on April 30, 2018 , subject to a proposedextension through June 14, 2018 for certain discovery related to questions in the Court’s March 11, 2018 class certification order . The Company is not in aposition at this time to assess the likely outcome or its exposure, if any, with respect to this matter, but will seek to vigorously defend against all claims asserted bythe plaintiffs.

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13. Fair Value MeasurementsFair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at

the measurement date. ASC Topic 820, FairValueMeasurement, provides a three-level hierarchy for classifying financial instruments, which is based on whetherthe inputs to the valuation techniques used to measure the fair value of each financial instrument are observable or unobservable. It also requires certain disclosuresabout those measurements. The three-level valuation hierarchy is as follows:

• Level1: Fair values determined by Level 1 inputs are defined as those that utilize quoted prices (unadjusted) in active markets for identical assets orliabilities that the Company has the ability to access.

• Level2: Fair values determined by Level 2 inputs are those that utilize inputs other than quoted prices included in Level 1 that are observable for theasset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active or inactive markets, quotedprices for the identical assets in an inactive market, and inputs other than quoted prices that are observable for the asset or liability, such as interest ratesand yield curves that are observable at commonly quoted intervals. The Company evaluates factors such as the frequency of transactions, the size of thebid-ask spread and the significance of adjustments made when considering transactions involving similar assets or liabilities to assess the relevance ofthose observed prices. If relevant and observable prices are available, the fair values of the related assets or liabilities would be classified as Level 2.

• Level3: Fair values determined by Level 3 inputs are those based on unobservable inputs and include situations where there is little, if any, marketactivity for the asset or liability being valued. In instances in which the inputs used to measure fair value may fall into different levels of the fair valuehierarchy, the level in the fair value hierarchy within which the fair value measurement in its entirety is classified is based on the lowest level input that issignificant to the fair value measurement in its entirety. The Company may utilize both observable and unobservable inputs in determining the fair valuesof financial instruments classified within the Level 3 category.

The determination of classification of its financial instruments within the fair value hierarchy is performed at least quarterly by the Company. For transfersin and out of the levels of the fair value hierarchy, the Company discloses the fair value measurement based on the value immediately preceding the transfer.

The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and involvesconsideration of factors specific to the asset or liability. Furthermore, certain techniques used to measure fair value involve some degree of judgment and, as aresult, are not necessarily indicative of the amounts the Company would realize in a current market exchange.

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Assets and Liabilities Measured at Fair Value on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis are as follows (dollars in millions):

Quoted Price inActive Markets

for IdenticalAssets

(Level 1)

SignificantOther

ObservableInputs

(Level 2)

SignificantUnobservable

Inputs (Level 3) Total

Balance at March 31, 2018 Assets

Fair value - OCI U.S. Treasury securities $ 672 $ — $ — $ 672Residential mortgage-backed securities - Agency — 668 — 668Available-for-sale investment securities $ 672 $ 668 $ — $ 1,340

Derivative financial instruments - cash flow hedges (1) $ — $ 7 $ — $ 7

Fair value - Net income Derivative financial instruments - fair value hedges (1) $ — $ 3 $ — $ 3

Liabilities

Fair value - OCI Derivative financial instruments - cash flow hedges (1) $ — $ 1 $ — $ 1

Balance at December 31, 2017 Assets

Fair value - OCI U.S. Treasury securities $ 672 $ — $ — $ 672Residential mortgage-backed securities - Agency — 723 — 723Available-for-sale investment securities $ 672 $ 723 $ — $ 1,395

Derivative financial instruments - cash flow hedges (1) $ — $ 2 $ — $ 2

Fair value - Net income Derivative financial instruments - fair value hedges (1) $ — $ 4 $ — $ 4

Liabilities

Fair value - OCI Derivative financial instruments - cash flow hedges (1) $ — $ 3 $ — $ 3

(1) Derivative instrument carrying values in an asset or liability position are presented as part of Other assets or Accrued expenses and other liabilities, respectively, in the Company's condensed consolidated statements of financial

condition.

Fair value hedge derivative financial instruments in a liability position were immaterial at March 31, 2018 and December 31, 2017 . There were notransfers between Levels 1 and 2 within the fair value hierarchy for the three months ended March 31, 2018 and 2017 .

Available-for-SaleInvestmentSecuritiesInvestment securities classified as available-for-sale consist of U.S. Treasury securities and residential mortgage-backed securities. The fair value estimates

of investment securities classified as Level 1, consisting of U.S. Treasury securities, are determined based on quoted market prices for the same securities. TheCompany classifies residential mortgage-backed securities as Level 2, the fair value estimates of which are based on the best information available. This data mayconsist of observed market prices, broker quotes or discounted cash flow models that incorporate assumptions such

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as benchmark yields, issuer spreads, prepayment speeds, credit ratings and losses, the priority of which may vary based on availability of information.

The Company validates the fair value estimates provided by the pricing services primarily by comparison to valuations obtained through other pricingsources. The Company evaluates pricing variances amongst different pricing sources to ensure that the valuations utilized are reasonable. The Company alsocorroborates the reasonableness of the fair value estimates with analysis of trends of significant inputs, such as market interest rate curves. The Company furtherperforms due diligence in understanding the procedures and techniques performed by the pricing services to derive fair value estimates.

At March 31, 2018 , amounts reported in residential mortgage-backed securities reflect government-rated obligations issued by Fannie Mae, Freddie Macand Ginnie Mae with a par value of $668 million , a weighted-average coupon of 2.81% and a weighted-average remaining maturity of three years .

DerivativeFinancialInstrumentsThe Company's derivative financial instruments consist of interest rate swaps and foreign exchange forward contracts. These instruments are classified as

Level 2 as their fair values are estimated using proprietary pricing models, containing certain assumptions based on readily observable market-based inputs,including interest rate curves, option volatility and foreign currency forward and spot rates. In determining fair values, the pricing models use widely acceptedvaluation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of thederivatives, including the period to maturity and the observable market-based inputs. The fair values of the interest rate swaps are determined using the marketstandard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). Thevariable cash payments are based on an expectation of future interest rates derived from the observable market interest rate curves. The Company considerscollateral and master netting agreements that mitigate credit exposure to counterparties in determining the counterparty credit risk valuation adjustment. The fairvalues of the currency instruments are valued comparing the contracted forward exchange rate pertaining to the specific contract maturities to the current marketexchange rate.

The Company validates the fair value estimates of interest rate swaps primarily through comparison to the fair value estimates computed by thecounterparties to each of the derivative transactions. The Company evaluates pricing variances amongst different pricing sources to ensure that the valuationsutilized are reasonable. The Company also corroborates the reasonableness of the fair value estimates with analysis of trends of significant inputs, such as marketinterest rate curves. The Company performs due diligence in understanding the impact to any changes to the valuation techniques performed by proprietary pricingmodels prior to implementation, working closely with the third-party valuation service, and reviews the control objectives of the service at least annually. TheCompany corroborates the fair value of foreign exchange forward contracts through independent calculation of the fair value estimates.

Assets and Liabilities Measured at Fair Value on a Non-Recurring BasisThe Company also has assets that under certain conditions are subject to measurement at fair value on a non-recurring basis. These assets include those

associated with acquired businesses, including goodwill and other intangible assets. For these assets, measurement at fair value in periods subsequent to the initialrecognition of the assets is applicable if one or more of the assets is determined to be impaired. During the three months ended March 31, 2018 and 2017 , theCompany had no material impairments related to these assets.

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Financial Instruments Measured at Other Than Fair ValueIn accordance with AS U 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial

Liabilities, the Company uses the exit price notion when measuring the fair value of financial instruments. See Note 1: Background and Basis of Presentation foradditional information.

The following tables disclose the estimated fair value of the Company's financial assets and financial liabilities that are not required to be carried at fairvalue (dollars in millions):

Quoted Prices inActive Markets

for IdenticalAssets

(Level 1)

SignificantOther

ObservableInputs (Level 2)


Inputs (Level 3) Total Carrying

ValueBalance at March 31, 2018 Assets

Amortized cost States and political subdivisions of states $ — $ — $ — $ — $ —Residential mortgage-backed securities - Agency — 200 — 200 203Held-to-maturity investment securities $ — $ 200 $ — $ 200 $ 203

Net loan receivables $ — $ — $ 83,634 $ 83,634 $ 80,008

Carrying value approximates fair value (1) Cash and cash equivalents $ 17,011 $ — $ — $ 17,011 $ 17,011Restricted cash $ 87 $ — $ — $ 87 $ 87Accrued interest receivables (2) $ — $ 830 $ — $ 830 $ 830

Liabilities

Amortized cost Time deposits (3) $ — $ 30,005 $ — $ 30,005 $ 30,098

Long-term borrowings - owed to securitization investors $ — $ 15,848 $ 596 $ 16,444 $ 16,385Other long-term borrowings — 10,148 — 10,148 9,859Long-term borrowings $ — $ 25,996 $ 596 $ 26,592 $ 26,244

Carrying value approximates fair value (1) Accrued interest payables (2) $ — $ 210 $ — $ 210 $ 210

(1) The carrying values of these assets and liabilities approximate fair value due to the nature of their liquidity (i.e., due or payable in less than one year).(2) Accrued interest receivable and payable carrying values are presented as part of Other assets or Accrued expenses and other liabilities, respectively, in the Company's condensed consolidated statements of financial condition.(3) Excludes deposits without contractually defined maturities for all periods presented.

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The following tables disclose the estimated fair value of the Company's financial assets and financial liabilities that are not required to be carried at fairvalue (dollars in millions):

Quoted Prices inActive Markets

for IdenticalAssets

(Level 1)

SignificantOther

ObservableInputs (Level 2)


Inputs (Level 3) Total Carrying

ValueBalance at December 31, 2017 Assets

Amortized cost States and political subdivisions of states $ — $ 1 $ — $ 1 $ 1Residential mortgage-backed securities - Agency — 172 — 172 172Held-to-maturity investment securities $ — $ 173 $ — $ 173 $ 173

Net loan receivables $ — $ — $ 85,108 $ 85,108 $ 81,627

Carrying value approximates fair value (1) Cash and cash equivalents $ 13,306 $ — $ — $ 13,306 $ 13,306Restricted cash $ 81 $ — $ — $ 81 $ 81Accrued interest receivables (2) $ — $ 818 $ — $ 818 $ 818

Liabilities

Amortized cost Time deposits (3) $ — $ 29,848 $ — $ 29,848 $ 29,752

Long-term borrowings - owed to securitization investors $ — $ 15,851 $ 640 $ 16,491 $ 16,536Other long-term borrowings — 10,293 — 10,293 9,790Long-term borrowings $ — $ 26,144 $ 640 $ 26,784 $ 26,326

Carrying value approximates fair value (1) Accrued interest payables (2) $ — $ 214 $ — $ 214 $ 214

(1) The carrying values of these assets and liabilities approximate fair value due to the nature of their liquidity (i.e., due or payable in less than one year).(2) Accrued interest receivable and payable carrying values are presented as part of Other assets or Accrued expenses and other liabilities, respectively, in the Company's condensed consolidated statements of financial condition.(3) Excludes deposits without contractually defined maturities for all periods presented.

14. Derivatives and Hedging ActivitiesThe Company uses derivatives to manage its exposure to various financial risks. The Company does not enter into derivatives for trading or speculative

purposes. Certain derivatives used to manage the Company’s exposure to foreign currency are not designated as hedges and do not qualify for hedge accounting.

Derivatives may give rise to counterparty credit risk, which generally is addressed through collateral arrangements as described under the sub-heading "—Collateral Requirements and Credit-Risk Related Contingency Features." The Company enters into derivative transactions with established dealers that meetminimum credit criteria established by the Company. All counterparties must be pre-approved prior to engaging in any transaction with the Company.Counterparties are monitored on a regular basis by the Company to ensure compliance with the Company’s risk policies and limits. In determining the counterpartycredit risk valuation adjustment for the fair values of derivatives, the Company considers collateral and legally enforceable master netting agreements that mitigatecredit exposure to related counterparties.

All derivatives are recorded in other assets at their gross positive fair values and in accrued expenses and other liabilities at their gross negative fair values.See Note 13: Fair Value Measurements for a description of the valuation methodologies of derivatives. Cash collateral posted and held balances are recorded inother assets and deposits, respectively, in the condensed consolidated statements of financial condition. Collateral amounts recorded in the condensed consolidatedstatements of financial condition are based on the net collateral posted or held position for each applicable legal entity's

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master netting arrangement with each counterparty. Certain cash collateral amounts associated with derivative positions that are cleared through an exchange arelegally characterized as settlement of the derivative positions. Such collateral amounts are reflected as offsets to the associated derivatives balances recorded inother assets or in accrued expenses and other liabilities, instead of as collateral in other assets or deposits.

Derivatives Designated as HedgesDerivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows arising from changes in interest rates, or other

types of forecasted transactions, are considered cash flow hedges. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value ofan asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges.

CashFlowHedgesThe Company uses interest rate swaps to manage its exposure to changes in interest rates related to future cash flows resulting from interest payments on

credit card securitized debt and deposits. The Company's outstanding cash flow hedges are for an initial maximum period of seven years for securitized debt anddeposits. The derivatives are designated as hedges of the risk of changes in cash flows on the Company's LIBOR or Federal Funds rate-based interest payments,and qualify for hedge accounting in accordance with ASC Topic 815, DerivativesandHedging(“ASC 815”).

Prior to adopting ASU 2017-12, the ineffective portion of the change in the fair value of derivatives designated as cash flow hedges, if any, was required tobe separately measured and recognized directly in earnings. As a result of adopting ASU 2017-12, the entire change in the fair value of derivatives designated ascash flow hedges is recorded in OCI and is subsequently reclassified into earnings in the period that the hedged forecasted cash flows affect earnings. Amountsreported in AOCI related to derivatives at March 31, 2018 will be reclassified to interest expense as interest payments are accrued on certain of the Company'sfloating-rate securitized debt and deposits. During the next 12 months, the Company estimates it will reclassify $7 million of pretax benefit to interest expenserelated to its derivatives designated as cash flow hedges.

FairValueHedgesThe Company is exposed to changes in fair value of certain of its fixed-rate debt obligations due to changes in interest rates. The Company uses interest rate

swaps to manage its exposure to changes in fair value of certain fixed-rate long-term borrowings, including securitized debt and bank or other senior notes, anddeposits attributable to changes in LIBOR, a benchmark interest rate as defined by ASC 815. These interest rate swaps qualify as fair value hedges in accordancewith ASC 815. Changes in both (i) the fair values of the derivatives and (ii) the hedged long-term borrowings and deposits relating to the risk being hedged arerecorded in interest expense. The changes generally provide substantial offset to one another, with any difference in interest expense.

Derivatives Not Designated as Hedges

ForeignExchangeForwardContractsThe Company has foreign exchange forward contracts that are economic hedges and are not designated as accounting hedges. The Company enters into

foreign exchange forward contracts to manage foreign currency risk. Changes in the fair value of these contracts are recorded in other income.

Derivatives Cleared Through an ExchangeThe legal characterization of cash variation margin payments on derivatives cleared through an exchange are legally considered settlement payments and are

accounted for with corresponding derivative positions as one unit of account and not separately as collateral. With settlement payments on derivative positionscleared through this exchange reflected as offsets to the associated derivative asset and liability balances, the fair values of derivative instruments and collateralbalances shown are generally reduced.

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Derivatives Activity

The following table summarizes the fair value (including accrued interest) and outstanding notional amounts of derivative instruments and related collateralbalances (dollars in millions):


NotionalAmount

Number ofOutstandingDerivativeContracts Derivative Assets

DerivativeLiabilities

NotionalAmount Derivative Assets

DerivativeLiabilities

Derivatives designated as hedges

Interest rate swaps—cash flow hedge $ 3,000 6 $ 7 $ 1 $ 3,800 $ 2 $ 3

Interest rate swaps—fair value hedge $ 7,230 9 3 — $ 7,333 4 —Derivatives not designated as hedges

Foreign exchange forward contracts (1) $ 23 7 — — $ 23 — —

Total gross derivative assets/liabilities (2) 10 1 6 3

Less: Collateral held/posted (3) (8) (1) (1) (3)

Total net derivative assets/liabilities $ 2 $ — $ 5 $ —

(1) The foreign exchange forward contracts have notional amounts of EUR 6 million , GBP 5 million , SGD 1 million and INR 464 million as of March 31, 2018 and notional amounts of EUR 7 million , GBP 5 million , SGD 1

million and INR 464 million as of December 31, 2017 .(2) In addition to the derivatives disclosed in the table, the Company enters into forward contracts to purchase when-issued mortgage-backed securities as part of its community reinvestment initiatives. At March 31, 2018 , the

Company had one outstanding contract with a notional amount of $47 million and immaterial fair value. At December 31, 2017 , the Company had one outstanding contract with a notional amount of $54 million and immaterialfair value.

(3) Collateral amounts, which consist of both cash and investment securities, are limited to the related derivative asset/liability balance and do not include excess collateral received/pledged.

The following amounts were recorded on the statements of financial condition related to cumulative basis adjustment for fair value hedges (dollars inmillions): March 31, 2018

Carrying Amount of the

Hedged Assets (Liabilities)

Cumulative Amount of FairValue Hedging Adjustment

Included in the CarryingAmount of the Hedged Assets

(Liabilities)

Long-term borrowings $ 7,027 $ 157

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The following table summarizes the impact of the derivative instruments on income and indicates where within the condensed consolidated financialstatements such impact is reported (dollars in millions): Location and Amount of (Loss) Gain Recognized in Income

Interest (Expense)

Deposits Long-TermBorrowings Other Income

For the Three Months Ended March 31, 2018 Total amounts of income and expense line items presented in the statements of income in which the effects of fair value orcash flow hedges are recorded $ (262) $ (207) $ 29

The effects of cash flow and fair value hedging:

Loss on cash flow hedging relationship

Amounts reclassified from OCI into earnings $ (1) $ — $ —

Gain (loss) on fair value hedging relationship

Gain on hedged items $ — $ 48 $ —

Loss on interest rate swaps — (52) —

Total loss on fair value hedges $ — $ (4) $ —

The effects of derivatives not designated in hedging relationships:

Loss on derivatives not designated as hedges $ — $ — $ (1)

For the Three Months Ended March 31, 2017 Total amounts of income and expense line items presented in the statements of income in which the effects of fair value orcash flow hedges are recorded $ (191) $ (195) $ 28

The effects of cash flow and fair value hedging:

Loss on cash flow hedging relationship

Amounts reclassified from OCI into earnings $ (2) $ (3) $ —

Gain (loss) on fair value hedging relationship

Gain on hedged items $ 1 $ 15 $ —

Loss on interest rate swaps (1) (9) —

Total gain on fair value hedges $ — $ 6 $ —

For the three months ended March 31, 2017 , the loss on derivatives not designated as hedges was immaterial. For the impact of the derivative instrumentson OCI, see Note 7: Accumulated Other Comprehensive Income.

Collateral Requirements and Credit-Risk Related Contingency FeaturesThe Company has master netting arrangements and minimum collateral posting thresholds with its counterparties for its fair value and cash flow hedge

interest rate swaps and foreign exchange forward contracts. The Company has not sought a legal opinion in relation to the enforceability of its master nettingarrangements and, as such, does not report any of these positions on a net basis. Collateral is required by either the Company or its subsidiaries or the counterpartydepending on the net fair value position of these derivatives held with that counterparty. The Company may also be required to post collateral with a counterpartyfor its fair value and cash flow hedge interest rate swaps depending on the credit rating it or Discover Bank receives from specified major credit rating agencies.Collateral receivable or payable amounts are generally not offset against the fair value of these derivatives, but are recorded separately in other assets or deposits.However, certain cash collateral amounts related to positions cleared through an exchange are reflected as offsets to the associated derivatives balances recorded inother assets and accrued expenses and other liabilities.

At March 31, 2018 , Discover Bank’s credit rating met specified thresholds set by its counterparties. However, if its credit rating is reduced belowinvestment grade, Discover Bank would be required to post additional collateral. The amount

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of additional collateral as of March 31, 2018 would have been $20 million . DFS (Parent Company) had no outstanding derivatives as of March 31, 2018 , andtherefore, no collateral was required.

The Company also has agreements with certain of its derivative counterparties that contain a provision where if the Company defaults on any of itsindebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default onits derivative obligations.

15. Segment DisclosuresThe Company’s business activities are managed in two segments: Direct Banking and Payment Services.

• DirectBanking:The Direct Banking segment includes Discover-branded credit cards issued to individuals on the Discover Network and otherconsumer products and services, including private student loans, personal loans, home equity loans, and other consumer lending and deposit products.The majority of Direct Banking revenues relate to interest income earned on the segment's loan products. Additionally, the Company’s credit cardproducts generate substantially all revenues related to discount and interchange, protection products and loan fee income.

• PaymentServices:The Payment Services segment includes PULSE, an automated teller machine, debit and electronic funds transfer network; DinersClub, a global payments network; and the Company’s Network Partners business, which provides payment transaction processing and settlementservices on the Discover Network. The majority of Payment Services revenues relate to transaction processing revenue from PULSE and royalty andlicensee revenue from Diners Club.

The business segment reporting provided to and used by the Company’s chief operating decision maker is prepared using the following principles andallocation conventions:

• The Company aggregates operating segments when determining reportable segments.

• Corporate overhead is not allocated between segments; all corporate overhead is included in the Direct Banking segment.

• Through its operation of the Discover Network, the Direct Banking segment incurs fixed marketing, servicing and infrastructure costs that are notspecifically allocated among the segments, with the exception of an allocation of direct and incremental costs driven by the Company's PaymentServices segment.

• The assets of the Company are not allocated among the operating segments in the information reviewed by the Company’s chief operating decisionmaker.

• The revenues of each segment are derived from external sources. The segments do not earn revenue from intercompany sources.

• Income taxes are not specifically allocated between the operating segments in the information reviewed by the Company’s chief operating decisionmaker.

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The following table presents segment data (dollars in millions):

Direct

Banking PaymentServices Total


Interest income

Credit card loans $ 2,090 $ — $ 2,090

Private student loans 147 — 147

PCI student loans 37 — 37

Personal loans 226 — 226

Other 69 — 69

Total interest income 2,569 — 2,569

Interest expense 469 — 469

Net interest income 2,100 — 2,100

Provision for loan losses 751 — 751

Other income 394 81 475

Other expense 932 36 968

Income before income tax expense $ 811 $ 45 $ 856


Interest income

Credit card loans $ 1,876 $ — $ 1,876

Private student loans 124 — 124

PCI student loans 41 — 41

Personal loans 198 — 198

Other 39 — 39

Total interest income 2,278 — 2,278

Interest expense 386 — 386

Net interest income 1,892 — 1,892

Provision for loan losses 594 (8) 586


Other expense 849 36 885

Income before income tax expense $ 824 $ 44 $ 868

16. Revenue from Contracts with CustomersFASB ASC Topic 606, Revenue from Contracts with Customers, generally applies to the sales of any good or service for which no other specific accounting

guidance is provided. ASC 606 defines a principles-based model under which revenue from a contract is allocated to the distinct performance obligations withinthe contract and recognized in income as each performance obligation is satisfied. The Company’s revenue that is subject to this model includes discount andinterchange, protection products fees, transaction processing revenue, and amounts classified as other income.

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The following table presents revenue from contracts with customers disaggregated by business segment and reconciles revenue from contracts withcustomers to total other income (dollars in millions):

Direct Banking Payment Services Total

For the Three Months Ended March 31, 2018 Other income subject to ASC 606

Discount and interchange revenue, net (1) $ 242 $ 12 $ 254

Protection products 53 — 53

Transaction processing revenue — 43 43


Total other income subject to ASC 606 (2) 298 81 379

Other income not subject to ASC 606

Loan Fee Income 96 — 96

Total other income not subject to ASC 606 96 — 96

Total other income by operating segment $ 394 $ 81 $ 475

For the Three Months Ended March 31, 2017 Other income subject to ASC 606

Discount and interchange revenue, net (1) $ 223 $ 10 $ 233

Protection products 58 — 58

Transaction processing revenue — 39 39


Total other income subject to ASC 606 (2) 286 72 358

Other income not subject to ASC 606

Loan Fee Income 89 — 89

Total other income not subject to ASC 606 89 — 89

Total other income by operating segment $ 375 $ 72 $ 447

(1) Net of rewards, including Cashback Bonus rewards, of $392 million and $363 million for the three months ended March 31, 2018 and 2017 , respectively.(2) Excludes $1 million of deposit product fees that are reported within net interest income for the three months ended March 31, 2018 . Deposit product fees were immaterial for the three months ended March 31, 2017 .

Discount and Interchange RevenueThe Company earns discount revenue from fees charged to merchants with whom it has entered into card acceptance agreements for processing credit card

purchase transactions. The Company earns acquirer interchange revenue primarily from merchant acquirers on all Discover Network card transactions and certainDiners Club transactions made by credit card customers at merchants with whom merchant acquirers have entered into card acceptance agreements for processingcredit card purchase transactions. These card acceptance arrangements generally renew automatically and do not have fixed durations. Under these agreements, theCompany stands ready to process payment transactions as and when each is presented to it. The Company earns discount, interchange and similar fees only if andwhen transactions are processed. Contractually defined per-transaction fee amounts typically apply to each type of transaction processed and are recognized asrevenue at the time each transaction is captured for settlement. These fees are typically collected by the Company as part of the process of settling transactionsdaily with merchants and acquirers and are fully earned at the time settlement is made.

The Company pays issuer interchange to card-issuing entities that have entered into contractual arrangements to issue cards on the Discover Network and oncertain transactions on the Diners Club network. This cost is contractually established and is based on the card-issuing organization’s transaction volume. TheCompany classifies this cost as a reduction of discount and interchange revenue. Costs of cardholder reward arrangements, including the Cashback Bonus rewardprogram, are classified as reductions of discount and interchange revenue pursuant to guidance under ASC 606 governing consideration payable to a customer. Forboth issuer interchange and cardholder rewards, the Company accrues the cost at the time each underlying card transaction is captured for settlement.

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Protection ProductsThe Company earns revenue related to fees received for marketing ancillary products and services, including payment protection and identity theft

protection services, to its credit card customers. A portion of this revenue comprises amounts earned for arranging for the delivery of products offered by third-party service providers. The amount of revenue recorded is generally based on either a percentage of a customer’s outstanding balance or a flat fee, in either caseassessed monthly, and is recognized as earned. These contracts are month-to-month arrangements that are cancellable at any time. The Company recognizes eachmonthly fee in the period to which the service or coverage relates.

Transaction Processing RevenueTransaction processing revenue represents switch fees charged to financial institutions and merchants under network participation agreements for processing

ATM, debit and POS transactions over the PULSE network, as well as various participation and membership fees. Network participation agreements generallyrenew automatically and do not have fixed durations, although the Company does enter into fixed-term pricing or incentive arrangements with certain networkparticipants. The impact of such incentives is not material to the Company’s consolidated statements of income. Similar to discount and interchange fees, switchfees are contractually defined per-transaction fee amounts and are assessed and recognized as revenue at the time each transaction is captured for settlement. Thesefees are typically collected by the Company as part of the process of settling transactions daily with network participants. Membership and other participation feesare recognized over the periods to which each fee relates.

Other Income

Other income includes sales-based royalty revenues earned by Diners Club, merchant fees, certain payments from merchants related to reward programs,revenues from network partners and other miscellaneous revenue items. Sales-based royalty revenues are recognized as the related sales are reported by Dinersfranchisees. All remaining items of other income are recognized as the related performance obligations are satisfied.

Future Revenue Associated with Customer Contracts

For contracts under which the Company processes payment card transactions, the Company has the right to assess fees for services performed and tocollect those fees through the settlement process. The Company generates essentially all of its discount and interchange revenue and transaction processingrevenue, as well as some revenue reported as other income, through such contracts. There is no specified quantity of service promised in these contracts as thenumber of payment transactions is dependent upon cardholder behavior which is outside the control of the Company and its network customers (i.e., merchants,acquirers, issuers, and other network participants). As noted above, these contracts are typically without fixed durations and renew automatically. For thesereasons, the Company does not make or disclose an estimate of revenue associated with performance obligations attributable to the remaining terms of thesecontracts. Future revenue associated with the Company’s sales-based royalty revenues earned from Diners Club licensees is similarly variable and open ended,and therefore the Company does not make or disclose an estimate of royalties associated with performance obligations attributable to the remaining terms of thelicensing and royalty arrangements. Because of the nature of the services and the manner of collection associated with the majority of the Company's revenuefrom contracts with customers, material receivables or deferred revenues are not generated.

