UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September 30, 2022~~March 31, 2023

☐ 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 registrant as specified in its charter)

Delaware

(State or other jurisdiction of incorporation or organization)

36-2517428

(I.R.S. 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)


Securities registered pursuant to Section 12(b) of the Act
Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	DFS	New York Stock Exchange

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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

Large Accelerated Filer

☒

Accelerated Filer

☐

Non-accelerated Filer

☐

Smaller Reporting Company

☐

Emerging Growth Company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

As of ~~October 21, 2022,~~April 20, 2023, there were ~~273,225,765~~253,946,033 shares of the registrant's Common Stock, par value $0.01 per share, outstanding.

DISCOVER FINANCIAL SERVICES

Quarterly Report on Form 10-Q for the quarterly period ended ~~September 30, 2022~~March 31, 2023

Except as otherwise indicated or unless the context otherwise requires, "Discover Financial Services," "Discover," "DFS," "we," "us," "our," and "the Company" refer to Discover Financial Services and its subsidiaries. See Glossary of Acronyms, located after Part I — Item 4, for terms and abbreviations used throughout the quarterly report.

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 to Discover®, PULSE®, Cashback Bonus®, Discover Cashback Checking®, Discover it®, Freeze it®, College Covered® and Diners Club International®. All other trademarks, trade names and service marks included in this quarterly report on Form 10-Q are the property of their respective owners.

Table of Contents

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

DISCOVER FINANCIAL SERVICES

Condensed Consolidated Statements of Financial Condition (unaudited)

(dollars in millions, except for share amounts)


		September 30, 2022		December 31, 2021			March 31, 2023		December 31, 2022

Assets	Assets					Assets
Cash and cash equivalents	Cash and cash equivalents	$	10,004	$	8,750	Cash and cash equivalents	$	10,130	$	8,856
Restricted cash	Restricted cash	1,866		2,582		Restricted cash	33		41

Investment securities (includes available-for-sale securities of $6,681 and $6,700 reported at fair value with associated amortized cost of $6,876 and $6,549 at September 30, 2022 and December 31, 2021, respectively)		6,897		6,904
Investment securities (includes available-for-sale securities of $12,017 and $11,987 reported at fair value with associated amortized cost of $12,075 and $12,167 at March 31, 2023 and December 31, 2022, respectively)						Investment securities (includes available-for-sale securities of $12,017 and $11,987 reported at fair value with associated amortized cost of $12,075 and $12,167 at March 31, 2023 and December 31, 2022, respectively)	12,248		12,208
Loan receivables	Loan receivables					Loan receivables
Loan receivables	Loan receivables	104,908		93,684		Loan receivables	112,674		112,120
Allowance for credit losses	Allowance for credit losses	(7,061)		(6,822)		Allowance for credit losses	(7,691)		(7,374)
Net loan receivables	Net loan receivables	97,847		86,862		Net loan receivables	104,983		104,746
Premises and equipment, net	Premises and equipment, net	1,015		983		Premises and equipment, net	1,031		1,003
Goodwill	Goodwill	255		255		Goodwill	255		255

Other assets	Other assets	4,002		3,906		Other assets	4,381		4,519
Total assets	Total assets	$	121,886	$	110,242	Total assets	$	133,061	$	131,628
Liabilities and Stockholders' Equity	Liabilities and Stockholders' Equity					Liabilities and Stockholders' Equity
Liabilities	Liabilities					Liabilities
Deposits	Deposits					Deposits
Interest-bearing deposit accounts	Interest-bearing deposit accounts	$	81,373	$	70,818	Interest-bearing deposit accounts	$	94,319	$	90,151
Non-interest bearing deposit accounts	Non-interest bearing deposit accounts	1,524		1,575		Non-interest bearing deposit accounts	1,421		1,485
Total deposits	Total deposits	82,897		72,393		Total deposits	95,740		91,636
Short-term borrowings		—		1,750

Long-term borrowings	Long-term borrowings	20,177		18,477		Long-term borrowings	18,163		20,108
Accrued expenses and other liabilities	Accrued expenses and other liabilities	4,526		4,214		Accrued expenses and other liabilities	4,843		5,294
Total liabilities	Total liabilities	107,600		96,834		Total liabilities	118,746		117,038
Commitments, contingencies and guarantees (Notes 9, 12 and 13)	Commitments, contingencies and guarantees (Notes 9, 12 and 13)					Commitments, contingencies and guarantees (Notes 9, 12 and 13)
Stockholders' Equity	Stockholders' Equity					Stockholders' Equity
Common stock, par value $0.01 per share; 2,000,000,000 shares authorized; 569,637,306 and 568,830,897 shares issued at September 30, 2022 and December 31, 2021, respectively		6		6
Preferred stock, par value $0.01 per share; 200,000,000 shares authorized; 10,700 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively		1,056		1,056
Common stock, par value $0.01 per share; 2,000,000,000 shares authorized; 570,460,075 and 569,689,007 shares issued at March 31, 2023 and December 31, 2022, respectively						Common stock, par value $0.01 per share; 2,000,000,000 shares authorized; 570,460,075 and 569,689,007 shares issued at March 31, 2023 and December 31, 2022, respectively	6		6
Preferred stock, par value $0.01 per share; 200,000,000 shares authorized; 10,700 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively						Preferred stock, par value $0.01 per share; 200,000,000 shares authorized; 10,700 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively	1,056		1,056
Additional paid-in capital	Additional paid-in capital	4,444		4,369		Additional paid-in capital	4,493		4,468
Retained earnings	Retained earnings	27,585		24,766		Retained earnings	29,292		28,453
Accumulated other comprehensive loss	Accumulated other comprehensive loss	(353)		(94)		Accumulated other comprehensive loss	(235)		(339)
Treasury stock, at cost; 296,412,179 and 280,502,577 shares at September 30, 2022 and December 31, 2021, respectively		(18,452)		(16,695)
Treasury stock, at cost; 313,857,601 and 302,305,216 shares at March 31, 2023 and December 31, 2022, respectively						Treasury stock, at cost; 313,857,601 and 302,305,216 shares at March 31, 2023 and December 31, 2022, respectively	(20,297)		(19,054)
Total stockholders' equity	Total stockholders' equity	14,286		13,408		Total stockholders' equity	14,315		14,590
Total liabilities and stockholders' equity	Total liabilities and stockholders' equity	$	121,886	$	110,242	Total liabilities and stockholders' equity	$	133,061	$	131,628

