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UNITED STATESSECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K
Current ReportPursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): April 26, 2018
DISCOVER FINANCIAL SERVICES(Exact name of registrant as specified in its charter)
Commission File Number: 001-33378
Delaware 36-2517428(State or other jurisdiction
of incorporation) (IRS Employer
Identification No.)
2500 Lake Cook Road, Riverwoods, Illinois 60015(Address of principal executive offices, including zip code)
(224) 405-0900(Registrant's telephone number, including area code)
N/A(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
oo Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
oo Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
oo Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
oo Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
oo
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of thischapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company
oo
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying withany new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act
Item 2.02. Results of Operations and Financial Condition.
On April 26, 2018 , Discover Financial Services (the “Company”) released financial information with respect to the quarter ended March 31, 2018 .Copies of the press release, financial data supplement and financial results presentation containing this information are attached hereto as exhibits andincorporated herein by reference.
The quotation immediately preceding the caption “Segment Results” included in Exhibit 99.1 (the “Excluded Quote”) and Exhibit 99.3 shall not bedeemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilitiesof that section nor shall it be deemed to be incorporated by reference in any filing of the Company under the Securities Act of 1933, as amended, or theExchange Act. The information included in Exhibit 99.1, other than in the Excluded Quote, and Exhibit 99.2 shall be deemed “filed” for purposes of theExchange Act.
Item 9.01. Financial Statements and Exhibits.
(d) Exhibits
Exhibit No. Description99.1
Press Release of the Company dated April 26, 2018 containing financial information for the quarter ended March 31,2018
99.2 Financial Data Supplement of the Company for the quarter ended March 31, 201899.3 Financial Results Presentation of the Company for the quarter ended March 31, 2018
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by theundersigned hereunto duly authorized.
DISCOVER FINANCIAL SERVICES Dated: April 26, 2018 By: /s/ D. Christopher Greene Name: D. Christopher Greene Title: Vice President, Deputy General Counsel and Assistant Secretary
EXHIBIT INDEX
Exhibit No. Description
99.1 Press Release of the Company dated April 26, 2018 containing financial information for the quarter ended March 31,2018
99.2 Financial Data Supplement of the Company for the quarter ended March 31, 201899.3 Financial Results Presentation of the Company for the quarter ended March 31, 2018
Exhibit 99.1
DISCOVER FINANCIAL SERVICES REPORTS FIRST QUARTER NET INCOME OF $666 MILLIONOR $1.82 PER DILUTED SHARE
Riverwoods, IL, April 26, 2018 - Discover Financial Services (NYSE: DFS) today reported net income of $666 million or $1.82 per diluted share for the first quarter of 2018 , ascompared to $564 million or $1.43 per diluted share for the first quarter of 2017 . The company’s return on equity for the first quarter of 2018 was 25% .
First Quarter Highlights
• Total loans grew $6.9 billion ( 9% ) from the prior year to $82.7 billion .
• Credit card loans grew $5.8 billion ( 10% ) to $65.6 billion , on Discover card sales volume of $30.9 billion .
• Total net charge-off rate, excluding purchased credit-impaired ("PCI") loans, increased 48 basis points from the prior year to 3.17% and the total 30+ day delinquency rateexcluding PCI loans increased 26 basis points from the prior year to 2.23% .
• Consumer deposits grew $4.2 billion ( 11% ) from the prior year to $41.3 billion .
• Payment Services transaction dollar volume was $56.1 billion , up 19% from the prior year.
“Our performance this quarter was characterized by robust loan and revenue growth reflecting the strength of the Discover franchise as we continued to invest in product andservice enhancements," said David Nelms, chairman and CEO of Discover. “I'm proud of our strong return on equity of 25%. In addition, this is the first full quarter reflecting thebenefits of tax reform which, combined with share repurchases, led to a 27% year-over-year increase in earnings per share."
Segment Results:
Direct Banking
Direct Banking pretax income of $811 million in the quarter declined by $13 million from the prior year driven by an increase in the provision for loan losses and higher operatingexpenses, partially offset by higher revenue.
Total loans ended the quarter at $ 82.7 billion, up 9% compared to the prior year. Credit card loans ended the quarter at $65.6 billion , up 10% from the prior year. Personalloans increased $644 million ( 10% ) from the prior year. Private student loans increased $234 million ( 3% ) year-over-year, and grew $727 million ( 11% ), excluding purchasedstudent loans.
Net interest income increased $208 million ( 11% ) from the prior year, driven by loan growth and a higher net interest margin. Net interest margin was 10.23% , up 16 basispoints from the prior year. Card yield was 12.85% , an increase of 20 basis points from the prior year as a result of increases in the prime rate, partially offset by a change inportfolio mix and higher interest charge-offs. Interest expense as a percent of total loans increased 23 basis points from the prior year, primarily as a result of higher marketrates.
Other income increased $19 million ( 5% ) from the prior year, driven by higher discount and interchange revenue.
The delinquency rate for credit card loans 30+ days past due was 2.33% , up 27 basis points from the prior year and 5 basis points from the prior quarter. The credit card netcharge-off rate for the first quarter was 3.32% , up 48 basis points from the prior year and 29 basis points from the prior quarter. The student loan net charge-off rate, excludingPCI loans, was 1.17% , up 34 basis points from the prior year. The personal loans net charge-off rate of 4.03% increased by 87 basis points from the prior year. Net charge-offrates were generally higher because of supply-driven credit normalization and the seasoning of loan growth from the last few years.
Provision for loan losses of $751 million increased $157 million from the prior year due to higher net charge-offs and a higher reserve build. The reserve build for the first quarterof 2018 was $116 million, compared to a reserve build of $107 million in the first quarter of 2017.
Expenses increased $83 million from the prior year as a result of higher employee compensation and marketing expenses. Additionally, we expanded investments to buildfinancial literacy, support diversity and inclusion, and strengthen the communities in which we operate. Employee compensation increased as a result of higher staffing levelsand higher average salaries. Marketing expenses increased as a result of higher account acquisition costs and brand advertising.
Payment Services
Payment Services pretax income was $45 million in the quarter, up $1 million from the prior year, primarily driven by higher transaction processing and interchange revenueoffset by a reserve release in the first quarter of 2017.
Payment Services transaction dollar volume was $56.1 billion , up 19% versus the prior year. PULSE transaction dollar volume was up 20% year-over-year primarily driven bymerchant and acquirer routing decisions. Diners Club volume increased 14% year-over-year driven by continued strength of newer franchise relationships. Network Partnersvolume increased by 24% from the prior year driven by AribaPay.
Share Repurchases
During the first quarter of 2018 , the company repurchased approximately 7.5 million shares of common stock for $584 million. Shares of common stock outstanding declined by1.8% from the prior quarter.