17. Subsequent EventsThe Company has evaluated events and transactions that have occurred subsequent to March 31, 2018 and determined that there were no subsequent events

that would require recognition or disclosure in the condensed consolidated financial statements.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of OperationsThefollowingdiscussionandanalysisofourfinancialconditionandresultsofoperationsshouldbereadinconjunctionwithourcondensedconsolidated

financialstatementsandrelatednotesincludedelsewhereinthisquarterlyreport.Thisquarterlyreportcontainsforward-lookingstatementswithinthemeaningofthePrivateSecuritiesLitigationReformActof1995.Suchstatements,whichspeaktoourexpectedbusinessandfinancialperformance,amongothermatters,containwordssuchas“believe,”“expect,”“anticipate,”“intend,”“plan,”“aim,”“will,”“may,”“should,”“could,”“would,”“likely,”andsimilarexpressions.Suchstatementsarebaseduponthecurrentbeliefsandexpectationsofourmanagementandaresubjecttosignificantrisksanduncertainties.Actualresultsmaydiffermateriallyfromthosesetforthintheforward-lookingstatements.Theseforward-lookingstatementsspeakonlyasofthedateofthisquarterlyreport,andthereisnoundertakingtoupdateorrevisethemasmoreinformationbecomesavailable.

Thefollowingfactors,amongothers,couldcauseactualresultstodiffermateriallyfromthosesetforthintheforward-lookingstatements:changesineconomicvariables,suchastheavailabilityofconsumercredit,thehousingmarket,energycosts,thenumberandsizeofpersonalbankruptcyfilings,therateofunemployment,thelevelsofconsumerconfidenceandconsumerdebtandinvestorsentiment;theimpactofcurrent,pendingandfuturelegislation,regulation,supervisoryguidanceandregulatoryandlegalactions,including,butnotlimitedto,thoserelatedtofinancialregulatoryreform,consumerfinancialservicespractices,anti-corruptionandfunding,capitalandliquidity;theactionsandinitiativesofcurrentandpotentialcompetitors;ourabilitytomanageourexpenses;ourabilitytosuccessfullyachievecardacceptanceacrossournetworksandmaintainrelationshipswithnetworkparticipants;ourabilitytosustainandgrowourprivatestudentloan,personalloanandhomeequityloanproducts;lossesasaresultofmortgageloanrepurchaseandindemnificationobligationstosecondarymarketpurchasers;difficultyobtainingregulatoryapprovalfor,financing,transitioning,integratingormanagingtheexpensesofacquisitionsoforinvestmentsinnewbusinesses,productsortechnologies;ourabilitytomanageourcreditrisk,marketrisk,liquidityrisk,operationalrisk,legalandcomplianceriskandstrategicrisk;theavailabilityandcostoffundingandcapital;accesstodeposit,securitization,equity,debtandcreditmarkets;theimpactofratingagencyactions;thelevelandvolatilityofequityprices,commoditypricesandinterestrates,currencyvalues,investments,othermarketfluctuationsandothermarketindices;lossesinourinvestmentportfolio;limitsonourabilitytopaydividendsandrepurchaseourcommonstock;limitsonourabilitytoreceivepaymentsfromoursubsidiaries;fraudulentactivitiesormaterialsecuritybreachesofkeysystems;ourabilitytoremainorganizationallyeffective;ourabilitytoincreaseorsustainDiscovercardusageorattractnewcustomers;ourabilitytomaintainrelationshipswithmerchants;theeffectofpolitical,economicandmarketconditions,geopoliticaleventsandunforeseenorcatastrophicevents;ourabilitytointroducenewproductsandservices;ourabilitytomanageourrelationshipswiththird-partyvendors;ourabilitytomaintaincurrenttechnologyandintegratenewandacquiredsystems;ourabilitytocollectamountsfordisputedtransactionsfrommerchantsandmerchantacquirers;ourabilitytoattractandretainemployees;ourabilitytoprotectourreputationandourintellectualproperty;andnewlawsuits,investigationsorsimilarmattersorunanticipateddevelopmentsrelatedtocurrentmatters.Weroutinelyevaluateandmaypursueacquisitionsoforinvestmentsinbusinesses,products,technologies,loanportfoliosordeposits,whichmayinvolvepaymentincashorourdebtorequitysecurities.

Additionalfactorsthatcouldcauseourresultstodiffermateriallyfromthosedescribedbelowcanbefoundinthissectioninthisquarterlyreportandin“RiskFactors,”“Business—Competition,”“Business—SupervisionandRegulation”and“Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperations”inourannualreportonForm10-KfortheyearendedDecember31,2017,whichisfiledwiththeSECandavailableattheSEC’sinternetsite(http://www.sec.gov).

Introduction and OverviewDiscover Financial Services ("DFS") is a direct banking and payment services company. We provide direct banking products and services and payment

services through our subsidiaries. We offer our customers credit card loans, private student loans, personal loans, home equity loans and deposit products. We alsooperate the Discover Network, the PULSE network (“PULSE”) and Diners Club International (“Diners Club”). The Discover Network processes transactions forDiscover-branded credit and debit cards and provides payment transaction processing and settlement services. PULSE operates an electronic funds transfernetwork, providing financial institutions issuing debit cards on the PULSE network with access to ATMs domestically and internationally, as well as point-of-saleterminals at retail locations throughout the U.S. for debit card transactions. Diners Club is a global payments network of licensees, which are generally financialinstitutions, that issue Diners Club branded charge cards and/or provide card acceptance services.

Our primary revenues consist of interest income earned on loan receivables and fees earned from customers, financial institutions, merchants and issuers.The primary expenses required to operate our business include funding costs (interest

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expense), loan loss provisions, customer rewards and expenses incurred to grow, manage and service our loan receivables and networks. Our business activities arefunded primarily through consumer deposits, securitization of loan receivables and the issuance of unsecured debt.

Quarter Highlights

• Net income for the three months ended March 31, 2018 was $666 million compared to $564 million for the same period in 2017 .

• Total loans grew $6.9 billion , or 9% , from March 31, 2017 to $82.7 billion .

• Credit card loans grew $5.8 billion , or 10% , to $65.6 billion , and Discover card sales volume increased 6% from March 31, 2017 .

• Net charge-off rate excluding PCI loans increased 48 basis points from the prior year to 3.17% and the credit card delinquency rate for loans over 30days past due increased 27 basis points from the prior year to 2.33% .

• Direct-to-consumer deposits grew $4.2 billion , or 11% , from the prior year to $41.3 billion .

• Payment Services transaction dollar volume for the segment was $56.1 billion , up 19% from the prior year.

OutlookWe continue to focus on deploying capital through disciplined and profitable organic loan growth as well as through our quarterly dividends and share

repurchase program as permitted by bank holding company regulation. We expect the reduction in income tax expense resulting from the Tax Cuts and Job Act("TCJA") to continue to benefit us and allow for additional investments in business growth, technology, analytical capabilities, our employees and our community.New card accounts and wallet share gains with existing customers remain priorities as we invest in marketing and rewards to achieve continued loan growth. Weexpect our rewards rate to rise slightly as we leverage enhanced rewards programs to support growth.

The total charge-off rate is expected to increase in comparison to the prior year and we expect to add to the loan loss reserve to provide for the seasoning ofrecent loan growth and supply-driven credit normalization. We expect net interest margin to increase slightly during the year, driven by the impact of recent andanticipated prime rate increases on our asset sensitive balance sheet. These increases may be partially offset by higher deposit rates, promotional card balances andinterest charge-offs.

In our payments segment, we will continue to pursue new ways to drive volume growth in 2018. We continue to leverage our network to support our card-issuing business and we expect the payments industry to remain competitive.

Regulatory Environment and DevelopmentsOver the past several years, regulators have proposed and implemented new regulations and supervisory guidance, including under the Dodd-Frank Wall

Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), and increased their examination and enforcement activities. In February 2017, an executiveorder was signed identifying principles by which the administration would regulate the U.S financial system, including making regulation appropriately tailoredand efficient. The executive order also directed the Treasury Secretary to identify laws, regulations, guidance and other government policies, among other things,that are inconsistent with those principles. In June, October and November 2017 as well as February 2018, the Treasury Department issued reportsthat recommended significant changes to many of the rules and regulations implemented in response to the financial crisis of 2007.

In addition, Congress has addressed regulation of the financial services sector in several ways. For example, it exercised its authority to reject recentlypromulgated regulations, rarely used in the past under the Congressional Review Act, to overturn a regulation adopted by the Consumer Financial ProtectionBureau (the "CFPB") that limited pre-dispute arbitration agreements. The joint resolution repealing the arbitration rule was signed by the President in November2017. Additionally, the House and Senate have approved different versions of regulatory relief legislation that modifies provisions of the Dodd-Frank Act.Included in both are amendments to Dodd-Frank provisions that currently impose enhanced supervisory and capital requirements automatically on banks with morethan $50 billion in assets. This and other changes would provide relief to mid-sized banks like Discover. The House bill makes significant changes to the structureand funding of the CFPB. While prospects for the enactment of financial regulatory reform legislation in 2018 are favorable, the breadth and form of the final laware uncertain at this time.

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Despite a growing focus on regulatory reform, banking regulators and policymakers at the federal and state levels are increasingly focused on measures toenhance data security and incident response capabilities as a result of growing cybersecurity threats and the number of incidents involving unauthorized access toconsumer information, including the September 2017 disclosure of a large data breach at a national credit reporting agency. Regulations at various levels ofgovernment have been proposed to address security breach notification and data security standards. For example, several states have recently issued regulations forcertain firms operating within their jurisdiction. While it is too early to know their impact, these developments could ultimately result in the imposition ofrequirements on Discover and other card issuers or networks that could increase costs or adversely affect the competitiveness of our credit card or debit cardproducts. In addition, the size and scope of the 2017 national credit reporting agency breach may result in the financial services industry shifting to new means ofidentifying and authenticating consumers.

The impact of the evolving regulatory environment on our business and operations depends upon a number of factors, including supervisory priorities andactions, our actions, actions of our competitors and other marketplace participants, and the behavior of consumers. For more information on how the regulatoryenvironment, enforcement actions, findings and ratings could also have an impact on our strategies, the value of our assets, or otherwise adversely affect ourbusiness see “Risk Factors — Economic and Regulatory Environment” of our annual report on Form 10-K for the year ended December 31, 2017 . For moreinformation on recent matters affecting us, see Note 12: Litigation and Regulatory Matters to our condensed consolidated financial statements.

Consumer Financial ServicesThe CFPB regulates consumer financial products and services, as well as certain financial services providers, including Discover. The CFPB has rulemaking

and interpretive authority under the Dodd-Frank Act and other federal consumer financial services laws, as well as broad supervisory, examination andenforcement authority over designated financial services providers, including Discover. The CFPB’s regulatory authority includes the exercise of rulemaking,supervision and enforcement powers with respect to “unfair, deceptive or abusive acts or practices” and consumer access to fair, transparent and competitivefinancial products and services. Historically, the CFPB's policy priorities focused on several financial products of the type we offer (e.g. credit cards and studentloans).

Under its interim director, the CFPB has recently issued a 5-year strategic plan that focuses on ensuring that all consumers have access to markets forconsumer financial products and services, implementing and enforcing the law consistently to ensure that markets for consumer financial products and services arefair, transparent and competitive, and fostering operational excellence through efficient and effective process governance and security of resources andinformation. In furtherance of each of these areas, the CFPB has recently issued formal requests for information on various topics. It is unclear when a new directorwill be nominated and confirmed and whether the new director will continue the interim director's priorities or goals. Notwithstanding any changes in the CFPB'sleadership, the CFPB is required by statute to undertake certain actions. For example, pursuant to the Credit Card Accountability Responsibility and Disclosure Actof 2009, the CFPB recently completed its bi-annual review of the consumer credit card market. The review may result in additional guidance for credit card issuers,regulatory changes or legislative recommendations to Congress.

Notwithstanding the leadership changes at the CFPB and other federal regulators, there continues to be legislative and regulatory focus on the privatestudent loan market, including by some state legislatures and state attorneys general. Recent areas of regulatory attention include servicing, payments andcollection practices, and other matters. This regulatory focus has resulted in an increase in supervisory examinations of Discover related to private student loans. Atthe legislative level, the focus on student loans has resulted in the enactment of student loan servicing laws in several states, and similar legislation is beingconsidered in other states that could impose new licensing, servicing, reporting and regulatory oversight requirements on student loan servicers. The enactment ofnew legislation or the adoption of new regulations or guidance may increase the complexity and expense of servicing student loans and impact the entire studentloan market, which could cause us to change our private student loan products or servicing practices in ways that we may not currently anticipate.

Payment NetworksThe Dodd-Frank Act contains several provisions impacting the debit card market, including network participation requirements and interchange fee

limitations. The changing debit card environment, including competitor actions related to merchant and acquirer pricing and transaction routing strategies, hasadversely affected, and is expected to continue to adversely affect, our PULSE network's business practices, network transaction volume, revenue and prospects forfuture growth. We continue to closely monitor competitor pricing and technology development strategies in order to assess their impact on our business and oncompetition in the marketplace. The U.S. Department of Justice is examining some of these

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competitor pricing strategies. In addition, PULSE filed a lawsuit against Visa in late 2014 with respect to these competitive concerns, which may impact expensesfor the payment services segment. In addition, the Dodd-Frank Act's network participation requirements impact PULSE's ability to enter into exclusivityarrangements, which affects PULSE's current business practices and may materially adversely affect its network transaction volume and revenue.

There are initiatives in Europe that may have an impact on our business, including revisions to the Payment Services Directive ("PSD2") and the newGeneral Data Protection Regulation ("GDPR"). The PSD2 was published in the Official Journal of the EU in December 2015 and may impact our Diners Clubbusiness. Each European Union member state was required to transpose the PSD2 into its national law by January 13, 2018. Among other terms, the PSD2 includesprovisions that once transposed into local law will regulate surcharging and network access requirements, which may result in differential surcharging of DinersClub cards and may impact Diners Club licensing arrangements in Europe. The final draft of the GDPR was published in the Official Journal of the EuropeanUnion in May 2016 and comes into force on May 25, 2018. The GDPR includes, among other things, a requirement for prompt notice of data breaches and requirescompanies processing personal data of individuals residing in the EU, regardless of the location of the company, to comply with EU privacy and data protectionrules. We expect the GDPR to have an impact on how we process the personal data of EU individuals and we have a program underway to address GDPRrequirements.

Banking

CapitalDiscover is subject to the Federal Reserve’s Comprehensive Capital Analysis and Review (“CCAR”) program which requires a company to submit its

capital plan to the Federal Reserve for approval each year, including planned dividends and share repurchases. In February 2018, the Federal Reserve published thesupervisory scenarios and instructions for the 2018 CCAR submission. The severely adverse scenario simulates an economic recession with a sudden increase inunemployment not seen since the 1930's. In March 2018, the Federal Reserve announced that it had made enhancements to its internal models used for supervisorystress tests, including a change to its domestic credit card model that the Federal Reserve anticipates will result in "materially higher" projected losses for firmswith large bank card exposures. These changes will be phased-in over two years. Our 2018 CCAR submission will include the impact of the TCJA. The TCJA hasthe effect of lowering the corporate tax rate; however, there are numerous other changes in the law that may impact our business, operations and financial results.For example, the TCJA has the effect of increasing the negative financial impact in capital stress testing scenarios due to larger disallowed deferred tax assets asnet operating losses can now only be carried forward. These changes could reduce the amount of capital available to return to shareholders in such scenarios. Foradditional information, see "Business — Supervision and Regulation — Capital, Dividends and Share Repurchases" of our annual report on Form 10-K for the yearended December 31, 2017 .

Discover Financial Services and Discover Bank are subject to regulatory capital requirements that became effective January 1, 2015 under final rules issuedby the Federal Reserve and the Federal Deposit Insurance Corporation ("FDIC") to implement the provisions under the Basel Committee’s December 2010framework (referred to as “Basel III”). The final capital rules ("Basel III rules") require minimum risk-based capital and leverage ratios and define what constitutescapital for purposes of calculating those ratios. In addition, the Basel III rules establish a capital conservation buffer ("CCB") above the regulatory minimumcapital requirements, which must consist entirely of Common Equity Tier 1 ("CET1") capital and result in higher required minimum ratios by at least 2.5%. Thenew CCB requirement became effective January 2016; however, the buffer threshold amounts are subject to a gradual phase-in period. In 2017, the highest CCBthreshold was 1.25%, which has risen to 1.875% for the 2018 calendar year. The full 2.5% buffer requirement will not be fully phased-in until January 2019. Abanking organization is subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if its capital level falls belowany of the minimum capital requirements, taking into account the applicable CCB thresholds. Based on our current capital composition and levels and businessplans, we are and expect to continue to be in compliance with the requirements for the foreseeable future. For additional information, see "— Liquidity and CapitalResources — Capital."

Federal banking regulators jointly issued a proposed rule in September 2017 that would simplify the treatment of certain assets and deductions forinstitutions that are not subject to the advanced approaches capital rule. Among other things, the proposed rule would increase or adjust the deduction thresholdsfor certain mortgage servicing assets, deferred tax assets, investments in the capital of unconsolidated financial institutions, and minority interests. As proposed,the new rules would apply to Discover Financial Services and its subsidiary banks. While the banking agencies consider comments on the proposed rule, theagencies adopted a rule in November 2017, that provides interim relief to non-advanced approaches

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banking organizations, such as Discover, by extending the regulatory capital transition periods effective in 2017 for certain items, including regulatory capitaldeductions, risk weights, and certain minority interest limitations.

In December 2017, the Basel Committee adopted various standards meant to finalize remaining elements of the Basel III reforms first introduced in 2010.Among the new standards are revisions to the standardized approach for credit risk, which establishes standardized risk weightings used to measure credit risk forpurposes of calculating regulatory capital requirements. The new revisions include a provision that would, for the first time, require banking organizations toinclude a percentage of “unconditionally cancellable commitments” in risk-weighted asset calculations. If this change were to be adopted in the United States bythe domestic federal banking agencies and made applicable to all "Standardized Approach" banking organizations such as Discover, it could require credit cardissuers to substantially increase the amount of capital they hold against unused credit card lines. The federal banking agencies have publicly indicated support forthe new Basel standards but stated that the standards were “designed for internationally active banks” and that any changes to the regulatory capital rules in theUnited States “will be made through the standard notice-and-comment rulemaking process.”

On April 10, 2018, the Federal Reserve issued a notice of proposed rulemaking that would significantly revise the regulatory capital and stress testingframeworks for mid-sized bank holding companies such as Discover Financial Services. The proposal is intended to make regulatory capital requirements moreforward-looking, risk-sensitive, and firm-specific by linking them to the annual CCAR stress testing and capital plan review process. The timing and substance ofany final rulemaking is uncertain at this time, however the notice indicates the Federal Reserve intends to adopt a final rule that would be effective on December31, 2018.

On April 17, 2018, federal banking agencies issued a joint proposal that would, among other things, give bank holding companies and banks, includingDiscover and its bank subsidiaries, the option to phase in the regulatory capital impacts of implementing the current expected credit loss (" CECL") approach overa three-year transition period. Recognition would be on a straight-line basis (i.e., 25% in year one, 50% in year two, 75% in year three and 100% thereafter). Thetiming and substance of any final rulemaking is uncertain at this time. For more information on CECL and how it may affect Discover, see Note 1: Backgroundand Basis of Presentation to our condensed consolidated financial statements.

LiquidityWe are subject to the U.S. liquidity coverage ratio rule issued by federal banking regulators. This quantitative requirement is designed to promote the short-

term resilience of the liquidity risk profile of large and internationally active banking organizations in the United States. The rule requires covered banks tomaintain an amount of high-quality liquid assets sufficient to cover projected net cash outflows during a prospective 30-day calendar period under an acute,hypothetical liquidity stress scenario. Given our current asset size, we are subject to a modified liquidity coverage ratio requirement which requires a lower level ofhigh-quality liquid assets to meet the minimum ratio requirement due to adjustments to the net cash outflow amount. As of March 31, 2018 , our liquidity coverageratio was in excess of the applicable regulatory requirement. Pursuant to the final rule issued by the Federal Reserve, we will be required to publish quarterly publicdisclosures regarding our liquidity risk profile and components of our liquidity coverage ratio beginning the fourth quarter of 2018.

FundingOn April 3, 2018, the Federal Reserve Bank of New York began publication of three new reference rates based on overnight repurchase agreement

transactions secured by Treasury securities. These new reference rates may be used in future transactions as a replacement for London Interbank Offered Rate("LIBOR"), which will no longer be maintained after 2021, in certain contracts.

SegmentsWe manage our business activities in two segments, Direct Banking and Payment Services, based on the products and services provided. For a detailed

description of the operations of each segment, as well as the allocation conventions used in our business segment reporting, see Note 15: Segment Disclosures toour condensed consolidated financial statements.

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The following table presents segment data (dollars in millions): For the Three Months Ended March 31, 2018 2017

Direct Banking

Interest income

Credit card $ 2,090 $ 1,876

Private student loans 147 124

PCI student loans 37 41

Personal loans 226 198

Other 69 39

Total interest income 2,569 2,278

Interest expense 469 386

Net interest income 2,100 1,892

Provision for loan losses 751 594

Other income 394 375

Other expense 932 849

Income before income tax expense 811 824

Payment Services

Provision for loan losses — (8)

Other income 81 72

Other expense 36 36

Income before income tax expense 45 44

Total income before income tax expense $ 856 $ 868

The following table presents information on transaction volume (in millions): For the Three Months Ended March 31,

2018 2017Network Transaction Volume PULSE Network $ 43,158 $ 36,066Network Partners 4,553 3,661Diners Club (1) 8,390 7,382Total Payment Services 56,101 47,109

Discover Network—Proprietary (2)32,382 29,859

Total Volume $ 88,483 $ 76,968Transactions Processed on Networks Discover Network 550 503PULSE Network 989 870Total 1,539 1,373

Credit Card Volume

Discover Card Volume (3)$ 34,327 $ 32,406

Discover Card Sales Volume (4)$ 30,850 $ 29,134

(1) Diners Club volume is derived from data provided by licensees for Diners Club branded cards issued outside North America and is subject to subsequent revision or amendment.(2) Represents gross proprietary sales volume on the Discover Network.(3) Represents Discover card activity related to net sales, balance transfers, cash advances and other activity.(4) Represents Discover card activity related to net sales.

Direct BankingOur Direct Banking segment reported pretax income of $811 million for the three months ended March 31, 2018 as compared to pretax income of $824

million for the three months ended March 31, 2017 .

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Net interest margin increased for the three months ended March 31, 2018 as compared to the same period in 2017 primarily driven by higher yields on creditcard loans, partially offset by higher funding costs, both of which were the result of higher market rates. Interest income increased during the three months endedMarch 31, 2018 as compared to the same period in 2017 primarily due to loan growth and yield expansion from prime rate increases. Interest expense increasedduring the three months ended March 31, 2018 as compared to the same period in 2017 primarily due to higher market rates and a larger funding base.

For the three months ended March 31, 2018 , the provision for loan losses increased as compared to the same period in 2017 primarily due to higher levelsof net charge-offs as well as a larger build of the allowance for loan losses as compared to the same period in 2017 . For a detailed discussion on provision for loanlosses, see "— Loan Quality — Provision and Allowance for Loan Losses."

Total other income increased in the three months ended March 31, 2018 as compared to the same period in 2017 . The increase was primarily due to higherdiscount and interchange revenue, partially offset by higher standard rewards, both of which were the result of higher sales volume.

Total other expense increased in the three months ended March 31, 2018 as compared to the same period in 2017 . The increase was primarily driven byhigher employee compensation and benefits, marketing and business development and other expense. The increase in employee compensation and benefits wasdriven by additional headcount for business growth and regulatory and compliance needs, as well as higher average salaries. The increase in marketing andbusiness development was primarily the result of higher brand advertising and acquisition costs that contributed to loan growth and deposit growth. The increase inother expense was primarily driven by incremental investments in philanthropic initiatives.

Discover card sales volume was $30.9 billion for the three months ended March 31, 2018 , which was an increase of 5.9% as compared to the same periodin 2017 . This volume growth was primarily driven by an increase in active cardmembers.

Payment ServicesOur Payment Services segment reported pretax income of $45 million for the three months ended March 31, 2018 which was relatively flat as compared to

pretax income of $44 million for the same period in 2017 with higher volume driven revenue offset by a reserve release in 2017.

Downturns in the global economy or negative impacts in foreign currency may adversely affect our financial condition or results of operations in ourPayment Services segment. We continue to work with our Diners Club licensees with regard to their ability to maintain financing sufficient to support businessoperations. We may continue to provide additional support in the future, including loans, facilitating transfer of ownership, or acquiring assets or licensees, whichmay cause us to incur losses. The licensees that we currently consider to be of concern accounted for approximately 4% of Diners Club revenues during the threemonths ended March 31, 2018 .

Critical Accounting EstimatesIn preparing our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States ("GAAP"),

management must make judgments and use estimates and assumptions about the effects of matters that are uncertain. For estimates that involve a high degree ofjudgment and subjectivity, it is possible that different estimates could reasonably be derived for the same period. For estimates that are particularly sensitive tochanges in economic or market conditions, significant changes to the estimated amount from period to period are also possible. Management believes the currentassumptions and other considerations used to estimate amounts reflected in our condensed consolidated financial statements are appropriate. However, if actualexperience differs from the assumptions and other considerations used in estimating amounts in our condensed consolidated financial statements, the resultingchanges could have a material effect on our consolidated results of operations and, in certain cases, could have a material effect on our consolidated financialcondition. Management has identified the estimates related to our allowance for loan losses, the evaluation of goodwill and other non-amortizable intangible assetsfor potential impairment and the accrual of income taxes as critical accounting estimates. These critical accounting estimates are discussed in greater detail in ourannual report on Form 10-K for the year ended December 31, 2017 . That discussion can be found within “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” under the heading “— Critical Accounting Estimates.” There have not been any material changes in the methods used toformulate these critical accounting estimates from those discussed in our annual report on Form 10-K for the year ended December 31, 2017 .

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Earnings Summary

The following table outlines changes in our condensed consolidated statements of income (dollars in millions):


March 31, 2018 vs. 2017

Increase (Decrease)

2018 2017 $ %Interest income $ 2,569 $ 2,278 $ 291 13 %Interest expense 469 386 83 22 %Net interest income 2,100 1,892 208 11 %

Provision for loan losses 751 586 165 28 %Net interest income after provision for loan losses 1,349 1,306 43 3 %

Other income 475 447 28 6 %Other expense 968 885 83 9 %Income before income tax expense 856 868 (12) (1)%

Income tax expense 190 304 (114) (38)%Net income $ 666 $ 564 $ 102 18 %

Net Interest IncomeThe table that follows this section has been provided to supplement the discussion below and provide further analysis of net interest income and net interest

margin. Net interest income represents the difference between interest income earned on our interest-earning assets and the interest expense incurred to financethose assets. We analyze net interest income in total by calculating net interest margin (net interest income as a percentage of average total loan receivables) andnet yield on interest-earning assets (net interest income as a percentage of average total interest-earning assets). We also separately consider the impact of the levelof loan receivables and the related interest yield and the impact of the cost of funds related to each of our funding sources, along with the income generated by ourliquidity portfolio, on net interest income.

Our interest-earning assets consist of: (i) cash and cash equivalents primarily related to amounts on deposit with the Federal Reserve Bank of Philadelphia,(ii) restricted cash, (iii) other short-term investments, (iv) investment securities and (v) loan receivables. Our interest-bearing liabilities consist primarily ofdeposits, both direct-to-consumer and brokered, and long-term borrowings, including amounts owed to securitization investors. Net interest income is influencedby the following:

• The level and composition of loan receivables, including the proportion of credit card loans to other loans, as well as the proportion of loan receivablesbearing interest at promotional rates as compared to standard rates;

• The credit performance of our loans, particularly with regard to charge-offs of finance charges, which reduce interest income;

• The terms of long-term borrowings and certificates of deposit upon initial offering, including maturity and interest rate;

• The level and composition of other interest-earning assets, including our liquidity portfolio and interest-bearing liabilities;

• Changes in the interest rate environment, including the levels of interest rates and the relationships among interest rate indices, such as the prime rate,the Federal Funds rate and LIBOR;

• The effectiveness of interest rate swaps in our interest rate risk management program; and

• The difference between the carrying amount and future cash flows expected to be collected on PCI loans.

Net interest margin increased for the three months ended March 31, 2018 as compared to the same period in 2017 primarily driven by higher yields on creditcard loans, partially offset by higher funding costs, both of which were the result of higher market rates. Interest income increased during the three months endedMarch 31, 2018 as compared to the same period in 2017 primarily due to loan growth and yield expansion from prime rate increases. Interest expense increasedduring the three months ended March 31, 2018 as compared to the same period in 2017 primarily due to higher market rates and a larger funding base.