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


		September 30, 2022		December 31, 2021			March 31, 2023		December 31, 2022
Assets	Assets					Assets
Restricted cash	Restricted cash	$	1,866	$	2,582	Restricted cash	$	33	$	41
Loan receivables	Loan receivables	$	24,885	$	25,449	Loan receivables	$	24,686	$	25,937
Allowance for credit losses allocated to securitized loan receivables	Allowance for credit losses allocated to securitized loan receivables	$	(1,153)	$	(1,371)	Allowance for credit losses allocated to securitized loan receivables	$	(1,106)	$	(1,152)
Other assets	Other assets	$	6	$	4	Other assets	$	4	$	3
Liabilities	Liabilities					Liabilities
Short- and long-term borrowings		$	11,092	$	9,539
Long-term borrowings						Long-term borrowings	$	9,095	$	10,259
Accrued expenses and other liabilities	Accrued expenses and other liabilities	$	13	$	6	Accrued expenses and other liabilities	$	13	$	14

See Notes to the Condensed Consolidated Financial Statements.

Table of Contents

DISCOVER FINANCIAL SERVICES

Condensed Consolidated Statements of Income (unaudited)

(dollars in millions, except for share amounts)


		For the Three Months Ended September 30,				For the Nine Months Ended September 30,					For the Three Months Ended March 31,
		2022		2021		2022		2021				2023		2022
Interest income	Interest income									Interest income
Credit card loans	Credit card loans	$	2,783	$	2,193	$	7,475	$	6,452	Credit card loans		$	3,321	$	2,268
Other loans	Other loans	476		433		1,343		1,301		Other loans		564		428
Investment securities	Investment securities	35		45		104		142		Investment securities		101		36
Other interest income	Other interest income	63		3		86		14		Other interest income		91		4
Total interest income	Total interest income	3,357		2,674		9,008		7,909		Total interest income		4,077		2,736
Interest expense	Interest expense									Interest expense
Deposits	Deposits	345		156		658		519		Deposits		756		139
Short-term borrowings	Short-term borrowings	1		—		2		—		Short-term borrowings		—		1
Long-term borrowings	Long-term borrowings	168		113		416		356		Long-term borrowings		189		117
Total interest expense	Total interest expense	514		269		1,076		875		Total interest expense		945		257
Net interest income	Net interest income	2,843		2,405		7,932		7,034		Net interest income		3,132		2,479
Provision for credit losses	Provision for credit losses	773		185		1,476		(45)		Provision for credit losses		1,102		154
Net interest income after provision for credit losses	Net interest income after provision for credit losses	2,070		2,220		6,456		7,079		Net interest income after provision for credit losses		2,030		2,325
Other income	Other income									Other income
Discount and interchange revenue, net	Discount and interchange revenue, net	346		299		1,056		879		Discount and interchange revenue, net		341		320
Protection products revenue	Protection products revenue	42		43		128		129		Protection products revenue		43		44
Loan fee income	Loan fee income	168		121		450		333		Loan fee income		166		140
Transaction processing revenue	Transaction processing revenue	65		58		183		167		Transaction processing revenue		67		57
Unrealized (losses) gains on equity investments		(37)		(167)		(394)		562
Realized gains on equity investments		33		—		186		—
Losses on equity investments										Losses on equity investments		(18)		(162)
Other income	Other income	19		18		64		47		Other income		22		24
Total other income	Total other income	636		372		1,673		2,117		Total other income		621		423
Other expense	Other expense									Other expense
Employee compensation and benefits	Employee compensation and benefits	551		483		1,566		1,487		Employee compensation and benefits		625		500
Marketing and business development	Marketing and business development	276		210		722		539		Marketing and business development		241		192
Information processing and communications	Information processing and communications	124		121		370		375		Information processing and communications		139		125
Professional fees	Professional fees	241		198		607		567		Professional fees		232		177
Premises and equipment	Premises and equipment	22		23		70		69		Premises and equipment		22		24
Other expense	Other expense	174		155		406		456		Other expense		124		112
Total other expense	Total other expense	1,388		1,190		3,741		3,493		Total other expense		1,383		1,130
Income before income taxes	Income before income taxes	1,318		1,402		4,388		5,703		Income before income taxes		1,268		1,618
Income tax expense	Income tax expense	312		311		1,029		1,321		Income tax expense		292		376
Net income	Net income	$	1,006	$	1,091	$	3,359	$	4,382	Net income		$	976	$	1,242
Net income allocated to common stockholders	Net income allocated to common stockholders	$	967	$	1,055	$	3,277	$	4,289	Net income allocated to common stockholders		$	939	$	1,205
Basic earnings per common share	Basic earnings per common share	$	3.54	$	3.54	$	11.74	$	14.17	Basic earnings per common share		$	3.58	$	4.23
Diluted earnings per common share	Diluted earnings per common share	$	3.54	$	3.54	$	11.73	$	14.16	Diluted earnings per common share		$	3.58	$	4.22

