Discover 2013 Annual Report Download

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2013 ANNUAL REPORT
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Table of contents

  • Page 1
    THE E F U T U RE I S H E RE 2013 ANNUAL REPORT

  • Page 2
    ...major credit card with cash rewards, no ann annual fee and 24/7 customer service, to the launch of our new Cashback Checking pro product, to forging powerful alliances across the payments industry and around the world, Disc Discover is shaping the future each and eve every day. Alo Along the way, we...

  • Page 3
    ... payments partner DIRECT BANKING Discover is one of the largest direct banks in the United States, offering a broad array of products, including credit cards, personal loans, student loans, deposit products, home loans and home equity loans. The Discover brand is known for rewards, service and value...

  • Page 4
    David Nelms Chairman and Chief Executive Officer To Our Shareholders The future is here-in more ways than one. The dynamics of the retail banking and payments industries are rapidly evolving. The future is being shaped by new technology, changes in consumer behavior, the economy and regulation. ...

  • Page 5
    ... share • Return on equity of 24% • Year-over-year loan growth of 5% • Record low charge-off rate • Network volume of $310 billion, including $110 billion from Discover card "Discover is seizing opportunities through a relentless focus on being the leading direct bank and payments partner...

  • Page 6
    ... $12.6 45.2 97 103 111 117 123 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 Diners Club International PULSE Discover Network Personal Student /Other* Credit card** *Includes other consumer loans and loans held for sale **2009 Non-GAAP, as-adjusted

  • Page 7
    ... banks have eliminated free checking and added fees. In contrast, our Cashback Checking product comes with valuable features like no monthly fees or minimum balance, plus 10 cents in Cashback Bonus when a customer writes a check, pays a bill online or uses a Discover debit card to make a purchase...

  • Page 8
    ... as home values increase, and we expect corresponding growth in demand for home equity loans. To serve that need, we offer a closed-end, fixed-rate product, positioned to help consumers leverage their home equity to achieve their financial goals. Overall, I firmly believe that direct banking is...

  • Page 9
    ...superior customer service and strong credit risk management capabilities. Our loyal customer base is the foundation for growing credit card market share and for cross-selling additional direct banking products. We have also been rapidly establishing new alliances in our global payments business. Our...

  • Page 10
    ... we are partnering with other companies inside and outside the financial services industry and other networks around the world to further leverage our global credit and debit networks. Our priorities for 2014 are to achieve growth in Discover card loans, other direct consumer banking products, and...

  • Page 11
    ... 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the calendar year ended December 31, 2013 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 001-33378 DISCOVER FINANCIAL SERVICES (Exact name of...

  • Page 12
    ...179 Principal Accounting Fees and Services ...179 Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities ...49 Selected Financial Data ...51 Management's Discussion and Analysis of Financial Condition and Results of Operations ...Quantitative and...

  • Page 13
    ... private student loans, personal loans, home loans, home equity loans, prepaid cards and other consumer lending and deposit products. Our Payment Services segment includes PULSE, Diners Club and our network partners business, which includes credit, debit and prepaid cards issued on the Discover...

  • Page 14
    ...financial information relating to our business and our operating segments, see Note 23: Segment Disclosures to our consolidated financial statements. Direct Banking Set forth below are descriptions of our credit cards, student loans, personal loans, home loans, home equity loans and deposit products...

  • Page 15
    ... a graduation reward. Students may redeem their graduation reward as a credit to the balance of any of their Discover student loans or as a direct deposit to a bank account. Personal Loans Our personal loans are unsecured loans with fixed interest rates, terms and payments. These loans are primarily...

  • Page 16
    ...to market the Diners Club brands to existing and new merchants. As we continue to work toward achieving full card acceptance across our networks, Discover customers are using their cards at an increasing number of merchant and ATM locations that accept Diners Club cards around the world. Diners Club...

  • Page 17
    .... The credit card, student loan, personal loan, home loan, home equity loan and deposit products issued through our Direct Banking segment require significant consumer portfolio investments in risk management, marketing, customer service and related technology, whereas the operation of our Payment...

  • Page 18
    ...customer's application for one of our unsecured lending and home equity products, we assign a specific annual percentage rate ("APR") using an analytical pricing strategy that provides competitive pricing for customers and seeks to maximize revenue on a risk-adjusted basis. For our credit card loans...

  • Page 19
    ... card products that allow them to earn their rewards based on how they want to use credit, as set forth below Discover it card offers 5% Cashback Bonus in categories that change throughout the year up to a quarterly maximum (signing up is required) and 1% Cashback Bonus on all other purchases...

  • Page 20
    ...-known online merchants using their Discover card. • • • Our student loan, personal loan, home equity and deposit product customers can utilize our online account services to manage their accounts, and to use interactive tools and calculators. For the home loan origination process, we have...

  • Page 21
    ... by the due date on that statement. Neither cash advances nor balance transfers are subject to a grace period. Each customer with an outstanding debit balance on his or her Discover card account must generally make a minimum payment each month. If a customer exceeds his or her credit limit as of the...

  • Page 22
    ... market, generally within 30 days of funding. Home equity loans are fixed rate loans that carry a monthly payment over the term of the loan and are secured by a customer's home. The terms of the loan are set at closing. Customers are sent monthly statements 20 days in advance of the payment due date...

  • Page 23
    ...and credited to each account on a monthly basis for certificates of deposit, savings accounts and money market accounts, using the daily balance method and daily periodic rates. We do not pay interest on checking account balances, but instead offer cashback rewards for certain transactions. We offer...

  • Page 24
    ... consumer financial services providers and payment networks on the basis of a number of factors, including brand, reputation, customer service, product offerings, incentives, pricing and other terms. Our credit card business also competes on the basis of reward programs and merchant acceptance. We...

  • Page 25
    ... attract network partners to issue credit, debit and prepaid cards on the Discover, PULSE and Diners Club networks. We generally compete on the basis of customization of services and various pricing strategies, including incentives and rebates. We also compete on the basis of issuer fees, fees paid...

  • Page 26
    ... businesses and risk types. Independence We maintain independent risk and control functions including our corporate risk management, law and compliance, and internal audit departments. Our Chief Risk Officer, who leads our corporate risk management department, is appointed by our board of directors...

  • Page 27
    ...Management Committees (Discover Financial Services and Discover Bank), the Capital Planning Committee, the Counterparty Credit Committee, the Discover Bank Credit Committee, the New Initiatives Committee, the Operational Risk Committee, and the Compliance Committee. Chief Executive Officer Our Chief...

  • Page 28
    ... approving acceptance of and limits for counterparties that represent significant exposure to us. Market Risk Market risk is the risk to our financial condition resulting from adverse movements in market rates or prices, such as interest rates, foreign exchange rates, credit spreads or equity prices...