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Average Balance Sheet Analysis(dollars in millions) For the Three Months Ended March 31,

2018 2017

Average Balance Rate Interest Average Balance Rate Interest

Assets

Interest-earning assets

Cash and cash equivalents $ 13,509 1.55% $ 52 $ 13,693 0.81% $ 27

Restricted cash 821 1.68% 3 819 0.70% 1

Investment securities 1,549 1.76% 7 1,731 1.61% 7

Loan receivables (1)

Credit card (2) 65,983 12.85% 2,090 60,122 12.65% 1,876

Personal loans 7,387 12.43% 226 6,582 12.18% 198

Private student loans 7,413 8.03% 147 6,678 7.52% 124

PCI student loans 2,019 7.38% 37 2,519 6.67% 41

Other 452 5.98% 7 284 5.39% 4

Total loan receivables 83,254 12.21% 2,507 76,185 11.94% 2,243

Total interest-earning assets 99,133 10.51% 2,569 92,428 9.99% 2,278

Allowance for loan losses (2,615) (2,166)

Other assets 4,221 4,166

Total assets $ 100,739 $ 94,428

Liabilities and Stockholders’ Equity

Interest-bearing liabilities

Interest-bearing deposits

Time deposits (3) $ 30,221 2.03% 151 $ 26,619 1.86% 122

Money market deposits (4) 6,772 1.59% 27 6,911 1.16% 20

Other interest-bearing savings deposits 22,470 1.52% 84 19,028 1.05% 49

Total interest-bearing deposits (5) 59,463 1.79% 262 52,558 1.48% 191

Borrowings

Short-term borrowings 1 1.75% — 1 0.67% —

Securitized borrowings (3)(4) 16,180 2.43% 97 16,960 2.17% 91

Other long-term borrowings (3) 9,945 4.49% 110 9,600 4.38% 104

Total borrowings 26,126 3.21% 207 26,561 2.97% 195

Total interest-bearing liabilities 85,589 2.22% 469 79,119 1.98% 386

Other liabilities and stockholders’ equity 15,150 15,309

Total liabilities and stockholders’ equity $ 100,739 $ 94,428

Net interest income $ 2,100 $ 1,892

Net interest margin (6) 10.23% 10.07%

Net yield on interest-earning assets (7) 8.59% 8.30%

Interest rate spread (8) 8.29% 8.01% (1) Average balances of loan receivables include non-accruing loans, which are included in the yield calculations. If the non-accruing loan balances were excluded, there would not be a material impact on the amounts reported above.(2) Interest income on credit card loans includes $59 million and $51 million of amortization of balance transfer fees for the three months ended March 31, 2018 and 2017 , respectively.(3) Includes the impact of interest rate swap agreements used to change a portion of fixed-rate funding to floating-rate funding.(4) Includes the impact of interest rate swap agreements used to change a portion of floating-rate funding to fixed-rate funding.(5) Includes the impact of FDIC insurance premiums and Large Institution Surcharge.(6) Net interest margin represents net interest income as a percentage of average total loan receivables.(7) Net yield on interest-earning assets represents net interest income as a percentage of average total interest-earning assets.(8) Interest rate spread represents the difference between the rate on total interest-earning assets and the rate on total interest-bearing liabilities.

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Loan Quality

Loan receivables consist of the following (dollars in millions):

March 31,

2018 December 31, 2017Loan receivables

Credit card loans $ 65,577 $ 67,291Other loans

Personal loans 7,307 7,374

Private student loans 7,416 7,076

Other 488 423

Total other loans 15,211 14,873PCI loans (1) 1,956 2,084

Total loan receivables 82,744 84,248Allowance for loan losses (2,736) (2,621)

Net loan receivables $ 80,008 $ 81,627

(1) Represents PCI private student loans. See Note 3: Loan Receivables to our condensed consolidated financial statements for more information regarding PCI loans.

Provision and Allowance for Loan LossesProvision for loan losses is the expense related to maintaining the allowance for loan losses at an appropriate level to absorb the estimated probable losses in

the loan portfolio at each period end date. While establishing the estimate for probable losses requires significant management judgment, the factors that influencethe provision for loan losses include:

• The impact of general economic conditions on the consumer, including national and regional conditions, unemployment levels, bankruptcy trends andinterest rate movements;

• Changes in consumer spending, payment and credit utilization behaviors;

• Changes in our loan portfolio, including the overall mix of accounts, products and loan balances within the portfolio and maturation of the loanportfolio;

• The level and direction of historical and anticipated loan delinquencies and charge-offs;

• The credit quality of the loan portfolio, which reflects, among other factors, our credit granting practices and effectiveness of collection efforts; and

• Regulatory changes or new regulatory guidance.

In determining the allowance for loan losses, we estimate probable losses separately for segments of the loan portfolio that have similar risk characteristics.We use a migration analysis to estimate the likelihood that a loan will progress through the various stages of delinquency. We use other analyses to estimate lossesincurred from non-delinquent accounts, which adds to the identification of loss emergence. We use these analyses together as a basis for determining our allowancefor loan losses.

The provision for loan losses is the amount of expense realized after considering the level of net charge-offs in the period and the required amount ofallowance for loan losses at the balance sheet date. For the three months ended March 31, 2018 , the provision for loan losses increased by $165 million , or 28% ,as compared to the same period in 2017 primarily due to higher levels of net charge-offs as well as a larger build of the allowance for loan losses as compared tothe same period in 2017 .

The allowance for loan losses was $2.7 billion at March 31, 2018 , which reflects a $115 million reserve build over the amount of the allowance for loanlosses at December 31, 2017 . The reserve build, which related primarily to credit card loans, was due to higher losses driven by seasoning of continued loangrowth and supply driven credit normalization.

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The following tables provide changes in our allowance for loan losses (dollars in millions): For the Three Months Ended March 31, 2018



Additions

Provision for loan losses 645 73 31 2 751

Deductions

Charge-offs (663) (81) (25) — (769)


Net charge-offs (540) (73) (22) — (635)

Other (2) — — (1) — (1)





Additions

Provision for loan losses 524 58 12 (8) 586

Deductions

Charge-offs (535) (57) (17) (2) (611)


Net charge-offs (422) (51) (14) (2) (489)


(1) Includes both PCI and non-PCI private student loans.(2) Net change in reserves on PCI pools having no remaining non-accretable difference.

Net Charge-offsOur net charge-offs include the principal amount of losses charged off less principal recoveries and exclude charged-off and recovered interest and fees and

fraud losses. Charged-off and recovered interest and fees are recorded in interest income and loan fee income, respectively, which is effectively a reclassification ofthe provision for loan losses, while fraud losses are recorded in other expense. Credit card loan receivables are charged off at the end of the month during which anaccount becomes 180 days contractually past due. Personal loans and private student loans, which are closed-end consumer loan receivables, are generally chargedoff at the end of the month during which an account becomes 120 days contractually past due. Generally, customer bankruptcies and probate accounts are chargedoff at the end of the month 60 days following the receipt of notification of the bankruptcy or death but not later than the 180-day or 120-day contractual time frame.

The following table presents amounts and rates of net charge-offs of key loan products (dollars in millions): For the Three Months Ended March 31,

2018 2017

$ % $ %Credit card loans $ 540 3.32% $ 422 2.84%Personal loans $ 73 4.03% $ 51 3.16%

Private student loans (excluding PCI (1) )$ 22 1.17% $ 14 0.83%

(1) Charge-offs for PCI loans did not result in a charge to earnings during any of the periods presented and are therefore excluded from the calculation. See Note 3: Loan Receivables to our condensed consolidated financial statements

for more information regarding the accounting for charge-offs on PCI loans.

The net charge-off rates on our credit card loans, personal loans and private student loans excluding PCI increased by 48 , 87 , and 34 basis points for thethree months ended March 31, 2018 , respectively, when compared to the same period in 2017 . The increase for all three portfolios was driven by seasoning ofcontinued loan growth and supply driven credit normalization.

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DelinquenciesDelinquencies are an indicator of credit quality at a point in time. A loan balance is considered delinquent when contractual payments on the loan become

30 days past due.

The following table presents the amounts and delinquency rates of key loan products that are 30 and 90 days or more delinquent, loan receivables that arenot accruing interest, regardless of delinquency and restructured loans (dollars in millions):


$ % $ %Loans 30 or more days delinquent

Credit card loans $ 1,529 2.33% $ 1,532 2.28%

Personal loans $ 101 1.37% $ 103 1.40%

Private student loans (excluding PCI loans (1) ) $ 167 2.25% $ 167 2.35% Loans 90 or more days delinquent

Credit card loans $ 777 1.18% $ 751 1.12%

Personal loans $ 28 0.38% $ 30 0.41%

Private student loans (excluding PCI loans (1) ) $ 49 0.66% $ 33 0.47%

Loans not accruing interest $ 249 0.31% $ 233 0.28%

Restructured loans

Credit card loans (2) $ 1,523 2.32% $ 1,316 1.96%

Personal loans (3) $ 121 1.66% $ 111 1.51%

Private student loans (excluding PCI loans (1) ) (4) $ 145 1.96% $ 137 1.94% (1) Excludes PCI loans which are accounted for on a pooled basis. Since a pool is accounted for as a single asset with a single composite interest rate and aggregate expectation of cash flows, the past-due status of a pool, or that of the

individual loans within a pool, is not meaningful. Because we are recognizing interest income on a pool of loans, it is all considered to be performing.(2) Restructured credit card loans include $86 million and $74 million at March 31, 2018 and December 31, 2017 , respectively, that are also included in loans over 90 days delinquent or more.(3) Restructured personal loans include $4 million and $5 million at March 31, 2018 and December 31, 2017 , respectively, that are also included in loans over 90 days delinquent or more.(4) Restructured private student loans include $7 million and $5 million at March 31, 2018 and December 31, 2017 , respectively, that are also included in loans over 90 days delinquent or more.

The 30-day and 90-day delinquency rates for credit card and personal loans at March 31, 2018 were relatively flat as compared to December 31, 2017 . The30-day delinquency rate for private student loans at March 31, 2018 decreased as compared to December 31, 2017 primarily due to seasonality of the loanportfolio. The 90-day delinquency rate for private student loans at March 31, 2018 increased as compared to December 31, 2017 as a result of seasoning of recentloan growth as more loans have entered into repayment.

The restructured loan balances at March 31, 2018 increased as compared to December 31, 2017 due to seasoning of continued loan growth and greaterutilization of programs available.

Modified and Restructured LoansWe have loan modification programs that provide for temporary or permanent hardship relief for our credit card loans to borrowers experiencing financial

difficulties. We offer temporary hardship programs consisting of an interest rate reduction and in some cases a reduced minimum payment, both lasting for aperiod no longer than 12 months. The permanent modification program involves changing the structure of the loan to a fixed payment loan with a maturity nolonger than 60 months and reducing the interest rate on the loan. The permanent modification program does not normally provide for the forgiveness of unpaidprincipal, but may allow for the reversal of certain unpaid interest or fee assessments. We also make permanent loan modifications for customers who requestfinancial assistance through external sources, such as a consumer credit counseling agency program. These loans continue to be subject to the original minimumpayment terms and do not normally include waiver of unpaid principal, interest or fees. Modified credit card loans that are deemed to meet the definition oftroubled debt restructurings ("TDRs") in both temporary and permanent programs.

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For personal loan customers, in certain situations we offer various payment programs, including temporary and permanent programs. The temporaryprograms normally consist of a reduction of the minimum payment for a period of no longer than 12 months with the option of a final balloon payment required atthe end of the loan term or an extension of the maturity date with the total term not exceeding nine years. Further, in certain circumstances, the interest rate on theloan is reduced. The permanent programs involve changing the terms of the loan in order to pay off the outstanding balance over a longer term and also in certaincircumstances reducing the interest rate on the loan. Similar to the temporary programs, the total term may not exceed nine years. We also allow permanent loanmodifications for customers who request financial assistance through external sources, similar to our credit card customers discussed above. Payments aremodified based on the new terms agreed upon with the credit counseling agency. Personal loans included in temporary and permanent programs are accounted foras TDRs.

At March 31, 2018 , there was $5.6 billion of private student loans in repayment, which includes both PCI and non-PCI loans to students who are not indeferment. To assist student loan borrowers who are experiencing temporary financial difficulties but are willing to resume making payments, we may offerhardship forbearance or programs that include payment deferral, temporary payment reduction, temporary interest rate reduction or extended terms. A non-PCImodified loan typically meets the definition of a TDR based on the cumulative length of the concession period and an evaluation of the credit quality of theborrower based on FICO scores.

Borrower performance after using payment programs or forbearance is monitored and we believe the programs help to prevent defaults and are useful inassisting customers experiencing financial difficulties. We plan to continue to use payment programs and forbearance and, as a result, we expect to have additionalloans classified as TDRs in the future.

For additional information regarding the accounting treatment for these loans as well as amounts recorded in the financial statements related to these loans,see Note 3: Loan Receivables to our condensed consolidated financial statements.

Other Income

The following table presents the components of other income (dollars in millions):


March 31, 2018 vs. 2017 Increase

(Decrease)

2018 2017 $ %

Discount and interchange revenue, net (1)$ 254 $ 233 $ 21 9 %

Protection products revenue 53 58 (5) (9)%Loan fee income 96 89 7 8 %Transaction processing revenue 43 39 4 10 %Other income 29 28 1 4 %Total other income $ 475 $ 447 $ 28 6 %

(1) Net of rewards, including CashbackBonusrewards, of $392 million and $363 million for the three months ended March 31, 2018 and 2017 , respectively.

Total other income increased in the three months ended March 31, 2018 as compared to the same period in 2017 . The increase was primarily due to higherdiscount and interchange revenue, partially offset by higher standard rewards, both of which were the result of higher sales volume.

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Other Expense

The following table represents the components of other expense (dollars in millions):


March 31, 2018 vs. 2017

Increase

2018 2017 $ %Employee compensation and benefits $ 405 $ 363 $ 42 12%Marketing and business development 185 168 17 10%Information processing and communications 82 80 2 3%Professional fees 155 147 8 5%Premises and equipment 26 25 1 4%Other expense 115 102 13 13%Total other expense $ 968 $ 885 $ 83 9%

Total other expense increased in the three months ended March 31, 2018 by $83 million as compared to the same period in 2017 . The increase wasprimarily driven by higher employee compensation and benefits, marketing and business development and other expense. The increase in employee compensationand benefits was driven by additional headcount for business growth and regulatory and compliance needs, as well as higher average salaries. The increase inmarketing and business development was primarily the result of higher brand advertising and acquisition costs that contributed to loan growth and deposit growth.The increase in other expense was primarily driven by incremental investments in philanthropic initiatives.

Income Tax Expense

The following table presents the calculation of the effective income tax rate (dollars in millions, except effective income tax rate): For the Three Months Ended March 31,

2018 2017Income before income tax expense $ 856 $ 868Income tax expense $ 190 $ 304Effective income tax rate 22.2% 35.0%

Income tax expense and the effective tax rate decreased $114 million and 12.8% respectively for the three months ended March 31, 2018 as compared to thesame period in 2017 as a result of a reduction in the U.S. federal statutory income tax rate from 35% to 21% offset by other provisions of the TCJA. For the threemonths ended March 31, 2018, the effective tax rate was also favorably impacted by the resolution of certain tax matters.

Liquidity and Capital Resources

Funding and LiquidityWe seek to maintain stable, diversified and cost-effective funding sources and a strong liquidity profile in order to fund our business and repay or refinance

our maturing obligations under both normal operating conditions and periods of economic or financial stress. In managing our liquidity risk, we seek to maintain aprudent liability maturity profile and ready access to an ample store of primary and contingent liquidity sources. Our primary funding sources include direct-to-consumer and brokered deposits, public term asset-backed securitizations and other short-term and long-term borrowings. Our primary liquidity sources include aliquidity portfolio comprised of highly liquid, unencumbered assets, including cash and cash equivalents and investment securities, and borrowing capacity throughprivate term asset-backed securitizations. In addition, we have unused borrowing capacity with the Federal Reserve discount window which provides anothersource of contingent liquidity.

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Funding Sources

DepositsWe offer deposit products to customers through two channels: (i) through direct marketing, internet origination and affinity relationships (“direct-to-

consumer deposits”); and (ii) indirectly through contractual arrangements with securities brokerage firms (“brokered deposits”). Direct-to-consumer depositsinclude certificates of deposit, money market accounts, online savings and checking accounts, and IRA certificates of deposit, while brokered deposits includecertificates of deposit and sweep accounts. At March 31, 2018 , we had $41.3 billion of direct-to-consumer deposits and $19.8 billion of brokered and otherdeposits.

CreditCardSecuritizationFinancingWe use the securitization of credit card receivables as a source of funding. We access the asset-backed securitization market using the Discover Card Master

Trust I ("DCMT") and the Discover Card Execution Note Trust ("DCENT"), through which we issue DCENT DiscoverSeries notes in both public and privatetransactions. From time to time, we may add credit card receivables to these trusts to create sufficient funding capacity for future securitizations while managingseller’s interest. We retain significant exposure to the performance of trust assets through holdings of the seller's interest and subordinated security classes ofDCENT.

The securitization structures include certain features designed to protect investors. The primary feature relates to the availability and adequacy of cash flowsin the securitized pool of receivables to meet contractual requirements, the insufficiency of which triggers early repayment of the securities. We refer to this as"economic early amortization", which is based on excess spread levels. Excess spread is the amount by which income received by a trust during a collection period,including interest collections, fees and interchange, exceeds the fees and expenses of the trust during such collection period, including interest expense, servicingfees and charged-off receivables. In the event of an economic early amortization, which would occur if the excess spread fell below 0% on a three-month rollingaverage basis, we would be required to repay the affected outstanding securitized borrowings using available collections received by the trust; the period ofultimate repayment would be determined by the amount and timing of collections received. An early amortization event would impair our liquidity, and mayrequire us to utilize our available non-securitization related contingent liquidity or rely on alternative funding sources, which may or may not be available at thetime. As of March 31, 2018 , the DiscoverSeries three-month rolling average excess spread was 12.81% .

We may elect to add receivables to the restricted pool of receivables subject to certain requirements. Through our wholly-owned indirect subsidiary,Discover Funding LLC, we are required to maintain a contractual minimum level of receivables in the trust in excess of the face value of outstanding investors’interests. This excess is referred to as the minimum seller’s interest. The required minimum seller’s interest in the pool of trust receivables, which is included incredit card loan receivables restricted for securitization investors, is set at approximately 7% in excess of the total investors’ interests (which includes interests heldby third parties as well as those interests held by us). If the level of receivables in the trust were to fall below the required minimum, we would be required to addreceivables from the unrestricted pool of receivables, which would increase the amount of credit card loan receivables restricted for securitization investors. Adecline in the amount of the excess seller’s interest could occur if balance repayments and charge-offs exceeded new lending on the securitized accounts or as aresult of changes in total outstanding investors’ interests. Seller's interest is impacted by seasonality as higher balance repayments tend to occur in the first calendaryear quarter. If we could not add enough receivables to satisfy the minimum seller's interest requirement, an early amortization (or repayment) of investors’interests would be triggered. No accounts were added to those restricted for securitization investors for the three months ended March 31, 2018 .

At March 31, 2018 , we had $16.0 billion of outstanding public asset-backed securities and $5.1 billion of outstanding subordinated asset-backed securitiesthat had been issued to our wholly-owned subsidiaries.

The following table summarizes expected contractual maturities of the investors’ interests in credit card securitizations, excluding those that have beenissued to our wholly-owned subsidiaries (dollars in millions):

At March 31, 2018 Total Less ThanOne Year

One YearThrough

Three Years

Four YearsThrough

Five Years After Five

YearsScheduled maturities of long-term borrowings - owed to credit cardsecuritization investors $ 15,815 $ 4,613 $ 6,321 $ 3,561 $ 1,320

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The triple-A rating of DCENT Class A Notes issued to date has been based, in part, on an FDIC rule which created a safe harbor that provides that theFDIC, as conservator or receiver, will not, using its power to disaffirm or repudiate contracts, seek to reclaim or recover assets transferred in connection with asecuritization, or recharacterize them as assets of the insured depository institution, provided such transfer satisfies the conditions for sale accounting treatmentunder previous GAAP. Although the implementation of the Financial Accounting Standards Board Accounting Standards Codification Topic 860, Transfers andServicing, no longer qualified certain transfers of assets for sale accounting treatment, the FDIC approved a final rule that preserved the safe-harbor treatmentapplicable to revolving trusts and master trusts, including DCMT, so long as those trusts would have satisfied the original FDIC safe harbor if evaluated underGAAP pertaining to transfers of financial assets in effect prior to December 1, 2009. Other legislative and regulatory developments may, however, impact ourability and/or desire to issue asset-backed securities in the future.

OtherLong-TermBorrowings—StudentLoansAt March 31, 2018 , we had $577 million of remaining principal balance outstanding on securitized debt assumed as part of the acquisition of The Student

Loan Corporation. Principal and interest payments on the underlying student loans will reduce the balance of these secured borrowings over time.

OtherLong-TermBorrowings-CorporateandBankDebt

The following table provides a summary of Discover Financial Services (Parent Company) and Discover Bank outstanding fixed-rate debt (dollars inmillions):

At March 31, 2018Principal Amount

OutstandingDiscover Financial Services (Parent Company) fixed-rate senior notes, maturing 2019-2027 $ 2,900Discover Financial Services (Parent Company) fixed-rate retail notes, maturing 2018-2031 $ 333Discover Bank fixed-rate senior bank notes, maturing 2018-2026 $ 6,200Discover Bank fixed-rate subordinated bank notes, maturing 2019-2020 $ 700

Certain Discover Financial Services senior notes require us to offer to repurchase the notes at a price equal to 101% of their aggregate principal amount plusaccrued and unpaid interest in the event of a change of control involving us and a corresponding ratings downgrade to below investment grade.

Short-TermBorrowingsAs part of our regular funding strategy, we may from time to time borrow short-term funds in the federal funds market or the repurchase (“repo”) market

through repurchase agreements. Federal funds are short-term, unsecured loans between banks or other financial entities with a Federal Reserve account. Fundsborrowed in the repo market are short-term, collateralized loans usually secured with highly-rated investment securities such as U.S. Treasury bills or notes, orfederal agency mortgage bonds or debentures. At March 31, 2018 and December 31, 2017 , there were no outstanding balances in the federal funds market orrepurchase agreements.

Additional Funding Sources

PrivateAsset-BackedSecuritizationsWe have access to committed borrowing capacity through privately placed asset-backed securitizations. At March 31, 2018 , we had total committed

capacity of $6.0 billion , $500 million of which was drawn. While we may utilize funding from these private securitizations from time to time for normal businessoperations, their committed nature also makes them a reliable contingency funding source. Therefore, we reserve some undrawn capacity, informed by ourliquidity stress testing results, for potential contingency funding needs. We also seek to ensure the stability and reliability of these securitizations by staggeringtheir maturity dates, renewing them approximately one year prior to their scheduled maturity dates and periodically drawing them for operational testing purposes.

FederalReserveDiscover Bank has access to the Federal Reserve Bank of Philadelphia’s discount window. As of March 31, 2018 , Discover Bank had $29.6 billion of

available borrowing capacity through the discount window based on the amount and type

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of assets pledged, primarily consumer loans. We have no borrowings outstanding under the discount window and reserve this capacity as a source of contingentliquidity.

Funding UsesOur primary uses of funds include the extensions of loans and credit, primarily through Discover Bank, the purchase of investment securities for our

liquidity portfolio, working capital, and debt and capital service. We assess funding uses and liquidity needs under stressed and normal operating conditions,considering primary uses of funding, such as on-balance sheet loans, and contingent uses of funding, such as the need to post additional collateral for derivativespositions. In order to anticipate funding needs under stress, we conduct liquidity stress testing to assess the impact of idiosyncratic, systemic, and hybrid(idiosyncratic and systemic) scenarios with varying levels of liquidity risk reflecting a range of stress severity.

Credit RatingsOur borrowing costs and capacity in certain funding markets, including those for securitizations and unsecured senior and subordinated debt, may be

affected by the credit ratings of DFS, Discover Bank and the securitization trusts. Downgrades in these credit ratings could result in higher interest expense on ourunsecured debt and asset securitizations, as well as higher collateral enhancement requirements for both our public and private asset securitizations. In addition toincreased funding costs, deterioration in credit ratings could reduce our borrowing capacity in the unsecured debt and asset securitization capital markets.

We also maintain agreements with certain of our derivative counterparties that contain provisions that require DFS and Discover Bank to maintain aninvestment grade credit rating from specified major credit rating agencies. At March 31, 2018 , Discover Bank's credit rating met specified thresholds set by itscounterparties. However, if Discover Bank's credit ratings were reduced below investment grade, Discover Bank would be required to post additional collateral,which, as of March 31, 2018 , would have been $20 million . DFS (Parent Company) had no outstanding derivatives as of March 31, 2018 , and therefore, nocollateral was required.

A credit rating is not a recommendation to buy, sell or hold securities, may be subject to revision or withdrawal at any time by the assigning ratingorganization, and each rating should be evaluated independently of any other rating. Our credit ratings are summarized in the following table:

Moody’s Investors

Service Standard & Poor’s Fitch

Ratings

Discover Financial Services

Senior unsecured debt Ba1 BBB- BBB+

Outlook for Discover Financial Services senior unsecured debt Positive Stable Stable

Discover Bank

Senior unsecured debt Baa3 BBB BBB+

Outlook for Discover Bank senior unsecured debt Positive Stable Stable

Subordinated debt Ba1 BBB- BBB

Discover Card Execution Note Trust

Class A (1) Aaa(sf) AAA(sf) AAA(sf) (1) An “sf” in the rating denotes rating agency identification for structured finance product ratings.

LiquidityWe seek to ensure that we have adequate liquidity to sustain business operations, fund asset growth and satisfy debt obligations under stressed and normal

operating conditions. In addition to the funding sources discussed in the previous section, we also maintain highly liquid, unencumbered assets in our liquidityportfolio that we expect to be able to convert to cash quickly and with little loss of value using either the repo market or outright sales.

We maintain a liquidity risk and funding management policy, which outlines the overall framework and general principles we follow in managing liquidityrisk across our business. The policy is approved by the Board of Directors with implementation responsibilities delegated to the Asset and Liability ManagementCommittee (the “ALCO”). Additionally, we maintain a liquidity management framework document, which outlines the general strategies, objectives and principleswe utilize to manage our liquidity position and the various liquidity risks inherent in our business model. We seek to balance the trade-offs between maintainingtoo much liquidity, which may be costly, with having too little liquidity, which could cause

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financial distress. Liquidity risk is centrally managed by the ALCO, which is chaired by our Treasurer and has cross-functional membership. The ALCO monitorsthe liquidity risk profiles of DFS and Discover Bank and oversees any actions Corporate Treasury may take to ensure that we maintain ready access to our fundingsources and sufficient liquidity to meet current and projected needs. In addition, the ALCO and our Board of Directors regularly review our compliance with ourliquidity limits at DFS and Discover Bank, which are established in accordance with the liquidity risk appetite set by our Board of Directors.

We employ a variety of metrics to monitor and manage liquidity. We utilize early warning indicators (“EWIs”) to detect the initial phases of liquidity stressevents and a reporting and escalation process that is designed to be consistent with regulatory guidance. The EWIs include both idiosyncratic and systemicmeasures, and are monitored on a daily basis and reported to the ALCO regularly. A warning from one or more of these indicators triggers prompt review anddecision-making by our senior management team, and in certain instances may lead to the convening of a senior-level response team and activation of ourcontingency funding plan.

In addition, we conduct liquidity stress testing regularly and ensure contingency funding is in place to address potential liquidity shortfalls. We evaluate arange of stress scenarios that are designed in accordance with regulatory requirements, including idiosyncratic, systemic and a combination of such events thatcould impact funding sources and our ability to meet liquidity needs. These scenarios measure the projected liquidity position at DFS and Discover Bank across arange of time horizons by comparing estimated contingency funding needs to available contingent liquidity.

Our primary contingent liquidity sources include our liquidity portfolio and private securitizations with unused borrowing capacity. In addition, we haveunused borrowing capacity with the Federal Reserve discount window, which provides an additional source of contingent liquidity. We seek to maintain sufficientliquidity to be able to satisfy all maturing obligations and fund business operations for at least 12 months in a severe stress environment. In such an environment,we may also take actions to curtail the size of our balance sheet, which would reduce the need for funding and liquidity.

At March 31, 2018 , our liquidity portfolio is comprised of highly liquid, unencumbered assets, including cash and cash equivalents and investmentsecurities. Cash and cash equivalents were primarily in the form of deposits with the Federal Reserve. Investment securities primarily included debt obligations ofthe U.S. Treasury and residential mortgage-backed securities issued by U.S. government housing agencies or Government Sponsored Enterprises. Theseinvestments are considered highly liquid, and we expect to have the ability to raise cash by selling them, utilizing repurchase agreements or pledging certain ofthese investments to access secured funding. The size and composition of our liquidity portfolio may fluctuate based upon the size of our balance sheet as well asoperational requirements and market conditions.

At March 31, 2018 , our liquidity portfolio and undrawn credit facilities were $52.6 billion , which was $3.9 billion higher than the balance at December 31,2017 . During the three months ended March 31, 2018 , the average balance of our liquidity portfolio was $15.2 billion .

March 31,

2018 December 31,

2017 (dollars in millions)Liquidity portfolio

Cash and cash equivalents (1)$ 16,248 $ 12,213

Investment securities (2)1,302 1,347

Total liquidity portfolio17,550 13,560

Private asset-backed securitizations (3)5,500 6,000

Primary liquidity sources23,050 19,560

Federal Reserve discount window (3)29,599 29,153

Total liquidity portfolio and undrawn credit facilities$ 52,649 $ 48,713

(1) Cash in the process of settlement and restricted cash are excluded from cash and cash equivalents for liquidity purposes.(2) Excludes $38 million and $48 million of U.S. Treasury securities that have been pledged as swap collateral in lieu of cash as of March 31, 2018 and December 31, 2017 , respectively.(3) See "— Additional Funding Sources" for additional information.