See Notes to the Condensed Consolidated Financial Statements.

Table of Contents

DISCOVER FINANCIAL SERVICES

Condensed Consolidated Statements of Comprehensive Income (unaudited)

(dollars in millions)

For the Three Months Ended September 30, For the Nine Months Ended September 30,
2022 2021 2022 2021
Net income $ 1,006 $ 1,091 $ 3,359 $ 4,382
Other comprehensive loss, net of tax
Unrealized losses on available-for-sale investment securities, net of tax (100) (29) (262) (115)
Unrealized (losses) gains on cash flow hedges, net of tax (2) — 3 2
Other comprehensive loss (102) (29) (259) (113)
Comprehensive income $ 904 $ 1,062 $ 3,100 $ 4,269


	For the Three Months Ended March 31,
		2023		2022
Net income		$	976	$	1,242
Other comprehensive income (loss), net of tax
Unrealized gains (losses) on available-for-sale investment securities, net of tax		92		(121)
Unrealized gains on cash flow hedges, net of tax		12		2

Other comprehensive income (loss)		104		(119)
Comprehensive income		$	1,080	$	1,123

See Notes to the Condensed Consolidated Financial Statements.

Table of Contents

DISCOVER FINANCIAL SERVICES

Condensed Consolidated Statements of Changes in Stockholders' Equity (unaudited)

(dollars in millions, shares in thousands)


								Additional Paid-in Capital				Retained Earnings		Accumulated Other Comprehensive Loss			Treasury Stock					Total Stockholders' Equity																	Additional Paid-in Capital					Retained Earnings					Accumulated Other Comprehensive Loss					Treasury Stock					Total Stockholders' Equity
		Preferred Stock			Common Stock											Preferred Stock											Common Stock
		Shares	Amount		Shares	Amount										Shares									Amount				Shares				Amount
For the Three Months Ended September 30, 2021
Balance at June 30, 2021		11	$	1,056	568,693	$	6			$	4,319			$	22,936					$	(39)					$	(15,107)			$	13,171
For the Three Months Ended March 31, 2022																									For the Three Months Ended March 31, 2022
Balance at December 31, 2021																									Balance at December 31, 2021	11				$	1,056			568,831		$	6					$	4,369				$	24,766				$	(94)				$	(16,695)				$	13,408
Net income	Net income	—	—		—	—				—				1,091					—					—				1,091		Net income		—			—			—			—					—					1,242					—					—			1,242
Other comprehensive loss	Other comprehensive loss	—	—		—	—		—				—		(29)			—					(29)			Other comprehensive loss	—				—				—		—				—					—					(119)					—					(119)
Purchases of treasury stock	Purchases of treasury stock	—	—		—	—		—				—		—			(815)					(815)			Purchases of treasury stock	—				—				—		—			—					—					—					(944)					(944)
Common stock issued under employee benefit plans	Common stock issued under employee benefit plans	—	—		21	—		2				—		—			—					2			Common stock issued under employee benefit plans	—				—				22		—			2					—					—					—					2
Common stock issued and stock-based compensation expense	Common stock issued and stock-based compensation expense	—	—		47	—		24				—		—			—					24			Common stock issued and stock-based compensation expense	—				—				651		—			19					—					—					—					19

Dividends — common stock ($0.50 per share)	Dividends — common stock ($0.50 per share)	—	—		—	—		—				(151)		—			—					(151)			Dividends — common stock ($0.50 per share)	—				—				—		—			—					(144)					—					—					(144)
Dividends — Series C preferred stock ($2,750 per share)	Dividends — Series C preferred stock ($2,750 per share)	—	—		—	—		—				(15)		—			—					(15)			Dividends — Series C preferred stock ($2,750 per share)	—				—				—		—			—					(16)					—					—					(16)
Dividends — Series D preferred stock ($3,062.50 per share)	Dividends — Series D preferred stock ($3,062.50 per share)	—	—		—	—		—				(15)		—			—					(15)			Dividends — Series D preferred stock ($3,062.50 per share)	—				—				—		—			—					(15)					—					—					(15)
Balance at September 30, 2021		11	$	1,056	568,761	$	6	$	4,345			$	23,846	$	(68)		$	(15,922)				$	13,263
Balance at March 31, 2022																									Balance at March 31, 2022	11				$	1,056			569,504		$	6		$	4,390				$	25,833				$	(213)				$	(17,639)				$	13,433