  • Page 29
    ... practices and workplace safety; customer, products and business practices; technology; physical asset and data security; processing; financial and reporting; and external provider. Operational risk exposures are managed through a combination of business line management and enterprisewide oversight...

  • Page 30
    ... We operate two banking subsidiaries, each of which is in the United States. Discover Bank, our main banking subsidiary, offers credit card loans, student loans, personal loans and home equity loans as well as certificates of deposit, savings and checking accounts and other types of deposit accounts...

  • Page 31
    ... our businesses. For more information regarding the Reform Act, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Regulatory Environment and Developments" and "Risk Factors." Capital, Dividends and Share Repurchases We, Discover Bank and Bank of New Castle...

  • Page 32
    ... and depend on payments from our subsidiaries," "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Capital" and Note 18: Capital Adequacy to our consolidated financial statements. FDIA The Federal Deposit Insurance Act (the...

  • Page 33
    ... marketing, underwriting, pricing and billing. The CARD Act's restrictions on our ability to increase interest rates on existing balances to respond to market conditions and credit risk ultimately limit our ability to extend credit to new customers and provide additional credit to current customers...

  • Page 34
    ... in countries in which our networks operate or our cards are used, either directly or indirectly through regulation affecting Diners Club network licensees. Changes in existing federal, state or international regulation could increase the cost or risk of providing network services, change the...

  • Page 35
    ...Senior Vice President, Chief Risk Officer Executive Vice President, President - Consumer Banking Executive Vice President, President - Payment Services Executive Vice President, Chief Credit and Card Operations Officer Senior Vice President, Chief Human Resources Officer Senior Vice President, Chief...

  • Page 36
    ... Cardmember Services and Consumer Banking from September 2006 through March 2010, and Executive Vice President, and Chief Risk Officer for Cardmember Services and Risk Management from January 2001 through August 2006. Prior to joining us, Mr. Minetti worked in card operations and risk management for...

  • Page 37
    ..., he served as Executive Vice President, Card Programs and Chief Marketing Officer since December 2008 and Executive Vice President, Discover Network since December 2003. From 2000 to 2003, Mr. Talwar was Managing Director for our international business. Mr. Talwar held a number of positions at...

  • Page 38
    ... Protection Bureau (the "CFPB"), and new requirements for debit card transactions, which impact our core businesses and are described in other risk factors below related to consumer financial services, payment services, risk management practices, and capital and liquidity. Additional legislative or...

  • Page 39
    ...of our other products, including credit cards, student loans and home loans, are areas of focus by the CFPB. The CFPB is currently investigating certain student loan servicing practices of Discover Bank. See Note 20: Litigation and Regulatory Matters to our consolidated financial statements for more...

  • Page 40
    ... impacting PULSE transaction volume growth. Strategic Business Risk We face competition in the credit card market from other consumer financial services providers, and we may not be able to compete effectively, which could result in fewer customers and lower account balances and could materially...

  • Page 41
    ... other payment networks to attract network partners to issue credit and debit cards and other card products on the Discover, PULSE and Diners Club networks. Competition with other operators of payment networks is generally based on issuer fees, fees paid to networks (including switch fees), merchant...

  • Page 42
    ... allow Discover customers to use their cards at merchant and ATM locations that accept Diners Club cards around the world and would allow Diners Club customers to use their cards on the Discover Network in North America and on the PULSE network both domestically and internationally. The Diners Club...

  • Page 43
    ... billion at December 31, 2013. The long-term success of our student loan strategy depends upon our ability to manage the credit risk, pricing, funding, operations and expenses of a larger student loan portfolio, as well as grow student loan originations. Our student loan strategy is also impacted by...

  • Page 44
    ... the financial results and prospects for our mortgage business. For example, recent regulatory changes capping points and fees on certain types of mortgages may reduce our origination volume. The long-term success of our mortgage business depends upon our ability to manage our expenses and risks. If...

  • Page 45
    ... materially adversely affect our business, profitability and financial condition. Our success depends on our ability to manage our credit risk while attracting new customers with profitable usage patterns. We select our customers, manage their accounts and establish terms and credit limits using...

  • Page 46
    ... could materially adversely impact our business operations and overall financial condition. We must effectively manage the liquidity risk to which we are exposed. We require liquidity in order to meet cash requirements such as day-to-day operating expenses, extensions of credit on our consumer loans...

  • Page 47
    ... could impact the pricing and/or volume of our asset-backed securities issuances. A prolonged inability to securitize our credit card receivables, or an increase in the costs of such issuances, may have a material adverse effect on our liquidity, cost of funds and overall financial condition. -37-

  • Page 48
    ...could materially adversely affect our cost of funds, access to capital and funding, and overall financial condition. There can be no assurance that we will be able to maintain our current credit ratings or that our credit ratings will not be lowered or withdrawn. We may not be successful in managing...

  • Page 49
    ... of operations or financial condition. For information related to interest rate risk sensitivities, see "Quantitative and Qualitative Disclosures About Market Risk." We may be limited in our ability to pay dividends on and repurchase our stock. In the 2013 calendar year, we increased our quarterly...

  • Page 50
    ... to increasingly more risk related to security systems as we increase acceptance of the Discover card internationally, expand our suite of online direct banking products, enhance our mobile payment technologies, acquire new or outsource some of our business operations, and expand our internal usage...

  • Page 51
    ... revenue. Our transaction volume is concentrated among large merchants, and a reduction in the number of, or rates paid by, large merchants that accept cards on the Discover Network or PULSE network could materially adversely affect our business, financial condition, results of operations and cash...

  • Page 52
    ... for the financial services industry in general. Additionally, our risk of fraud continues to increase as acceptance of the Discover card grows internationally and we expand our direct banking business. Our financial condition, the level of our fraud charge-offs and other results of operations could...

  • Page 53
    ...financial condition, cash flows and results of operations. As an issuer and merchant acquirer in the United States on the Discover Network, and as a holder of certain merchant agreements internationally for the Diners Club network, we may be contingently liable for certain disputed credit card sales...

  • Page 54
    ... of our company and brands. Our brands are licensed for use to business partners and network participants, some of whom have contractual obligations to promote and develop our brands. For example, the Discover card brand is now being issued by certain Diners Club licensees in their local markets. If...

  • Page 55
    ... related to identity theft, privacy, data security and marketing that could have a direct effect on us and our merchant and financial institution customers. Internationally, we are subject to government regulation in countries in which our networks operate or our cards are used, either directly...

  • Page 56
    Current and proposed regulation addressing consumer privacy and data use and security could inhibit the number of payment cards issued and increase our costs. Regulatory pronouncements relating to consumer privacy, data use and security affect our business. In the United States, we are subject to a ...