Conference Call and Webcast Information
The company will host a conference call to discuss its first quarter results on Thursday, April 26, 2018, at 4:00 p.m. Central time. Interested parties can listen to the conferencecall via a live audio webcast at https://investorrelations.discover.com.
About Discover
Discover Financial Services (NYSE: DFS) is a direct banking and payment services company with one of the most recognized brands in U.S. financial services. Since itsinception in 1986, the company has become one of the largest card issuers in the United States. The company issues the Discover card, America's cash rewards pioneer, andoffers private student loans, personal loans, home equity loans, checking and savings accounts and certificates of deposit through its direct banking business. It operates theDiscover Network, with millions of retail and cash access locations; PULSE, one of the nation's leading ATM/debit networks; and Diners Club International, a global paymentsnetwork with acceptance in 190 countries and territories. For more information, visit www.discover.com/company.
Contacts:
Investors:
Craig Streem, 224-405-5923
Media:
Jon Drummond, 224-405-1888
A financial summary follows. Financial, statistical, and business related information, as well as information regarding business and segment trends, is included in the financialsupplement filed as Exhibit 99.2 to the company's Current Report on Form 8-K filed today with the Securities and Exchange Commission ( “ SEC ” ). Both the earnings releaseand the financial supplement are available online at the SEC's website (http://www.sec.gov) and the company's website (https://investorrelations.discover.com).
This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements, which speak to ourexpected business and financial performance, among other matters, contain words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “aim,” “will,” “may,” “should,” “could,”“would,” “likely,” and similar expressions. Such statements are based upon the current beliefs and expectations of the company's management and are subject to significantrisks and uncertainties. Actual results may differ materially from those set forth in the forward-looking statements. These forward-looking statements speak only as of the date ofthis press release, and there is no undertaking to update or revise them as more information becomes available.
The following factors, among others, could cause actual results to differ materially from those set forth in the forward-looking statements: changes in economic variables, such asthe availability of consumer credit, the housing market, energy costs, the number and size of personal bankruptcy filings, the rate of unemployment, the levels of consumerconfidence and consumer debt, and investor sentiment; the impact of current, pending and future legislation, regulation, supervisory guidance, and regulatory and legal actions,including, but not limited to, those related to tax reform, financial regulatory reform, consumer financial services practices, anti-corruption, and funding, capital and liquidity; theactions and initiatives of current and potential competitors; the company's ability to manage its expenses; the company's ability to successfully achieve card acceptance acrossits networks and maintain relationships with network participants; the company's ability to sustain and grow its non-card products; difficulty obtaining regulatory approval for,financing, closing, transitioning, integrating or managing the expenses of acquisitions of or investments in new businesses, products or technologies; the company's ability tomanage its credit risk, market risk, liquidity risk, operational risk, compliance and legal risk, and strategic risk; the availability and cost of funding and capital; access to deposit,securitization, equity, debt and credit markets; the impact of rating agency actions; the level and volatility of equity prices, commodity prices and interest rates, currency values,investments, other market fluctuations and other market indices; losses in the company's investment portfolio; limits on the company's ability to pay dividends and repurchase itscommon stock; limits on the company's ability to receive payments from its subsidiaries; fraudulent activities or material security breaches of key systems; the company's abilityto remain organizationally effective; the company's ability to increase or sustain Discover card usage or attract new customers; the company's ability to maintain relationshipswith merchants; the effect of political, economic and market conditions, geopolitical events and unforeseen or catastrophic events; the company's ability to introduce newproducts or services; the company's ability to manage its relationships with third-party vendors; the company's ability to maintain current technology and integrate new andacquired systems; the company's ability to collect amounts for disputed transactions from merchants and merchant acquirers; the company's ability to attract and retainemployees; the company's ability to protect its reputation and its intellectual property; and new lawsuits, investigations or similar matters or unanticipated developments relatedto current matters. The company routinely evaluates and may pursue acquisitions of or investments in businesses, products, technologies, loan portfolios or deposits, which mayinvolve payment in cash or the company's debt or equity securities.
Additional factors that could cause the company's results to differ materially from those described in the forward-looking statements can be found under “Risk Factors,”“Business - Competition,” “Business - Supervision and Regulation” and “Management's Discussion and Analysis of Financial Condition and Results of Operations” in thecompany's Annual Report on Form 10-K for the year ended December 31, 2017, which is filed with the SEC and available at the SEC's internet site (http://www.sec.gov).
DISCOVER FINANCIAL SERVICES Exhibit 99.2
EARNINGS SUMMARY
(unaudited, in millions, except per share statistics)
Quarter Ended
Mar 31, 2018 Dec 31, 2017 Sep 30, 2017 Jun 30, 2017 Mar 31, 2017 Mar 31, 2018 vs. Mar