For the Three Months Ended September 30, 2022
Balance at June 30, 2022		11	$	1,056	569,564	$	6	$	4,417			$	26,776	$	(251)		$	(18,240)				$	13,764
For the Three Months Ended March 31, 2023																									For the Three Months Ended March 31, 2023
Balance at December 31, 2022																									Balance at December 31, 2022	11				$	1,056			569,689		$	6		$	4,468				$	28,453				$	(339)				$	(19,054)				$	14,590
Cumulative effect of ASU No. 2022-02 adoption																									Cumulative effect of ASU No. 2022-02 adoption	—				—				—		—			—					52					—					—					52
Net income	Net income	—	—		—	—		—				1,006		—			—					1,006			Net income	—				—				—		—			—					976					—					—					976
Other comprehensive loss		—	—		—	—		—				—		(102)			—					(102)
Other comprehensive income																									Other comprehensive income	—				—				—		—			—					—					104					—					104
Purchases of treasury stock	Purchases of treasury stock	—	—		—	—		—				—		—			(212)					(212)			Purchases of treasury stock	—				—				—		—			—					—					—					(1,243)					(1,243)
Common stock issued under employee benefit plans	Common stock issued under employee benefit plans	—	—		31	—		2				—		—			—					2			Common stock issued under employee benefit plans	—				—				29		—			3					—					—					—					3
Common stock issued and stock-based compensation expense	Common stock issued and stock-based compensation expense	—	—		42	—		25				—		—			—					25			Common stock issued and stock-based compensation expense	—				—				742		—			22					—					—					—					22

Dividends — common stock ($0.60 per share)	Dividends — common stock ($0.60 per share)	—	—		—	—		—				(166)		—			—					(166)			Dividends — common stock ($0.60 per share)	—				—				—		—			—					(158)					—					—					(158)
Dividends — Series C preferred stock ($2,750 per share)	Dividends — Series C preferred stock ($2,750 per share)	—	—		—	—		—				(15)		—			—					(15)			Dividends — Series C preferred stock ($2,750 per share)	—				—				—		—			—					(16)					—					—					(16)
Dividends — Series D preferred stock ($3,062.50 per share)	Dividends — Series D preferred stock ($3,062.50 per share)	—	—		—	—		—				(16)		—			—					(16)			Dividends — Series D preferred stock ($3,062.50 per share)	—				—				—		—			—					(15)					—					—					(15)
Balance at September 30, 2022		11	$	1,056	569,637	$	6	$	4,444			$	27,585	$	(353)		$	(18,452)				$	14,286
Balance at March 31, 2023																									Balance at March 31, 2023	11				$	1,056			570,460		$	6		$	4,493				$	29,292				$	(235)				$	(20,297)				$	14,315

See Notes to the Condensed Consolidated Financial Statements.

~~Table of Contents~~

Additional
Paid-in
Capital Retained
Earnings Accumulated Other Comprehensive Loss Treasury
Stock Total
Stockholders'
Equity
Preferred Stock Common Stock
Shares Amount Shares Amount
For the Nine Months Ended September 30, 2021
Balance at December 31, 2020 11 $ 1,056 567,898 $ 6 $ 4,257 $ 19,955 $ 45 $ (14,435) $ 10,884
Net income — — — — — 4,382 — — 4,382
Other comprehensive loss — — — — — — (113) — (113)
Purchases of treasury stock — — — — — — — (1,487) (1,487)
Common stock issued under employee benefit plans — — 67 — 7 — — — 7
Common stock issued and stock-based compensation expense — — 796 — 81 — — — 81
Dividends — common stock ($1.38 per share) — — — — — (422) — — (422)
Dividends — Series C preferred stock ($5,500 per share) — — — — — (31) — — (31)
Dividends — Series D preferred stock ($7,674 per share) — — — — — (38) — — (38)
Balance at September 30, 2021 11 $ 1,056 568,761 $ 6 $ 4,345 $ 23,846 $ (68) $ (15,922) $ 13,263
For the Nine Months Ended September 30, 2022
Balance at December 31, 2021 11 $ 1,056 568,831 $ 6 $ 4,369 $ 24,766 $ (94) $ (16,695) $ 13,408
Net income — — — — — 3,359 — — 3,359
Other comprehensive loss — — — — — — (259) — (259)
Purchases of treasury stock — — — — — — — (1,757) (1,757)
Common stock issued under employee benefit plans — — 80 — 7 — — — 7
Common stock issued and stock-based compensation expense — — 726 — 68 — — — 68
Dividends — common stock ($1.70 per share) — — — — — (478) — — (478)
Dividends — Series C preferred stock ($5,500 per share) — — — — — (31) — — (31)
Dividends — Series D preferred stock ($6,125 per share) — — — — — (31) — — (31)
Balance at September 30, 2022 11 $ 1,056 569,637 $ 6 $ 4,444 $ 27,585 $ (353) $ (18,452) $ 14,286

~~See Notes to the Condensed Consolidated Financial Statements.~~

Table of Contents

DISCOVER FINANCIAL SERVICES

Condensed Consolidated Statements of Cash Flows (unaudited)