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BankHoldingCompanyLiquidityThe primary uses of funds at the unconsolidated DFS level include debt service obligations (interest payments and return of principal) and capital service

and management activities, which include dividend payments on capital instruments and the periodic repurchase of shares of our common stock. Our primarysources of funds at the bank holding company level include the proceeds from the issuance of unsecured debt and capital securities, as well as dividends from oursubsidiaries, particularly Discover Bank. Under periods of idiosyncratic or systemic stress, the bank holding company could lose or experience impaired access tothe capital markets. In addition, our regulators have the discretion to restrict dividend payments from Discover Bank to the bank holding company.

We utilize a measure referred to as Number of Months of Pre-Funding to determine the length of time Discover Financial Services can meet upcomingfunding obligations including common and preferred stock dividend payments and debt service obligations using existing cash resources. At March 31, 2018 ,Discover Financial Services had sufficient cash resources to fund the dividend and debt service payments for more than 18 months.

We structure our debt maturity schedule to minimize the amount of debt maturing at the bank holding company within a short period of time. See Note 6:Long-Term Borrowings to our condensed consolidated financial statements for further information regarding our debt. Our ALCO and Board of Directors regularlyreview our compliance with our liquidity limits as a bank holding company, which are established in accordance with the liquidity risk appetite articulated by ourBoard.

CapitalOur primary sources of capital are the earnings generated by our businesses and the proceeds from issuances of capital securities. We seek to manage capital

to a level and composition sufficient to support the growth and risks of our businesses and to meet regulatory requirements, rating agency targets and debt investorexpectations. Within these constraints, we are focused on deploying capital in a manner that provides attractive returns to our stockholders. The level, compositionand utilization of capital are influenced by changes in the economic environment, strategic initiatives, and legislative and regulatory developments.

Under regulatory capital requirements adopted by the Federal Reserve and the FDIC, DFS, along with Discover Bank, must maintain minimum levels ofcapital. Failure to meet minimum capital requirements can result in the initiation of certain mandatory and possibly additional discretionary actions by regulatorsthat, if undertaken, could limit our business activities and have a direct material effect on our financial position and results. We must meet specific capitalrequirements that involve quantitative measures of assets, liabilities and certain off-balance sheet items, as calculated under regulatory guidance and regulations.Current or future legislative or regulatory initiatives may require us to hold more capital in the future.

In 2013, the Federal Reserve, the Office of the Comptroller of the Currency, and the FDIC issued the Basel III rules applicable to DFS and Discover Bank.Under those rules, DFS and Discover Bank are classified as "Standardized Approach" entities, defined as U.S. banking organizations with consolidated total assetsover $50 billion but not exceeding $250 billion and consolidated total on-balance sheet foreign exposures less than $10 billion. Additional phase-in requirementsrelated to components of the final capital rules will become effective through 2019. The Basel III rules include new minimum and "well-capitalized" risk-basedcapital and leverage ratios, effective January 1, 2015, and refine the definition of what constitutes "capital" for purposes of calculating those ratios of which certainrequirements are subject to phase-in periods through the end of 2018 (the "transition period"). During the transition period, the effects of the changes to capital(i.e., certain deductions and adjustments) are recognized in 20% increments from 2015 through 2018. For example, one of the deductions from CET1 capital,goodwill and intangibles, was subject to a 40% of total deduction in 2015 that increased to 60% in 2016 and so on, until reaching 100% deduction of total in 2018.For additional information regarding the risk-based capital and leverage ratios, see Note 10: Capital Adequacy to our condensed consolidated financial statements.

The Basel III rules also introduced a CCB on top of the minimum risk-weighted asset ratios. The buffer is designed to absorb losses during periods ofeconomic stress. The calculation of the buffer started to phase in beginning on January 1, 2016 at the rate of 0.625% and increases by 0.625% on each subsequentJanuary 1 until it reaches the maximum 2.5% on January 1, 2019. When the CCB is fully phased-in on January 1, 2019, this will effectively result in minimumratios of (i) CET1 to risk-weighted assets of at least 7.0%, (ii) Tier 1 capital to risk-weighted assets of at least 8.5% and (iii) Total capital to risk-weighted assets ofat least 10.5%. Banking institutions with a capital ratio below the required amount will face constraints on dividends, equity repurchases and compensation basedon the amount of the shortfall.

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Another main component of the Basel III rules is a prescribed standardized approach for calculating risk-weighted assets that expands the risk-weight rangefrom 0% to 100% (under Basel I) to 0% to 1,250% (under Basel III). The new range is intended to be more risk-sensitive and the risk weight assigned depends onthe nature of the asset in question.

The Basel III rules provide for a number of the deductions from and adjustments to CET1, to the extent that any one such category exceeds 10% of CET1 orall such categories in the aggregate exceed 15%.

Basel III also requires disclosures relating to market discipline. This series of disclosures is commonly referred to as “Pillar 3.” The objective is to increasetransparency of capital requirements for banking organizations. We are required to make prescribed regulatory disclosures on a quarterly basis regarding ourcapital structure, capital adequacy, risk exposures and risk-weighted assets. The Pillar 3 disclosures are made publicly available on our website in a report called"Basel III Regulatory Capital Disclosures."

At March 31, 2018 , DFS and Discover Bank met the requirements for "well-capitalized" status under Regulation Y and the prompt corrective action rules,respectively, exceeding the regulatory minimums to which they were subject under the applicable rules.

As discussed in Note 10: Capital Adequacy to our condensed consolidated financial statements, we are subject to a CET1 capital ratio requirement under theBasel III rules. We believe that providing an estimate of our capital position based on the Basel III fully phased-in rules is important to complement the existingcapital ratios and for comparability to other financial institutions. In addition, we disclose tangible common equity, which represents common equity less goodwilland intangibles. Management believes that common stockholders' equity excluding goodwill and intangibles is a more meaningful measure to investors of our truenet asset value. As of March 31, 2018 , the CET1 capital ratio calculated under Basel III fully phased-in rules and tangible common equity are not formally definedby U.S. GAAP or codified in the federal banking regulations and, as such, they are considered to be non-GAAP financial measures. Other financial servicescompanies may also disclose this ratio and metric and definitions may vary, so we advise users of this information to exercise caution in comparing this ratio andmetric for different companies.

The following table provides a reconciliation of total common stockholders’ equity (a U.S. GAAP financial measure) to tangible common equity (dollars inmillions):

March 31,

2018 December 31,

2017

Total common stockholders’ equity (1) $ 10,308 $ 10,329

Less: Goodwill (255) (255)

Less: Intangible assets, net (162) (163)

Tangible common equity $ 9,891 $ 9,911

(1) Total common stockholders’ equity is calculated as total stockholders’ equity less preferred stock.

The following table provides a reconciliation of CET1 capital calculated under Basel III transition rules (a U.S. GAAP financial measure) to CET1 capitaland risk-weighted assets calculated under fully phased-in Basel III rules (dollars in millions):

March 31,

2018CET1 capital (Basel III transition) $ 10,081Adjustments related to capital components during transition (1) (27)

CET1 capital (Basel III fully phased-in) $ 10,054

Risk-weighted assets (Basel III fully phased-in) (2) $ 84,862CET1 capital ratio (Basel III fully phased-in) 11.8% (1) Adjustments related to capital components for fully phased-in Basel III include the phase-in of the intangible asset exclusion.(2) 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.

Additionally, we are required to submit an annual capital plan to the Federal Reserve that includes an assessment of our expected uses and sources of capitalover a nine-quarter planning horizon. We submitted our annual capital plan to the Federal Reserve under its CCAR program and received notice in June 2017 thatthe Federal Reserve does not object to our

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proposed capital plan, including planned quarterly capital distributions through June 30, 2018. Our ability to make capital distributions, including our ability to paydividends on or repurchase shares of our common stock, will continue to be subject to the Federal Reserve’s review and non-objection of the actions that wepropose each year in our annual capital plan. On April 5, 2018, we submitted our 2018 CCAR plan and are awaiting a response from the Federal Reserve on ourplan.

In June 2017, the Federal Reserve published the results of its annual supervisory stress tests for bank holding companies with $50 billion or more in totalconsolidated assets, including DFS. At that same time, we published company-run stress test results for DFS and Discover Bank. DFS is required to publishcompany-run stress tests results twice each year in accordance with Federal Reserve rules and Discover Bank is required to publish bank-run stress test resultsunder FDIC rules.

We recently declared a quarterly cash dividend on our common stock of $0.35 per share, payable on June 7, 2018 to holders of record on May 24, 2018 ,which is consistent with last quarter. We also pay dividends on our preferred stock semi-annually.

On July 25, 2017 , our Board of Directors approved a share repurchase program authorizing the repurchase of up to $2.8 billion of our outstanding shares ofcommon stock. The program expires on October 31, 2018 and may be terminated at any time. This program replaced the prior $2.5 billion share repurchaseprogram, which had $562 million of remaining authorization. During the three months ended March 31, 2018 , we repurchased approximately 7 million shares, or2% , of our outstanding common stock for $555 million . We expect to continue to repurchase shares under our program from time to time based on marketconditions and other factors, subject to legal and regulatory requirements and restrictions, including non-objection from the Federal Reserve as described above.Share repurchases under the program may be made through a variety of methods, including open market purchases, privately negotiated transactions or otherpurchases, including block trades, accelerated share repurchase transactions, or any combination of such methods.

The amount and size of any future dividends and share repurchases will depend upon our results of operations, financial condition, capital levels, cashrequirements, future prospects and other factors. The declaration and payment of future dividends, as well as the amount thereof, are subject to the discretion of ourBoard of Directors. Holders of our shares of common stock are subject to the prior dividend rights of holders of our preferred stock or the depositary sharesrepresenting such preferred stock outstanding, and if full dividends have not been declared and paid on all outstanding shares of preferred stock in any dividendperiod, no dividend may be declared or paid or set aside for payment on our common stock. In addition, as noted above, banking laws and regulations and ourbanking regulators may limit our ability to pay dividends and make share repurchases, including limitations on the extent to which our banking subsidiaries canprovide funds to us through dividends, loans or otherwise. Further, current or future regulatory initiatives may require us to hold more capital in the future. Therecan be no assurance that we will declare and pay any dividends or repurchase any shares of our common stock in the future.

Certain Off-Balance Sheet Arrangements

GuaranteesGuarantees are contracts or indemnification agreements that contingently require us to make payments to a guaranteed party based on changes in an

underlying asset, liability, or equity security of a guaranteed party, rate or index. Also included in guarantees are contracts that contingently require the guarantor tomake payments to a guaranteed party based on another entity’s failure to perform under an agreement. Our guarantees relate to transactions processed on theDiscover Network and certain transactions processed by PULSE and Diners Club. See Note 11: Commitments, Contingencies and Guarantees to our condensedconsolidated financial statements for further discussion regarding our guarantees.

Contractual Obligations and Contingent Liabilities and CommitmentsIn the normal course of business, we enter into various contractual obligations that may require future cash payments. Contractual obligations at March 31,

2018 , which include deposits, long-term borrowings, operating and capital lease obligations, interest payments on fixed-rate debt, purchase obligations and otherliabilities were $91.2 billion . For a description of our contractual obligations, see our annual report on Form 10-K for the year ended December 31, 2017 under“Management’s Discussion and Analysis of Financial Condition and Results of Operations — Contractual Obligations and Contingent Liabilities andCommitments.”

We extend credit for consumer loans, primarily arising from agreements with customers for unused lines of credit on certain credit cards and certain otherloan products, provided there is no violation of conditions established in the related

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agreement. At March 31, 2018 , our unused credit arrangements were approximately $190.7 billion . These arrangements, substantially all of which we canterminate at any time and which do not necessarily represent future cash requirements, are periodically reviewed based on account usage, customercreditworthiness and loan qualification. In addition, in the ordinary course of business, we guarantee payment on behalf of subsidiaries relating to contractualobligations with external parties. The activities of the subsidiaries covered by any such guarantees are included in our condensed consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market RiskMarket risk refers to the risk that a change in the level of one or more market prices, rates, indices, correlations or other market factors will result in losses

for a position or portfolio. We are exposed to market risk primarily from changes in interest rates.

Interest Rate RiskWe borrow money from a variety of depositors and institutions in order to provide loans to our customers, as well as invest in other assets and our business.

These loans and other assets earn interest, which we use to pay interest on the money borrowed. Our net interest income and, therefore, earnings, will be reduced ifthe interest rate earned on assets increases at a slower pace than the interest rate on our borrowings. Changes in interest rates and our competitors' responses tothose changes may influence customer payment rates, loan balances or deposit account activity. As a result, we may incur higher funding costs, which has thepotential to decrease earnings.

Our interest rate risk management policies are designed to measure and manage the potential volatility of earnings that may arise from changes in interestrates by having a financing portfolio that reflects our mix of variable- and fixed-rate assets. To the extent that the repricing characteristics of the assets andliabilities in a particular portfolio are not sufficiently matched, we may utilize interest rate derivative contracts, such as swap agreements, to achieve our objectives.Interest rate swap agreements effectively convert the underlying asset or liability from fixed- to floating-rate or from floating- to fixed-rate. See Note 14:Derivatives and Hedging Activities to our condensed consolidated financial statements for information on our derivatives activity.

We use an interest rate sensitivity simulation to assess our interest rate risk exposure. For purposes of presenting the possible earnings effect of ahypothetical, adverse change in interest rates over the 12-month period from our reporting date, we assume that all interest rate sensitive assets and liabilities willbe impacted by a hypothetical, immediate 100 basis point change in interest rates relative to market consensus expectations as of the beginning of the period. Thesensitivity is based upon the hypothetical assumption that all relevant types of interest rates would change instantaneously, simultaneously and to the same degree.

Our interest rate sensitive assets include our variable-rate loan receivables and the assets that make up our liquidity portfolio. We have limitations on ourability to mitigate interest rate risk by adjusting rates on existing balances and competitive actions may limit our ability to increase the rates that we charge tocustomers for new loans. At March 31, 2018 , the majority of our credit card and student loans charge variable rates. Assets with rates that are fixed at period endbut which will mature, or otherwise contractually reset to a market-based indexed rate or other fixed rate prior to the end of the 12-month period, are considered tobe rate sensitive. The latter category includes certain revolving credit card loans that may be offered at below-market rates for an introductory period, such asbalance transfers and special promotional programs, after which the loans will contractually reprice in accordance with our normal market-based pricing structure.For purposes of measuring rate sensitivity for such loans, only the effect of the hypothetical 100 basis point increase in the underlying market-based indexed ratehas been considered. For assets that have a fixed interest rate but which contractually will, or are assumed to, reset to a market-based indexed rate or other fixedrate during the next 12 months, earnings sensitivity is measured from the expected repricing date. In addition, for all interest rate sensitive assets, earningssensitivity is calculated net of expected loan losses, which for purposes of this analysis are assumed to remain unchanged relative to our baseline expectations overthe analysis horizon.

Interest rate sensitive liabilities are assumed to be those for which the stated interest rate is not contractually fixed for the next 12-month period. Thus,liabilities that vary with changes in a market-based index, such as federal funds or LIBOR, which will reset before the end of the 12-month period, or liabilitieswhose rates are fixed at the fiscal period end, but which will mature and are assumed to be replaced with a market-based indexed rate prior to the end of the 12-month period, also are considered to be rate sensitive. For these fixed-rate liabilities, earnings sensitivity is measured from the expected maturity date.

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Net interest income sensitivity requires assumptions to be made regarding market conditions, consumer behavior, and the overall growth and composition ofthe balance sheet. These assumptions are inherently uncertain and, as a result, actual earnings may differ from the simulated earnings presented above. Our actualearnings depend on multiple factors including, but not limited to, the direction and timing of changes in interest rates, the movement of short-term versus long-termrates, balance sheet composition, competitor actions affecting pricing decisions in our loans and deposits, and strategic actions undertaken by management.

The table below shows the impacts to net interest income over the following 12-month period that we estimate would result from an immediate and parallelchange in interest rates affecting all interest rate sensitive assets and liabilities (dollars in millions). At March 31, 2018 At December 31, 2017

Basis point change $ % $ %

+100 $ 204 2.26 % $ 179 2.03 %

-100 $ (211) (2.34)% $ (190) (2.15)%

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and ProceduresUnder the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an

evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, asamended (the “Exchange Act”)), which are designed to ensure that information required to be disclosed by us in the reports that we file or submit under theExchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms. Disclosure controls and proceduresinclude, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit underthe Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate toallow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that ourdisclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in Internal Control over Financial ReportingThere have been no changes in our internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) that

occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financialreporting.

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Part II. OTHER INFORMATION

Item 1. Legal ProceedingsFor a description of legal proceedings, see Note 12: Litigation and Regulatory Matters to our condensed consolidated financial statements.

Item 1A. Risk FactorsThere have been no material changes to the risk factors disclosed in our annual report on Form 10-K for the year ended December 31, 2017 .

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

The table below sets forth information regarding purchases of our common stock related to our share repurchase program and employee transactions thatwere made by us or on our behalf during the most recent quarter.

PeriodTotal Number ofShares Purchased

Average Price PaidPer Share

Total Number ofShares Purchased as

Part of PubliclyAnnounced Plan or

Program (1)

Maximum DollarValue of Shares that

may yet be purchasedunder the Plans or

Programs (1)

January 1 - 31, 2018

Repurchase program (1) 2,302,800 $ 78.58 2,302,800 $ 1,600,409,640

Employee transactions (2) 1,932 $ 79.18 N/A N/A

February 1 - 28, 2018


Employee transactions (2) 355,947 $ 80.57 N/A N/AMarch 1 - 31, 2018


Employee transactions (2) — $ — N/A N/A Total


Employee transactions (2) 357,879 $ 80.57 N/A N/A (1) On July 25, 2017 , our board of directors approved a share repurchase program authorizing the purchase of up to $2.8 billion of our outstanding shares of common stock. This share repurchase program expires on October 31, 2018

and may be terminated at any time.(2) Reflects shares withheld (under the terms of grants under employee stock compensation plans) to offset tax withholding obligations that occur upon the delivery of outstanding shares underlying restricted stock units or upon the

exercise of stock options.

Item 3. Defaults Upon Senior SecuritiesNone.

Item 4. Mine Safety DisclosuresNone.

Item 5. Other InformationNone.

Item 6. ExhibitsSee "Exhibit Index" for documents filed herewith and incorporated herein by reference.

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Exhibit Index

ExhibitNumber Description

10.1 Form 2018 Award Certificate for Restricted Stock Units under Discover Financial Services Directors' Compensation Plan.

10.2 Form 2018 Award Certificate for Restricted Stock Units under Discover Financial Services Amended and Restated Omnibus Incentive Plan.

10.3 Form 2018 Award Certificate for Performance Stock Units under Discover Financial Services Amended and Restated Omnibus Incentive Plan.

10.4

Amendment to 2017 Directors' Annual Equity Award Certificate for Restricted Stock Units of Discover Financial Services, effective February22, 2018.

10.5 Amendment No. 6 to the Director's Compensation Plan of Discover Financial Services, effective as of February 22, 2018.

12.1

Statement regarding computation of ratio of earnings to fixed charges and computation of ratio of earnings to fixed charges and preferred stockdividends.

31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

32.1

Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 1350 of Chapter 63 of Title 18 of the United StatesCode.

101.INS XBRL Instance Document.

101.SCH XBRL Taxonomy Extension Schema Document.

101.CAL XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB XBRL Taxonomy Extension Label Linkbase Document.

101.PRE XBRL Taxonomy Extension Presentation Linkbase Document.

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Signature

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned thereunto duly authorized.

Discover Financial Services(Registrant)

By: /s/ R. M ARK G RAF

R. Mark Graf

Executive Vice President, Chief Financial Officer

Date: May 1, 2018

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Exhibit 10.1

DISCOVER FINANCIAL SERVICES

DIRECTORS’ COMPENSATION PLAN

20XX Directors’ Annual Equity Award

AWARD CERTIFICATE FOR

RESTRICTED STOCK UNITS

TABLE OF CONTENTS FOR AWARD CERTIFICATE

1. Stock units generally. 2

2. Vesting schedule and conversion. 3

3. Dividend equivalent payments. 3

4. Death and Disability. 3

5. Change in Control. 4

6. Termination of Service and cancellation of awards. 4

7. Satisfaction of obligations. 4

8. Nontransferability. 5

9. Designation of a beneficiary. 5

10. Ownership and possession. 5

11. Securities law compliance matters. 6

12. Compliance with laws and regulations. 6

13. No entitlements. 6

14. Consents under local law. 6

15. Award modification. 6

16. Severability. 7

17. Governing law. 7

18. Defined terms. 7

1

DISCOVER FINANCIAL SERVICESDIRECTORS’ COMPENSATION PLAN

20XX DIRECTORS’ ANNUAL EQUITY AWARDAWARD CERTIFICATE FOR RESTRICTED STOCK UNITS

Discover has awarded to you restricted stock units as an incentive for you to continue to provide services as aDirector of the Company from the Date of the Award through the Scheduled Vesting Date, as provided in this Award Certificate.This Award Certificate sets forth the general terms and conditions of your 20XX Annual Equity Award restricted stock unit award.

The number of restricted stock units in your award has been communicated to you separately in writing.

Your restricted stock unit award is made pursuant to the Plan. References to “restricted stock units” in this AwardCertificate mean only those restricted stock units included in your 20XX Annual Equity Award restricted stock unit award, and theterms and conditions herein apply only to such award. If you receive any other award under the Plan or another equity compensationplan, it will be governed by the terms and conditions of the applicable award documentation, which may be different from thoseherein.

The purpose of the restricted stock unit award is, among other things, to align your interests with the interests ofDiscover and its stockholders and to reward you for your continued service as a Director of Discover in the future. In view of thesepurposes, you will earn your 20XX Annual Equity Award restricted stock unit award only if you remain in continuous service as aDirector of Discover through the applicable Scheduled Vesting Date.

Section 409A of the Internal Revenue Code imposes rules relating to the taxation of deferred compensation, includingyour 20XX Annual Equity Award restricted stock unit award. Discover reserves the right to modify the terms of your 20XX AnnualEquity Award restricted stock unit award, including, without limitation, the payment provisions applicable to your restricted stockunits, to the extent necessary or advisable to comply with Section 409A of the Internal Revenue Code.

Capitalized terms used in this Award Certificate that are not defined in the text have the meanings set forth in Section18 below. Capitalized terms used in this Award Certificate that are not defined in the text or in Section 18 below have the meaningsset forth in the Plan.

2

1. Stock units generally .

Each of your restricted stock units corresponds to one share of Discover common stock. A restricted stock unitconstitutes an unsecured promise by Discover to pay you one share of Discover common stock on the conversion date for therestricted stock unit. As the holder of restricted stock units, you have only the rights of a general unsecured creditor of Discover.You will not be a stockholder with respect to the shares of Discover common stock underlying your restricted stock units unless anduntil your restricted stock units convert to shares.

2. Vesting schedule and conversion .

(a) Vesting schedule. Your restricted stock units will fully vest on the Scheduled Vesting Date. Except asotherwise provided in this Award Certificate, your restricted stock units will vest only if you continue to provide future services toDiscover by remaining in continuous service as a Director of Discover through the applicable Scheduled Vesting Date. The specialvesting terms set forth in Sections 4 and 5 of this Award Certificate apply (i) if your service as a Director of Discover terminates byreason of your death or Disability or (ii) upon a Change in Control.

(b) Conversion . Except as otherwise provided in this Award Certificate, each of your vested restricted stock unitswill convert to one share of Discover common stock on the applicable Scheduled Vesting Date.

The shares received upon conversion of restricted stock units will be delivered as soon as administratively practicablethereafter or, if deferred by you, delivered pursuant to the terms of your Restricted Stock Unit Deferral Election Form, and will notbe subject to any transfer restrictions, other than those that may arise under the securities laws or Discover’s policies.

3. Dividend equivalent payments .

Until your restricted stock units convert to shares, if Discover pays a regular or ordinary cash dividend on its commonstock, you will be paid a dividend equivalent for your vested and unvested restricted stock units. No dividend equivalents will bepaid to you with respect to any canceled restricted stock units.

Discover will decide on the form of payment and may pay dividend equivalents in shares of Discover common stock,in cash or in a combination thereof. Discover will pay the dividend equivalent as soon as administratively practicable after Discoverpays the corresponding dividend on its common stock.

4. Death and Disability .

The following special vesting and payment terms apply to your restricted stock units:

(a) Death. If your service as a Director of Discover terminates due to death, all of your unvested restricted stockunits will vest on the date your service terminates. Your restricted stock units will convert to shares of Discover common stock andbe delivered to the beneficiary you have designated pursuant to Section 9 or the legal representative of your estate, as applicable, assoon as administratively practicable after Discover receives appropriate notice of your death.

(b) Disability. If your service as a Director of Discover terminates due to Disability, all your unvested restrictedstock units will vest on the date your service terminates. On that date, your restricted stock units will convert to shares of Discovercommon stock and be delivered to you as soon as administratively practicable thereafter.

5. Change in Control .

If there is a Change in Control, all of your restricted stock units will immediately vest. On the date of a Change inControl, your restricted stock units will convert to shares of Discover common stock and be delivered as soon as administrativelypracticable thereafter.

6. Termination of Service and cancellation of awards .

Your unvested restricted stock units will be canceled if your service as a Director of Discover terminates for anyreason other than under the circumstances set forth in this Award Certificate for death, Disability or Change in Control.

7. Satisfaction of obligations .

Notwithstanding any other provision of this Award Certificate, Discover may, in its sole discretion, take variousactions affecting your restricted stock units in order to collect amounts sufficient to satisfy any obligation that you owe to Discoverand any tax or other withholding obligations. These actions include the following:

(a) Upon conversion of restricted stock units, including any accelerated conversion pursuant to Sections 4, 5 or 6above, or, if later, upon delivery of the shares of Discover common stock, Discover may withhold a number of shares sufficient tosatisfy any obligation that you owe to the Company and any tax or other withholding obligations. Discover shall determine thenumber of shares to be withheld by dividing the dollar value of your obligation to Discover and any tax or other withholdingobligations by the fair market value of Discover common stock on the date of conversion, or, if later, on the date the shares ofDiscover common stock are delivered.

(b) Discover may withhold the payment of dividend equivalents on your restricted stock units to ensure satisfactionof any obligation that you owe Discover or any tax or other withholding obligations.

Discover’s determination of the amount that you owe to it shall be conclusive. The fair market value of Discovercommon stock for purposes of the foregoing provisions shall be determined using a valuation methodology established by Discover.

8. Nontransferability .

You may not sell, pledge, hypothecate, assign or otherwise transfer your restricted stock units, other than as providedin Section 9 (which allows you to designate a beneficiary or beneficiaries in the event of your death) or by will or the laws of descentand distribution. This prohibition includes any assignment or other transfer that purports to occur by operation of law or otherwise.During your lifetime, payments relating to the restricted stock units will be made only to you.

Your personal representatives, heirs, legatees, beneficiaries, successors and assigns, and those of Discover, shall allbe bound by, and shall benefit from, the terms and conditions of your award.

9. Designation of a beneficiary .

You may make a written designation of beneficiary or beneficiaries to receive all or part of the shares to be paidunder this Award Certificate in the event of your death. To make a beneficiary designation, you must complete and file the formattached hereto as Appendix A with the Human Resources department.

Any shares that become payable upon your death, and as to which a designation of beneficiary is not in effect, will bedistributed to your estate.

You may replace or revoke your beneficiary designation at any time. If there is any question as to the legal right ofany beneficiary to receive shares under this award, Discover may determine in its sole discretion to deliver the shares in question toyour estate. Discover’s determination shall be binding and conclusive on all persons and it will have no further liability to anyonewith respect to such shares.

10. Ownership and possession .

(a) Generally. Generally, you will not have any rights as a stockholder in the shares of Discover common stockcorresponding to your restricted stock units prior to conversion of your restricted stock units. Prior to conversion of your restrictedstock units, however, you will receive dividend equivalent payments, as set forth in Section 3 of this Award Certificate.

To the extent necessary or advisable to comply with Section 409A of the Internal Revenue Code, with respect to anyprovision of this Award Certificate that provides for vested restricted stock units to convert to shares of Discover common stock onor as soon as administratively practicable after a specified event or date, such conversion will be made by the later of the end of thecalendar year in which the specified event or date occurs or the 15 th day of the third calendar month following the specified event ordate.

(b) Following conversion . Following conversion of your restricted stock units you will be the beneficial owner ofthe net shares issued to you, and you will be entitled to all rights of ownership, including voting rights and the right to receive cashor stock dividends or other distributions paid on the shares.

11. Securities law matters .

Shares of Discover common stock issued upon conversion of your restricted stock units may be subject to restrictionson transfer by virtue of the Securities Act of 1933, as amended. Discover may advise the transfer agent to place a stop order against

such shares if it determines that such an order is necessary or advisable. Because Discover common stock will only be maintained inbook-entry form, you will not receive a stock certificate representing your interest in such shares.