  • Page 57
    ... receive payments from our subsidiaries; fraudulent activities or material security breaches of key systems; our ability to increase or sustain Discover card usage or attract new customers; our ability to maintain relationships with merchants; the effect of political, economic and market conditions...

  • Page 58
    ...Home Loans offices and a Student Loan Corporation office. The call centers, processing center and Student Loan Corporation offices largely support our Direct Banking segment; the PULSE headquarters is used by our Payment Services segment; the Discover Home Loans offices support our mortgage business...

  • Page 59
    Part II. | Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Common Stock Market Prices and Dividends Our common stock is traded on the New York Stock Exchange ("NYSE") (ticker symbol DFS). The approximate number of record holders ...

  • Page 60
    ...three months ended December 31, 2013: Total Number of Shares Purchased Total Number of Shares Purchased as Part of Publicly Announced Plan or Program(1) Maximum Dollar Value of Shares that may yet be purchased under the Plans or Programs(1) Period Average Price Paid Per Share October 1 - 31, 2013...

  • Page 61
    ... Company changed fiscal years creating a one month transition period in December 2012. Item 6. Selected Financial Data The following table presents our selected financial data and operating statistics. The statement of income data for the calendar year ended December 31, 2013, fiscal years ended...

  • Page 62
    ... of Financial Condition Data (as of): Loan receivables(3) ...$ Total assets ...$ Total stockholders' equity ...$ Allowance for loan losses ...$ Long-term borrowings ...$ Per Share of Common Stock: Basic EPS from continuing operations ...$ Diluted EPS from continuing operations ...$ Weighted average...

  • Page 63
    ... numbers are useful to investors and for a reconciliation of these numbers, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Reconciliations of GAAP to Non-GAAP As-Adjusted Data." For the Calendar Year Ended December 31, 2013 For the One Month Ended...

  • Page 64
    ... Diners Club International ("Diners Club"). The Discover Network is a payment card transaction processing network for Discover-branded credit cards and credit, debit and prepaid cards issued by third parties, which we refer to as network partners. PULSE operates an electronic funds transfer network...

  • Page 65
    ... with the financial information used in management's decision-making process and in evaluating the business. The non-GAAP as-adjusted amounts related to Statement No. 167 show how our financial data would have been presented if the trusts used in our securitization activities were consolidated into...

  • Page 66
    Loan Receivables Data and Reconciliation (dollars in millions) As of and for the Fiscal Year Ended November 30, 2009 Total Loan Receivables Loan portfolio GAAP ...$ Adjustments for Statement No. 167 ...Non-GAAP As-Adjusted ...$ Loan...GAAP As-Adjusted ...$ Allowance for loan losses (end of period) GAAP...

  • Page 67
    ...Non-GAAP As-Adjusted ...Delinquency rate (Loans not accruing interest) GAAP ...Adjustments for Statement No. 167 ...Non-GAAP As-Adjusted ...Discover Card Total Discover Card Loans GAAP ...$ Adjustments for Statement No. 167 ...Non-GAAP As-Adjusted ...$ Total Credit Card Loans Loan receivables GAAP...

  • Page 68
    ...of and for the Fiscal Year Ended November 30, 2009 Total Credit Card Loans (continued) Allowance for loan losses (beginning of period...0.08 5.60% 2.92% 0.02 2.94% 73 145 218 Delinquency Rate (Restructured Loans) GAAP ...Adjustments for Statement No. 167 ...Non-GAAP As-Adjusted ... 0.31% 0.15 0.46%...

  • Page 69
    ...) For the Fiscal Year Ended November 30, 2009 Total average loan receivables GAAP ...$ Adjustments for Statement No. 167 ...Non-GAAP As-Adjusted ...$ Total loans interest yield GAAP ...Adjustments for Statement No. 167 ...Non-GAAP As-Adjusted ...Total average credit card loan receivables GAAP...

  • Page 70
    ... 41 basis points to 2.21% in comparison to the fiscal year ended November 30, 2012. Our capital market activities included issuances of approximately $4.7 billion in public credit card assetbacked securities. Discover Bank issued $1.7 billion in senior bank notes. Payment Services pretax income was...

  • Page 71
    ... us to limit or change our business practices, limit our product offerings, require continued investment of management time and resources in compliance efforts, limit fees we can charge for services, require us to meet more stringent capital, liquidity and leverage ratio requirements, increase costs...

  • Page 72
    ...has resulted in an increase in supervisory examinations of the company related to student loans. The CFPB is currently investigating certain student loan servicing practices of Discover Bank. See Note 20: Litigation and Regulatory Matters to our consolidated financial statements for more information...

  • Page 73
    ... our business and financial results, are uncertain at this time. Payment Networks The Reform Act contains several provisions impacting the debit card market. The changing debit card environment, including competitor actions related to merchant and acquirer pricing and transaction routing strategies...

  • Page 74
    .... Changes in the debit card market resulting from this matter could affect PULSE's business practices, transaction volume, revenue, and prospects for future growth. We continue to face competitive challenges from the new merchant and acquirer pricing and transaction routing strategies implemented...

  • Page 75
    ...impact our return on equity, financial condition, operations, capital position and ability to pursue business opportunities. Stress Test Requirements In October 2012, the Federal Reserve issued final rules implementing the stress test requirements under the Reform Act for bank holding companies with...

  • Page 76
    ... bank holding companies and foreign banking organizations to help increase the resiliency of their operations. For U.S. bank holding companies (BHCs) with total consolidated assets of $50 billion or more, such as Discover, it incorporates as an enhanced prudential standard previously issued capital...

  • Page 77
    ... Discover-branded credit cards issued to individuals and small businesses and other consumer products and services, including private student loans, personal loans, home loans, home equity loans, prepaid cards and other consumer lending and deposit products. The majority of Direct Banking revenues...

  • Page 78
    ... 2013 Direct Banking Interest income Credit card ...$ Private student loans ...PCI student loans ...Personal loans ...Other ...Total interest income ...Interest expense ...Net interest income ...Provision for loan losses ...Other income ...Other expense ...Income before income tax expense ...Payment...

  • Page 79
    ...income increased during the calendar year ended December 31, 2013 as compared to the fiscal year ended November 30, 2012 primarily due to higher average balances of credit card loans, personal loans and private student loans resulting from growth across these products combined with lower credit card...

  • Page 80
    ...the number of existing customers using their Discover card. Net interest margin increased for the fiscal year ended November 30, 2012 as compared to the same period in 2011. This was driven by improved funding rates on our deposit products, partially offset by lower yields on credit cards and growth...

  • Page 81
    ... interest rates. In addition, marketing and business development expenses increased due to growth initiatives. Finally, the increase in other expense was driven by higher incentive payments related to merchant global acceptance. Payment Services For the Calendar Year Ended December 31, 2013 compared...