(dollars in millions)


		For the Nine Months Ended September 30,					For the Three Months Ended March 31,
		2022		2021			2023		2022
Cash flows provided by operating activities	Cash flows provided by operating activities					Cash flows provided by operating activities
Net income	Net income	$	3,359	$	4,382	Net income	$	976	$	1,242
Adjustments to reconcile net income to net cash provided by operating activities:	Adjustments to reconcile net income to net cash provided by operating activities:					Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses	Provision for credit losses	1,476		(45)		Provision for credit losses	1,102		154
Deferred income taxes	Deferred income taxes	(314)		388		Deferred income taxes	(112)		(10)
Depreciation and amortization	Depreciation and amortization	424		387		Depreciation and amortization	129		139
Amortization of deferred revenues	Amortization of deferred revenues	(261)		(217)		Amortization of deferred revenues	(105)		(76)
Net unrealized and realized losses (gains) on investments and other assets		246		(531)
Net losses on investments and other assets						Net losses on investments and other assets	30		173
Other, net	Other, net	73		227		Other, net	25		20
Changes in assets and liabilities:	Changes in assets and liabilities:					Changes in assets and liabilities:
Increase in other assets		(350)		(273)
Increase in accrued expenses and other liabilities		312		359
Decrease (increase) in other assets						Decrease (increase) in other assets	133		(127)
(Decrease) increase in accrued expenses and other liabilities						(Decrease) increase in accrued expenses and other liabilities	(387)		219
Net cash provided by operating activities	Net cash provided by operating activities	4,965		4,677		Net cash provided by operating activities	1,791		1,734

Cash flows provided by investing activities
Maturities of other short-term investments		—		2,200
Cash flows provided by (used for) investing activities						Cash flows provided by (used for) investing activities

Maturities of available-for-sale investment securities	Maturities of available-for-sale investment securities	1,677		1,709		Maturities of available-for-sale investment securities	402		769
Purchases of available-for-sale investment securities	Purchases of available-for-sale investment securities	(2,001)		(9)		Purchases of available-for-sale investment securities	(285)		—
Maturities of held-to-maturity investment securities	Maturities of held-to-maturity investment securities	26		63		Maturities of held-to-maturity investment securities	3		12
Purchases of held-to-maturity investment securities	Purchases of held-to-maturity investment securities	(40)		(28)		Purchases of held-to-maturity investment securities	(13)		(14)
Net change in principal on loans originated for investment	Net change in principal on loans originated for investment	(12,297)		(255)		Net change in principal on loans originated for investment	(1,245)		(103)
Proceeds from the sale of available-for-sale securities		—		5

Proceeds from the sale of other investments	Proceeds from the sale of other investments	325		—		Proceeds from the sale of other investments	1		71
Purchases of other investments	Purchases of other investments	(135)		(108)		Purchases of other investments	(16)		(23)

Purchases of premises and equipment	Purchases of premises and equipment	(178)		(146)		Purchases of premises and equipment	(76)		(51)
Net cash (used for) provided by investing activities	Net cash (used for) provided by investing activities	(12,623)		3,431		Net cash (used for) provided by investing activities	(1,229)		661

Cash flows used for by financing activities
Cash flows provided by (used for) financing activities						Cash flows provided by (used for) financing activities
Net change in short-term borrowings	Net change in short-term borrowings	(1,750)		—		Net change in short-term borrowings	—		(1,750)
Net change in deposits	Net change in deposits	10,482		(4,359)		Net change in deposits	4,088		82
Proceeds from issuance of securitized debt	Proceeds from issuance of securitized debt	4,626		1,731		Proceeds from issuance of securitized debt	—		1,242
Maturities and repayment of securitized debt	Maturities and repayment of securitized debt	(2,566)		(3,445)		Maturities and repayment of securitized debt	(1,180)		(2,556)

Maturities and repayment of other long-term borrowings		(322)		(922)
Maturities and repayments of other long-term borrowings						Maturities and repayments of other long-term borrowings	(800)		—
Proceeds from issuance of common stock	Proceeds from issuance of common stock	7		7		Proceeds from issuance of common stock	3		2
Purchases of treasury stock	Purchases of treasury stock	(1,757)		(1,487)		Purchases of treasury stock	(1,232)		(944)

Dividends paid on common and preferred stock	Dividends paid on common and preferred stock	(524)		(474)		Dividends paid on common and preferred stock	(175)		(160)
Net cash provided by (used for) financing activities	Net cash provided by (used for) financing activities	8,196		(8,949)		Net cash provided by (used for) financing activities	704		(4,084)
Net increase (decrease) in cash, cash equivalents and restricted cash	Net increase (decrease) in cash, cash equivalents and restricted cash	538		(841)		Net increase (decrease) in cash, cash equivalents and restricted cash	1,266		(1,689)
Cash, cash equivalents and restricted cash, at the beginning of the period	Cash, cash equivalents and restricted cash, at the beginning of the period	11,332		13,589		Cash, cash equivalents and restricted cash, at the beginning of the period	8,897		11,332
Cash, cash equivalents and restricted cash, at the end of the period	Cash, cash equivalents and restricted cash, at the end of the period	$	11,870	$	12,748	Cash, cash equivalents and restricted cash, at the end of the period	$	10,163	$	9,643