12. Compliance with laws and regulations .

Any sale, assignment, transfer, pledge, mortgage, encumbrance or other disposition of shares issued upon conversionof your restricted stock units (whether directly or indirectly, whether or not for value, and whether or not voluntary) must be made incompliance with any applicable constitution, rule, regulation, or policy of any of the exchanges or associations or other institutionswith which Discover has membership or other privileges, and any applicable law, or applicable rule or regulation of anygovernmental agency, self-regulatory organization or state or federal regulatory body.

13. No entitlements .

(a) No right to continued service. Nothing in this Award Certificate or the Plan shall confer the right to continueas a Director of Discover or any right to continue in the service of Discover during any period (including without limitation theperiod between the Date of the Award and the Scheduled Vesting Date or any portion of that period).

(b) No right to future awards . This award does not confer on you any right or entitlement to receive anotheraward of restricted stock units or any other equity-based award at any time in the future or in respect of any future period.

(c) No effect on future compensation . This award does not confer on you any right or entitlement to receivecompensation in any specific amount for any future fiscal year.

14. Consents under local law .

Your award is conditioned upon the making of all filings and the receipt of all consents or authorizations required tocomply with, or required to be obtained under, applicable local law.

15. Award modification .

Discover reserves the right to modify or amend unilaterally the terms and conditions of your restricted stock units,without first asking your consent, or to waive any terms and conditions that operate in favor of Discover. These amendments mayinclude (but are not limited to) changes that Discover considers necessary or advisable as a result of changes in any, or the adoptionof any new, Legal Requirement. Discover may not modify your restricted stock units in a manner that would materially impair yourrights in your restricted stock units without your consent; provided, however, that Discover may, without your consent, amend ormodify your restricted stock units in any manner that Discover considers necessary or advisable to comply with any LegalRequirement or to ensure that your restricted stock units are not subject to United States federal, state or local income tax or anyequivalent taxes in territories outside the United States prior to payment. Discover will notify you of any amendment of yourrestricted stock units that affects your rights. Any amendment or waiver of a provision of this Award Certificate (other than anyamendment or waiver applicable to all recipients generally), which amendment or waiver operates in your favor or confers a benefiton you, must be in writing and signed by Discover’s Head of Human Resources (or if such positions no longer exist, by the holder ofan equivalent position) to be effective.

16. Severability .

In the event Discover determines that any provision of this Award Certificate would cause you to be in constructivereceipt for United States federal or state income tax purposes of any portion of your award, then such provision will be considerednull and void and this Award Certificate will be construed and enforced as if the provision had not been included in this AwardCertificate as of the date such provision was determined to cause you to be in constructive receipt of any portion of your award.

17. Governing law .

This Award Certificate and the related legal relations between you and Discover will be governed by and construed inaccordance with the laws of the State of Delaware, without regard to any conflicts or choice of law, rule or principle that mightotherwise refer the interpretation of the award to the substantive law of another jurisdiction.

18. Defined terms .

3

For purposes of this Award Certificate, the following terms shall have the meanings set forth below:

(a) “ Board ” means the Board of Directors of Discover.

(b) A “Change in Control” means, except as provided otherwise below, any of the following events:

(1) any person (as defined in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the “ExchangeAct”), as such term is modified in Sections 13(d) and 14(d) of the Exchange Act), other than (i) any employee planestablished by Discover or any of its subsidiaries, (ii) any group of employees holding shares subject to agreements relatingto the voting of such shares, (iii) Discover or any of its affiliates (as defined in Rule 12b-2 promulgated under the ExchangeAct), (iv) an underwriter temporarily holding securities pursuant to an offering of such securities, or (v) a corporation owned,directly or indirectly, by stockholders of Discover in substantially the same proportions as their ownership of Discover, is orbecomes the beneficial owner, directly or indirectly, of securities of Discover (not including in the securities beneficiallyowned by such person any securities acquired directly from Discover or its affiliates other than in connection with theacquisition by Discover or its affiliates of a business) representing 30% or more of either the total fair market value or totalvoting power of the stock of Discover;

(2) a change in the composition of the Board such that individuals who, as of the Date of the Award,constitute the Board (the “ IncumbentBoard”) cease for any reason to constitute at least a majority of the Board; provided,however, that any individual becoming a member of the Board subsequent to the Date of the Award whose election, ornomination for election by Discover’s stockholders, was approved by a vote of at least a majority of the directors thencomprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, butexcluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual orthreatened election contest with respect to the election or removal of directors or other actual or threatened solicitation ofproxies or consents by or on behalf of a person other than the Board;

(3) the consummation of a merger or consolidation of Discover with any other corporation or other entity,or the issuance of voting securities in connection with a merger or consolidation of Discover (or any direct or indirectsubsidiary of Discover) pursuant to applicable stock exchange requirements, other than (A) a merger or consolidation whichresults in the voting securities of Discover outstanding immediately prior thereto continuing to represent (either by remainingoutstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination withthe ownership of any trustee or other fiduciary holding securities under an employee

4

benefit plan of Discover or any of its subsidiaries, at least 50% of the combined voting power of the voting securities ofDiscover or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (B) amerger or consolidation effected to implement a recapitalization of Discover (or similar transaction) in which no person(determined pursuant to clause 18(b)(1) above) is or becomes the beneficial owner, directly or indirectly, of securities ofDiscover (not including in the securities beneficially owned by such person any securities acquired directly from Discover orits affiliates other than in connection with the acquisition by Discover or its affiliates of a business) representing 30% or moreof either the then outstanding shares of Discover’s common stock or the combined voting power of Discover’s thenoutstanding voting securities; or

(4) the stockholders of Discover approve a plan of complete liquidation of Discover or an agreement for thesale or disposition by Discover of all or substantially all of Discover’s assets, other than a sale or disposition by Discover ofall or substantially all of Discover’s assets to an entity, at least 50% of the combined voting power of the voting securities ofwhich are owned by persons in substantially the same proportions as their ownership of Discover immediately prior to suchsale.

Notwithstanding the foregoing, no Change in Control shall be deemed to have occurred if there is consummated anytransaction or series of integrated transactions immediately following which the beneficial holders of Discover’s common stockimmediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in anentity which owns substantially all of the assets of Discover immediately prior to such transaction or series of transactions.

(c) “ Date of the Award ” means [insert date of grant which is the date of the annual meeting of shareholders].

(d) “ Disability ” means a “permanent and total disability,” as defined in Section 22(e)(3) of the Internal RevenueCode.

(e) “Discover” means Discover Financial Services, a Delaware corporation.

(f) “ Internal Revenue Code ” means the United States Internal Revenue Code of 1986, as amended, and the rules,regulations and guidance thereunder.

(g) “Legal Requirement” means any law, regulation, ruling, judicial decision, accounting standard, regulatoryguidance or other legal requirement.

(h) “ Plan ” means the Discover Financial Services Directors’ Compensation Plan, as in effect from time to time.

5

(i) “ Scheduled Vesting Date ” means the earlier of [insert the date of the first anniversary of the Date of theAward], or immediately prior to [insert the date of the first annual meeting of shareholders following the Date of the Award].

IN WITNESS WHEREOF , Discover has duly executed and delivered this Award Certificate as of the Date of theAward.


By: _____________________________Doug RoseSenior Vice President, Chief HR Officer

APPENDIX A

Designation of Beneficiary(ies) Under

Discover Equity Compensation Plans

This Designation of Beneficiary shall remain in effect with respect to all awards issued to me under any Discover equitycompensation plan, including any awards that may be issued to me after the date hereof, unless and until I modify or revoke it bysubmitting a later dated beneficiary designation. This Designation of Beneficiary supersedes all my prior beneficiary designationswith respect to all my equity awards.

If you have more than one primary beneficiary, benefits will be divided equally among the living beneficiaries unless you specify thepercentage. The percentages for all of the primary beneficiaries must total 100%. Contingent beneficiary(ies) receive any survivorbenefits with respect to your equity awards, ONLY if all primary beneficiaries predecease you. If you have more than one contingentbeneficiary, benefits will be divided equally among the living beneficiaries unless you specify the percentage. The percentages forall of the contingent beneficiaries must total 100%.

I hereby designate the following beneficiary(ies) to receive any survivor benefits with respect to all my equity awards:

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Primary Beneficiary(ies) Relationship Percentage(1) (2) (3) (4)

Contingent Beneficiary(ies) Relationship Percentage(1) (2) (3) (4)

Address(es) of Primary Beneficiary(ies):

(1)

(2)

(3)

(4)

Address(es) of Contingent Beneficiary(ies):

(1)

(2)

(3)

(4)

Name: (please print) Date

Signature

Please sign and email this form to [email protected] , or return via mail to:

Discover Financial ServicesAttn: Executive Compensation2500 Lake Cook RoadRiverwoods, IL 60015

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#DFSEX1013312018_HTM_

Exhibit 10.2


AMENDED AND RESTATED 2014 OMNIBUS INCENTIVE PLAN

2018 AWARD CERTIFICATE FOR

RESTRICTED STOCK UNITS

Vice President and Above

I


1. Restricted Stock Units Generally. 3

2. Vesting Schedule; Conversion; Retention Requirement. 3

3. Special Provisions for Certain “Specified Employees”. 4

4. Dividend Equivalent Payments. 4

5. Death; Disability; Retirement. 4

6. Reduction in Force. 5


8. Termination of Employment. 5

9. Forfeiture/Cancellation/Clawback of RSU Awards Under Certain Circumstances. 6

10. Tax and Other Withholding Obligations. 8

11. Satisfaction of Obligations. 8


13. Designation of a Beneficiary. 9

14. Ownership and Possession. 9

15. Securities Law Matters. 10

16. Compliance with Laws and Regulations. 10

17. No Entitlements. 10

18. Consents. 11

19. Electronic Delivery and Consent to Electronic Participation. 12

20. Award Modification. 12

21. Severability. 12

22. Successors. 12

23. Governing Law. 13

24. Section 409A. 13

25. Defined Terms. 13

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2018 AWARD CERTIFICATE FOR RESTRICTED STOCK UNITS

Discover has awarded to you restricted stock units (“RSUs”) as part of your discretionary long-term incentive compensationfor services provided to the Company, from the Date of the Award through the Scheduled Vesting Dates, as provided in this AwardCertificate. This Award Certificate sets forth the general terms and conditions of your restricted stock unit award (your “RSUAward”). Capitalized terms used in this Award Certificate that are not defined in the text have the meanings set forth in Section 25below. Capitalized terms used in this Award Certificate that are not defined in the text or in Section 25 below have the meanings setforth in the Plan.

The number of RSUs in your RSU Award has been communicated to you separately. If you are employed outside the UnitedStates, please reference the “ International Supplement ” included herein as Appendix C , which contains supplemental terms andconditions for your RSU Award. This Award Certificate should be read in conjunction with the International Supplement, ifapplicable, in order for you to understand the terms and conditions of your RSU Award.

Your RSU Award is made pursuant to the Plan. References to “restricted stock units” or “RSUs” in this Award Certificatemean only those RSUs included in your RSU Award, and the terms and conditions herein apply only to such RSU Award. If youreceive any other award under the Plan or another equity compensation plan, it will be governed by the terms and conditions of theapplicable award documentation, which may be different from those herein.

The purpose of the RSU Award is, among other things, to align your interests with the interests of Discover and itsshareholders and to reward you for your continued Employment with the Company in the future and your compliance with theCompany’s policies (including, without limitation, the Company’s risk policies and Code of Conduct), to protect the Company’sinterests in non-public, confidential and/or proprietary information, products, trade secrets, customer relationships, and otherlegitimate business interests, and to ensure an orderly transition of responsibilities. In view of these purposes, you will earn RSUsincluded in your RSU Award only if you (1) remain in continuous Employment through the applicable Scheduled Vesting Dates(subject to limited exceptions set forth herein), (2) are not found to be subject to the forfeiture, cancellation, or clawback provisionsset forth in Section 9 below, and (3) satisfy obligations you owe to the Company as set forth in Section 11 below. As the Companydeems appropriate and in its sole discretion, the Company will require you to provide a written certification or other evidence, fromtime to time, to confirm that none of the circumstances described in Section 9 below exist or have occurred, including upon atermination of Employment and/or during a specified period of time prior to the applicable Scheduled Vesting Dates. If you fail totimely provide any required certification or other evidence, the Company will cancel your RSU Award. It is your responsibility toprovide the Human Resources Department with your up-to-date contact information.

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1. Restricted Stock Units Generally .

Each of your RSUs corresponds to one share of Stock. A RSU constitutes an unsecured promise by Discover to pay you oneshare of Stock on the conversion date for the RSU. As the holder of RSUs, you have only the rights of a general unsecured creditorof the Company. You will not be a shareholder with respect to the Shares stock underlying your RSUs unless and until your RSUsconvert to Shares.

2. Vesting Schedule; Conversion; Retention Requirement .

a) Vesting Schedule. Your RSUs will vest according to the Scheduled Vesting Dates set forth in Appendix A .Except as otherwise provided in this Award Certificate, each portion of your RSUs will vest only if you continue to provide futureservices to the Company by remaining in continuous Employment through the applicable Scheduled Vesting Date. The specialvesting terms set forth in Sections 5, 6 and 7 of this Award Certificate apply (1) if your Employment terminates by reason of yourdeath, Disability, or Retirement, (2) if the Company terminates your Employment in an involuntary termination under thecircumstances described in Section 6, or (3) upon a Change in Control. Vested RSUs are subject to the tax withholding provisionsset forth in Section 10 of this Award Certificate.

b) Conversion.

(A) Except as otherwise provided in this Award Certificate, each of your vested RSUs will convert to oneshare of Stock on the applicable Scheduled Vesting Date. The special conversion provisions set forth in Sections 5, 6 and 7of this Award Certificate apply (i) if your Employment terminates by reason of your death, Disability, or Retirement, (ii) ifthe Company terminates your Employment in an involuntary termination under the circumstances described in Section 6, or(iii) upon a Change in Control.

(B) Shares to which you are entitled upon conversion of RSUs under any provision of this AwardCertificate shall be delivered as soon as administratively practicable thereafter and shall not be subject to any transferrestrictions, other than those that may arise under the securities laws or the Company’s policies, including, without limitation,its stock ownership guidelines and/or Section 11 below, but will be subject to forfeiture, cancellation or clawback as set forthin Section 9 below.

c) Accelerated Conversion. The Committee, in its sole discretion, may determine that any RSUs may beconverted to Shares prior to the Scheduled Vesting Date subject to compliance with all Legal Requirements. In such case, theCommittee may determine in its sole discretion that the shares may not be transferable and may remain subject to applicable vesting,retention, forfeiture, cancellation, clawback and withholding provisions.

d) Rule of Construction for Timing of Conversion. Whenever this Award Certificate provides for your RSUsto convert to Shares on the Scheduled Vesting Date or upon a different specified event or date, such conversion will be considered tohave been timely made, and neither you nor any of your beneficiaries or your estate shall have any claim against the Company

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for damages based on a delay in conversion of your RSUs (or delivery of Shares following conversion), and the Company shall haveno liability to you (or to any of your beneficiaries or your estate) in respect of any such delay, as long as conversion is made byDecember 31 of the year in which occurs the Scheduled Vesting Date or such other specified event or date or, if later, by the 15thday of the third calendar month following such specified event or date. Similarly, neither you nor any of your beneficiaries or yourestate shall have any claim against the Company for damages, and the Company shall have no liability to you (or to any of yourbeneficiaries or your estate), based on any acceleration of the conversion of your RSUs pursuant to Section 2.c), as applicable.

e) Retention Requirement. Notwithstanding anything in the Plan or any other provisions of this AwardCertificate to the contrary, following delivery thereof, you will be required to hold (and not transfer or otherwise dispose of) one-hundred percent (100%) of the Net Shares until one (1) year after the applicable Scheduled Vesting Date or such other specifiedevent or date which accelerates the conversion of such Net Shares; provided, that this requirement shall lapse in the event of yourdeath, Disability or a Change in Control.

3. Special Provisions for Certain “Specified Employees” .

Notwithstanding the other provisions of this Award Certificate, to the extent necessary to comply with Section 409A of theInternal Revenue Code, if Discover reasonably considers you to be one of its “specified employees” as defined in Section 409A ofthe Internal Revenue Code at the time of the termination of your Employment, any RSUs to which you are entitled under this AwardCertificate that constitute a deferred compensation arrangement under Section 409A of the Internal Revenue Code and that arepayable upon termination of your Employment will not convert to Stock until the date that is six months after the termination of yourEmployment (or the date of your death, if such event occurs earlier).

4. Dividend Equivalent Payments .

Until your RSUs convert to Shares, if Discover pays a regular or ordinary cash dividend on its common stock, you will bepaid a dividend equivalent for your vested and unvested RSUs. The decision to pay a dividend and, if so, the amount of any suchdividend, is determined by Discover in its sole discretion. No dividend equivalents will be paid to you on any canceled RSUs.Discover will decide on the form of payment and may pay dividend equivalents in Shares, in cash or in a combination thereof.Discover will pay the dividend equivalents as soon as administratively practicable after Discover pays the corresponding dividend onits common stock. Because dividend equivalent payments are considered part of your compensation for income tax purposes, theywill be subject to applicable tax and other withholding obligations, as summarized in Section 10.

5. Death; Disability; Retirement .

The following special vesting and payment terms apply to your RSUs:

a) Death. If your Employment terminates due to your death, all RSUs subject to this Award Certificate will veston the date your Employment terminates. On that date, your RSUs will convert to Shares and be delivered to the beneficiary youhave designated pursuant to

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Section 13 or the legal representative of your estate, as applicable, as soon as administratively practicable after the Companyreceives appropriate notice of your death. After your death, the cancellation provisions set forth in Section 9.a) will no longer apply.

b) Disability. If your Employment terminates due to Disability, all RSUs subject to this Award Certificate willvest on the date your Employment terminates. On that date, subject to Section 3 above, your RSUs will convert to Shares and bedelivered to you.

c) Retirement. If your Employment terminates due to Retirement, the number of RSUs that will vest on the dateyour Employment terminates will be determined by multiplying the RSUs subject to this Award Certificate by the Pro RationFraction. On that date, subject to Section 3 above, your RSUs will convert to Shares and be delivered to you.

6. Reduction in Force .

If the Company terminates your Employment due to a reduction in force or an elimination of your position, each asdetermined by the Company in its sole discretion, the number of RSUs that will vest on the date your Employment terminates will bedetermined by multiplying the RSUs subject to this Award Certificate by the Pro Ration Fraction. These shares will convert toShares and be delivered to you on the 60th day following your termination of Employment, subject to Section 3 above, providedthatyou sign (and do not revoke) an agreement and release of claims satisfactory to the Company.

7. Change in Control .

a) Termination in Connection with Change in Control. If the Company terminates your Employment otherthan for Cause, or if you terminate your Employment for Good Reason, within six months prior to or within 24 months after aChange in Control, all your RSUs will immediately vest and convert to Shares on the later of the date of a Change in Control and thedate of your termination following a Change in Control, as applicable and be delivered as soon as administratively practicablethereafter.

b) Stock Consideration. In the event of a Change in Control which results from a transaction pursuant to whichthe shareholders of Discover receive shares of common stock of an acquiring entity that are registered under Section 12 of theExchange Act (as defined in Section 25.c)(1)), unless otherwise determined by the Committee, in its sole discretion prior to suchChange in Control, there shall be substituted for each Share subject to this certificate the number and class of shares of commonstock of the acquiring entity into which each outstanding Share shall be converted pursuant to such Change in Control transactions,and this Award Certificate shall otherwise continue in effect.

c) Non-stock Consideration. In the event of a Change in Control which results from a transaction pursuant towhich the shareholders of Discover receive consideration other than shares of common stock of the Acquirer that are registeredunder Section 12 of the Exchange Act, the value of the RSUs hereunder shall, unless otherwise determined by the Committee, in itssole discretion prior to such Change in Control, be converted into a right to receive the cash or other

5

consideration received by the shareholders of Discover in such transaction, and this Award Certificate shall otherwise continue ineffect.

8. Termination of Employment .

a) Cancellation of Unvested RSU Awards. Your unvested RSUs will be canceled if your Employmentterminates for any reason other than under the circumstances set forth in this Award Certificate for death, Disability, and Retirementdescribed in Section 5, for an involuntary termination by the Company described in Section 6, or in connection with a Change inControl as provided in Section 7.

b) General Treatment of Vested RSU Awards. Except as otherwise provided in this Award Certificate, yourvested RSUs will convert to Shares on the applicable Scheduled Vesting Date. The tax and other withholding provisions as set forthin Section 10 of this Award Certificate will continue to apply until the date the Shares are delivered.

9. Forfeiture/Cancellation/Clawback of RSU Awards Under Certain Circumstances .

The forfeiture, cancellation and/or clawback circumstances and events set forth in this Section 9 are designed, among otherthings, to incentivize compliance with the Company’s policies (including, without limitation, the Company’s risk policies and Codeof Conduct), to protect the Company’s interests in non-public, confidential and/or proprietary information, products, trade secrets,customer relationships, and other legitimate business interests, and to ensure an orderly transition of responsibilities. This Section 9shall apply notwithstanding any other terms of this Award Certificate (except where sections in this Award Certificate specificallyprovide that the circumstances set forth in this Section 9 no longer apply).

a) Breach of Restrictive Covenants. Notwithstanding your satisfaction of the vesting conditions of this AwardCertificate, RSUs are not earned until the applicable Scheduled Vesting Date and will be canceled prior to the applicable ScheduledVesting Date in any of the circumstances set forth below. Although you will become the beneficial owner of Shares followingconversion of your RSUs, the Company may, upon notice, issue a transfer restriction with respect to your Shares followingconversion of your RSUs pending any investigation or other review that impacts the determination as to whether the RSUs arecancellable under the circumstances set forth below. The Shares underlying such RSUs shall be forfeited and recoverable in theevent the Company determines that the RSUs were cancellable under the circumstances set forth below . Notwithstanding anyprovision of this Award Certificate to the contrary, in the event that at any time prior to one year after the termination of yourEmployment or service with the Company, you (i) engage, in Competitive Activity; (ii) engage in Wrongful Solicitation or (iii)breach your obligations to the Company under a confidentiality, intellectual property or other restrictive covenant, you shall berequired to:

(A) pay to the Company an amount in cash equal to the value of the Shares that vested and converted on orafter, or within two years prior to, your termination of Employment, which value shall be determined by the Company, in itssole discretion, and

6

shall include an amount for tax adjustments appropriate to reflect your obligation to repay such amounts due to your breachof the restrictive covenants; or

(B) transfer to the Company the number of Shares that vested and converted on or after, or within two yearsprior to, your termination of Employment, plus an amount calculated by the Company, in its sole discretion, for taxadjustments appropriate to reflect your obligation to transfer such common stock due to your breach of the restrictivecovenants.

b) Clawback.

(1) In the event and to the extent the Committee reasonably determines that the performance considered by theCommittee, and on the basis of which the amount of RSUs were granted, was based on Discover’s materialnoncompliance with any financial reporting requirement under the securities laws which requires Discover to file arestatement of its financial statements within three years of the Date of the Award, you will be required to complywith paragraphs (1) and (2) (as applicable) below to repay to the Company an amount equal to the number of RSUswhich were granted hereunder less the number of RSUs that would have been granted had your RSUs been grantedbased on compliance with any such financial reporting requirement under the securities laws (such number ofRSUs, the “ Clawback RSUs ,” to be determined in each case by the Committee in its sole discretion:

(A) You shall forfeit a number of RSUs hereunder equal to the Clawback RSUs. In the event such forfeitedRSUs are less than the Clawback RSUs, then you shall comply with the following paragraph (B).

(B) You shall be required:

(1) to pay to the Company an amount in cash equal to the value of Shares that vested and converted hereunder,which value shall be determined using a valuation method established by the Company, in its sole discretion,and shall include an amount for tax adjustments appropriate to reflect your obligation to repay such amountsdue to the restatement of the Company’s financial statements; or

(2) to transfer to the Company the number of Shares that vested and converted, hereunder plus such amountcalculated by the Company, in its sole discretion, for tax adjustments appropriate to reflect your obligation torepay such amounts due to the restatement of the Company’s financial statements.

c) Risk Review. No RSUs will convert to Shares until the Chief Human Resources Officer receives confirmationfrom the Chief Risk Officer that a review has been completed by the Chief Risk Officer to determine whether you engaged in anywillful or reckless

7

violation of the Company’s risk policies. If the Chief Risk Officer finds any such violation or breach, then the Company maydetermine that all or a portion of your RSUs will be forfeited. Additionally, if you are a Covered Employee, the Chief Risk Officerwill conduct Company and/or Business Unit risk reviews as well as evaluate your individual risk goals. Based on this assessment,the Company may determine that all or a portion of your RSUs will be forfeited.

d) Authorization. You authorize the Company to deduct any amount or amounts owed by you pursuant to thisSection 9 from any amounts payable by or on behalf of the Company to you, including, without limitation, any amount payable toyou as salary, wages, paid time off, bonus, severance, change in control severance or the conversion of any equity-based award. Thisright of offset shall not be an exclusive remedy and the Company’s election not to exercise this right of offset with respect to anyamount payable to you shall not constitute a waiver of this right of offset with respect to any other amount payable to you or anyother remedy.

10. Tax and Other Withholding Obligations .

Subject to rules and procedures established by Discover, you may be eligible to elect to satisfy the tax or other withholdingobligations arising upon conversion of your RSUs or upon any taxable event by having Discover withhold Shares or by tenderingShares, in each case in an amount sufficient to satisfy the tax or other withholding obligations. Shares withheld or tendered will bevalued using the fair market value of Stock on the date the Shares are scheduled to convert, or otherwise become taxable, asapplicable, using a valuation methodology established by Discover. In order to comply with applicable accounting standards or theCompany’s policies in effect from time to time, Discover may limit the amount of Shares that you may have withheld or that youmay tender.

11. Satisfaction of Obligations .

Notwithstanding any other provision of this Award Certificate, the Company may, in its sole discretion, take various actionsaffecting your RSUs in order to collect amounts sufficient to satisfy any obligation that you owe to the Company and any tax orother withholding obligations. The Company’s determination of the amount that you owe the Company shall be conclusive. The fairmarket value of Stock for purposes of the following provisions shall be determined using a valuation methodology established by theCompany. The actions that may be taken by the Company pursuant to this Section 11 include, but are not limited to, the following:

a) Withholding of Shares. Upon conversion of RSUs, including any accelerated conversion pursuant to Sections5, 6, or 7 above, or, if later, upon delivery of the Shares, the Company may withhold a number of Shares sufficient to satisfy anyobligation that you owe to the Company and any tax or other withholding obligations whether national, federal, state or local taxwithholding obligations including any social insurance contributions or employment tax obligation. The Company shall determinethe number of Shares to be withheld by dividing the dollar value of your obligation to the Company and any tax or other withholdingobligations by the fair market value of Stock on the date the Shares are scheduled to convert, or otherwise become taxable, asapplicable. To the extent that the Company retains any Shares or reduces the number of RSUs to cover the withholding obligations,it will do so at the minimum statutory rate. Should the

8

Company withhold in excess of the actual tax withholding obligation, the Company will refund the excess amount to you within areasonable period and without any interest.

b) Netting of Accelerated RSUs. In order to satisfy any taxes due upon an event which is earlier thanconversion, Discover may accelerate the vesting and conversion of a portion of your unvested RSUs. The Company shall determinethe number of RSUs to be accelerated and converted by dividing the dollar value of your tax obligations upon such event by the fairmarket value of Stock on the date of accelerated conversion. Accelerated and converted RSUs shall not exceed the value of taxes dueupon such event and the resulting Shares will be withheld by the Company.

c) Withholding of Other Compensation. The Company may withhold the payment of dividend equivalents onyour RSUs or any other compensation or payments due from Discover to ensure satisfaction of any obligation that you owe theCompany or any tax or other withholding obligations or Discover may permit you to satisfy such tax or other withholding obligationby paying such obligation in immediately available funds.

d) Mobile Employees. You are liable and responsible for all taxes and social insurance contributions owed inconnection with the Award, regardless of any action the Company takes with respect to any tax withholding obligations that arise inconnection with the Award. The Company does not make any representation or undertaking regarding the tax treatment or thetreatment of any tax withholding in connection with the grant, vesting or payment of the Award. The Company does not commit andis under no obligation to structure the Award to reduce or eliminate your tax liability. Further, you may be subject to individualincome taxation (and possibly social security or other applicable personal or payroll taxes) in each jurisdiction where you haveperformed services for the Company between the Award Date and the Vesting Date. Taxes for which you are liable, if applicable,may be withheld and deposited by the Company in each jurisdiction in which you have performed services regardless of your statusas a resident or non-resident in one or more of the jurisdictions that have a right to impose taxation. You agree that you will complywith all United States and foreign individual income tax return filing obligations that may be imposed with respect to the Award.

12. Nontransferability .

You may not sell, pledge, hypothecate, assign or otherwise transfer your RSUs, other than as provided in Section 13 (whichallows you to designate a beneficiary or beneficiaries in the event of your death) or by will or the laws of descent and distribution.This prohibition includes any assignment or other transfer that purports to occur by operation of law or otherwise. During yourlifetime, payments relating to the RSUs will be made only to you.