31, 2017
EARNINGS SUMMARY
Interest Income $2,569 $2,556 $2,476 $2,338 $2,278 $291 13%
Interest Expense 469 436 426 400 386 83 22%
Net Interest Income 2,100 2,120 2,050 1,938 1,892 208 11%
Discount/Interchange Revenue 646 717 675 666 596 50 8%
Rewards Cost 392 434 417 388 363 29 8%
Discount and Interchange Revenue, net 254 283 258 278 233 21 9%
Protection Products Revenue 53 54 55 56 58 (5) (9%)
Loan Fee Income 96 96 95 83 89 7 8%
Transaction Processing Revenue 43 43 43 42 39 4 10%
Other Income 29 18 24 22 28 1 4%
Total Other Income 475 494 475 481 447 28 6% Revenue Net of Interest Expense 2,575 2,614 2,525 2,419 2,339 236 10% Provision for Loan Losses 751 679 674 640 586 165 28% Employee Compensation and Benefits 405 411 371 367 363 42 12%
Marketing and Business Development 185 213 203 192 168 17 10%
Information Processing & Communications 82 80 78 77 80 2 3%
Professional Fees 155 189 163 156 147 8 5%
Premises and Equipment 26 26 25 23 25 1 4%
Other Expense 115 117 108 97 102 13 13%
Total Other Expense 968 1,036 948 912 885 83 9% Income Before Income Taxes 856 899 903 867 868 (12) (1%)
Tax Expense 190 512 301 321 304 (114) (38%)
Net Income $666 $387 $602 $546 $564 $102 18%
Net Income Allocated to Common Stockholders $646 $359 $589 $532 $551 $95 17%
Effective Tax Rate 22.2% 57.0% 33.3% 37.1% 35.0% Net Interest Margin 10.23% 10.28% 10.28% 10.11% 10.07% 16 bps
Operating Efficiency 37.6% 39.7% 37.5% 37.7% 37.9% (30) bps
ROE 25% 14% 22% 19% 20%
Capital Returned to Common Stockholders $684 $657 $667 $547 $620 $64 10%
Payout Ratio 106% 183% 113% 103% 113% Ending Common Shares Outstanding 351 358 366 375 382 (31) (8%)
Weighted Average Common Shares Outstanding 355 362 371 379 386 (31) (8%)
Weighted Average Common Shares Outstanding (fully diluted) 355 362 371 379 386 (31) (8%) PER SHARE STATISTICS
Basic EPS $1.82 $0.99 $1.59 $1.41 $1.43 $0.39 27%
Diluted EPS $1.82 $0.99 $1.59 $1.40 $1.43 $0.39 27%
Common Stock Price (period end) $71.93 $76.92 $64.48 $62.19 $68.39 $3.54 5%
Book Value per share $30.93 $30.43 $30.56 $30.01 $29.46 $1.47 5% Note: See Glossary of Financial Terms for definitions of financial terms
DISCOVER FINANCIAL SERVICES
EARNINGS SUMMARY
(unaudited, in millions)
Quarter Ended
Mar 31, 2018 Dec 31, 2017 Sep 30, 2017 Jun 30,
2017 Mar 31,2017 Mar 31, 2018 vs. Mar 31,
2017
SEGMENT- INCOME BEFORE INCOME TAXES
Direct Banking $811 $870 $867 $831 $824 ($13) (2%)
Payment Services 45 29 36 36 44 1 2%
Total $856 $899 $903 $867 $868 ($12) (1%)
TRANSACTIONS PROCESSED ON NETWORKS
Discover Network 550 607 579 551 503 47 9%
PULSE Network 989 1,029 996 961 870 119 14%
Total 1,539 1,636 1,575 1,512 1,373 166 12%
NETWORK VOLUME
PULSE Network $43,158 $42,386 $39,828 $38,848 $36,066 $7,092 20%
Network Partners 4,553 3,280 3,811 3,461 3,661 892 24%
Diners Club International 1 8,390 8,373 7,989 7,800 7,382 1,008 14%
Total Payment Services 56,101 54,039 51,628 50,109 47,109 8,992 19%
Discover Network - Proprietary 32,382 36,267 33,576 33,342 29,859 2,523 8%
Total $88,483 $90,306 $85,204 $83,451 $76,968 $11,515 15%
1 Volume is derived from data provided by licensees for Diners Club branded cards issued outside of North America and is subject to subsequent revision or amendment
Note: See Glossary of Financial Terms for definitions of financial terms
DISCOVER FINANCIAL SERVICESBALANCE SHEET SUMMARY(unaudited, in millions)
Quarter Ended
Mar 31, 2018 Dec 31, 2017 Sep 30, 2017 Jun 30, 2017 Mar 31, 2017 Mar 31, 2018 vs. Mar 31,
2017
BALANCE SHEET SUMMARY Assets Cash and Investment Securities $18,641 $14,955 $16,155 $14,722 $17,981 $660 4%
Total Loan Receivables 82,744 84,248 80,443 77,997 75,853 6,891 9%
Allowance for Loan Losses (2,736) (2,621) (2,531) (2,384) (2,264) (472) (21%)
Net Loan Receivables 80,008 81,627 77,912 75,613 73,589 6,419 9%
Premises and Equipment, net 848 825 800 774 750 98 13%
Goodwill and Intangible Assets, net 417 418 418 419 420 (3) (1%)
Other Assets 2,053 2,262 2,323 2,229 2,055 (2) NM
Total Assets $101,967 $100,087 $97,608 $93,757 $94,795 $7,172 8%
Liabilities & Stockholders' Equity
Direct to Consumer and Affinity Deposits $41,321 $39,367 $38,703 $37,709 $37,094 $4,227 11%
Brokered Deposits and Other Deposits 19,809 19,397 17,432 15,155 16,428 3,381 21%
Deposits 61,130 58,764 56,135 52,864 53,522 7,608 14%
Borrowings 26,244 26,326 26,737 26,438 26,823 (579) (2%)
Accrued Expenses and Other Liabilities 3,722 4,105 3,549 3,196 3,185 537 17%
Total Liabilities 91,096 89,195 86,421 82,498 83,530 7,566 9%
Total Equity 10,871 10,892 11,187 11,259 11,265 (394) (3%)
Total Liabilities and Stockholders' Equity $101,967 $100,087 $97,608 $93,757 $94,795 $7,172 8%
LIQUIDITY
Liquidity Portfolio $17,550 $13,560 $13,906 $13,865 $16,213 1,337 8%
Undrawn Credit Facilities 1 35,099 35,153 33,696 31,877 30,823 4,276 14%
Total Liquidity $52,649 $48,713 $47,602 $45,742 $47,036 $5,613 12%
1 Excludes investments pledged to the Federal Reserve, which is included within the liquidity portfolio Note: See Glossary of Financial Terms for definitions of financial terms
DISCOVER FINANCIAL SERVICES
BALANCE SHEET STATISTICS
(unaudited, in millions)
Quarter Ended
Mar 31, 2018 Dec 31, 2017 Sep 30, 2017 Jun 30, 2017 Mar 31, 2017 Mar 31, 2018 vs. Mar 31,2017
BALANCE SHEET STATISTICS
Total Common Equity $10,308 $10,329 $10,627 $10,699 $10,705 ($397) (4%)
Total Common Equity/Total Assets 10.1% 10.3% 10.9% 11.4% 11.3%
Total Common Equity/Net Loans 12.9% 12.7% 13.6% 14.2% 14.5% Tangible Assets $101,550 $99,669 $97,190 $93,338 $94,375 $7,175 8%
Tangible Common Equity 1 $9,891 $9,911 $10,209 $10,280 $10,285 ($394) (4%)
Tangible Common Equity/Tangible Assets 1 9.7% 9.9% 10.5% 11.0% 10.9%
Tangible Common Equity/Net Loans 1 12.4% 12.1% 13.1% 13.6% 14.0%
Tangible Common Equity per share 1 $28.15 $27.69 $27.89 $27.40 $26.90 $1.25 5% REGULATORY CAPITAL RATIOS Basel III Transition
Total Risk Based Capital Ratio 14.0% 13.8% 14.7% 15.2% 15.7%
Tier 1 Risk Based Capital Ratio 12.5% 12.3% 13.2% 13.7% 14.1%
Tier 1 Leverage Ratio 10.6% 10.8% 11.4% 11.8% 11.8%
Common Equity Tier 1 Capital Ratio 11.9% 11.6% 12.5% 13.0% 13.4% Basel III Fully Phased-in
Common Equity Tier 1 Capital Ratio 2 11.8% 11.6% 12.5% 13.0% 13.4% RATIO OF EARNINGS TO FIXED CHARGES