Reconciliation of cash, cash equivalents and restricted cash	Reconciliation of cash, cash equivalents and restricted cash					Reconciliation of cash, cash equivalents and restricted cash
Cash and cash equivalents	Cash and cash equivalents	$	10,004	$	12,716	Cash and cash equivalents	$	10,130	$	9,625
Restricted cash	Restricted cash	1,866		32		Restricted cash	33		18
Cash, cash equivalents and restricted cash, at the end of the period	Cash, cash equivalents and restricted cash, at the end of the period	$	11,870	$	12,748	Cash, cash equivalents and restricted cash, at the end of the period	$	10,163	$	9,643

See Notes to the Condensed Consolidated Financial Statements.

Table of Contents

Notes to the Condensed Consolidated Financial Statements

(unaudited)

1. Background and Basis of Presentation

Description of Business

Discover Financial Services ("DFS" or the "Company") is a digital banking and payment services company. The Company is a bank holding company under the Bank Holding Company Act of 1956 and a financial holding company under the Gramm-Leach-Bliley Act. Therefore, the Company is subject to oversight, regulation and examination by the Board of Governors of the Federal Reserve System (the "Federal Reserve"). The Company provides digital banking products and services and payment services through its subsidiaries. The Company offers its customers credit card loans, private student loans, personal loans, home loans and deposit products. The Company also operates the Discover Network, the PULSE network ("PULSE") and Diners Club International ("Diners Club"), collectively known as the Discover Global Network. The Discover Network processes transactions for Discover-branded credit and debit cards and provides payment transaction processing and settlement services. PULSE operates an electronic funds transfer network, providing financial institutions issuing debit cards on the PULSE network with access to ATMs domestically and internationally, as well as merchant acceptance throughout the United States of America ("U.S.") for debit card transactions. Diners Club is a global payments network of licensees, which are generally financial institutions, that issue Diners Club branded credit and charge cards and/or provide card acceptance services.

The Company manages its business activities in two segments, Digital Banking and Payment Services, based on the products and services provided. See Note 16: Segment Disclosures for a detailed description of each segment's operations and the allocation conventions used in business segment reporting.

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. In the opinion of management, the financial statements reflect all adjustments necessary for the fair presentation of results for the interim period. All such adjustments are of a normal, recurring nature. The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and related disclosures. These estimates are based on information available as of the date of the condensed consolidated financial statements. The Company believes that the estimates used in the preparation of the condensed consolidated financial statements are reasonable. Actual results could differ from these estimates. These interim condensed consolidated financial statements should be read in conjunction with the Company's ~~2021~~2022 audited consolidated financial statements filed with the Company's annual report on Form 10-K for the year ended December 31, ~~2021.~~2022.

Recently Issued Accounting ~~Pronouncements~~Pronouncement (Not Yet Adopted)

In March ~~2022,~~2023, the Financial Accounting Standards Board ~~("FASB"~~(“FASB”) issued Accounting Standards Update ~~("ASU"~~(“ASU”) No. 2023-02, Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. The ASU expands the use of the proportional amortization method of accounting for tax credit investments. Currently, the method is limited to Low Income Housing Tax Credit investments. Under the amended guidance, use of proportional amortization will be available to any qualifying tax credit investments, including but not limited to investments in New Markets Tax Credit and Renewable Energy Tax Credit programs. The amendments in the ASU are to be applied on a retrospective or modified retrospective basis. The ASU is effective for the Company on January 1, 2024. Management does not expect the amendments to have a material impact on the Company’s consolidated financial statements.

Recently Adopted Accounting Pronouncement

In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The ASU eliminates the troubled debt restructuring ("TDR") recognition and measurement guidance and enhances disclosures for modifications of receivables to borrowers experiencing financial difficulty. Under ASU 2022-02, ~~no longer requires~~ the ~~application~~use of a discounted cash flow method ~~for any modified receivables~~is no longer required when measuring expected credit ~~losses.~~losses on modified loans. The ASU also refines existing credit-related disclosures by requiring disclosure of ~~current-period~~current-

Table of Contents

period gross charge-offs of receivables by year of origination. The amendments in the ASU are to be applied prospectively to modifications and disclosures of gross charge-offs; however, adoption on a modified retrospective basis is permitted for the effect on the allowance for credit losses related to the elimination of the TDR recognition and measurement guidance. The ASU isbecame effective for the Company on January 1, 2023. ~~Management does not expect~~Upon adoption, the ~~amendments~~Company recorded an adjustment to ~~have a material impact on~~reduce the ~~Company's financial statements.~~beginning balance of its allowance for credit losses by $68 million to reflect the elimination of the measurement guidance related to TDRs with an offsetting increase, net of tax, to beginning retained earnings.