13. Designation of a Beneficiary .

You may make a written designation of beneficiary or beneficiaries to receive all or part of the Shares to be paid under thisAward Certificate in the event of your death. To make a beneficiary designation, you must complete and file the form attachedhereto as Appendix B with the Human Resources Department. Any Shares that become payable upon your death, and as to which a

9

designation of beneficiary is not in effect, will be distributed to your estate. If you previously filed a designation of beneficiary formfor your equity awards with the Human Resources Department, such form will also apply to the RSUs granted pursuant to this RSUAward. You may replace or revoke your beneficiary designation at any time. If there is any question as to the legal right of anybeneficiary to receive Shares under this RSU Award, Discover may determine in its sole discretion to deliver the shares in questionto your estate. Discover’s determination shall be binding and conclusive on all persons and it will have no further liability to anyonewith respect to such shares.

14. Ownership and Possession .

a) Generally. Generally, you will not have any rights as a shareholder in the Shares corresponding to your RSUsprior to conversion of your RSUs. Prior to conversion of your RSUs, however, you will receive dividend equivalent payments, as setforth in Section 4 of this Award Certificate. To the extent necessary or advisable to comply with Section 409A of the InternalRevenue Code, with respect to any provision of this Award Certificate that provides for vested RSUs to convert to Shares on or assoon as administratively practicable after a specified event or date, such conversion will be made by the later of the end of thecalendar year in which the specified event or date occurs or the 15 th day of the third calendar month following the specified event ordate.

b) Following Conversion. Subject to the terms and conditions of this Award Certificate, following conversion ofyour RSUs you will be the beneficial owner of the Shares issued to you, net of taxes, and you will be entitled to all rights ofownership, including voting rights and the right to receive cash or stock dividends or other distributions paid on such shares.

15. Securities Law Matters .

Shares issued upon conversion of your RSUs may be subject to restrictions on transfer by virtue of the Securities Act of1933, as amended. Discover may advise the transfer agent to place a stop order against such shares if it determines that such anorder is necessary or advisable. Because Stock will only be maintained in book-entry form, you will not receive a stock certificaterepresenting your interest in such shares.

16. Compliance with Laws and Regulations .

Any sale, assignment, transfer, pledge, mortgage, encumbrance or other disposition of Shares issued upon conversion of yourRSUs (whether directly or indirectly, whether or not for value, and whether or not voluntary) must be made in compliance with anyapplicable constitution, rule, regulation, or policy of any of the exchanges or associations or other institutions with which theCompany or a Related Employer has membership or other privileges, and any applicable law, or applicable rule or regulation of anygovernmental agency, self-regulatory organization or state or federal regulatory body.

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17. No Entitlements .

a) No Right to Continued Employment. This RSU Award is not an employment agreement, and nothing in thisAward Certificate, the International Supplement, if applicable, or the Plan shall alter your status as an “at-will” employee of theCompany or your Employment status at a Related Employer. None of this Award Certificate, the International Supplement, ifapplicable, or the Plan shall be construed as guaranteeing your Employment by the Company or a Related Employer, or as givingyou any right to continue in the employ of the Company or a Related Employer, during any period (including without limitation theperiod between the Date of the Award and any of the Scheduled Vesting Dates, or any portion of any of these periods), nor shall theybe construed as giving you any right to be reemployed by the Company or a Related Employer following any termination ofEmployment.

b) No Right to Future Awards. This RSU Award, and all other awards of RSUs and other equity-based awards,are discretionary. This RSU Award does not confer on you any right or entitlement to receive another award of RSUs, any otherequity-based award or any other award at any time in the future or in respect of any future period.

c) No Effect on Future Employment Compensation. Discover has made this RSU Award to you in its solediscretion. This RSU Award does not confer on you any right or entitlement to receive compensation in any specific amount for anyfuture fiscal year, and does not diminish in any way the Company’s discretion to determine the amount, if any, of yourcompensation. In addition, this RSU Award is not part of your base salary or wages and will not be taken into account indetermining any other Employment-related rights you may have, such as rights to pension or severance pay, end of servicepayments, bonuses, long-service awards or similar payments and in no event shall be considered as compensation for, or relating inany way to, past services for the Company.

d) Termination of Employment. In consideration of the grant of the Award, no claim or entitlement tocompensation or damages shall arise from termination of the Award or diminution in value of the Award or Shares acquired throughvesting of the Award resulting from termination of your employment by the Company (for any reason whatsoever and whether ornot in breach of local labor laws) and you irrevocably release the Company and the Employer from any such claim that may arise; if,notwithstanding the foregoing, any such claim is found by a court of competent jurisdiction to have arisen, then, by signing thisAgreement, you will be deemed irrevocably to have waived your entitlement to pursue such claim; and in the event of termination ofyour employment (whether or not in breach of local labor laws), your right to receive the Award and vest in the Award under thePlan, if any, will terminate effective as of the date that you are no longer actively employed and will not be extended by any noticeperiod mandated under local law (e.g., active employment would not include a period of “garden leave” or similar period pursuant tolocal law); Discover shall have the exclusive discretion to determine when you are no longer actively employed for purposes of yourAward.

e) Language. If you have received this Agreement or any other document related to the Plan translated into alanguage other than English and if the translated version is different that the English version, the English version will control.

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f) Award Terms Control; Plan Terms Control. In the event of any conflict between any terms applicable toequity awards in any employment agreement, offer letter or other arrangement that you have entered into with the Company and theterms set forth in this Award Certificate, the latter shall control. In the event of any conflict between the terms set forth in this AwardCertificate and the terms of the Plan, the latter shall control.

18. Consents .

Your RSU Award is conditioned upon the Company’s making of all filings and the receipt of all consents or authorizationsrequired to comply with, or required to be obtained under, applicable local law.

In accepting this RSU Award, you consent to the collection, use and transfer, in electronic or other form, of your personaldata by and among, as applicable, the Company and any other possible recipients for the purpose of implementing, administeringand managing your participation in the Plan, as well as for the purpose of the Company’s compliance with applicable law, including,without limitation, Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. You understand that therecipients of your personal data may be located in the U.S. or elsewhere, and the recipients’ country may have different data privacylaws and protections than your country. You understand that you may request a list with the names and addresses of any potentialrecipients of your personal data, view the personal data, request additional information about the storage of your personal data,require any necessary amendments to your personal data or refuse or withdraw your consent by contacting your local humanresources representative, in any case without cost. You understand, however, that refusing or withdrawing your consent may affectyour ability to participate in the Plan.

19. Electronic Delivery and Consent to Electronic Participation.

The Company may, in its sole discretion, decide to deliver any documents related to the RSU Award and participationin the Plan or future RSU Awards by electronic means. You hereby consent to receive such documents by electronic delivery and toparticipate in the Plan through an online or electronic system established and maintained by the Company or another third partydesignated by the Company, including the acceptance of RSU Awards and the execution of the RSU agreements through electronicsignature.

20. Award Modification .

The Committee reserves the right to modify or amend unilaterally the terms and conditions of your RSUs, without firstasking your consent, or to waive any terms and conditions that operate in favor of Discover. These amendments may include (but arenot limited to) changes that the Committee considers necessary or advisable as a result of changes in any, or the adoption of anynew, Legal Requirement. The Committee may not modify your RSUs in a manner that would materially impair your rights in yourRSUs without your consent; provided, however, that the Committee may, without your consent, amend or modify your RSUs inany manner that the Committee considers necessary or advisable to comply with or reflect the application of any Legal Requirementor to ensure that your RSUs are not subject to United States federal, state or local

12

income tax or any equivalent taxes in territories outside the United States prior to payment. Discover will notify you of anyamendment of your RSUs that affects your rights. Any amendment or waiver of a provision of this Award Certificate (other than anyamendment or waiver applicable to all recipients generally), which amendment or waiver operates in your favor or confers a benefiton you, must be in writing and signed by the Chief Human Resources Officer to be effective.

21. Severability .

In the event the Committee determines that any provision of this Award Certificate would cause you to be in constructivereceipt for United States federal or state income tax purposes of any portion of your RSU Award, then such provision will beconsidered null and void and this Award Certificate will be construed and enforced as if the provision had not been included in thisAward Certificate as of the date such provision was determined to cause you to be in constructive receipt of any portion of your RSUAward.

22. Successors .

This Award Certificate shall be binding upon and inure to the benefit of any successor or successors of Discover and anyperson or persons who shall, upon your death, acquire any rights hereunder in accordance with this Award Certificate or the Plan.

23. Governing Law .

This Award Certificate and the related legal relations between you and Discover will be governed by and construed inaccordance with the laws of the State of Delaware, without regard to any conflicts or choice of law, rule or principle that mightotherwise refer the interpretation of the RSU Award to the substantive law of another jurisdiction. The Company and you agree thatthe jurisdiction and venue for any disputes arising under, or any action brought to enforce (or otherwise relating to), the Plan or thisAward Certificate shall be exclusively in the courts in the State of Illinois, Counties of Cook or Lake, including the federal courtslocated therein (should federal jurisdictions exist), and the Company and you hereby submit and consent to said jurisdiction andvenue.

24. Section 409A.

This Award Certificate and your RSU Award (including all adjustments, substitutions, dividends, valuations anddistributions, and deferrals hereunder) are intended to be exempt from or comply with Section 409A of the Internal Revenue Codepursuant to the guidance issued thereunder by the U.S. Internal Revenue Service in all respects and shall be administered in amanner consistent with such intent. If an unintentional operational failure occurs with respect to requirements under Section 409A ofthe Internal Revenue Code, you or your beneficiary shall fully cooperate with Discover to correct the failure, to the extent possible,in accordance with any correction procedure established by the U.S. Internal Revenue Service. Any reference herein to Section 409Aof the Internal Revenue Code shall be interpreted to refer to any successor section of the Internal Revenue Code or other guidanceissued by the U.S. Internal Revenue Service, or other agency with jurisdiction, as appropriate. To the extent that full or partialpayment of your RSU Award that

13

constitutes a deferral of compensation subject to Section 409A of the Internal Revenue Code is made upon a termination ofEmployment, a termination of Employment shall be deemed to occur only if it is a “separation from service” for purposes of Section409Aof the Internal Revenue Code, and references in this Award Certificate to “termination,” “termination of Employment,” or liketerms shall mean a “separation from service.”

25. Defined Terms .


a) “ Board ” means the Board of Directors of Discover .

b) “Cause” means:

(A) any act or omission which constitutes a material breach of your obligations to the Company or yourfailure or refusal to perform satisfactorily any duties reasonably required of you, which breach, failure or refusal (ifsusceptible to cure) is not corrected (other than failure to correct by reason of your incapacity due to Disability) within ten(10) business days after written notification thereof to you by the Company;

(B) any act or omission by you that constitutes (i) fraud or intentional misrepresentation, (ii) embezzlement,misappropriation or conversion of assets of, or business opportunities considered by, the Company or (iii) any other actwhich has caused or may reasonably be expected to cause material injury to the interest or business reputation of theCompany; or

(C) your violation of any securities, commodities or banking laws, any rules or regulations issued pursuantto such laws, or rules or regulations of any securities or commodities exchange or association of which the Company is amember or of any policy of the Company relating to compliance with any of the foregoing.

c) “Change in Control” means, except as provided otherwise below, the first to occur of any of the followingevents:

(A) except as otherwise provided in clause (3) below, any person (as defined in Section 3(a)(9) of theSecurities Exchange Act of 1934 (the “Exchange Act”), as such term is modified in Sections 13(d) and 14(d) of the ExchangeAct), other than (i) any employee plan established by the Company or any of its Subsidiaries, (ii) any group of employeesholding shares subject to agreements relating to the voting of such shares, (iii) the Company or any of its affiliates (as definedin Rule 12b-2 promulgated under the Exchange Act), (iv) an underwriter temporarily holding securities pursuant to anoffering of such securities, or (v) a corporation owned, directly or indirectly, by shareholders of the Company in substantiallythe same proportions as their ownership of the Company, either (x) acquires ownership of stock of the Company that,together with stock held by such person (not including the stock owned by such person any stock acquired directly from theCompany

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other than in connection with the acquisition by the Company of a business), constitutes more than fifty percent (50%) of thetotal fair market value of the stock of the Company (but only if such person did not own more than 50% of the total fairmarket value of the stock of the Company prior to the acquisition of additional stock), or (y) acquires (or has acquired duringthe twelve-month period ending on the date of the most recent acquisition by such person) ownership of the stock of theCompany possessing thirty percent (30%) or more of the total voting power of the stock of the Company (but only if suchperson did not own 30% or more of the total voting power of the stock of the Company prior to the acquisition of additionalstock and not including the stock owned by such person any stock acquired directly from the Company other than inconnection with the acquisition by the Company of a business);

(B) a change in the composition of the Board during any twelve-month period, such that individuals who, asof the Date of the Award, constitute the Board (the “Incumbent Board”) cease for any reason to constitute at least a majorityof the Board; provided, however, that any individual becoming a member of the Board subsequent to the date of Date of theAward whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least amajority of the directors then comprising the Incumbent Board shall be considered as though such individual were a memberof the Incumbent Board;

(C) the consummation of a merger or consolidation of the Company with any other corporation or otherentity, or the issuance of voting securities in connection with a merger or consolidation of the Company (or any direct orindirect subsidiary of the Company) pursuant to applicable stock exchange requirements, other than (i) a merger orconsolidation which results in the securities of the Company outstanding immediately prior thereto continuing to represent(either by remaining outstanding or by being converted into securities of the surviving entity or any parent thereof), incombination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of theCompany or any of its subsidiaries, at least fifty percent (50%) of the combined voting power of the voting securities of theCompany or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (ii) amerger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person(determined pursuant to clause (1) above) is or becomes the beneficial owner, directly or indirectly, of securities of theCompany (not including in the securities beneficially owned by such person any securities acquired directly from theCompany or its affiliates other than in connection with the acquisition by the Company or its affiliates of a business)representing thirty percent (30%) or more of the total voting power of the stock of the Company (but only if such person didnot own 30% or more of the total voting power of the stock of the Company prior to the acquisition of additional securities);

(D) the complete liquidation of the Company or the sale or disposition by the Company of all orsubstantially all of the Company’s assets, other than a sale or disposition by the Company of all or substantially all of theCompany’s assets to (i) a shareholder of the Company (immediately before the asset transfer) in exchange for or with

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respect to the Company’s stock, (ii) an entity, at least fifty percent (50%) of the total value or voting power of which isowned, directly or indirectly, either by the Company or by a person or more than one person acting as a group, that owns fiftypercent (50%) or more of the total value or voting power of all the outstanding stock of the Company, or (iii) a person, ormore than one person acting as a group, that owns, directly or indirectly, fifty percent (50%) or more of the total value orvoting power of all the outstanding stock of the Company; provided, however, that a Change in Control pursuant to thisclause (4) shall not be deemed to have occurred unless a person (determined pursuant to clause (1) above) or persons actingas a group acquires (or has acquired during the twelve-month period ending on the date of the most recent acquisition bysuch person or persons) assets from the Company that have a total gross fair market value equal to or more than forty percent(40%) of the total gross fair market value of all of the assets of the Company immediately before such acquisition oracquisitions.

Notwithstanding the foregoing, with respect to a Change in Control of Discover, no Change in Control shall be deemed tohave occurred if there is consummated any transaction or series of integrated transactions immediately following which thebeneficial holders of the Company’s common stock immediately prior to such transaction or series of transactions continue to havesubstantially the same proportionate ownership in an entity which owns substantially all of the assets of the Company immediatelyprior to such transaction or series of transactions.

d) “Chief Human Resources Officer” means the chief human resources officer of Discover, any successor chiefhuman resources officer, or any other individual or committee appointed by the chief executive officer of Discover with the powerand authority of the chief human resources officer.

e) “Chief Risk Officer” means the chief risk officer of Discover, any successor chief risk officer, or any otherindividual or committee appointed by the chief executive officer of Discover with the power and authority of the chief risk officer.

f) “Committee” means the Compensation and Leadership Development Committee of the Board, any successorcommittee thereto or any other committee of the Board appointed by the Board with the powers of the Committee under the Plan,or any subcommittee appointed by such Committee.

g) “ Company ” means Discover and all of its Subsidiaries.

h) “ Competitive Activity” means:

(A) becoming, or entering into any arrangement as, an employee, officer, partner, member, proprietor,director, independent contractor, consultant, advisor, representative or agent of, or serving in any similar position or capacitywith, a Competitor, where you will be responsible for providing, or managing or supervising others who are providing,services (i) that are similar or substantially related to the services that you provided to the Company, or (ii) that you haddirect or indirect managerial or supervisory responsibility for at the Company, or (iii) that call for the application of the sameor similar

16

specialized knowledge or skills as those utilized by you in your services for the Company, in each such case, at any timeduring the year preceding the termination of your employment with the Company; or

(B) either alone or in concert with others, forming, or acquiring a five percent (5%) or greater equityownership, voting interest or profit participation in, a Competitor.

i) “Competitor” means any corporation, partnership or other entity that engages in (or that owns a significantinterest in any corporation, partnership or other entity that engages in) (1) the business of consumer lending, including, withoutlimitation, credit card issuance or electronic payment services, or (2) any other business in which you have been involved in or hadsignificant knowledge of, which has been conducted by the Company at any time during your employment with the Company. Forthe avoidance of doubt, a competitor of any entity which results from a corporate transaction involving the Company thatconstitutes a Change in Control shall be considered a Competitor for purposes of this Award Certificate.

j) “Covered Employee” means an employee who, as of the Date of the Award, has been identified as a coveredemployee by Human Resources.

k) “ Date of the Award ” means the date set forth in Appendix A .

l) “ Disability ” means a “permanent and total disability,” as defined in Section 22(e)(3) of the Internal RevenueCode.

m) “Discover” means Discover Financial Services, a Delaware corporation.

n) “Employed” and “Employment” refer to employment with the Company and/or Related Employment.

o) “Good Reason” means the occurrence of any of the following upon, or within six (6) months prior to ortwenty-four (24) months after the occurrence of a Change in Control of Discover without your prior written consent:

(A) any material diminution in your assigned duties, responsibilities and/or authority, including theassignment to you of any duties, responsibilities or authority inconsistent with the duties, responsibilities and authorityassigned to you, immediately prior to such assignment;

(B) a material diminution in the authority, duties, or responsibilities of the supervisor to whom you arerequired to report;

(C) any material reduction in your base compensation; provided, however, that Company-initiated across-the-board reductions in compensation affecting substantially all eligible Company employees shall alone not be considered“Good Reason,” unless the compensation reductions exceed twenty percent (20%) of your base compensation;

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(D) A material diminution of the budget over which you have authority;

(E) The Company’s requiring you to be based at a location that (i) is in excess of thirty-five (35) miles fromthe location of your principal job location or office immediately prior to the Change in Control, or (ii) results in an increasein your normal daily commuting time by more than ninety (90) minutes, except for required travel on Company’s business toan extent substantially consistent with your then present business travel obligations; or

(F) Any other action or inaction that constitutes a material breach by the Company of any agreementpursuant to which you provide services to the Company.

For purposes of paragraphs (1) through (6) above, the duties, responsibilities and/or authority assigned to you shall bedeemed to be the greatest of those in effect prior to or after the Change in Control. Unless you become Disabled, your right toterminate your Employment for Good Reason shall not be affected by your incapacity due to physical or mental illness. Yourcontinued Employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting GoodReason. Notwithstanding the foregoing, Good Reason shall not exist unless you give the Company written notice thereof withinthirty (30) days after its occurrence and the Company shall not have remedied the action within thirty (30) days after such writtennotice.

p) “ Internal Revenue Code ” means the United States Internal Revenue Code of 1986, as amended, and therules, regulations and guidance thereunder.

q) “Legal Requirement” means any law, regulation, ruling, judicial decision, accounting standard, regulatoryguidance or other legal requirement (including any foreign legal requirements).

r) “ Plan ” means the Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan, as ineffect from time to time.

s) “Pro Ration Fraction” means a fraction, not to exceed 1.0, the numerator of which is the number of daysstarting with and inclusive of the first day of the calendar year of the Date of the Award and ending on the effective date of yourtermination of Employment and the denominator of which is the number of days in the calendar year of the Date of the Award.

t) “ Related Employment ” means your employment with an employer other than the Company (such employer,herein referred to as a “ Related Employer ”), provided: (1) you undertake such employment at the written request or with thewritten consent of the Chief Human Resources Officer; (2) immediately prior to undertaking such employment you were anemployee of the Company or were engaged in Related Employment (as defined herein); and (3) such employment is recognized bythe Company in its discretion as Related Employment; and, providedfurtherthat the Company may (i) determine at any time in itssole discretion that employment that was recognized by the Company as Related Employment no longer qualifies as RelatedEmployment, and (ii) condition the designation and benefits of Related Employment on such terms and conditions as the Companymay determine in its sole discretion. The designation

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of employment as Related Employment does not give rise to an employment relationship between you and the Company, orotherwise modify your and the Company’s respective rights and obligations.

u) “ Retirement ” means the termination of your Employment by you or by the Company for any reason otherthan for Cause and other than due to your death or Disability, on or after the date on which:

(A) you have attained age 55; and

(B) your combined age and years of service at least 65 years.

v) “ Scheduled Vesting Date ” means the Scheduled Vesting Dates set forth in Appendix A as the contextrequires.

w) “Shares” means shares of Stock.

x) “Stock” means the common stock, par value $0.01 per share, of Discover.

y) “Subsidiary” means (i) a corporation or other entity with respect to which Discover, directly or indirectly, hasthe power, whether through the ownership of voting securities, by contract or otherwise, to elect at least a majority of the membersof such corporation’s board of directors or analogous governing body, or (ii) any other corporation or other entity in whichDiscover, directly or indirectly, has an equity or similar interest and which the Committee designates as a Subsidiary for purposesof the Plan.

z) “Wrongful Solicitation” occurs upon either of the following events:

(A) while Employed, including during any notice period applicable to you in connection with thetermination of your Employment, or within one year after the termination of your Employment, directly or indirectly in anycapacity (including through any person, corporation, partnership or other business entity of any kind), you hire or solicit,recruit, induce, entice, influence or encourage any Company employee to leave the Company or become hired or engaged byanother firm; provided, however, that this clause shall apply only to employees with whom you worked or had professionalor business contact, or who worked in or with your business unit, during any notice period applicable to you in connectionwith the termination of your Employment or during the one year preceding notice of the termination of your Employment; or

(B) while Employed, including during any notice period applicable to you in connection with thetermination of your Employment, or within one year after the termination of your Employment, directly or indirectly in anycapacity (including through any person, corporation, partnership or other business entity of any kind), you solicit or enticeaway or in any manner attempt to persuade any client or customer, or prospective client or customer, of the Company (i) todiscontinue or diminish his, her or its relationship or prospective relationship with the Company or (ii) to otherwise providehis, her or its

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business to any person, corporation, partnership or other business entity which engages in any line of business in which theCompany is engaged (other than the Company); provided, however, that this clause shall apply only to clients or customers,or prospective clients or customers, that you worked for on an actual or prospective project or assignment during any noticeperiod applicable to you in connection with the termination of your Employment or during the one year preceding notice ofthe termination of your Employment.

IN WITNESS WHEREOF , Discover has duly executed and delivered this Award Certificate as of the Date of the Award.

DISCOVER FINANCIAL SERVICESBy:

Doug RoseSenior Vice President, Chief HR Officer

APPENDIX A

Summary of Award

Date of Award : February 22, 2018

Vesting Schedule : Scheduled Vesting Date Vesting Amount

February 1, 2019 one-third*

February 1, 2020 one-third

February 1, 2021 one-third

20

*Any fractional RSUs resulting from the application of the vesting schedule will be aggregated and will vest on the first ScheduledVesting Date.

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APPENDIX B









(1)

(2)

(3)

(4)

22


(1)

(2)

(3)

(4)


Signature


Discover Financial ServicesAttn: Human Resources Executive Compensation2500 Lake Cook RoadRiverwoods, IL 60015

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#DFSEX1023312018_HTM_

APPENDIX C

Discover Financial ServicesInternational Supplement

This International Supplement to the Award Certificate for Restricted Stock Units ("Award Certificate") containssupplemental terms and conditions for the Restricted Stock Unit award (“Equity Award”) to employees of Discover FinancialServices (or the relevant affiliated company) located in certain jurisdictions outside of the United States. The terms included in thisInternational Supplement are intended to ensure compliance with the laws of the country in which you are Employed or, in certaininstances, to make the awards more tax efficient in your country.

You have also received an Award Certificate applicable to your award. The Award Certificate, together with thisInternational Supplement, collectively set forth the terms and conditions of your award. To the extent that this InternationalSupplement amends, deletes or supplements any terms of the Award Certificate, this International Supplement shall control.

Capitalized terms that are used without definition in this International Supplement have the meanings assigned in theAward Certificate.

Employees in the United Kingdom.

If you are Employed in the United Kingdom, the Company will act in accordance with the Data Protection Act of1998 as amended from time to time regarding any personal information which you provide to it in connection with your EquityAward (including the amount of the award) and you consent to the processing of such personal information in order to facilitate yourparticipation in such equity incentive program, for any purposes required by law or regulation, or for any other legitimate businesspurpose. By accepting your Equity Award, you agree that from time to time, for the purposes described above, your personalinformation may be stored and processed by and disclosed and transferred to other offices and companies within the Company and tothird parties, some of which are situated outside of the European Union and may not offer as high a level of protection for personalinformation as countries within the European Union.

All Employees Located Outside the United States.

If you are Employed outside of the United States, please note that your Equity Award is offered, issued andadministered by Discover Financial Services, a Delaware corporation, and your local employer is not involved in the grant of awardsunder such equity incentive program. All documents related to your Equity Award, including the Award Certificate, thisInternational

24

Supplement and the link by which you access these documents, originate and are maintained in the United States.

Your Equity Award is made in virtue of your Employment with, and your services performed for, the appropriateentities within the Company. However, your award does not form part of your entitlement to remuneration or benefits, whetherpursuant to any contract of Employment to which you may be a party or otherwise. Similarly, the existence of a contract ofEmployment between you and any entity within the Company shall not confer on you any right or entitlement to participate in theEquity Award or to receive awards thereunder, or any expectation that you might participate in such equity incentive program orreceive additional equity awards in the future. Your Equity Award , the Award Certificate, and/or this International Supplement doesnot constitute an employment contract and does not create an employment relationship or a promise of continued employment forany period of time.

In addition, your equity award is not part of your base salary or wages and will not be taken into account (except tothe extent otherwise required by local law) in determining any other employment-related rights you may have, such as rights topension or severance pay.

Whether or not you have a contract of Employment with any entity within the Company, your rights and obligationsunder the terms of your office or Employment shall not be affected by your receipt of the Equity Award . By accepting your receiptof the Equity Award , you waive any and all rights to compensation or damages for any loss of the Equity Award in the event ofyour termination of your office or Employment for any reason whatsoever. This waiver applies whether or not such terminationamounts to a wrongful or unfair dismissal.

You may be subject to applicable exchange control, currency control or similar financial laws that may affect yourtransactions with respect to your equity award, including without limitation, your ability to bring shares of Discover FinancialServices common stock into your jurisdiction or to receive the proceeds of a sale of Discover Financial Services common stock inyour jurisdiction. Moreover, you may be subject to certain notification, approval and/or repatriation obligations with respect tosecurities and funds you receive in connection with your awards. In addition the Company is not responsible for any foreignexchange fluctuations that change the value of your RSU Award. You are encouraged to consult your advisors to ascertainwhether any restrictions or obligations apply to you.

Your Equity Award has not been authorized or approved by any applicable securities authorities and may have beenoffered pursuant to an exemption from registration in your local jurisdiction. Similarly, no prospectus or similar offering orregistration document has been prepared, authorized or approved by any applicable securities authorities in your jurisdiction. Thegrant of awards is being made only to employees of the Company and does not constitute and is not intended to be an offering to thepublic. For this reason, you must keep all award documents you receive, including but not limited to this International Supplementand the Award Certificate, confidential and you may not distribute or otherwise make public any award documents without the priorwritten consent of the Company. Moreover, you may not reproduce (in whole or in part) any award documents you receive. Inaddition, the shares of Company common stock you acquire upon vesting and conversion of your Equity Award may be subject toapplicable restrictions on resale in your

25

local jurisdiction. You are encouraged to consult your advisors to ascertain whether any restrictions or obligations apply to you.

The Company recommends that you seek advice of your tax advisors regarding the tax treatment of your awards.