Ratio of Earnings to Fixed Charges 3, 4 2.8 3.2 3.2 3.2 3.3 1 Tangible Common Equity ("TCE") is a non-GAAP measure. The Company believes TCE is a more meaningful measure to investors of the net asset value of the Company. For corresponding reconciliation of TCEto a GAAP financial measure see Reconciliation of GAAP to non-GAAP data schedule 2 Common Equity Tier 1 Capital Ratio (Basel III Fully Phased-in) is calculated using Basel III Fully Phased-in Common Equity Tier 1 Capital, a non-GAAP measure. The Company believes that the Common EquityTier 1 Capital Ratio based on Fully Phased-in Basel III rules is an important complement to the existing capital ratios and for comparability to other financial institutions. For the corresponding reconciliation ofCommon Equity Tier 1 Capital and Risk Weighted Assets calculated under Fully Phased-in Basel III rules to Common Equity Tier 1 Capital and Risk Weighted Assets calculated under Basel III transition rules see theReconciliation of GAAP to non-GAAP data schedule 3 Fixed charges are the sum of interest expense, amortized premiums, discounts and capitalized expenses related to indebtedness and an estimate of interest within rental expense 4 The Ratio of Earnings to Fixed Charges is a year-to-date statistic. The periods reported reflect the three months ended March 31, 2018, the twelve months ended December 31, 2017, the nine months endedSeptember 30, 2017, the six months ended June 30, 2017 and the three months ended March 31, 2017 Note: See Glossary of Financial Terms for definitions of financial terms
DISCOVER FINANCIAL SERVICESAVERAGE BALANCE SHEET(unaudited, in millions)
Quarter Ended
Mar 31, 2018 Dec 31, 2017 Sep 30, 2017 Jun 30, 2017 Mar 31, 2017 Mar 31, 2018 vs. Mar 31,
2017
AVERAGE BALANCES
Assets
Cash and Investment Securities $15,058 $15,290 $14,547 $14,616 $15,424 ($366) (2%)
Restricted Cash 821 276 848 559 819 2 —%
Credit Card Loans 65,983 64,791 62,647 60,700 60,122 5,861 10%
Private Student Loans 9,432 9,158 8,986 9,020 9,197 235 3%
Personal Loans 7,387 7,455 7,208 6,820 6,582 805 12%
Other Loans 452 398 348 314 284 168 59%
Total Loans 83,254 81,802 79,189 76,854 76,185 7,069 9%
Total Interest Earning Assets 99,133 97,368 94,584 92,029 92,428 6,705 7%
Allowance for Loan Losses (2,615) (2,530) (2,379) (2,262) (2,166) (449) (21%)
Other Assets 4,221 4,252 4,192 4,147 4,166 55 1%
Total Assets $100,739 $99,090 $96,397 $93,914 $94,428 $6,311 7%
Liabilities and Stockholders' Equity
Direct to Consumer and Affinity Deposits $39,825 $38,807 $37,900 $36,956 $36,316 $3,509 10%
Brokered Deposits and Other Deposits 19,638 18,244 16,192 15,600 16,242 3,396 21%
Total Interest-bearing Deposits 59,463 57,051 54,092 52,556 52,558 6,905 13%
Short-term Borrowings 1 2 1 2 1 — —%
Securitized Borrowings 16,180 16,676 17,206 16,141 16,960 (780) (5%)
Other Long-term Borrowings 9,945 9,768 9,721 9,979 9,600 345 4%
Total Interest-bearing Liabilities 85,589 83,497 81,020 78,678 79,119 6,470 8%
Other Liabilities & Stockholders' Equity 15,150 15,593 15,377 15,236 15,309 (159) (1%)
Total Liabilities and Stockholders' Equity $100,739 $99,090 $96,397 $93,914 $94,428 $6,311 7%
AVERAGE RATES
Assets
Cash and Investment Securities 1.57% 1.34% 1.31% 1.12% 0.90% 67 bpsRestricted Cash 1.68% 1.34% 1.15% 0.89% 0.70% 98 bpsCredit Card Loans 12.85% 12.79% 12.83% 12.66% 12.65% 20 bpsPrivate Student Loans 7.89% 7.69% 7.56% 7.45% 7.29% 60 bpsPersonal Loans 12.43% 12.27% 12.33% 12.22% 12.18% 25 bpsOther Loans 5.98% 5.66% 5.56% 5.59% 5.39% 59 bps
Total Loans 12.21% 12.14% 12.15% 11.98% 11.94% 27 bpsTotal Interest Earning Assets 10.51% 10.41% 10.39% 10.19% 9.99% 52 bps
Liabilities and Stockholders' Equity
Direct to Consumer and Affinity Deposits 1.59% 1.44% 1.37% 1.29% 1.25% 34 bpsBrokered Deposits and Other Deposits 2.19% 2.12% 2.12% 2.07% 1.98% 21 bps
Total Interest-bearing Deposits 1.79% 1.65% 1.59% 1.52% 1.48% 31 bpsShort-term Borrowings 1.75% 1.31% 1.33% 1.06% 0.67% 108 bpsSecuritized Borrowings 2.43% 2.19% 2.37% 2.31% 2.17% 26 bpsOther Long-term Borrowings 4.49% 4.30% 4.30% 4.36% 4.38% 11 bps
Total Interest-bearing Liabilities 2.22% 2.07% 2.08% 2.04% 1.98% 24 bps Net Interest Margin 10.23% 10.28% 10.28% 10.11% 10.07% 16 bpsNet Yield on Interest-earning Assets 8.59% 8.64% 8.60% 8.44% 8.30% 29 bps Note: See Glossary of Financial Terms for definitions of financial terms
DISCOVER FINANCIAL SERVICES
LOAN STATISTICS
(unaudited, in millions)
Quarter Ended
Mar 31, 2018 Dec 31, 2017 Sep 30, 2017 Jun 30, 2017 Mar 31, 2017 Mar 31, 2018 vs. Mar 31,
2017
TOTAL LOAN RECEIVABLES
Ending Loans 1, 2 $82,744 $84,248 $80,443 $77,997 $75,853 $6,891 9%
Average Loans 1, 2 $83,254 $81,802 $79,189 $76,854 $76,185 $7,069 9% Interest Yield 12.21% 12.14% 12.15% 11.98% 11.94% 27 bps
Gross Principal Charge-off Rate 3.74% 3.45% 3.26% 3.36% 3.25% 49 bps
Gross Principal Charge-off Rate excluding PCI Loans 3 3.84% 3.54% 3.35% 3.47% 3.37% 47 bps
Net Principal Charge-off Rate 3.09% 2.85% 2.63% 2.71% 2.60% 49 bps
Net Principal Charge-off Rate excluding PCI Loans 3 3.17% 2.92% 2.71% 2.79% 2.69% 48 bps
Delinquency Rate (30 or more days) excluding PCI Loans 3 2.23% 2.20% 2.05% 1.93% 1.97% 26 bps
Delinquency Rate (90 or more days) excluding PCI Loans 3 1.06% 0.99% 0.91% 0.88% 0.92% 14 bps
Gross Principal Charge-off Dollars $769 $711 $651 $645 $611 $158 26%
Net Principal Charge-off Dollars $635 $583 $527 $520 $489 $146 30%
Net Interest and Fee Charge-off Dollars $136 $119 $107 $110 $106 $30 28%
Loans Delinquent 30 or more days 3 $1,800 $1,806 $1,605 $1,457 $1,445 $355 25%
Loans Delinquent 90 or more days 3 $855 $815 $709 $667 $675 $180 27% Allowance for Loan Loss (period end) $2,736 $2,621 $2,531 $2,384 $2,264 $472 21%
Reserve Change Build/ (Release) 4 $116 $96 $147 $120 $97 $19
Reserve Rate 3.31% 3.11% 3.15% 3.06% 2.98% 33 bps
Reserve Rate Excluding PCI Loans 3 3.35% 3.15% 3.20% 3.11% 3.04% 31 bps CREDIT CARD LOANS
Ending Loans $65,577 $67,291 $63,475 $61,797 $59,757 $5,820 10%
Average Loans $65,983 $64,791 $62,647 $60,700 $60,122 $5,861 10% Interest Yield 12.85% 12.79% 12.83% 12.66% 12.65% 20 bps
Gross Principal Charge-off Rate 4.08% 3.73% 3.53% 3.71% 3.61% 47 bps