  • Page 82
    ... point-of-sale volume. The number of transactions on the PULSE network increased by 13% for the fiscal year ended November 30, 2012, as compared to the same period in 2011. Critical Accounting Estimates In preparing our consolidated financial statements in conformity with GAAP, management must make...

  • Page 83
    ... revenue. See "- Other Income" and Note 2: Summary of Significant Accounting Policies to our consolidated financial statements for further details about customer rewards cost. Goodwill We recognize goodwill when the purchase price of an acquired business exceeds the total of the fair values...

  • Page 84
    ...our consolidated financial condition and results of operations can be significant. See Note 16: Income Taxes to our consolidated financial statements for additional information about income taxes. Purchased Credit-Impaired Loans The estimate of expected future cash flows on purchased credit-impaired...

  • Page 85
    ...rate balances, partially offset by growth in customers with revolving balances. Interest income increased during the calendar year ended December 31, 2013 as compared to the fiscal year ended November 30, 2012 primarily due to higher interest income from credit card loans, personal loans and private...

  • Page 86
    ... due to improved funding rates on our deposit products, partially offset by lower yields on credit cards and growth in private student loans, which have lower yields as compared to other products. Interest income increased during the fiscal year ended November 30, 2012, as compared to the same...

  • Page 87
    ... Year Ended December 31, 2013 Average Balance Assets Interest-earning assets: Cash and cash equivalents ...$ 5,557 Restricted cash ...Other short-term investments ...Investment securities ...Loan receivables(1): Credit card(2)(3) ...Personal loans ...Federal student loans(4) ...Private student loans...

  • Page 88
    ... Volume Increase/(decrease) in net interest income due to changes in: Interest-earning assets: Cash and cash equivalents ...$ Restricted cash ...Other short-term investments ...Investment securities ...Loan receivables: Credit card ...Personal loans ...Federal student loans ...Private student loans...

  • Page 89
    ... other loan product. See reconciliation in "- Reconciliations of GAAP to Non-GAAP As-Adjusted Data." Represents purchased credit-impaired private student loans (see Note 5: Loan Receivables to our consolidated financial statements). Provision and Allowance for Loan Losses Provision for loan losses...

  • Page 90
    ... charges on a small number of loans to Diners Club licensees. At November 30, 2012, the allowance related to personal loans and private student loans increased $15 million and $20 million as compared to November 30, 2011, respectively. These increases were attributable to growth in the respective...

  • Page 91
    ... changes in our allowance for loan losses for the periods presented (dollars in millions): For the Calendar Year Ended December 31, 2013 Credit Card Balance at beginning of period ...$ Additions: Provision for loan losses ...Deductions: Charge-offs ...Recoveries ...Net charge-offs ...Balance at end...

  • Page 92
    ...Personal Loans 52 Student Loans $ 4 $ Other 1 $ Total 2,754 (1) (2) On December 1, 2009, upon adoption of the Financial Accounting Standards Board ("FASB") Statements No. 166 and 167, we recorded $2.1 billion allowance for loan losses related to newly consolidated and reclassified credit card loan...

  • Page 93
    .... See Note 5: Loan Receivables to our consolidated financial statements for more information regarding the accounting for charge-offs on PCI loans. The net charge-off rate on our credit card loan receivables decreased 41 basis points for the calendar year ended December 31, 2013 as compared to the...

  • Page 94
    ...Both credit card and personal loan receivables 30-day and 90-day delinquency rates at December 31, 2013 decreased slightly as compared to December 31, 2012 due to continuing favorable economic factors. The delinquency rates for private student loan balances at December 31, 2013 increased as compared...

  • Page 95
    ... statements related to these loans, see Note 5: Loan Receivables to our consolidated financial statements. For student loan borrowers, in certain situations we offer payment forbearance to borrowers who are experiencing temporary financial difficulties and are willing to resume making payments. When...

  • Page 96
    ...partners. We earn discount revenue from fees charged to merchants with whom we have entered into card acceptance agreements for processing credit card purchase transactions. We earn acquirer interchange revenue from merchant acquirers on all Discover Network card transactions and certain Diners Club...

  • Page 97
    ...of merchant rerouting and lower rates. Transaction processing revenue increased for the fiscal year ended November 30, 2012, as compared to the fiscal year ended November 30, 2011, primarily due to higher PULSE transaction volumes partially offset by increased business development costs and customer...

  • Page 98
    ... 31, 2013 as compared to the fiscal year ended November 30, 2012 primarily due to higher employee compensation costs driven by growth in overall headcount along with a full year of operating activity of the Home Loan Center assets. Additionally, marketing and business development costs increased due...

  • Page 99
    ... an additional source of funding. We access the assetbacked securitization market using the Discover Card Master Trust I ("DCMT") and the Discover Card Execution Note Trust ("DCENT"), through which we issue asset-backed securities both publicly and through private transactions. We retain significant...

  • Page 100
    ... when DCENT's three-month average excess spread rate decreases to below 4.50%, with increasing funding requirements as excess spread levels decline below preset levels to 0%. See Note 6: Credit Card and Student Loan Securitization Activities to our consolidated financial statements for additional...

  • Page 101
    ... of DFS, Discover Bank and the securitization trusts. Downgrades in these credit ratings could result in higher interest expense on our unsecured debt and asset securitizations, as well as potentially higher fees related to borrowings under our lines of credit. In addition to increased funding costs...

  • Page 102
    ... ... Discover Card Execution Note Trust Class A(1) ...Class B (1) ... Class C ... (1) (2) An "sf" in the rating denotes rating agency identification for structured finance product ratings. All Class C notes are currently held by subsidiaries of Discover Bank and, therefore, are not publicly rated...

  • Page 103
    ... quarter-end date, based on our projected future taxable income for that year; or (ii) 10% of the amount of our Tier 1 capital. At December 31, 2013, no portion of our deferred tax asset was disallowed for regulatory capital purposes. At December 31, 2013, Discover Financial Services and Discover...

  • Page 104
    ... require the guarantor to make payments to a guaranteed party based on another entity's failure to perform under an agreement. Our guarantees relate to transactions processed on the Discover Network and certain transactions processed by PULSE and Diners Club. See Note 19: Commitments, Contingencies...

  • Page 105
    ... course of business, we enter into various contractual obligations that may require future cash payments. Contractual obligations at December 31, 2013 included deposits, long-term borrowings, operating and capital lease obligations, interest payments on fixed rate debt, purchase obligations and...

  • Page 106
    ... and competitor responses to those changes may influence customer payment rates, loan balances or deposit account activity. We may face higher-cost alternative sources of funding as a result, which has the potential to decrease earnings. Our interest rate risk management policies are designed to...

  • Page 107
    ... Accounting Oversight Board (United States), the consolidated statement of financial condition, and related consolidated statements of income, comprehensive income, changes in stockholders' equity, and cash flows as of and for the year ended December 31, 2013 of the Company and our report dated...