26

Exhibit 10.3



2018 AWARD CERTIFICATE FOR

PERFORMANCE STOCK UNITS

I


1. Performance Stock Units Generally. 3

2. Performance Measures. 3

3. Vesting Schedule; Conversion; Retention Requirement. 3

4. Special Provisions for Certain “Specified Employees”. 4

5. Dividend Equivalent Payments. 4

6. Death; Disability; Retirement. 5

7. Reduction in Force. 6


9. Termination of Employment. 7

10. Forfeiture/Cancellation/Clawback of PSU Awards Under Certain Circumstances. 7

11. Tax and Other Withholding Obligations. 9

12. Satisfaction of Obligations. 9


14. Designation of a Beneficiary. 10

15. Ownership and Possession. 11

16. Securities Law Matters. 11

17. Compliance with Laws and Regulations. 11

18. No Entitlements. 11

19. Consents. 12

20. Electronic Delivery and Consent to Electronic Participation. 13

21. Award Modification. 13

22. Severability. 13

23. Successors. 14

24. Governing Law. 14

25. Section 409A. 14

26. Defined Terms. 14

EMPLOYEES IN THE UNITED KINGDOM. 25

ALL EMPLOYEES LOCATED OUTSIDE THE UNITED STATES. 25

1



2018 AWARD CERTIFICATE FOR PERFORMANCE STOCK UNITS

Discover has awarded to you performance stock units (“PSUs”) as part of your discretionary long-term incentivecompensation for services provided to the Company during the Performance Period and through the Scheduled Vesting Date. ThisAward Certificate sets forth the general terms and conditions of your performance stock unit award (your “PSU Award”).Capitalized terms used in this Award Certificate that are not defined in the text have the meanings set forth in Section 26 below.Capitalized terms used in this Award Certificate that are not defined in the text or in Section 26 below have the meanings set forth inthe Plan.

The number of PSUs in your Target Award has been communicated to you separately. If you are employed outside theUnited States, please reference the “ International Supplement ” included herein as Appendix C , which contains supplementalterms and conditions for your PSU Award. This Award Certificate should be read in conjunction with the International Supplement,if applicable, in order for you to understand the terms and conditions of your PSU Award.

Your PSU Award is made pursuant to the Plan. References to “performance stock units” or “PSUs” in this Award Certificatemean only those PSUs included in your PSU Award, and the terms and conditions herein apply only to such PSU Award. If youreceive any other award under the Plan or another equity compensation plan, it will be governed by the terms and conditions of theapplicable award documentation, which may be different from those herein.

The purpose of this PSU Award is, among other things, to align your interests with the interests of Discover and itsshareholders and to reward you for your continued Employment with the Company in the future and your compliance with theCompany’s policies (including, without limitation, the Company’s risk policies and Code of Conduct), to protect the Company’sinterests in non-public, confidential and/or proprietary information, products, trade secrets, customer relationships, and otherlegitimate business interests, and to ensure an orderly transition of responsibilities. In view of these purposes, the number of PSUsthat you earn will depend on the Company’s performance during the Performance Period. Moreover, you will earn PSUs included inyour PSU Award only if you (1) remain in continuous Employment through the Scheduled Vesting Date (subject to limitedexceptions set forth herein), (2) are not found to be subject to the forfeiture, cancellation, or clawback provisions set forth in Section10 below, and (3) satisfy obligations you owe to the Company as set forth in Section 12 below. As the Company deems appropriateand in its sole discretion, the Company will require you to provide a written certification or other evidence, from time to time, toconfirm that none of the circumstances described in Section 10 below exist or have occurred, including upon a termination ofEmployment and/or during a specified period of time prior to the Scheduled Vesting Date. If you fail to timely provide any requiredcertification or other evidence, the Company will cancel your PSU Award. It is your responsibility to provide the Human ResourcesDepartment with your up-to-date contact information.

2

1. Performance Stock Units Generally .

Each PSU is a Restricted Stock Unit that is subject to additional conditions as described herein and corresponds to one shareof Stock. A PSU constitutes a contingent and unsecured promise by Discover to pay you one share of Discover common stock on theconversion date for the PSU. As the holder of PSUs, you have only the rights of a general unsecured creditor of Discover. You willnot be a shareholder with respect to the Shares corresponding to your PSUs unless and until your PSUs convert to Shares.

2.Performance Measures .

The portion, if any, of your Target Award that you can earn will be based on Discover EPS performance as set forth inAppendix A and the other terms and conditions of this Award Certificate, and may vary from zero to 1.5 times the number of PSUsincluded in your Target Award.

3.Vesting Schedule; Conversion; Retention Requirement .

(a) Vesting Schedule. Except as otherwise provided in this Award Certificate, you will vest in any PSUs that areearned in accordance with Section 2 on the Scheduled Vesting Date, so long as you continue to provide future services to theCompany by remaining in continuous Employment through the Scheduled Vesting Date. The special vesting terms set forth inSections 6, 7, and 8 of this Award Certificate apply (1) if your Employment terminates by reason of your death, Disability, orRetirement, (2) if the Company terminates your Employment in an involuntary termination under the circumstances described inSection 7, or (3) upon a Change in Control. Vested PSUs are subject to the tax withholding provisions set forth in Section 11 of thisAward Certificate.

(b) Conversion.

(1) Except as otherwise provided in this Award Certificate, your PSUs, to the extent earned and vested, willconvert to Shares (rounded to the nearest whole share) on the Scheduled Vesting Date. The special conversion provisions setforth in Sections 6, 7, and 8 of this Award Certificate apply (i) if your Employment terminates by reason of your death,Disability, or Retirement, (ii) if the Company terminates your Employment in an involuntary termination under thecircumstances described in Section 7, or (iii) upon a Change in Control.

(2) The Shares delivered upon conversion of PSUs shall be delivered as soon as administratively practicableafter the Scheduled Vesting Date and shall not be subject to any transfer restrictions, other than those that may arise under thesecurities laws, or the Company’s policies, including, without limitation, its stock ownership guidelines and/or Section 12below, but will be subject to forfeiture, cancellation, or clawback as set forth in Section 10 below.

(c) Accelerated Conversion. The Committee, in its sole discretion, may determine that any PSUs may beconverted to Shares or any dividend equivalents may be paid prior to the Scheduled Vesting Date subject to compliance with allLegal Requirements. In such case the

3

Committee may determine in its sole discretion that the shares or dividend equivalents may not be transferable and may remainsubject to applicable vesting, retention, forfeiture, cancellation, clawback and withholding provisions.

(d) Rule of Construction for Timing of Conversion. Whenever this Award Certificate provides for your PSUsto convert to Shares, or your dividend equivalents to be paid, on the Scheduled Vesting Date or upon a different specified event ordate, such conversion or payment will be considered to have been timely made, and neither you nor any of your beneficiaries or yourestate shall have any claim against the Company for damages based on a delay in conversion of your PSUs (or delivery of Sharesfollowing conversion) or payment of your dividend equivalents, as applicable, and the Company shall have no liability to you (or toany of your beneficiaries or your estate) in respect of any such delay, as long as conversion or payment, as applicable, is made byDecember 31 of the year in which occurs the Scheduled Vesting Date or such other specified event or date or, if later, by the 15thday of the third calendar month following such specified event or date. Similarly, neither you nor any of your beneficiaries or yourestate shall have any claim against the Company for damages, and the Company shall have no liability to you (or to any of yourbeneficiaries or your estate), based on any acceleration of the conversion of your PSUs or payment of your dividend equivalentspursuant to Section 3(c), as applicable.

(e) Retention Requirement. Notwithstanding anything in the Plan or any other provisions of this AwardCertificate to the contrary, following delivery thereof, you will be required to hold (and not transfer or otherwise dispose of) one-hundred percent (100%) of the PSUs that vest and convert to Shares, net of taxes ( “ Net Shares ”), until one (1) year after theScheduled Vesting Date or such other specified event or date which accelerates the conversion of such Net Shares; provided, thatthis requirement shall lapse in the event of your death, Disability or a Change in Control.

4.Special Provisions for Certain “Specified Employees” .

Notwithstanding the other provisions of this Award Certificate, to the extent necessary to comply with Section 409A of theInternal Revenue Code, if Discover reasonably considers you to be one of its “specified employees” as defined in Section 409A ofthe Internal Revenue Code at the time of the termination of your Employment, any PSUs to which you are entitled under this AwardCertificate that constitute a deferred compensation arrangement under Section 409A of the Internal Revenue Code and that arepayable upon termination of your Employment will not convert to Stock until the date that is six (6) months after the termination ofyour Employment (or the date of your death, if such event occurs earlier).

5.Dividend Equivalent Payments .

If Discover pays a regular or ordinary dividend on its Stock, you will be credited with cash dividend equivalents with respectto your PSU Award in an amount equal to the amount of the dividend that would have been paid on a number of Sharescorresponding to your Target Award. Discover will credit the dividend equivalents as soon as is administratively practicable after itpays the corresponding dividend on its Stock. Your dividend equivalents will vest and be paid at the same time as, and subject to thesame vesting and cancellation provisions set forth in this Award Certificate with respect to, your PSUs (provided that, subject toSection 3(d), the dividend equivalents may be paid following the date on which the PSUs convert to Shares as soon asadministratively practicable). The amount of dividend equivalents paid to you will be based on the number of PSUs that actuallyconvert to Shares (and will be paid only if your PSUs convert to Shares), providedthat such dividend equivalents will be reduced tothe extent that application of the performance measures set forth in Appendix A results in your earning less than the Target Awardand will be increased to the extent that application of those performance measures results in your earning more than the TargetAward. (For example, if you earn eighty percent (80%) of the Target Award based on the performance measures, twenty percent(20%) of the dividend equivalents credited in respect of regular or ordinary dividends will be canceled.) The decision to pay adividend and, if so, the amount of any such dividend, is determined by Discover in its sole discretion. No dividend equivalents willbe paid to you on any canceled PSUs. Discover will decide on the form of payment and may pay dividend equivalents in Shares, incash or in a combination thereof. Because dividend equivalent payments are considered part of your compensation for income taxpurposes, they will be subject to applicable tax and other withholding obligations, as summarized in Section 11.

(a) Pro Rata Reduction. If your PSU Award is subject to a pro rata reduction upon the termination of yourEmployment (as described below) and your PSU Award is to be paid on a date following such termination, the amount of dividendequivalents credited to you in respect of regular or ordinary dividends paid on Stock following your termination shall continue to bebased on the number of Shares corresponding to your Target Award, and the amount paid to you (subject to the other terms andconditions of this Award Certificate) shall be the amount calculated as provided above in this Section 5, in each case multiplied bythe Pro Ration Fraction. If your PSU Award is subject to a pro rata reduction upon the termination of your Employment and is paidout on such termination (as described below), the amount of dividend equivalents paid to you shall be calculated

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based on the number of Shares corresponding to your Target Award (adjusted, if applicable, as provided in this Section 5) multipliedby the Pro Ration Fraction.

(b) Effect of Cancellation. Notwithstanding the foregoing, in the event your PSU Award is canceled in full on orbefore the Scheduled Vesting Date, all dividend equivalents credited to you in respect of regular or ordinary dividends will becanceled.

6.Death; Disability; Retirement .

The following special vesting and payment terms apply to your PSUs:

(a) Death. If you die, you will vest on the Scheduled Vesting Date in the number of Shares as if you had youremained in Employment through the Scheduled Vesting Date, subject

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to the performance measures described in Appendix A , provided that your beneficiary or estate promptly notifies the Company ofyour death. Any such Shares will convert to Shares on the Scheduled Vesting Date and will be delivered to the beneficiary you havedesignated pursuant to Section 13 or the legal representative of your estate, as applicable. After your death, the cancellationprovisions set forth in Section 10(a) will no longer apply.

(b) Disability. If your Employment terminates due to Disability, you will vest on the Scheduled Vesting Date inthe number of Shares as if you had you remained in Employment through the Scheduled Vesting Date, subject to the performancemeasures described in Appendix A . On your Scheduled Vesting Date, subject to Section 4 above, any transfer restrictions and thecancellation provisions described herein, any such Shares will convert to Shares and be delivered to you.

(c) Retirement. If your Employment terminates due to Retirement, the number of PSUs that will vest on theScheduled Vesting Date will be determined by multiplying (1) the number of Shares that would have been delivered to you, based onthe performance measures described in Appendix A had you remained in Employment through the Scheduled Vesting Date, by (2)the Pro Ration Fraction. On the Scheduled Vesting Date, subject to Section 4 above, any transfer restrictions and the cancellationprovisions described herein, your PSUs will convert to Shares and be delivered to you.

7.Reduction in Force.

If the Company terminates your Employment due to a reduction in force or an elimination of your position, each asdetermined by the Company in its sole discretion, the number of PSUs that will vest on the Scheduled Vesting Date will bedetermined by multiplying (a) the number of Shares that would have been delivered to you, based on the performance measuresdescribed in Appendix A had you remained in Employment through the Scheduled Vesting Date, by (b) the Pro Ration Fraction.These shares will convert to Shares and be delivered to you on the later of the Scheduled Vesting Date or the date that is 60 daysfollowing your termination of Employment, subject to Section 4 above, providedthat you sign (and do not revoke) an agreement andrelease of claims satisfactory to the Company.

8.Change in Control .

(a) During First Year of Performance Period. If, during the first year of the Performance Period, a Change inControl occurs, then your Target Award (including the value of any dividend equivalents theretofore credited to you) will beconverted to a cash award valued as of the date of the Change in Control event as determined by the Company using the EPS Targetmultiplier set forth in Appendix A , the use of which shall be deemed to be a valuation using the target level . Any such cash awardwill be paid to you (subject to Section 4 above and the cancellation provisions set forth herein) on the earlier of (1) the ScheduledVesting Date or (2) the date when the Company terminates your Employment other than for Cause, or if you terminate yourEmployment for Good Reason. Notwithstanding the foregoing, if, following the Change in Control event but prior to the delivery ofsuch cash award, you voluntarily terminate your Employment other than for Good Reason or you are terminated for Cause, you willforfeit such cash award.

(b) After First Year of Performance Period. If, after the first year of the Performance Period, a Change inControl occurs, then your Target Award (including the value of any dividend equivalents theretofore credited to you) will beconverted to a cash award valued as of date of the Change in Control event as determined by the Company based on the performancemeasures in Appendix A but applied as though the Performance Period ended with the last quarter of Discover endingsimultaneously with or before the effective date of the Change in Control event, the use of which shall be deemed to be a valuationusing the target level . Any such cash award will be paid to you (subject to Section 4 above and the cancellation provisions set forthherein) on the earlier of (1) the Scheduled Vesting Date or (2) the date when the Company terminates your Employment other thanfor Cause, or if you terminate your Employment for Good Reason. Notwithstanding the foregoing, if, following the Change inControl event but prior to the delivery of such cash award, you voluntarily terminate your Employment other than for Good Reasonor you are terminated for Cause, you will forfeit such cash award.

9.Termination of Employment .

(a) Cancellation of Unvested PSU Awards. Your unvested PSUs, including any dividend equivalentstheretofore credited to you, will be canceled if your Employment terminates for any reason other than under the circumstances setforth in this Award Certificate for death, Disability, and Retirement described in Section 6, for an involuntary termination by theCompany described in Section 7, or in connection with a Change in Control as provided in Section 8.

(b) General Treatment of Vested PSU Awards. Except as otherwise provided in this Award Certificate, yourvested PSUs will convert to Shares on the Scheduled Vesting Date. The tax and other withholding provisions as set forth in Section

11 of this Award Certificate will continue to apply until the date the Shares are delivered.

10.Forfeiture/Cancellation/Clawback of PSU Awards Under Certain Circumstances.

The forfeiture, cancellation, and/or Clawback circumstances and events set forth in this Section 10 are designed, among otherthings, to incentivize compliance with the Company’s policies (including, without limitation, the Company’s risk policies and Codeof Conduct), to protect the Company’s interests in non-public, confidential and/or proprietary information, products, trade secrets,customer relationships, and other legitimate business interests, and to ensure an orderly transition of responsibilities. This Section 10shall apply notwithstanding any other terms of this Award Certificate (except where sections in this Award Certificate specificallyprovide that the circumstances set forth in this Section 10 no longer apply).

(a) Breach of Restrictive Covenants. Notwithstanding Discover’s performance based on the measures set forthin Appendix A or your satisfaction of the vesting conditions of this Award Certificate, PSUs (and any dividend equivalents creditedthereon) are not earned until the Scheduled Vesting Date and, unless prohibited by applicable law, will be canceled prior to theScheduled Vesting Date in any of the circumstances set forth below. Although you will become the beneficial owner of Sharesfollowing conversion of your PSUs, the Company may, upon notice, issue a transfer restriction with respect to your Shares followingconversion of your PSUs (and any dividend equivalents credited thereon) pending any investigation or other review that impacts thedetermination as to whether the PSUs (and any dividend equivalents credited thereon) are cancellable under the circumstances setforth below. The Shares underlying such PSUs (and any dividend equivalents credited thereon) shall be forfeited and recoverable inthe event the Company determines that the PSUs were cancellable under the circumstances set forth below . Notwithstanding anyprovision of this Award Certificate to the contrary, in the event that at any time prior to one year after the termination of yourEmployment or service with the Company, you (i) engage, in Competitive Activity; (ii) engage in Wrongful Solicitation or (iii)breach your obligations to the Company under a confidentiality, intellectual property or other restrictive covenant, you shall berequired to:

(1) pay to the Company an amount in cash equal to the value of Shares that vested and converted on orafter, or within two years prior to, your termination of Employment, which value shall be determined by the Company, in itssole discretion and

shall include an amount for tax adjustments appropriate to reflect your obligation to repay such amounts due to your breachof the restrictive covenants; or

(2) transfer to the Company the number of Shares that vested and converted on or after, or within two yearsprior to, your termination of Employment, plus an amount calculated by the Company, in its sole discretion, for taxadjustments appropriate to reflect your obligation to transfer such Shares due to your breach of the restrictive covenants.

(b) Clawback.

(1) In the event and to the extent the Committee reasonably determines that the performance considered bythe Committee, and on the basis of which the amount of PSUs were granted, was based on Discover’s materialnoncompliance with any financial reporting requirement under the securities laws which requires Discover to file arestatement of its financial statements, you will forfeit the number of PSUs that were granted during the three-year periodpreceding the date on which Discover is required to prepare an accounting restatement, less the number of PSUs that wouldhave been granted had your PSUs been granted based on compliance with any such financial reporting requirement under thesecurities laws (such number of PSUs, the “ Clawback PSUs ”, to be determined in each case by the Committee in its solediscretion:

(2) In the event and to the extent the Committee reasonably determines that the performance certified by theCommittee, and on the basis of which PSUs were converted to Shares, was based on Discover’s material noncompliance withany financial reporting requirement under the securities laws which requires Discover to file a restatement of its financialstatements, you will be required:

a. to pay to the Company an amount in cash equal to the value of the Shares that vested andconverted hereunder, which value shall be determined using a valuation method established by theCompany, in its sole discretion, and shall include an amount for tax adjustments appropriate to reflect yourobligation to repay such amounts due to the restatement of the Company’s financial statements; or

b. transfer to the Company the number of Shares that vested and converted hereunder, plus suchamount calculated by the Company, in its sole discretion, for tax adjustments appropriate to reflect yourobligation to repay such amounts due to the restatement of the Company’s financial statements.

(c) Risk Review. No PSUs will convert to Shares until (1) the Committee certifies the extent to which the

performance criteria set forth in Appendix A have been satisfied, and (2) the Chief Human Resources Officer receives confirmationfrom the Chief Risk Officer that a review has been completed by the Chief Risk Officer to determine whether you engaged in anywillful or reckless violation of the Company’s risk policies. If the Chief Risk Officer finds any such

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violation or breach, then the Company may determine that all or a portion of your PSUs will be forfeited. Additionally, if you are aCovered Employee, the Chief Risk Officer will conduct Company and / or Business Unit risk reviews as well as evaluate yourindividual risk goals. Based on this assessment, the Company may determine that all or a portion of your PSUs will be forfeited.

(d) Authorization. You authorize the Company to deduct any amount or amounts owed by you pursuant to thisSection 10 from any amounts payable by or on behalf of the Company to you, including, without limitation, any amount payable toyou as salary, wages, paid time off, bonus, severance, change in control severance or the conversion of any equity-based award. Thisright of offset shall not be an exclusive remedy and the Company’s election not to exercise this right of offset with respect to anyamount payable to you shall not constitute a waiver of this right of offset with respect to any other amount payable to you or anyother remedy.

11.Tax and Other Withholding Obligations .

Subject to rules and procedures established by Discover, you may be eligible to elect to satisfy the tax or other withholdingobligations arising upon conversion of your PSUs or upon any taxable event by paying cash or by having Discover withhold Sharesor by tendering Shares, in each case in an amount sufficient to satisfy the tax or other withholding obligations. Shares withheld ortendered will be valued using the fair market value of Discover common stock on the date the Shares are scheduled to convert, orotherwise become taxable, as applicable, using a valuation methodology established by Discover. In order to comply with applicableaccounting standards or the Company’s policies in effect from time to time, Discover may limit the amount of Shares that you mayhave withheld or that you may tender.

12.Satisfaction of Obligations .

Notwithstanding any other provision of this Award Certificate, the Company may, in its sole discretion, take various actionsaffecting your PSUs in order to collect amounts sufficient to satisfy any obligation that you owe to the Company and any tax or otherwithholding obligations. The Company’s determination of the amount that you owe the Company shall be conclusive. The fairmarket value of Stock for purposes of the foregoing provisions shall be determined using a valuation methodology established byDiscover. The actions that may be taken by the Company pursuant to this Section 12 include, but are not limited to, the following:

(a) Withholding of Shares. Upon conversion of PSUs, including any accelerated conversion pursuant toSections 6, 7, or 8 above, or, if later, upon delivery of the Shares, the Company may withhold a number of Shares sufficient tosatisfy any obligation that you owe to the Company and any tax or other withholding obligations whether national, federal, state orlocal tax withholding obligations including any social insurance contributions or employment tax obligation. The Company shalldetermine the number of Shares to be withheld by dividing the dollar value of your obligation to the Company and any tax or otherwithholding obligations by the fair market value of Discover common stock on the date the Shares are scheduled to convert, orotherwise become taxable, as applicable. To the extent that the Company retains any Shares or reduces the number of PSUs to coverthe withholding obligations, it will do so at the minimum statutory rate. Should the Company withhold in excess of the actual taxwithholding obligation, the Company will refund the excess amount to you within a reasonable period and without any interest.

(b) Withholding of Other Compensation. Discover may withhold the payment of dividend equivalents on yourPSUs or any other compensation or payments due from Discover to ensure satisfaction of any obligation that you owe the Companyor any tax or other withholding obligations or Discover may permit you to satisfy such tax or other withholding obligation by payingsuch obligation in immediately available funds.

(c) Mobile Employees . You are liable and responsible for all taxes and social insurance contributions owed inconnection with the Award, regardless of any action the Company takes with respect to any tax withholding obligations that arisein connection with the Award. The Company does not make any representation or undertaking regarding the tax treatment or thetreatment of any tax withholding in connection with the grant, vesting or payment of the Award.

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The Company does not commit and is under no obligation to structure the Award to reduce or eliminate your tax liability. Further,you may be subject to individual income taxation (and possibly social security or other applicable personal or payroll taxes) ineach jurisdiction where you have performed services for the Company between the Award Date and the Vesting Date. Taxes forwhich you are liable, if applicable, may be withheld and deposited by the Company in each jurisdiction in which you haveperformed services regardless of your status as a resident or non-resident in one or more of the jurisdictions that have a right toimpose taxation. You agree that you will comply with all United States and foreign individual income tax return filing obligationsthat may be imposed with respect to the Award.

13.Nontransferability .

You may not sell, pledge, hypothecate, assign or otherwise transfer your PSUs, other than as provided in Section 14 (whichallows you to designate a beneficiary or beneficiaries in the event of your death) or by will or the laws of descent and distribution.This prohibition includes any assignment or other transfer that purports to occur by operation of law or otherwise. During yourlifetime, payments relating to the PSUs will be made only to you.

14.Designation of a Beneficiary .

You may make a written designation of beneficiary or beneficiaries to receive all or part of the Shares and any dividendequivalents credited to you pursuant to Section 5 hereof to be paid under this Award Certificate in the event of your death. To makea beneficiary designation, you must complete and file the form attached hereto as Appendix B with the Human ResourcesDepartment. Any Shares that become payable upon your death, and as to which a designation of beneficiary is not in effect, will bedistributed to your estate. If you previously filed a designation of beneficiary form for your equity awards with the HumanResources Department, such form will also apply to the PSUs granted pursuant to this PSU Award. You may replace or revoke yourbeneficiary designation at any time. If there is any question as to the legal right of any beneficiary to receive Shares under this PSUAward, Discover may determine in its sole discretion to deliver the Shares in question to your estate. Discover’s determination shallbe binding and conclusive on all persons and it will have no further liability to anyone with respect to such Shares.

15.Ownership and Possession .

(a) Generally. Generally, you will not have any rights as a shareholder in the Shares corresponding to your PSUsprior to conversion of your PSUs. Prior to conversion of your PSUs, however, you will receive dividend equivalent credits, as setforth in Section 5 of this Award Certificate. To the extent necessary or advisable to comply with Section 409A of the InternalRevenue Code, with respect to any provision of this Award Certificate that provides for vested PSUs to convert to Shares on or assoon as administratively practicable after a specified event or date, such conversion will be made by the later of the end of thecalendar year in which the specified event or date occurs or the 15 th day of the third calendar month following the specified event ordate.

(b) Following Conversion. Subject to the terms and conditions of this Award Certificate, following conversionof your PSUs you will be the beneficial owner of Shares issued to you net of taxes and you will be entitled to all rights of ownership,including voting rights and the right to receive cash or stock dividends or other distributions paid on the Shares.

16.Securities Law Matters .

Shares issued upon conversion of your PSUs may be subject to restrictions on transfer by virtue of the Securities Act of1933, as amended. Discover may advise the transfer agent to place a stop order against such shares if it determines that such anorder is necessary or advisable. Because Stock will only be maintained in book-entry form, you will not receive a stock certificaterepresenting your interest in such shares.

17.Compliance with Laws and Regulations .

Any sale, assignment, transfer, pledge, mortgage, encumbrance or other disposition of Shares issued upon conversion of yourPSUs (whether directly or indirectly, whether or not for value, and whether or not voluntary) must be made in compliance with anyapplicable constitution, rule, regulation, or policy of any of the exchanges or associations or other institutions with which the

Company or a Related Employer has membership or other privileges, and any applicable law, or applicable rule or regulation of anygovernmental agency, self-regulatory organization or state or federal regulatory body.

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18.No Entitlements .

(a) No Right to Continued Employment. This PSU Award is not an employment agreement, and nothing in thisAward Certificate, the International Supplement, if applicable, or the Plan shall alter your status as an “at-will” employee of theCompany or your Employment status at a Related Employer. None of this Award Certificate, the International Supplement, ifapplicable, or the Plan shall be construed as guaranteeing your Employment by the Company or a Related Employer, or as givingyou any right to continue in the employ of the Company or a Related Employer, during any period (including without limitation theperiod between the Date of the Award and the Scheduled Vesting Date or any portion of this period), nor shall they be construed asgiving you any right to be reemployed by the Company or a Related Employer following any termination of Employment.

(b) No Right to Future Awards. This PSU Award, and all other awards of PSUs and other equity-based awards,are discretionary. This PSU Award does not confer on you any right or entitlement to receive another award of PSUs, any otherequity-based award or any other award at any time in the future or in respect of any future period.

(c) No Effect on Future Employment Compensation. Discover has made this PSU Award to you in its solediscretion. This PSU Award does not confer on you any right or entitlement to receive compensation in any specific amount for anyfuture fiscal year, and does not diminish in any way the Company’s discretion to determine the amount, if any, of yourcompensation. In addition, this PSU Award is not part of your base salary or wages and will not be taken into account in determiningany other Employment-related rights you may have, such as rights to pension or severance pay, end of service payments, bonuses,long-service awards or similar payments and in no event shall be considered as compensation for, or relating in any way to, pastservices for the Company.

(d) Termination of Employment. In consideration of the grant of the Award, no claim or entitlement tocompensation or damages shall arise from termination of the Award or diminution in value of the Award or Shares acquired throughvesting of the Award resulting from termination of your employment by the Company (for any reason whatsoever and whether ornot in breach of local labor laws) and you irrevocably release the Company and the Employer from any such claim that may arise; if,notwithstanding the foregoing, any such claim is found by a court of competent jurisdiction to have arisen, then, by signing thisAgreement, you will be deemed irrevocably to have waived your entitlement to pursue such claim; and in the event of termination ofyour employment (whether or not in breach of local labor laws), your right to receive the Award and vest in the Award under thePlan, if any, will terminate effective as of the date that you are no longer actively employed and will not be extended by any noticeperiod mandated under local law (e.g., active employment would not include a period of “garden leave” or similar period pursuant tolocal law); the Company shall have the exclusive discretion to determine when you are no longer actively employed for purposes ofyour Award.

(e) Language. If you have received this Agreement or any other document related to the Plan translated into alanguage other than English and if the translated version is different that the English version, the English version will control.

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(f) Award Terms Control; Plan Terms Control. In the event of any conflict between any terms applicable toequity awards in any employment agreement, offer letter or other arrangement that you have entered into with the Company and theterms set forth in this Award Certificate, the latter shall control. In the event of any conflict between the terms set forth in this AwardCertificate and the terms of the Plan, the latter shall control.

19.Consents .

Your PSU Award is conditioned upon the Company’s making of all filings and the receipt of all consents or authorizationsrequired to comply with, or required to be obtained under, applicable local law.