Net Principal Charge-off Rate 3.32% 3.03% 2.80% 2.94% 2.84% 48 bps
Delinquency Rate (30 or more days) 2.33% 2.28% 2.14% 2.00% 2.06% 27 bps
Delinquency Rate (90 or more days) 1.18% 1.12% 1.02% 0.98% 1.03% 15 bps
Gross Principal Charge-off Dollars $663 $612 $555 $561 $535 $128 24%
Net Principal Charge-off Dollars $540 $496 $439 $445 $422 $118 28%
Loans Delinquent 30 or more days $1,529 $1,532 $1,359 $1,237 $1,233 $296 24%
Loans Delinquent 90 or more days $777 $751 $646 $603 $616 $161 26% Allowance for Loan Loss (period end) $2,252 $2,147 $2,091 $1,980 $1,892 $360 19%
Reserve Change Build/ (Release) $105 $56 $111 $88 $102 $3
Reserve Rate 3.43% 3.19% 3.29% 3.21% 3.17% 26 bps Total Discover Card Volume $34,327 $38,574 $35,581 $35,297 $32,406 $1,921 6%
Discover Card Sales Volume $30,850 $35,339 $32,161 $32,172 $29,134 $1,716 6%
Rewards Rate 1.27% 1.23% 1.30% 1.20% 1.25% 2 bps 1 Total Loans includes Home Equity and other loans 2 Purchased Credit Impaired ("PCI") loans are loans that were acquired in which a deterioration in credit quality occurred between the origination date and the acquisition date. These loans were initially recorded at fair value and accrete interest income over the estimated livesof the loans as long as cash flows are reasonably estimable, even if the loans are contractually past due. PCI loans are private student loans and are included in total loan receivables 3 Excludes PCI loans (described above) which are accounted for on a pooled basis. Since a pool is accounted for as a single asset with a single composite interest rate and aggregate expectation of cash flows, the past-due status of a pool, or that of the individual loans within apool, is not meaningful. Because the Company is recognizing interest income on a pool of loans, it is all considered to be performing 4 Allowance for loan loss includes the net change in reserves on PCI pools having no remaining non-accretable difference which does not impact the reserve change build/(release) in provision for loan losses Note: See Glossary of Financial Terms for definitions of financial terms
DISCOVER FINANCIAL SERVICES
LOAN STATISTICS
(unaudited, in millions)
Quarter Ended
Mar 31, 2018 Dec 31, 2017 Sep 30, 2017 Jun 30, 2017 Mar 31, 2017 Mar 31, 2018 vs. Mar 31,2017
PRIVATE STUDENT LOANS
Ending Loans (excluding PCI) $7,416 $7,076 $6,998 $6,594 $6,689 $727 11%
Ending PCI Loans 1 $1,956 $2,084 $2,202 $2,322 $2,449 ($493) (20%)
Ending Loans $9,372 $9,160 $9,200 $8,916 $9,138 $234 3% Interest Yield 7.89% 7.69% 7.56% 7.45% 7.29% 60 bps
Net Principal Charge-off Rate 0.92% 1.03% 1.14% 0.85% 0.60% 32 bps
Net Principal Charge-off Rate excluding PCI Loans 2 1.17% 1.34% 1.52% 1.15% 0.83% 34 bps
Delinquency Rate (30 or more days) excluding PCI Loans 2 2.25% 2.35% 2.14% 2.12% 2.04% 21 bps Reserve Rate 1.82% 1.77% 1.77% 1.78% 1.70% 12 bps
Reserve Rate excluding PCI Loans 2 1.93% 1.89% 1.89% 1.91% 1.80% 13 bps PERSONAL LOANS
Ending Loans $7,307 $7,374 $7,397 $6,955 $6,663 $644 10% Interest Yield 12.43% 12.27% 12.33% 12.22% 12.18% 25 bps
Net Principal Charge-off Rate 4.03% 3.62% 3.19% 3.18% 3.16% 87 bps
Delinquency Rate (30 or more days) 1.37% 1.40% 1.27% 1.14% 1.12% 25 bps Reserve Rate 4.12% 4.08% 3.63% 3.38% 3.10% 102 bps
1 Purchased Credit Impaired ("PCI") loans are loans that were acquired in which a deterioration in credit quality occurred between the origination date and the acquisition date. These loans wereinitially recorded at fair value and accrete interest income over the estimated lives of the loans as long as cash flows are reasonably estimable, even if the loans are contractually past due. PCI loansare private student loans and are included in total loan receivables
2 Excludes PCI loans (described above) which are accounted for on a pooled basis. Since a pool is accounted for as a single asset with a single composite interest rate and aggregate expectation ofcash flows, the past-due status of a pool, or that of the individual loans within a pool, is not meaningful. Because the Company is recognizing interest income on a pool of loans, it is all considered tobe performing
Note: See Glossary of Financial Terms for definitions of financial terms
DISCOVER FINANCIAL SERVICES
SEGMENT RESULTS
(unaudited, in millions)
Quarter Ended
Mar 31,
2018 Dec 31,2017 Sep 30,
2017 Jun 30,2017 Mar 31,
2017 Mar 31, 2018 vs. Mar31, 2017
DIRECT BANKING
Interest Income $2,569 $2,556 $2,476 $2,338 $2,278 $291 13%
Interest Expense 469 436 426 400 386 83 22%
Net Interest Income 2,100 2,120 2,050 1,938 1,892 208 11%
Other Income 394 423 401 408 375 19 5%
Revenue Net of Interest Expense 2,494 2,543 2,451 2,346 2,267 227 10%
Provision for Loan Losses 751 678 675 639 594 157 26%
Total Other Expense 932 995 909 876 849 83 10%
Income Before Income Taxes $811 $870 $867 $831 $824 ($13) (2%)
Net Interest Margin 10.23% 10.28% 10.28% 10.11% 10.07% 16 bps
Pretax Return on Loan Receivables 3.95% 4.22% 4.35% 4.34% 4.39% (44) bps Allowance for Loan Loss (period end) $2,728 $2,613 $2,525 $2,377 $2,258 $470 21%
Reserve Change Build/ (Release) 1 $116 $94 $148 $119 $107 $9
PAYMENT SERVICES
Interest Income $— $— $— $— $— $— NM
Interest Expense — — — — — — NM
Net Interest Income — — — — — — NM
Other Income 81 71 74 73 72 9 13%
Revenue Net of Interest Expense 81 71 74 73 72 9 13%
Provision for Loan Losses — 1 (1) 1 (8) 8 NM
Total Other Expense 36 41 39 36 36 — —%
Income Before Income Taxes $45 $29 $36 $36 $44 $1 2%
1 Allowance for loan loss includes the net change in reserves on PCI pools having no remaining non-accretable difference which does not impact the reserve change build/(release) in provision for loan losses
Note: See Glossary of Financial Terms for definitions of financial terms
DISCOVER FINANCIAL SERVICESGLOSSARY OF FINANCIAL TERMS Book Value per share represents total equity divided by ending common shares outstanding Capital Returned to Common Stockholders represents common stock dividends declared plus treasury share repurchases minus common stock issued under employee benefit plans and stock based compensation
Common Equity Tier 1 Capital Ratio (Basel III transition) represents common equity tier 1 capital divided by risk weighted assets calculated under Basel III rules subject to transition provisions