  • Page 108
    ...comprehensive income, changes in stockholders' equity, and cash flows for the calendar year ended December 31, 2013, the fiscal years ended November 30, 2012 and 2011, and the one-month period ended December 31, 2012. These financial statements are the responsibility of the Company's management. Our...

  • Page 109
    Consolidated Statements of Financial Condition December 31, 2013 2012 (dollars in millions, except share amounts) Assets Cash and cash equivalents ...Restricted cash ...Investment securities: Available-for-sale (amortized cost of $4,900 and $6,031 at December 31, 2013 and December 31, 2012, ...

  • Page 110
    DISCOVER FINANCIAL SERVICES Consolidated Statements of Income For the Calendar Year Ended December 31, 2013 Interest income: Credit card loans ...$ Other loans ...Investment securities ...Other interest income ...Total interest income ...Interest expense: Deposits ...Short-term borrowings ...Long-...

  • Page 111
    ... $ 19 (4) (38) - (23) 2,322 $ 47 5 (21) - 31 2,258 $ (3) - 6 - 3 173 2,470 $ For the Fiscal Years Ended November 30, 2012 2,345 $ 2011 2,227 (dollars in millions) $ 170 For the One Month Ended December 31, 2012 DISCOVER FINANCIAL SERVICES See Notes to the Consolidated Financial Statements. -101-

  • Page 112
    ... Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Total Stockholders' Equity DISCOVER FINANCIAL SERVICES Retained Earnings Treasury Stock (dollars in millions, shares in thousands) Balance at November 30, 2010 .. Net income ...Other comprehensive income ...Purchases of...

  • Page 113
    ...long-term borrowings ...Repayment of long-term borrowings and bank notes ...Payment of contingent consideration for purchase of net assets of a business, at fair value...Premium paid on debt exchange ...Proceeds from issuance of common stock ...Purchases of treasury stock ...Net increase in deposits...

  • Page 114
    ... International ("Diners Club"). The Discover Network is a payment card transaction processing network for Discover branded credit cards and credit, debit and prepaid cards, issued by third parties, which the Company refers to as network partners. PULSE operates an electronic funds transfer network...

  • Page 115
    ... new accounting model, the new guidance will have no effect on the Company's financial condition, results of operations or cash flows. 2. Summary of Significant Accounting Policies Cash and Cash Equivalents Cash and cash equivalents is defined by the Company as cash on deposit with banks, including...

  • Page 116
    .... Credit card loan receivables are reported at their principal amounts outstanding and include uncollected billed interest and fees and are reduced for unearned revenue related to balance transfer fees (also see "- Loan Interest and Fee Income"). Other loans consist of student loans, personal loans...

  • Page 117
    ... segmenting the portfolio by loan product type. For its credit card loan receivables, the Company bases its allowance for loan loss on several analyses that help estimate incurred losses as of the balance sheet date. While the Company's estimation process includes historical data and analysis, there...

  • Page 118
    ... in delinquencies and bankruptcy filings, account collection management, policy changes, account seasoning, loan volume and amounts, payment rates and forecasting uncertainties. Similar to credit card loans, the Company estimates its allowance for personal and student loan losses on a pooled basis...

  • Page 119
    ... appropriate. The Company's nonamortizable intangible assets consist of the international transaction processing rights and brand-related intangibles included in the acquisition of Diners Club as well as the trade names acquired in The Student Loan Corporation acquisition. These assets are deemed to...

  • Page 120
    ...cash flows arising from changes in interest rates, or other types of forecasted transactions, and changes in foreign exchange rates. All derivatives are carried at their estimated fair values on the Company's consolidated statements of financial condition. Derivatives having positive net fair values...

  • Page 121
    ...assets, in the consolidated statements of financial condition. Interest related to purchased credit-impaired loans is discussed in Note 5: Loan Receivables. The Company recognizes fees (except annual fees, balance transfer fees and certain product fees) on loan receivables in interest income or loan...

  • Page 122
    ... liabilities on the consolidated statements of financial condition. Protection Products The Company earns revenue related to fees received for marketing products or services that are ancillary to the Company's credit card and personal loans, including payment protection products and identity theft...

  • Page 123
    ... market investors. These contingent liabilities were not assumed by the Company. During the second quarter of the 2013 calendar year, an additional $10 million of purchase price due on the first anniversary of the closing was paid as certain conditions were satisfied. Since the acquisition date...

  • Page 124
    ... Losses Fair Value (1) (2) (3) (4) Available-for-sale investment securities are reported at fair value. Held-to-maturity investment securities are reported at amortized cost. Amount represents securities pledged as collateral to a government-related merchant for which transaction settlement...

  • Page 125
    ... during the calendar year ended December 31, 2013. The Company recognized gains on sales of available-for-sale investment securities of $2 million, which were calculated using the specific identification method and were recorded entirely in earnings. There were no gains or losses related to other...

  • Page 126
    ...maturity investment securities ...$ Available-for-Sale-Fair Values(1) U.S. Treasury securities ...$ U.S. government agency securities ...Credit card asset-backed securities of other issuers ...Residential mortgage-backed securities - Agency ...Total available-for-sale investment securities ...$ Held...

  • Page 127
    ... within the statement of financial condition. The portion of each investment's operating results allocable to the Company is recorded in other expense within the consolidated statement of income. The Company earns a return primarily through the receipt of tax credits allocated to the affordable...

  • Page 128
    .... Discover Bank must purchase such loans from the trust before a claim may be filed. Credit Quality Indicators The Company regularly reviews its collection experience (including delinquencies and net charge-offs) in determining its allowance for loan losses. Credit card and closed-end consumer loan...

  • Page 129
    ... on customers' current balances and most recent interest rates. Consumer credit card loans that are 90 or more days delinquent and accruing interest include $41 million and $52 million of loans accounted for as troubled debt restructurings at December 31, 2013 and 2012, respectively. Personal loans...

  • Page 130
    ... which an account becomes 180 days contractually past due. Personal loans and private student loans, which are closed-end consumer loan receivables are generally charged off at the end of the month during which an account becomes 120 days contractually past due. Generally, customer bankruptcies and...

  • Page 131
    ... available for the Company's customers as a percentage of each class of loan receivables: Credit Risk Profile by FICO Score 660 and Above At December 31, 2013 Discover card ...Discover business card ...Personal loans ...Private student loans (excluding PCI)(1) ...At December 31, 2012 Discover card...

  • Page 132
    ... tables provide changes in the Company's allowance for loan losses for the calendar year ended December 31, 2013, one month period ended December 30, 2012 and fiscal years ended November 30, 2012 and 2011 (dollars in millions): For the Calendar Year Ended December 31, 2013 Credit Card Balance at...