In accepting this PSU Award, you consent to the collection, use and transfer, in electronic or other form, of your personaldata by and among, as applicable, the Company and any other possible recipients for the purpose of implementing, administeringand managing your participation in the Plan, as well as for the purpose of the Company’s compliance with applicable law, including,without limitation, Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. You understand that therecipients of your personal data may be located in the U.S. or elsewhere, and the recipients’ country may have different data privacylaws and protections than your country. You understand that you may request a list with the names and addresses of any potentialrecipients of your personal data, view the personal data, request additional information about the storage of your personal data,require any necessary amendments to your personal data or refuse or withdraw your consent by contacting your local humanresources representative, in any case without cost. You understand, however, that refusing or withdrawing your consent may affectyour ability to participate in the Plan.

20. Electronic Delivery and Consent to Electronic Participation.

The Company may, in its sole discretion, decide to deliver any documents related to the PSU Award and participationin the Plan or future PSU Awards by electronic means. You hereby consent to receive such documents by electronic delivery and toparticipate in the Plan through an online or electronic system established and maintained by the Company or another third partydesignated by the Company, including the acceptance of PSU Awards and the execution of the PSU agreements through electronicsignature.

21.Award Modification .

The Committee reserves the right to modify or amend unilaterally the terms and conditions of your PSUs, without first askingyour consent, or to waive any terms and conditions that operate in favor of Discover. These amendments may include (but are notlimited to) changes that the Committee considers necessary or advisable as a result of changes in any, or the adoption of any new,Legal Requirement. The Committee may not modify your PSUs in a manner that would materially impair your rights in your PSUswithout your consent; provided , however , that the Committee may, without your consent, amend or modify your PSUs in anymanner that the Committee considers necessary or advisable to comply with or reflect the application of any Legal Requirement orto ensure that your PSUs are not subject to United States federal, state or local income tax or any equivalent taxes in territoriesoutside the United States prior to payment. Discover will notify you of any amendment of your PSUs that affects your rights. Anyamendment or waiver of a provision of this Award Certificate (other than any amendment or waiver applicable to all recipientsgenerally), which amendment or waiver operates in your favor or confers a benefit on you, must be in writing and signed by theChief Human Resources Officer to be effective.

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22.Severability .

In the event the Committee determines that any provision of this Award Certificate would cause you to be in constructivereceipt for United States federal or state income tax purposes of any portion of your PSU Award, then such provision will beconsidered null and void and this Award Certificate will be construed and enforced as if the provision had not been included in thisAward Certificate as of the date such provision was determined to cause you to be in constructive receipt of any portion of your PSUAward.

23.Successors .

This Award Certificate shall be binding upon and inure to the benefit of any successor or successors of Discover and anyperson or persons who shall, upon your death, acquire any rights hereunder in accordance with this Award Certificate or the Plan.

24.Governing Law .

This Award Certificate and the related legal relations between you and Discover will be governed by and construed inaccordance with the laws of the State of Delaware, without regard to any conflicts or choice of law, rule or principle that mightotherwise refer the interpretation of the PSU Award to the substantive law of another jurisdiction. The Company and you agree thatthe jurisdiction and venue for any disputes arising under, or any action brought to enforce (or otherwise relating to), the Plan or thisAward Certificate shall be exclusively in the courts in the State of Illinois, Counties of Cook or Lake, including the federal courtslocated therein (should federal jurisdiction exist), and the Company and you hereby submit and consent to said jurisdiction andvenue.

25.Section 409A.

This Award Certificate and your PSU Award (including all adjustments, substitutions, dividends, valuations anddistributions, and deferrals hereunder) are intended to be exempt from or comply with Section 409A of the Internal Revenue Codepursuant to the guidance issued thereunder by the U.S. Internal Revenue Service in all respects and shall be administered in amanner consistent with such intent. If an unintentional operational failure occurs with respect to requirements under Section 409Aofthe Internal Revenue Code, you or your beneficiary shall fully cooperate with Discover to correct the failure, to the extent possible,in accordance with any correction procedure established by the U.S. Internal Revenue Service. Any reference herein toSection 409Aof the Internal Revenue Code shall be interpreted to refer to any successor section of the Internal Revenue Code orother guidance issued by the U.S. Internal Revenue Service, or other agency with jurisdiction, as appropriate. To the extent that fullor partial payment of your PSU Award that constitutes a deferral of compensation subject to Section 409Aof the Internal RevenueCode is made upon a termination of Employment, a termination of Employment shall be deemed to occur only if it is a “separationfrom service” for purposes of Section 409Aof the Internal Revenue Code, and references in this Award Certificate to “termination,”“termination of Employment,” or like terms shall mean a “separation from service.”

26.Defined Terms .


(a) “ Board ” means the Board of Directors of Discover.

(b) “Cause” means:

(1) any act or omission which constitutes a material breach of your obligations to the Company or yourfailure or refusal to perform satisfactorily any duties reasonably required of you, which breach, failure or refusal (ifsusceptible to cure) is not corrected (other than failure to correct by reason of your incapacity due to Disability) within ten(10) business days after written notification thereof to you by the Company;

(2) any act or omission by you that constitutes (i) fraud or intentional misrepresentation, (ii) embezzlement,misappropriation or conversion of assets of, or business opportunities considered by, the Company or (iii)any other act whichhas caused or may reasonably be expected to cause material injury to the interest or business reputation of the Company; or

(3) your violation of any securities, commodities or banking laws, any rules or regulations issued pursuantto such laws, or rules or regulations of any securities or commodities exchange or association of which the Company is amember or of any policy of the Company relating to compliance with any of the foregoing.

(c) “Change in Control” means, except as provided otherwise below, the first to occur of any of the followingevents:

(1) except as otherwise provided in clause (3) below, any person (as defined in Section 3(a)(9) of theSecurities Exchange Act of 1934 (the “Exchange Act”), as such term is modified in Sections 13(d) and 14(d) of the ExchangeAct), other than (i) any employee plan established by the Company or any of its Subsidiaries, (ii) any group of employeesholding shares subject to agreements relating to the voting of such shares, (iii) the Company or any of its affiliates (as definedin Rule 12b-2 promulgated under the Exchange Act), (iv) an underwriter temporarily holding securities pursuant to anoffering of such securities, or (v) a corporation owned, directly or indirectly, by shareholders of the Company in substantiallythe same proportions as their ownership of the Company, either (x) acquires ownership of stock of the Company that,together with stock held by such person (not including the stock owned by such person any stock acquired directly from theCompany other than in connection with the acquisition by the Company of a business), constitutes more than fifty percent(50%) of the total fair market value of the stock of the Company (but only if such person did not own more than 50% of thetotal fair market value of the stock of the Company prior to the acquisition of additional stock), or (y) acquires (or hasacquired during the twelve-month period ending on the date of the most recent acquisition by such person) ownership of thestock of the Company possessing thirty percent (30%) or more of the total voting power of the stock of the Company (butonly if such person did not own 30% or more of the total voting power of the stock of the Company prior to the acquisition ofadditional stock and not including the stock owned by such person any stock acquired directly from the Company other thanin connection with the acquisition by the Company of a business);

(2) a change in the composition of the Board during any twelve-month period, such that individuals who, asof the Date of the Award, constitute the Board (the “Incumbent Board”) cease for any reason to constitute at least a majorityof the Board; provided, however, that any individual becoming a member of the Board subsequent to the date of Date of theAward whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least amajority of the directors then comprising the Incumbent Board shall be considered as though such individual were a memberof the Incumbent Board;

(3) the consummation of a merger or consolidation of the Company with any other corporation or otherentity, or the issuance of voting securities in connection with a merger or consolidation of the Company (or any direct orindirect subsidiary of the Company) pursuant to applicable stock exchange requirements, other than (i) a merger orconsolidation which results in the securities of the Company outstanding immediately prior thereto continuing to represent(either by remaining outstanding or by being converted into securities of the surviving entity or any parent thereof), incombination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of theCompany or any of its subsidiaries, at least fifty percent (50%) of the combined voting power of the voting securities of theCompany or such surviving entity or any parent thereof

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outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement arecapitalization of the Company (or similar transaction) in which no person (determined pursuant to clause (1) above) is orbecomes the beneficial owner, directly or indirectly, of securities of the Company (not including in the securities beneficiallyowned by such person any securities acquired directly from the Company or its affiliates other than in connection with theacquisition by the Company or its affiliates of a business) representing thirty percent (30%) or more of the total voting powerof the stock of the Company (but only if such person did not own 30% or more of the total voting power of the stock of theCompany prior to the acquisition of additional securities);

(4) the complete liquidation of the Company or the sale or disposition by the Company of all orsubstantially all of the Company’s assets, other than a sale or disposition by the Company of all or substantially all of theCompany’s assets to (i) a shareholder of the Company (immediately before the asset transfer) in exchange for or with respectto the Company’s stock, (ii) an entity, at least fifty percent (50%) of the total value or voting power of which is owned,directly or indirectly, either by the Company or by a person or more than one person acting as a group, that owns fiftypercent (50%) or more of the total value or voting power of all the outstanding stock of the Company, or (iii) a person, ormore than one person acting as a group, that owns, directly or indirectly, fifty percent (50%) or more of the total value orvoting power of all the outstanding stock of the Company; provided, however, that a Change in Control pursuant to thisclause (4) shall not be deemed to have occurred unless a person (determined pursuant to clause (1) above) or persons actingas a group acquires (or has acquired during the twelve-month period ending on the date of the most recent acquisition bysuch person or persons) assets from the Company that have a total gross fair market value equal to or more than forty percent(40%) of the total gross fair market value of all of the assets of the Company immediately before such acquisition oracquisitions.

Notwithstanding the foregoing, with respect to a Change in Control of Discover, no Change in Control shall be deemed tohave occurred if there is consummated any transaction or series of integrated transactions immediately following which thebeneficial holders of the Company’s common stock immediately prior to such transaction or series of transactions continue to havesubstantially the same proportionate ownership in an entity which owns substantially all of the assets of the Company immediatelyprior to such transaction or series of transactions.

(d) “Chief Human Resources Officer” means the chief human resources officer of Discover, any successor chiefhuman resources officer, or any other individual or committee appointed by the chief executive officer of Discover with the powerand authority of the chief human resources officer.

(e) “Chief Risk Officer” means the chief risk officer of Discover, any successor chief risk officer, or any otherindividual or committee appointed by the chief executive officer of Discover with the power and authority of the chief risk officer.

(f) “Committee” means the Compensation and Leadership Development Committee of the Board, any successorcommittee thereto or any other committee of the Board

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appointed by the Board with the powers of the Committee under the Plan, or any subcommittee appointed by such Committee.

(g) “ Company ” means Discover and all of its Subsidiaries.

(h) “Competitive Activity” means:

(1) becoming, or entering into any arrangement as, an employee, officer, partner, member, proprietor,director, independent contractor, consultant, advisor, representative or agent of, or serving in any similar position or capacitywith, a Competitor, where you will be responsible for providing, or managing or supervising others who are providing,services (i) that are similar or substantially related to the services that you provided to the Company, or (ii) that you haddirect or indirect managerial or supervisory responsibility for at the Company, or (iii) that call for the application of the sameor similar specialized knowledge or skills as those utilized by you in your services for the Company, in each such case, at anytime during the year preceding the termination of your employment with the Company; or

(2) either alone or in concert with others, forming, or acquiring a five percent (5%) or greater equityownership, voting interest or profit participation in, a Competitor.

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(i) “Competitor” means any corporation, partnership or other entity that engages in (or that owns a significantinterest in any corporation, partnership or other entity that engages in) (1) the business of consumer lending, including, withoutlimitation, credit card issuance or electronic payment services, or (2) any other business in which you have been involved in or hadsignificant knowledge of, which has been conducted by the Company at any time during your employment with the Company. Forthe avoidance of doubt, a competitor of any entity which results from a corporate transaction involving the Company that constitutesa Change in Control shall be considered a Competitor for purposes of this Award Certificate.

(j) “Covered Employee” means an employee who, as of the Date of the Award, has been identified as a coveredemployee by Human Resources.

(k) “ Date of the Award ” means the date set forth in Appendix A .

(l) “ Disability ” means a “permanent and total disability,” as defined in Section 22(e)(3) of the Internal RevenueCode.

(m) “Discover” means Discover Financial Services, a Delaware corporation.

(n) “Discover EPS” means sum of EPS for each fiscal year within the Performance Period.

(o) “Employed” and “Employment” refer to employment with the Company and/or Related Employment.

(p) “ EPS ” means fully-diluted earnings per share as defined by U.S. GAAP, excluding unusual or non-recurringevents identified in the Plan and not reflected in business plan assumptions, as determined by the Committee.

(q) “Good Reason” means the occurrence of any of the following upon, or within six (6) months prior to ortwenty-four (24) months after the occurrence of a Change in Control of Discover without your prior written consent:

(1) any material diminution in your assigned duties, responsibilities and/or authority, including theassignment to you of any duties, responsibilities or authority inconsistent with the duties, responsibilities and authorityassigned to you, immediately prior to such assignment;

(2) a material diminution in the authority, duties, or responsibilities of the supervisor to whom you arerequired to report;

(3) any material reduction in your base compensation; provided, however, that Company-initiated across-the-board reductions in compensation affecting substantially all eligible Company employees shall alone not be considered“Good Reason,” unless the compensation reductions exceed twenty percent (20%) of your base compensation;

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(4) A material diminution of the budget over which you have authority;

(5) The Company’s requiring you to be based at a location that (i) is in excess of thirty-five (35) miles fromthe location of your principal job location or office immediately prior to the Change in Control, or (ii) results in an increasein your normal daily commuting time by more than ninety (90) minutes, except for required travel on Company’s business toan extent substantially consistent with your then present business travel obligations; or

(6) Any other action or inaction that constitutes a material breach by the Company of any agreementpursuant to which you provide services to the Company.

For purposes of paragraphs (1) through (6) above, the duties, responsibilities and/or authority assigned to you shall bedeemed to be the greatest of those in effect prior to or after the Change in Control. Unless you become Disabled, your right toterminate your Employment for Good Reason shall not be affected by your incapacity due to physical or mental illness. Yourcontinued Employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting GoodReason. Notwithstanding the foregoing, Good Reason shall not exist unless you give the Company written notice thereof withinthirty (30) days after its occurrence and the Company shall not have remedied the action within thirty (30) days after such writtennotice

(r) “ Internal Revenue Code ” means the United States Internal Revenue Code of 1986, as amended, and therules, regulations and guidance thereunder.

(s) “Legal Requirement” means any law, regulation, ruling, judicial decision, accounting standard, regulatoryguidance or other legal requirement (including any foreign legal requirements).

(t) “Performance Period” means the period set forth in Appendix A .

(u) “ Plan ” means the Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan, as ineffect from time to time.

(v) “Pro Ration Fraction” means a fraction, not to exceed 1.0, the numerator of which is the number of daysstarting with and inclusive of the first day of the Performance Period and ending on the effective date of your termination ofEmployment and the denominator of which is the number of days in the first calendar year of the Performance Period.

(w) “ Related Employment ” means your employment with an employer other than the Company (suchemployer, herein referred to as a “ Related Employer ”), provided: (1) you undertake such employment at the written request orwith the written consent of the Chief Human Resources Officer; (2) immediately prior to undertaking such employment you were anemployee of the Company or were engaged in Related Employment (as defined herein); and (3) such employment is recognized bythe Company in its discretion as Related Employment; and, providedfurtherthat the Company may (i) determine at any time in itssole discretion that employment that was recognized by the Company as Related Employment no longer qualifies as Related

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Employment, and (ii) condition the designation and benefits of Related Employment on such terms and conditions as the Companymay determine in its sole discretion. The designation of employment as Related Employment does not give rise to an employmentrelationship between you and the Company, or otherwise modify your and the Company’s respective rights and obligations.

(x) “ Retirement ” means the termination of your Employment by you or by the Company for any reason otherthan for Cause and other than due to your death or Disability, on or after the date on which:

(1) you have attained age 55; and

(2) your combined age and years of service is at least 65 years.

(y) “ Scheduled Vesting Date ” means the Scheduled Vesting Date set forth in Appendix A .

(z) “Shares” means shares of Stock.

(aa) “Stock” means the common stock, par value $0.01 per share, of Discover.

(bb) “Subsidiary” means (i) a corporation or other entity with respect to which Discover, directly or indirectly,has the power, whether through the ownership of voting securities, by contract or otherwise, to elect at least a majority of themembers of such corporation’s board of directors or analogous governing body, or (ii) any other corporation or other entity in whichDiscover, directly or indirectly, has an equity or similar interest and which the Committee designates as a Subsidiary for purposes ofthe Plan.

(cc) “ Target Award ” means the number of PSUs that has been communicated to you separately and that will beearned, subject to the other terms and conditions of this Award Certificate, if the Discover EPS Target is achieved.

(dd) “Wrongful Solicitation” occurs upon either of the following events:

(1) while Employed, including during any notice period applicable to you in connection with thetermination of your Employment, or within one year after the termination of your Employment, directly or indirectly in anycapacity (including through any person, corporation, partnership or other business entity of any kind), you hire or solicit,recruit, induce, entice, influence or encourage any Company employee to leave the Company or become hired or engaged byanother firm; provided, however, that this clause shall apply only to employees with whom you worked or had professionalor business contact, or who worked in or with your business unit, during any notice period applicable to you in connectionwith the termination of your Employment or during the one year preceding notice of the termination of your Employment; or

(2) while Employed, including during any notice period applicable to you in connection with thetermination of your Employment, or within one year after the termination of your Employment, directly or indirectly in anycapacity (including through

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any person, corporation, partnership or other business entity of any kind), you solicit or entice away or in any manner attemptto persuade any client or customer, or prospective client or customer, of the Company (i) to discontinue or diminish his, heror its relationship or prospective relationship with the Company or (ii) to otherwise provide his, her or its business to anyperson, corporation, partnership or other business entity which engages in any line of business in which the Company isengaged (other than the Company); provided , however , that this clause shall apply only to clients or customers, orprospective clients or customers, that you worked for on an actual or prospective project or assignment during any noticeperiod applicable to you in connection with the termination of your Employment or during the one year preceding notice ofthe termination of your Employment.

IN WITNESS WHEREOF , Discover has duly executed and delivered this Award Certificate as of the Date of the Award.


By:


APPENDIX A

Summary of Award

Date of Award : February 22, 2018

Scheduled Vesting Date : February 1, 2021

Performance Measures :

Your Target Award will be earned based on the Discover EPS. The number of PSUs that you earn based on the DiscoverEPS (subject to vesting and the other terms and conditions of your PSU Award) will be determined by multiplying the number ofPSUs in your Target Award by a multiplier determined as follows:

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Discover EPS Performance* Target Award MultiplierLower than $12.77 0$12.77(threshold) 0

$17.88 0.5$25.54(target) 1.0

$29.37(maximum) 1.5Greater than $29.37 1.5

* If the Discover EPS is between the EPS Performance levels above, the Target Award Multiplier will be interpolated on astraight-line basis.

Performance Period : January 1, 2018 to December 31, 2020

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APPENDIX B









(1)

(2)

(3)

(4)

19


(1)

(2)

(3)

(4)


Signature


Discover Financial ServicesAttn: Human Resources Executive Compensation2500 Lake Cook RoadRiverwoods, IL 60015

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#DFSEX1033312018_HTM_

APPENDIX C

Discover Financial ServicesInternational Supplement

This International Supplement to the Award Certificate for Performance Stock Units ("Award Certificate") containssupplemental terms and conditions for the Performance Stock Unit award (“Equity Award”) to employees of Discover FinancialServices (or the relevant affiliated company) located in certain jurisdictions outside of the United States. The terms included in thisInternational Supplement are intended to ensure compliance with the laws of the country in which you are Employed or, in certaininstances, to make the awards more tax efficient in your country.

You have also received an Award Certificate applicable to your award. The Award Certificate, together with thisInternational Supplement, collectively set forth the terms and conditions of your award. To the extent that this InternationalSupplement amends, deletes or supplements any terms of the Award Certificate, this International Supplement shall control.

Capitalized terms that are used without definition in this International Supplement have the meanings assigned in theAward Certificate.

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Employees in the United Kingdom.

If you are Employed in the United Kingdom, the Company will act in accordance with the Data Protection Act of1998 as amended from time to time regarding any personal information which you provide to it in connection with your EquityAward (including the amount of the award) and you consent to the processing of such personal information in order to facilitate yourparticipation in such equity incentive program, for any purposes required by law or regulation, or for any other legitimate businesspurpose. By accepting your Equity Award, you agree that from time to time, for the purposes described above, your personalinformation may be stored and processed by and disclosed and transferred to other offices and companies within the Company and tothird parties, some of which are situated outside of the European Union and may not offer as high a level of protection for personalinformation as countries within the European Union.

All Employees Located Outside the United States.

If you are Employed outside of the United States, please note that your Equity Award is offered, issued andadministered by Discover Financial Services, a Delaware corporation, and your local employer is not involved in the grant of awardsunder such equity incentive program. All documents related to your Equity Award, including the Award Certificate, thisInternational Supplement and the link by which you access these documents, originate and are maintained in the United States.

Your Equity Award is made in virtue of your Employment with, and your services performed for, the appropriateentities within the Company. However, your award does not form part of your entitlement to remuneration or benefits, whetherpursuant to any contract of Employment to which you may be a party or otherwise. Similarly, the existence of a contract ofEmployment between you and any entity within the Company shall not confer on you any right or entitlement to participate in theEquity Award or to receive awards thereunder, or any expectation that you might participate in such equity incentive program orreceive additional equity awards in the future. Your Equity Award , the Award Certificate, and/or this International Supplement doesnot constitute an employment contract and does not create an employment relationship or a promise of continued employment forany period of time.

In addition, your equity award is not part of your base salary or wages and will not be taken into account (except tothe extent otherwise required by local law) in determining any other employment-related rights you may have, such as rights topension or severance pay.

Whether or not you have a contract of Employment with any entity within the Company, your rights and obligationsunder the terms of your office or Employment shall not be affected by your receipt of the Equity Award . By accepting your receiptof the Equity Award , you waive any and all rights to compensation or damages for any loss of the Equity Award in the event ofyour termination of your office or Employment for any reason whatsoever. This waiver applies whether or not such terminationamounts to a wrongful or unfair dismissal.

You may be subject to applicable exchange control, currency control or similar financial laws that may affect yourtransactions with respect to your equity award, including without

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limitation, your ability to bring shares of Discover Financial Services common stock into your jurisdiction or to receive the proceedsof a sale of Discover Financial Services common stock in your jurisdiction. Moreover, you may be subject to certain notification,approval and/or repatriation obligations with respect to securities and funds you receive in connection with your awards. In additionthe Company is not responsible for any foreign exchange fluctuations that change the value of your PSU Award. You areencouraged to consult your advisors to ascertain whether any restrictions or obligations apply to you.

Your Equity Award has not been authorized or approved by any applicable securities authorities and may have beenoffered pursuant to an exemption from registration in your local jurisdiction. Similarly, no prospectus or similar offering orregistration document has been prepared, authorized or approved by any applicable securities authorities in your jurisdiction. Thegrant of awards is being made only to employees of the Company and does not constitute and is not intended to be an offering to thepublic. For this reason, you must keep all award documents you receive, including but not limited to this International Supplementand the Award Certificate, confidential and you may not distribute or otherwise make public any award documents without the priorwritten consent of the Company. Moreover, you may not reproduce (in whole or in part) any award documents you receive. Inaddition, the shares of Company common stock you acquire upon vesting and conversion of your Equity Award may be subject toapplicable restrictions on resale in your local jurisdiction. You are encouraged to consult your advisors to ascertain whether anyrestrictions or obligations apply to you.

The Company recommends that you seek advice of your tax advisors regarding the tax treatment of your awards.

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Exhibit 10.4

DISCOVER FINANCIAL SERVICESDIRECTORS’ COMPENSATION PLAN

AMENDMENT TO2017 DIRECTORS’ ANNUAL EQUITY AWARD

AWARD CERTIFICATE FOR RESTRICTED STOCK UNITS

Discover awarded you restricted stock units as an incentive for you to continue to provide services as a Director of theCompany from the date of the grant on May 11, 2017 through the Scheduled Vesting Date on May 11, 2018 (“ 2017 RSU ”).Effective February 22, 2018, the 2017 RSU is hereby amended to change the Scheduled Vesting Date to immediately prior to May 2,2018, the first annual meeting of shareholders following the date of grant.

IN WITNESS WHEREOF , Discover has duly executed and delivered this Amendment to the 2017 RSU as of February 22,2018.

DISCOVER FINANCIAL SERVICESBy:


Exhibit 10.5

Amendment No. 6 to the Discover Financial Services Directors’ Compensation Plan

Effective February 22, 2018, the Discover Financial Services Directors’ Compensation Plan (the “Plan”), is hereby amendedin the following respects:

• The Plan is amended by replacing the text of Subsection 5(b)(i) Restriction Period in Section 5 Initial and Annual Awardsof Restricted Stock Units in its entirety with the following:

(i) Restriction Period . Restricted Stock Units granted pursuant to Section 5(a)(i) shall be subject to a restriction periodwhereby 50% of such units shall vest on the first anniversary of the date of grant and the remaining units shall vest on the secondanniversary of the date of grant. Each grant of Restricted Stock Units pursuant to Section 5(a)(ii) shall vest on the earlier of the firstanniversary of the date of grant or immediately prior to the first annual meeting of shareholders following the date of grant.Notwithstanding the foregoing, the Plan Administrators, in their discretion, may specify in the agreement circumstances under whichthe award shall become immediately transferable and nonforfeitable or under which the award shall be forfeited.

Exhibit 12.1

DISCOVER FINANCIAL SERVICESCOMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES

AND PREFERRED STOCK DIVIDENDS(dollars in millions)

For the Three Months

Ended March 31, For the Calendar Years Ended December 31,

2018 2017 2017 2016 2015 2014 2013

Earnings:

Income before income tax expense $ 856 $ 868 $ 3,537 $ 3,656 $ 3,612 $ 3,694 $ 3,944

Losses from unconsolidated investees 11 14 55 58 50 29 18

Total earnings $ 867 $ 882 $ 3,592 $ 3,714 $ 3,662 $ 3,723 $ 3,962

Fixed charges: (1)

Total interest expense $ 469 $ 386 $ 1,648 $ 1,398 $ 1,263 $ 1,134 $ 1,146

Interest factor in rents 1 1 4 5 6 5 5

Total fixed charges $ 470 $ 387 $ 1,652 $ 1,403 $ 1,269 $ 1,139 $ 1,151

Combined fixed charges and preferred stock dividends: (1)

Total interest expense $ 469 $ 386 $ 1,648 $ 1,398 $ 1,263 $ 1,134 $ 1,146

Interest factor in rents 1 1 4 5 6 5 5

Preferred stock dividends 20 14 87 57 59 60 60

Total combined fixed charges and preferred stock dividends $ 490 $ 401 $ 1,739 $ 1,460 $ 1,328 $ 1,199 $ 1,211

Earnings before income tax expense and fixed charges $ 1,337 $ 1,269 $ 5,244 $ 5,117 $ 4,931 $ 4,862 $ 5,113Earnings before income tax expense and combined fixed charges and preferredstock dividends $ 1,357 $ 1,283 $ 5,331 $ 5,174 $ 4,990 $ 4,922 $ 5,173

Ratio of earnings to fixed charges 2.8 3.3 3.2 3.6 3.9 4.3 4.4

Ratio of earnings to combined fixed charges and preferred stock dividends 2.8 3.2 3.1 3.5 3.8 4.1 4.3 (1) Fixed charges are the sum of interest expensed, amortized premiums, discounts and capitalized expenses related to indebtedness, an estimate of interest within rental expense. Combined fixed charges and preferred stock

requirements are the sum of interest expense, amortized premiums, discounts and capitalized expenses related to indebtedness, an estimate of interest within rental expense and preference security dividend requirements.

Exhibit 31.1

CERTIFICATIONI, David W. Nelms, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Discover Financial Services (the “registrant”);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recentfiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controlover financial reporting.

Date: May 1, 2018

/s/ DAVID W. NELMS David W. Nelms Chairman of the Board andChief Executive Officer

Exhibit 31.2

CERTIFICATIONI, R. Mark Graf, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Discover Financial Services (the “registrant”);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recentfiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controlover financial reporting.

Date: May 1, 2018

/s/ R. MARK GRAF R. Mark Graf Executive Vice President, Chief Financial Officer

Exhibit 32.1

CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Discover Financial Services (the “Company”) on Form 10-Q for the period ended March 31, 2018 , as filed with theSecurities and Exchange Commission (the “Report”), each of David W. Nelms, Chairman of the Board and Chief Executive Officer of the Company, and R. MarkGraf, Executive Vice President and Chief Financial Officer of the Company, certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 ofthe Sarbanes-Oxley Act of 2002, that:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: May 1, 2018

/s/ DAVID W. NELMS David W. Nelms Chairman of the Board and Chief ExecutiveOfficer

Date: May 1, 2018

/s/ R. MARK GRAF R. Mark Graf Executive Vice President, Chief Financial Officer

Documents

DISCOVER FINANCIAL SERVICESd18rn0p25nwr6d.cloudfront.net/CIK-0001393612/80... · 2 1 Purchases of treasury stock (584 ) (520 ) Net increase in deposits 2,338 1,529 Dividends paid