Common Equity Tier 1 Capital Ratio (Basel III fully phased-in) represents fully phased-in common equity tier 1 capital divided by risk weighted assets under fully phased-in Basel III rules. The Common Equity Tier 1 Capital Ratio (Basel III fully phased-in) is calculated using Basel III fully phased-in common equity tier 1 capital, a non-GAAP measure. The Company believes that the common equity tier 1 capital ratio based on fully phased-in Basel III rules is an important complement to the existing capitalratios and for comparability to other financial institutions. For the corresponding reconciliation of common equity tier 1 capital and risk weighted assets calculated under fully phased-in Basel III rules to common equity tier 1 capital and risk weighted assetscalculated under Basel III transition rules see the Reconciliation of GAAP to non-GAAP data schedule
Delinquency Rate (Over 30 Days) represents loans delinquent over thirty days divided by ending loans (total or respective loans, as appropriate) Delinquency Rate (Over 90 Days) represents loans delinquent over ninety days divided by ending loans (total or respective loans, as appropriate)
Discover Card Sales Volume represents Discover card activity related to net sales
Discover Card Volume represents Discover card activity related to net sales, balance transfers, cash advances and other activity
Discover Network Proprietary Volume represents gross proprietary sales volume on the Discover Network
Earnings Per Share represents net income allocated to common stockholders divided by the weighted average common shares outstanding Effective Tax Rate represents tax expense divided by income before income taxes Gross Principal Charge-off Rate represents gross principal charge-off dollars (annualized) divided by average loans for the reporting period
Interest Yield represents interest income on loan receivables (annualized) divided by average loans for the reporting period Liquidity Portfolio represents cash and cash equivalents (excluding cash-in-process) and other investments Net Income Allocated to Common Stockholders represents net income less (i) dividends and accretion of discount on shares of preferred stock and (ii) income allocated to participating securities Net Interest Margin represents net interest income (annualized) divided by average total loans for the period. Net Principal Charge-off Rate represents net principal charge-off dollars (annualized) divided by average loans for the reporting period
Operating Efficiency represents total other expense divided by revenue net of interest expense Payout Ratio represents capital returned to common stockholders divided by net income allocated to common stockholders
Pretax Return on Loan Receivables represents income before income taxes (annualized) divided by total average loans for the period Proprietary Network Volume represents gross proprietary sales volume on the Discover Network
Ratio of Earnings to Fixed Charges is a year-to-date statistic and represents income before income tax expense and fixed charges divided by fixed charges for the reporting period. Fixed charges are the sum of interest expense, amortized premiums,discounts and capitalized expenses related to indebtedness and an estimate of interest within rental expense for the reporting period Regulatory Capital Ratios are regulatory measures used to evaluate capital adequacy. Under Basel III, for a Bank Holding Company to be considered "well-capitalized," total risk-based and tier 1 risk-based capital ratios of 10% and 6% respectively must bemaintained. Under Basel III, to meet the regulatory minimum a Bank Holding Company must maintain total risk-based, tier 1 risk-based, tier 1 leverage, and common equity tier 1 ratios of 8%, 6%, 4%, and 4.5% respectively. As of January 1, 2015 regulatorycapital ratios are calculated under Basel III rules subject to transition provisions. Total Risk Based Capital Ratio represents total capital divided by risk-weighted assets. Tier 1 Capital Ratio represents tier 1 capital divided by risk-weighted assets. Tier 1Leverage Ratio represents tier 1 capital divided by average total assets. The Tier 1 Common Capital Ratio has been replaced by the Common Equity Tier 1 Ratio under Basel III Reserve Rate represents the allowance for loan losses divided by total loans Return on Equity represents net income (annualized) divided by average total equity for the reporting period Rewards Rate represents rewards cost divided by Discover Card sales volume
Tangible Assets represents total assets less goodwill and intangibles Tangible Common Equity ("TCE") , a non-GAAP financial measure, represents total common equity less goodwill and intangibles. The Company believes TCE is a more meaningful measure to investors of the net asset value of the Company. Forcorresponding reconciliation of TCE to a GAAP financial measure, see Reconciliation of GAAP to Non-GAAP data schedule Tangible Common Equity/Net Loans , a non-GAAP measure, represents total common equity less goodwill and intangibles divided by total loans less the allowance for loan loss (period end) Tangible Common Equity per Share , a non-GAAP measure, represents total common equity less goodwill and intangibles divided by ending common shares outstanding Tangible Common Equity/Tangible Assets , a non-GAAP measure, represents total common equity less goodwill and intangibles divided by total assets less goodwill and intangibles
Total Volume represents the transaction dollar volume from the PULSE network, Network Partners, Diners Club and proprietary Discover Network Undrawn Credit Facilities represents asset-backed conduit funding facilities and Federal Reserve discount window (excluding investments pledged to the Federal Reserve, which are included within the liquidity investment portfolio)
DISCOVER FINANCIAL SERVICESRECONCILIATION OF GAAP TO NON-GAAP DATA(unaudited, in millions) Quarter Ended
Mar 31, 2018 Dec 31, 2017 Sep 30, 2017 Jun 30, 2017 Mar 31, 2017
GAAP Total Common Equity $10,308 $10,329 $10,627 $10,699 $10,705
Less: Goodwill (255) (255) (255) (255) (255)