  • Page 133
    ... tables provide changes in the Company's allowance for loan losses for the calendar year ended December 31, 2013, one month period ended December 30, 2012 and fiscal years ended November 30, 2012 and 2011 (dollars in millions): For the Fiscal Year Ended November 30, 2011 Credit Card Balance at...

  • Page 134
    ... to credit card and personal loan borrowers who are experiencing financial hardship. The internal loan modification programs include both temporary and permanent programs. For credit card customers, the temporary hardship program primarily consists of a reduced minimum payment and an interest rate...

  • Page 135
    ...present value of cash flows expected to be collected. Consistent with the Company's measurement of impairment of modified loans on a pooled basis, the discount rate used for credit card loans in internal programs is the average current annual percentage rate applied to non-impaired credit card loans...

  • Page 136
    ... with the terms of the modification or successful completion of a temporary modification program. Student loan customers who have been granted a forbearance are not given interest rate reductions. In order to evaluate the primary financial effects that resulted from credit card loans entering into...

  • Page 137
    ...31, 2013 Number of Accounts Troubled debt restructurings that subsequently defaulted: Credit card (1)(2): Internal programs ...External programs ...Personal loans (2) For the Fiscal Years Ended November 30, 2012 Number of Accounts Aggregated Outstanding Balances Upon Default Number of Accounts 2011...

  • Page 138
    .... Mortgage loans are funded through a warehouse line of credit and are recorded at fair value. Changes in the fair value of mortgage loans are recorded through other income prior to the sale of the loans to investors. The gain or loss on the sale of loans is recognized on the date the loans are sold...

  • Page 139
    ... of the initial unpaid principal balance of mortgage loans sold by type of loan for the calendar year ended December 31, 2013, fiscal year ended November 30, 2012 and one month ended December 31, 2012 (dollars in millions): For the Calendar Year Ended December 31, 2013 Amount Conforming (1) For the...

  • Page 140
    ...Credit Card and Student Loan Securitization Activities Credit Card Securitization Activities The Company accesses the term asset securitization market through the Discover Card Master Trust I ("DCMT") and the Discover Card Execution Note Trust ("DCENT"), which are trusts into which credit card loan...

  • Page 141
    ... of investments in DCMT certificates and DCENT notes held by subsidiaries of Discover Bank, constitute intercompany positions which are eliminated in the preparation of the Company's consolidated statements of financial condition. Upon transfer of credit card loan receivables to the trust, the...

  • Page 142
    ... is applicable only to the notes issued from DCENT, is a reserve account funding requirement in which excess cash flows generated by the transferred loan receivables are held at the trust. This funding requirement is triggered when DCENT's three-month average excess spread rate decreases to below...

  • Page 143
    ... in purchased credit-impaired loans, and the related debt issued by the trusts is reported in long-term borrowings. The assets of the Company's consolidated VIEs are restricted from being sold or pledged as collateral for other borrowings and the cash flows from these restricted assets may be used...

  • Page 144
    ...all of the operating and related assets and certain liabilities of Home Loan Center (see Note 3: Business Combinations), which was allocated to the Direct Banking segment. In 2013, a $2 million adjustment was recorded to reduce goodwill as a result of the finalization of purchase accounting for this...

  • Page 145
    ... of SLC, along with international transaction processing rights and trade name intangibles recognized in the acquisition of Diners Club in June 2008. During the fourth quarter of 2013, the Company changed the date of its annual impairment test for nonamortizable intangible assets from June 1 to...

  • Page 146
    ... of $100,000 to less than $250,000 (1) ... Certificates of deposit in amounts of $250,000 or greater ...Savings deposits, including money market deposit accounts ...Total interest-bearing deposits ...$ Average annual interest rate ... (1) $100,000 represents the basic insurance amount previously...

  • Page 147
    ... SLC Private Student Loan Trusts...Total long-term borrowings - owed to securitization investors ...Discover Financial Services (Parent Company) Fixed rate senior notes due 2017 Principal value ...Fair value adjustment(1) ...Book value ...Fixed rate senior notes due 2019 ...Fixed rate senior notes...

  • Page 148
    ... aggregate principal amount of 8.70% Subordinated Notes due 2019 issued by Discover Bank for the same aggregate principal amount of new 3.85% Senior Notes due 2022 issued by Discover Financial Services and a cash premium paid of $176 million. The exchange was accounted for as a debt modification and...

  • Page 149
    ...Compensation Plan may be authorized but unissued shares, treasury shares or shares that the Company acquires in the open market. Annual awards for eligible directors are calculated by dividing $125,000 by the fair market value of a share of stock on the date of grant and are subject to a restriction...

  • Page 150
    ... 31, 2013 Intrinsic value of RSUs converted to common stock ...$ Grant date fair value of RSUs vested ...$ Weighted average grant date fair value of RSUs granted ...$ 63 27 42.14 $ $ $ For the Fiscal Years Ended November 30, 2012 49 28 25.64 $ $ $ 2011 30 35 19.57 For the One Month Ended December 31...

  • Page 151
    ...Weighted Average Grant-Date Fair Value 21.74 - - - 21.74 38.89 - 29.20 26.93 $ 106 $ 51 Aggregate Intrinsic Value (in millions) (15,949) $ 1,897,867 $ The following table sets forth the activity related to unvested PSUs during the calendar year ended December 31, 2013 and one month ended December...

  • Page 152
    ...employees, with a weighted-average period of 1.2 years. Stock Option Activity Option awards are granted with an exercise price equal to the fair market value of one share of the Company's common stock at the date of grant; these types of awards expire ten years from the grant date and may be subject...

  • Page 153
    ... term equal to the expected life assumed at the date of grant. 12. Employee Benefit Plans The Company sponsors the Discover Financial Services Pension Plan (the "Discover Pension Plan"), which is a non-contributory defined benefit plan that is qualified under Section 401(a) of the Internal Revenue...

  • Page 154
    ... of the changes in the benefit obligation and fair value of plan assets as well as a summary of the Company's funded status (dollars in millions): Pension For the Calendar Year Ended December 31, 2013 Reconciliation of benefit obligation: Benefit obligation at beginning of year ...$ Service cost...

  • Page 155
    ... assessment of business and financial conditions, demographic and actuarial data, funding characteristics and related risk factors. Other relevant factors, including industry practices and long-term historical and prospective capital market returns were considered as well. The Discover Pension Plan...

  • Page 156
    ...the fair value hierarchy, see Note 21: Fair Value Measurements and Disclosures. (dollars in millions): December 31, 2013 Level 1 Assets Registered Investment Company Domestic small/mid cap equity fund ...$ Emerging markets equity fund ...Global low volatility equity fund ...International core equity...