~~Table of Contents~~

2. Investments

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


		September 30, 2022		December 31, 2021			March 31, 2023		December 31, 2022

U.S. Treasury(1) and U.S. GSE(2) securities	U.S. Treasury(1) and U.S. GSE(2) securities	$	6,092	$	6,514	U.S. Treasury(1) and U.S. GSE(2) securities	$	11,474	$	11,423
Residential mortgage-backed securities - Agency~~(2)~~(3)	Residential mortgage-backed securities - Agency~~(2)~~(3)	805		390		Residential mortgage-backed securities - Agency~~(2)~~(3)	774		785
Total investment securities	Total investment securities	$	6,897	$	6,904	Total investment securities	$	12,248	$	12,208

(1)Includes ~~$35~~$132 million and ~~$27~~$97 million of U.S. Treasury securities pledged as swap collateral as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively.

(2)Consists of a security issued by the Federal Home Loan Bank.

(3)Consists of securities issued by Fannie Mae, Freddie Mac, or Ginnie ~~Mae, or the Federal Home Loan Bank.~~Mae.

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


		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value			Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
At September 30, 2022
At March 31, 2023										At March 31, 2023
Available-for-Sale Investment Securities(1)	Available-for-Sale Investment Securities(1)									Available-for-Sale Investment Securities(1)
U.S. Treasury and U.S. GSE securities	U.S. Treasury and U.S. GSE securities	$	6,258	$	—	$	(166)	$	6,092	U.S. Treasury and U.S. GSE securities	$	11,515	$	74	$	(115)	$	11,474
Residential mortgage-backed securities - Agency	Residential mortgage-backed securities - Agency	618		—		(29)		589		Residential mortgage-backed securities - Agency	560		—		(17)		543
Total available-for-sale investment securities	Total available-for-sale investment securities	$	6,876	$	—	$	(195)	$	6,681	Total available-for-sale investment securities	$	12,075	$	74	$	(132)	$	12,017
Held-to-Maturity Investment Securities(2)	Held-to-Maturity Investment Securities(2)									Held-to-Maturity Investment Securities(2)
Residential mortgage-backed securities - Agency(3)	Residential mortgage-backed securities - Agency(3)	$	216	$	—	$	(25)	$	191	Residential mortgage-backed securities - Agency(3)	$	231	$	—	$	(19)	$	212
Total held-to-maturity investment securities	Total held-to-maturity investment securities	$	216	$	—	$	(25)	$	191	Total held-to-maturity investment securities	$	231	$	—	$	(19)	$	212

At December 31, 2021
At December 31, 2022										At December 31, 2022
Available-for-Sale Investment Securities(1)	Available-for-Sale Investment Securities(1)									Available-for-Sale Investment Securities(1)
U.S. Treasury and U.S. GSE securities	U.S. Treasury and U.S. GSE securities	$	6,368	$	146	$	—	$	6,514	U.S. Treasury and U.S. GSE securities	$	11,580	$	21	$	(178)	$	11,423
Residential mortgage-backed securities - Agency	Residential mortgage-backed securities - Agency	181		5		—		186		Residential mortgage-backed securities - Agency	587		—		(23)		564
Total available-for-sale investment securities	Total available-for-sale investment securities	$	6,549	$	151	$	—	$	6,700	Total available-for-sale investment securities	$	12,167	$	21	$	(201)	$	11,987
Held-to-Maturity Investment Securities(2)	Held-to-Maturity Investment Securities(2)									Held-to-Maturity Investment Securities(2)
Residential mortgage-backed securities - Agency(3)	Residential mortgage-backed securities - Agency(3)	$	204	$	3	$	(1)	$	206	Residential mortgage-backed securities - Agency(3)	$	221	$	—	$	(22)	$	199
Total held-to-maturity investment securities	Total held-to-maturity investment securities	$	204	$	3	$	(1)	$	206	Total held-to-maturity investment securities	$	221	$	—	$	(22)	$	199

(1)Available-for-sale investment securities are reported at fair value.

(2)Held-to-maturity investment securities are reported at amortized cost.

(3)Amounts represent residential mortgage-backed securities ("RMBS") that were classified as held-to-maturity as they were entered into as a part of the Company's community reinvestment initiatives.

The Company invests in U.S. Treasury obligations and securities issued by government agencies and government-sponsored enterprises of the U.S. ("U.S. GSEs"), which have long histories with no credit losses and are explicitly or implicitly guaranteed by the U.S. federal government. Therefore, management has concluded that there is no expectation of non-payment on its investment securities and does not record an allowance for credit losses on these investments. In addition, the Company ~~did~~does not have the intent to sell any available-for-sale securities with an unrealized loss position and ~~did~~does not believe it is more likely than not that it will be required to sell any such security before recovery of its amortized cost basis.

Table of Contents

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


		Number of Securities in a Loss Position		Less than 12 months						More than 12 months						Number of Securities in a Loss Position		Less than 12 months						More than 12 months
			Fair Value			Unrealized Losses			Fair Value			Unrealized Losses					Fair Value			Unrealized Losses			Fair Value			Unrealized Losses
At September 30, 2022
At March 31, 2023															At March 31, 2023
Available-for-Sale Investment Securities	Available-for-Sale Investment Securities														Available-for-Sale Investment Securities
U.S. Treasury and U.S. GSE securities	U.S. Treasury and U.S. GSE securities	54		$	5,863		$	(163)		$	106		$	(3)	U.S. Treasury and U.S. GSE securities	52		$	3,614		$	(45)		$	1,928		$	(70)
Residential mortgage-backed securities - Agency	Residential mortgage-backed securities - Agency	28		$	584		$	(28)		$	5		$	(1)	Residential mortgage-backed securities - Agency	34		$	456		$	(13)		$	86		$	(4)