Less: Intangibles (162) (163) (163) (164) (165)
Tangible Common Equity 1 $9,891 $9,911 $10,209 $10,280 $10,285
Common Equity Tier 1 Capital (Basel III Transition) $10,081 $10,114 $10,419 $10,492 $10,501
Adjustments Related To Capital Components During Transition 2 (27) (27) (25) (25) (26)
Common Equity Tier 1 Capital (Basel III Fully Phased-in) $10,054 $10,087 $10,394 $10,467 $10,475
Common Equity Tier 1 Capital Ratio (Basel III Transition) 11.9% 11.6% 12.5% 13.0% 13.4%
Common Equity Tier 1 Capital Ratio (Basel III Fully Phased-in) 3 11.8% 11.6% 12.5% 13.0% 13.4%
GAAP Book Value Per Share $30.93 $30.43 $30.56 $30.01 $29.46
Less: Goodwill (0.72) (0.72) (0.69) (0.68) (0.67)
Less: Intangibles (0.46) (0.45) (0.45) (0.44) (0.43)
Less: Preferred Stock (1.60) (1.57) (1.53) (1.49) (1.46)
Tangible Common Equity Per Share $28.15 $27.69 $27.89 $27.40 $26.90
1 Tangible Common Equity ("TCE"), a non-GAAP financial measure, represents common equity less goodwill and intangibles. A reconciliation of TCE to common equity, a GAAP financialmeasure, is shown above. Other financial services companies may also use TCE and definitions may vary, so users of this information are advised to exercise caution in comparing TCE ofdifferent companies. TCE is included because management believes that common equity excluding goodwill and intangibles is a more meaningful measure to investors of the true net assetvalue of the Company
2 Adjustments related to capital components for fully phased-in Basel III include the phase-in of the intangible asset exclusion 3 Common Equity Tier 1 Capital Ratio (Basel III Fully Phased-in) is calculated using Common Equity Tier 1 Capital (Basel III Fully Phased-in), a non-GAAP measure, divided by RiskWeighted Assets (Basel III Fully Phased-in)
Note: See Glossary of Financial Terms for definitions of financial terms
1Q18 Financial Results April 26, 2018 ©2018 DISCOVER FINANCIAL SERVICES Exhibit 99.3
The following slides are part of a presentation by Discover Financial Services (the "Company") in connection with reporting quarterly financial results and are intended to be viewed as part of that presentation. No representation is made that the information in these slides is complete. For additional financial, statistical, and business related information, as well as information regarding business and segment trends, see the earnings release and financial supplement included as exhibits to the Company’s Current Report on Form 8-K filed today and available on the Company’s website (www.discover.com) and the SEC’s website (www.sec.gov). The information provided herein includes certain non-GAAP financial measures. The reconciliations of such measures to the comparable GAAP figures are included at the end of this presentation, which is available on the Company’s website and the SEC’s website. The presentation contains forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which they are made, which reflect management’s estimates, projections, expectations or beliefs at that time, and which are subject to risks and uncertainties that may cause actual results to differ materially. For a discussion of certain risks and uncertainties that may affect the future results of the Company, please see "Special Note Regarding Forward-Looking Statements," "Risk Factors," "Business – Competition," "Business – Supervision and Regulation" and "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, which is filed with the SEC and available at the SEC's website (www.sec.gov). The Company does not undertake to update or revise forward-looking statements as more information becomes available. Notice 2
• Net income of $666MM, diluted EPS of $1.82 and 25% return on equity • Credit normalization continued as a result of secular growth of consumer credit as well as our organic growth; credit environment remains constructive • Total loan growth of 9% led by a 10% gain in credit card loans • Continued to drive positive operating leverage led by 10% revenue growth, while investing for growth and new capabilities • Payment Services network volume continues to show strong growth (up 19%) • Returned $684MM of capital through dividends and share repurchases 1Q18 Highlights(1) 3 Note(s) (1) All comparisons stated on a year-over-year basis
Note(s) 1. Pre-tax, pre-provision income, which is derived by adding provision for loan losses to pre-tax income, is a non-GAAP financial measure which should be viewed in addition to, and not as a substitute for, the Company’s reported results. Management believes this information helps investors understand the effect of provision for loan losses on reported results and provides an alternate presentation of the Company’s performance; see appendix for a reconciliation • Diluted EPS of $1.82, up 27% • Revenue net of interest expense of $2.6Bn, up 10%, driven by higher net interest income • Provision for loan losses increased $165MM (28%) on higher net charge-offs and a larger reserve build • Expenses rose 9%, primarily driven by investments to support growth and new capabilities • Income tax expense includes $15MM of non-recurring benefits, primarily related to resolution of certain tax matters 1Q18 Summary Financial Results B / (W) ($MM, except per share data) 1Q18 1Q17 $ Δ % Δ Revenue Net of Interest Expense $2,575 $2,339 $236 10% Net Principal Charge-off 635 489 (146) (30%) Reserve Change build/(release) 116 97 (19) (20%) Provision for Loan Losses 751 586 (165) (28%) Operating Expense 968 885 (83) (9%) Direct Banking 811 824 (13) (2%) Payment Services 45 44 1 2% Total Pre-Tax Income 856 868 (12) (1%) Income Tax Expense 190 304 114 38% Net Income $666 $564 $102 18% ROE 25% 20% Diluted EPS $1.82 $1.43 $0.39 27% Pre-Tax, Pre-Provision Income (1) $1,607 $1,454 $153 11% 4 Highlights
Payment Services 1Q17 1Q18 $75.9 $59.8 $9.1 $6.7 $82.7 $65.6 $9.4 $7.3 +9% +10% +3% +10% Note(s) 1. Volume is derived from data provided by licensees for Diners Club branded cards issued outside of North America and is subject to subsequent revision or amendment Total Network Volume up 15% YOY 1Q17 1Q18 $29.9 $36.1 $7.4 $3.7 $32.4 $43.2 $8.4 $4.6 Total Card Student Personal +8% +20% +14% +24% Proprietary PULSE Network PartnersDiners (1) 1Q18 Loan and Volume Growth 5 Ending Loans ($Bn) Volume ($Bn)