  • Page 157
    ... for the calendar year ended December 31, 2013, fiscal years ended November 30, 2012 and 2011 and one month ended December 31, 2012 was $50 million, $42 million, $38 million and $3 million respectively. 13. Common and Preferred Stock Preferred Stock The Company has 575,000 shares of Fixed Rate Non...

  • Page 158
    ...(152) - 6 (146) 45 ... Balance at December 31, 2013 ...$ $ (101) $ (1) (2) (3) (4) (5) Represents the difference between the fair value and amortized cost of available-for-sale investment securities. Represents unrealized gains (losses) related to effective portion of cash flow hedges. Reflects...

  • Page 159
    ... in millions): For the Calendar Year Ended December 31, 2013 Before Tax Available-for-Sale Investment Securities: Net unrealized holding losses arising during the period ...$ Amounts reclassified from accumulated other comprehensive income ...Net change ...$ Cash Flow Hedges: Net unrealized gains...

  • Page 160
    ... service agreement revenue ...Gain from sales of merchant contracts ...Other income ...Total other income ...$ 68 44 6 - 51 169 Total other expense includes the following components (dollars in millions): For the Calendar Year Ended December 31, 2013 Postage ...$ Fraud losses ...Supplies ...Credit...

  • Page 161
    ... components of the Company's net deferred income taxes, which are included in other assets in the consolidated statements of financial condition, were as follows (dollars in millions): December 31, 2013 Deferred tax assets: Allowance for loan losses ...$ Customer fees and rewards ...Compensation and...

  • Page 162
    ... the fiscal year ended November 30, 2011 and increased by $2 million to $101 million for the one month ended December 31, 2012. The changes primarily relate to the revaluation of existing federal and state tax issues. The Company is subject to examination by the Internal Revenue Service ("IRS") and...

  • Page 163
    ... For the Calendar Year Ended December 31, 2013 Numerator: Net income ...$ Preferred stock dividends ...Net income available to common stockholders ...Income allocated to participating securities ...Net income allocated to common stockholders ...$ Denominator: Weighted average shares of common stock...

  • Page 164
    ... regulatory restrictions. Under the current banking regulations, a bank may not pay dividends if such a payment would leave the bank inadequately capitalized. In the calendar year ended December 31, 2013 and fiscal years ended November 30, 2012 and 2011, Discover Bank paid dividends of $1.6 billion...

  • Page 165
    ...customers for unused lines of credit on certain credit cards and certain other loan products, provided there is no violation of conditions in the related agreements. These commitments, substantially all of which the Company can terminate at any time and which do not necessarily represent future cash...

  • Page 166
    ... customers with these merchants. However, Diners Club retains a counterparty exposure if a licensee fails to meet its financial payment obligation to one of these merchants. ATM Guarantee. PULSE entered into contractual relationships with certain international ATM acquirers in which DFS Services...

  • Page 167
    ... product or service is not scheduled to be provided to the customer until a later date following the purchase, the likelihood of a contingent payment obligation by the Discover Network increases. Losses related to merchant chargebacks were not material for the calendar year ended December 31, 2013...

  • Page 168
    ..., customer restitution or other relief, which could materially impact the Company's financial statements, increase its cost of operations, or limit its ability to execute its business strategies and engage in certain business activities. The FDIC is completing its annual anti-money laundering/ Bank...

  • Page 169
    ... (often spanning multiple years and, in some cases, a wide range of business activities), unspecified damages and/or the novelty of the legal issues presented. The outcome of pending matters could be material to the Company's consolidated financial condition, operating results and cash flows for...

  • Page 170
    ... the Company would realize in a current market exchange. During the calendar year ended December 31, 2013, there were no changes to the Company's valuation techniques that had, or are expected to have, a material impact on the Company's consolidated financial position or results of operations. -160...

  • Page 171
    ... Prices in Active Markets for Identical Assets (Level 1) Balance at December 31, 2013 Assets U.S. Treasury securities ...$ U.S. government agency securities ...Credit card asset-backed securities of other issuers ...Residential mortgage-backed securities - Agency ...Available-for-sale investment...

  • Page 172
    ... securities. The fair value estimates of mortgage-backed and credit card asset-backed securities are based on the best information available. This data may consist of observed market prices, broker quotes or discounted cash flow models that incorporate assumptions such as benchmark yields, issuer...

  • Page 173
    ... pricing models prior to implementation, working closely with the third-party valuation service, and reviews the control objectives of the service at least annually. The Company corroborates the fair value of foreign exchange forward contracts through independent calculation of the fair value...

  • Page 174
    ... Company's Level 3 financial assets and liabilities measured at fair value on a recurring and non-recurring basis as of December 31, 2013 (dollars in millions): Fair Value Interest rate lock commitments ...$ 4 Valuation Technique Quantitative risk models Significant Unobservable Input Loan funding...

  • Page 175
    ...2013, fiscal years ended November 30, 2012 and 2011 and one month ended December 31, 2012, the Company had no material impairments related to these assets. Financial Instruments Measured at Other Than Fair Value The following tables disclose the estimated fair value of the Company's financial assets...

  • Page 176
    ... owed to credit card securitization investors are determined utilizing quoted market prices of the same transactions and, as such, are classified as Level 2. Fair values of long-term borrowings owed to student loan securitization investors are calculated by discounting cash flows using estimated...

  • Page 177
    ... risk, are considered fair value hedges. Cash Flow Hedges The Company uses interest rate swaps to manage its exposure to changes in interest rates related to future cash flows resulting from interest receipts on credit card loan receivables, and, beginning in 2013, from interest payments on credit...

  • Page 178
    ... of its fixed rate debt obligations due to changes in interest rates. During the calendar year ended December 31, 2013, the Company used interest rate swaps to manage its exposure to changes in fair value of certain fixed rate senior notes, securitized debt and interest-bearing brokered deposits...

  • Page 179
    ... contract had a notional amount of $40 million and an immaterial fair value as of December 31, 2013. 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. -169-

  • Page 180
    ... year ended December 31, 2013. Collateral Requirements and Credit-Risk Related Contingency Features The Company has master netting arrangements and minimum collateral posting thresholds with its counterparties for its fair value and cash flow hedge interest rate swaps, foreign exchange forward...

  • Page 181
    ... activities are managed in two segments: Direct Banking and Payment Services. • Direct Banking: The Direct Banking segment includes Discover branded credit cards issued to individuals and small businesses and other consumer products and services, including home loans, personal loans, student loans...

  • Page 182
    ...calendar year ended December 31, 2013, fiscal years ended November 30, 2012 and 2011 and one month ended December 31, 2012 (dollars in millions): Direct Banking For the Calendar Year Ended December 31, 2013 Interest income Credit card ...$ Private student loans ...PCI student loans ...Personal loans...

  • Page 183
    ... products are offered on substantially the same terms as those prevailing at the time for comparable transactions with unrelated parties, and these receivables are included in the loan receivables in the Company's consolidated statements of financial condition. They were not material to the Company...