Highlights Note(s) 1. Rewards cost divided by Discover card sales volume • Loan growth and margin expansion drove 11% increase in net interest income • Net discount and interchange revenue increased $21MM driven by a 6% increase in card sales volume • Rewards rate increased 2 bps YOY due to mix shift towards the Discover it® product 1Q18 Revenue Detail B / (W) ($MM) 1Q18 1Q17 $ Δ % Δ Interest Income $2,569 $2,278 $291 13% Interest Expense 469 386 (83) (22%) Net Interest Income 2,100 1,892 208 11% Discount/Interchange Revenue 646 596 50 8% Rewards Cost 392 363 (29) (8%) Net Discount/Interchange Revenue 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 Non-Interest Income 475 447 28 6% Revenue Net of Interest Expense $2,575 $2,339 $236 10% Direct Banking $2,494 $2,267 $227 10% Payment Services 81 72 9 13% Revenue Net of Interest Expense $2,575 $2,339 $236 10% Change ($MM) 1Q18 1Q17 QOQ YOY Discover Card Sales Volume $30,850 $29,134 (13%) 6% Rewards Rate (1) 1.27% 1.25% 4 bps 2 bps 6
Highlights • Net interest margin on loans increased 16 bps on higher loan yields, partially offset by higher funding costs • Credit card yield increased 20 bps as increases in the prime rate were partially offset by portfolio mix and higher interest charge-offs • Average consumer deposits grew 10% and composed 47% of total average funding • Funding costs on interest-bearing liabilities increased 24 bps, driven by higher market rates partially offset by maturities of higher-cost debt and favorable shifts in funding mix 1Q18 Net Interest Margin 1Q18 1Q17 ($MM) Average Balance Rate Average Balance Rate Credit Card $65,983 12.85% $60,122 12.65% Private Student 9,432 7.89% 9,197 7.29% Personal 7,387 12.43% 6,582 12.18% Other 452 5.98% 284 5.39% Total Loans 83,254 12.21% 76,185 11.94% Other Interest-Earning Assets 15,879 1.58% 16,243 0.89% Total Interest-Earning Assets $99,133 10.51% $92,428 9.99% Direct to Consumer and Affinity $39,825 1.59% $36,316 1.25% Brokered Deposits and Other 19,638 2.19% 16,242 1.98% Interest Bearing Deposits 59,463 1.79% 52,558 1.48% Borrowings 26,126 3.21% 26,561 2.97% Total Interest-Bearing Liabilities $85,589 2.22% $79,119 1.98% Change (%) 1Q18 QOQ YOY Total Interest Yield 12.21% 7bps 27bps NIM on Loans 10.23% -5bps 16bps NIM on Interest-Earning Assets 8.59% -5bps 29bps 7
Highlights Note(s) 1. Defined as reported total operating expense divided by revenue net of interest expense • Employee compensation and benefits up 12%, primarily on higher staffing levels, as well as higher average salaries • Marketing up 10% as a result of higher account acquisition costs and brand advertising • Other expense up 13% primarily due to incremental investment in philanthropic initiatives • Operating efficiency improved 30 bps on strong revenue growth with disciplined expense growth 1Q18 Operating Expense Detail B / (W) ($MM) 1Q18 1Q17 $ Δ % Δ Employee Compensation and Benefits $405 $363 ($42) (12%) Marketing and Business Development 185 168 (17) (10%) Information Processing & 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 Operating Expense $968 $885 ($83) (9%) Direct Banking 932 849 ($83) (10%) Payment Services 36 36 0 —% Total Operating Expense $968 $885 ($83) (9%) Operating Efficiency(1) 37.6% 37.9% 30 bps 8
Total Company Loans Credit Card Loans Private Student Loans Personal Loans NCO rate (%) 30+ day DQ rate ex-PCI (%) 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2.02 2.11 2.18 2.02 2.31 2.60 2.71 2.63 2.85 3.09 1.67 1.64 1.60 1.79 1.97 1.97 1.93 2.05 2.20 2.23 NCO rate (%) 30+ day DQ rate (%) 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2.18 2.34 2.39 2.17 2.47 2.84 2.94 2.80 3.03 3.32 1.72 1.68 1.63 1.87 2.04 2.06 2.00 2.14 2.28 2.33 NCO rate (%) 30+ day DQ rate (%) 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2.28 2.45 2.38 2.63 2.70 3.16 3.18 3.19 3.62 4.03 0.89 0.97 1.02 0.98 1.12 1.12 1.14 1.27 1.40 1.37 NCO rate (%) 30+ day DQ rate ex-PCI (%) 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 0.82 0.56 0.74 0.70 1.00 0.60 0.85 1.14 1.03 0.92 1.91 1.92 1.88 1.87 2.22 2.04 2.12 2.14 2.35 2.25 Credit Performance Trends 9
1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 95 94 99 99 104 108 109 123 120 14.3 14.3 13.9 13.2 13.4 13.0 12.5 11.6 11.9 Capital Trends Note(s) 1. Common Equity Tier 1 Capital Ratio (Basel III Transition) 2. Payout Ratio is displayed on a trailing twelve month basis. This represents the trailing twelve months’ Capital Return to Common Stockholders divided by the trailing twelve months’ Net Income Allocated to Common Stockholders Common Equity Tier 1 (CET1) Capital Ratio(1) (%) Payout Ratio(2) (%) 10
• Total loans grew 9% ($6.9Bn) YOY with strong contributions from all primary lending products • Credit card loans grew 10% ($5.8Bn) YOY as sales volume increased 6% • Average consumer deposits grew 10% ($3.5Bn) YOY, while deposit rates increased 34 bps 1Q18 Financial Summary 11 • Total NCO rate of 3.09%, up 49 bps YOY • Driven by supply- induced credit normalization and loan seasoning • Capital plan execution • Repurchased 7.5MM shares of common stock for $584MM • CET1 capital ratio(1) of 11.9% down 150 bps YOY • Net income of $666MM and diluted EPS of $1.82 • Revenue growth of 10% on higher net interest income • NIM of 10.23%, up 16 bps YOY • Efficiency ratio improved 30 bps YOY to 38% • Strong return on equity at 25% Note(s) 1. Basel III Transition Balance Sheet Credit and Capital Profitability
Note(s) 1. Pre-tax, pre-provision income, which is derived by adding provision for loan losses to pre-tax income, is a non-GAAP financial measure which should be viewed in addition to, and not as a substitute for, the Company's reported results. Management believes this information helps investors understand the effect of provision for loan losses on reported results and provides an alternate presentation of the Company's performance Appendix Reconciliation of GAAP to Non-GAAP Data (unaudited, $MM) 1Q18 1Q17 Provision for loan losses $751 $586 Income before income taxes 856 868 Pre-tax, pre-provision income(1) $1,607 $1,454 12