  • Page 184
    ...year, the Company completed a private exchange offer, resulting in the exchange of $500 million outstanding aggregate principal amount of subordinated debt issued by a subsidiary for the same aggregate principal amount of new senior notes issued by the Parent. A cash premium of $176 million was paid...

  • Page 185
    ...advances from subsidiaries ...Purchases of treasury stock ...Net (decrease) increase in deposits ...Premium paid on debt exchange ...Dividends paid on common and preferred stock ...Net cash used for financing activities ...Increase (decrease) in cash and cash equivalents ...Cash and cash equivalents...

  • Page 186
    ... ...Weighted average shares outstanding (fully diluted) ...0.34 0.34 498 499 $ $ 0.31 0.30 529 530 Statement of Financial Condition Data (as of): Total loan receivables ...$ Allowance for loan losses ...$ Total assets ...$ Long-term borrowings ...$ Total liabilities ...$ Total stockholders' equity...

  • Page 187
    ... and earnings per share are calculated using weighted averages for the quarter, the sum of all four quarters may differ from the year to date amounts in the consolidated statements of income. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item...

  • Page 188
    ...this matter is included in Item 8 of this annual report on Form 10-K. Discover Financial Services Riverwoods, IL February 24, 2014 Changes in Internal Control over Financial Reporting There have been no changes in our internal control over financial reporting (as such term is defined in Exchange Act...

  • Page 189
    ... Discussion and Analysis" "2013 Executive Compensation" "Compensation Committee Report" Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information related to the compensation plans under which our equity securities are authorized for...

  • Page 190
    ...STATEMENTS Reports of Independent Registered Public Accounting Firm ...Consolidated Statements of Financial Condition as of December 31, 2013 and 2012 ...Consolidated Statements of Income for the calendar year ended December 31, 2013, fiscal years ended November 30, 2012 and 2011 and one month ended...

  • Page 191
    ...of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Discover Financial Services (Registrant) By: /s/ R. Mark Graf R. Mark Graf Executive Vice President and Chief Financial Officer Date: February...

  • Page 192
    ... the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on February 24, 2014. Signature /S / DAVID W. NELMS Title Chairman and Chief Executive Officer David W. Nelms /S / R. MARK GRAF Executive Vice...

  • Page 193
    ... Discover Financial Services' Current Report on Form 8-K filed on February 12, 2010 and incorporated herein by reference thereto). Agreement for the Sale and Purchase of the Goldfish Credit Card Business, dated February 7, 2008, among Discover Financial Services, Goldfish Bank Limited, Discover Bank...

  • Page 194
    ...issuer, and U.S. Bank National Association, as fiscal and paying agent (filed as Exhibit 4.1 to Discover Financial Services' Current Report on Form 8-K filed on August 8, 2013 and incorporated herein by reference thereto). Other instruments defining the rights of holders of long-term debt securities...

  • Page 195
    ..., dated as of July 2, 2009, between Discover Card Execution Note Trust, as Issuer, and U.S. Bank National Association, as Indenture Trustee (filed as Exhibit 4.1 to Discover Bank's Current Report on Form 8-K filed on July 6, 2009 and incorporated herein by reference thereto). Discover Financial...

  • Page 196
    ..., 2010 and incorporated herein by reference thereto). Purchase Price Adjustment Agreement by and among Citibank, N.A., The Student Loan Corporation and Discover Bank, dated September 17, 2010 (filed as Exhibit 10.32 to Discover Financial Services' Annual Report on Form 10-K filed on January 26, 2011...

  • Page 197
    ...No. 3 to the Directors' Compensation Plan of Discover Financial Services, effective as of July 1, 2013 (filed as Exhibit 10.1 to Discover Financial Services' Quarterly Report on Form 10-Q filed on July 30, 2013 and incorporated herein by reference thereto). Form of 2013 Special Award Certificate for...

  • Page 198
    ... 12.1 DISCOVER FINANCIAL SERVICES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND COMPUT ATION OF RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (dollars in millions) For the Calendar Year Ended December 31, 2013 Earnings: Income from continuing operations before income tax...

  • Page 199
    ... the Securities and Exchange Commission and have issued our report thereon dated February 24, 2014, which expresses an unqualified opinion. Note 2 to such financial statements contains a description of your adoption during the calendar year ended December 31, 2013 of the change in date of the annual...

  • Page 200
    ...Subsidiary Bank of New Castle ...DB Servicing Corporation ...Diners Club International Ltd...Diners Club Italia S.r.l...Diners Club Services Private Limited ...DINIT d.o.o...Discover Bank ...Discover Community Development Corporation ...Discover Financial Services (Canada), Inc...Discover Financial...

  • Page 201
    ...reports dated February 24, 2014, relating to the consolidated financial statements of Discover Financial Services, and the effectiveness of the Company's internal control over financial reporting, appearing in this Annual Report on Form 10-K of Discover Financial Services for the calendar year ended...

  • Page 202
    ... CERTIFICATION I, David W. Nelms, certify that: 1. 2. I have reviewed this Annual Report on Form 10-K of Discover Financial Services (the "registrant"); 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 the...

  • Page 203
    ....2 CERTIFICATION I, R. Mark Graf, certify that: 1. 2. I have reviewed this Annual Report on Form 10-K of Discover Financial Services (the "registrant"); 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 the...

  • Page 204
    ... with the Annual Report of Discover Financial Services (the "Company") on Form 10-K for the period ended December 31, 2013, as filed with the Securities and Exchange Commission (the "Report"), each of David W. Nelms, Chairman of the Board and Chief Executive Officer of the Company, and R. Mark...

  • Page 205
    ... of Financial Condition and Results of Operations" in the accompanying Annual Report on Form 10-K for the year ended December 31, 2013. 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 not limited...

  • Page 206
    ...Founding Partner Tegean Capital Management, LLC f Gregory C. Case President and CEO, Aon Corporation Board of Directors g b Michael H. Moskow Retired President and CEO Federal Reserve Bank of Chicago Lawrence A. Weinbach Lead Director, Discover Financial Services Chairman Great Western Products...

  • Page 207
    ... 6590 Corporate Web site: www.computershare.com/investor Carlos M. Minetti Executive Vice President President -Consumer Banking ANNUAL SHAREHOLDERS' MEETING The 2014 Annual Meeting of Shareholders of Discover Financial Services will be held on Wednesday, May 7, 2014, at 9:00 AM CST at the company...

  • Page 208
    VISION To be the leading direct bank and payments partner. MISSION To help people spend smarter, manage debt better and save more so they achieve a brighter financial future. VALUES Doing the right thing Innovation Simplicity Collaboration Openness Volunteerism Enthusiasm Respect 2500 La Lake...