At December 31, 2021
At December 31, 2022															At December 31, 2022
Available-for-Sale Investment Securities	Available-for-Sale Investment Securities														Available-for-Sale Investment Securities
U.S. Treasury and U.S. GSE securities	U.S. Treasury and U.S. GSE securities	2		$	110		NM			$	—		$	—	U.S. Treasury and U.S. GSE securities	123		$	9,060		$	(175)		$	106		$	(3)
Residential mortgage-backed securities - Agency	Residential mortgage-backed securities - Agency	1		$	7		NM			$	—		$	—	Residential mortgage-backed securities - Agency	34		$	559		$	(22)		$	5		$	(1)

There were no proceeds from sales or recognized gains or losses on available-for-sale securities during the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022. During the three and nine months ended September 30, 2021, the Company received $5 million of proceeds from the sale of available-for-sale securities. As a result of the sale, the Company recognized an immaterial gain during the three and nine months ended September 30, 2021. See Note 8: Accumulated Other Comprehensive Income for unrealized gains and losses on available-for-sale securities during the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 and ~~2021.~~2022.

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


At September 30, 2022		One Year or Less		After One Year Through Five Years		After Five Years Through Ten Years		After Ten Years		Total
At March 31, 2023												At March 31, 2023	One Year or Less		After One Year Through Five Years		After Five Years Through Ten Years		After Ten Years		Total
Available-for-Sale Investment Securities — Amortized Cost	Available-for-Sale Investment Securities — Amortized Cost											Available-for-Sale Investment Securities — Amortized Cost
U.S. Treasury and U.S. GSE securities	U.S. Treasury and U.S. GSE securities	$	1,724	$	4,534	$	—	$	—	$	6,258	U.S. Treasury and U.S. GSE securities	$	1,850	$	9,113	$	552	$	—	$	11,515
Residential mortgage-backed securities - Agency(1)	Residential mortgage-backed securities - Agency(1)	2		78		45		493		618		Residential mortgage-backed securities - Agency(1)	—		79		55		426		560
Total available-for-sale investment securities	Total available-for-sale investment securities	$	1,726	$	4,612	$	45	$	493	$	6,876	Total available-for-sale investment securities	$	1,850	$	9,192	$	607	$	426	$	12,075
Held-to-Maturity Investment Securities — Amortized Cost	Held-to-Maturity Investment Securities — Amortized Cost											Held-to-Maturity Investment Securities — Amortized Cost
Residential mortgage-backed securities - Agency(1)	Residential mortgage-backed securities - Agency(1)	$	—	$	—	$	—	$	216	$	216	Residential mortgage-backed securities - Agency(1)	$	—	$	—	$	—	$	231	$	231
Total held-to-maturity investment securities	Total held-to-maturity investment securities	$	—	$	—	$	—	$	216	$	216	Total held-to-maturity investment securities	$	—	$	—	$	—	$	231	$	231
Available-for-Sale Investment Securities — Fair Values	Available-for-Sale Investment Securities — Fair Values											Available-for-Sale Investment Securities — Fair Values
U.S. Treasury and U.S. GSE securities	U.S. Treasury and U.S. GSE securities	$	1,709	$	4,383	$	—	$	—	$	6,092	U.S. Treasury and U.S. GSE securities	$	1,828	$	9,085	$	561	$	—	$	11,474
Residential mortgage-backed securities - Agency(1)	Residential mortgage-backed securities - Agency(1)	2		75		43		469		589		Residential mortgage-backed securities - Agency(1)	—		75		54		414		543
Total available-for-sale investment securities	Total available-for-sale investment securities	$	1,711	$	4,458	$	43	$	469	$	6,681	Total available-for-sale investment securities	$	1,828	$	9,160	$	615	$	414	$	12,017
Held-to-Maturity Investment Securities — Fair Values	Held-to-Maturity Investment Securities — Fair Values											Held-to-Maturity Investment Securities — Fair Values
Residential mortgage-backed securities - Agency(1)	Residential mortgage-backed securities - Agency(1)	$	—	$	—	$	—	$	191	$	191	Residential mortgage-backed securities - Agency(1)	$	—	$	—	$	—	$	212	$	212
Total held-to-maturity investment securities	Total held-to-maturity investment securities	$	—	$	—	$	—	$	191	$	191	Total held-to-maturity investment securities	$	—	$	—	$	—	$	212	$	212

(1)Maturities of RMBS are reflective of the contractual maturities of the investment.

Other Investments

As a part of the Company's community reinvestment initiatives, the Company has made equity investments in certain limited partnerships and limited liability companies that finance the construction and rehabilitation of affordable rental housing and stimulate economic development in low- to moderate-income communities. These investments are accounted for using the equity method of accounting and are recorded within other assets. The related commitment for future investments is recorded in accrued expenses and other liabilities within the condensed consolidated statements of financial condition. The portion of each investment's operating results allocable to the Company reduces the carrying value of the investments and is recorded in other expense within the condensed consolidated statements of income. The Company further reduces the carrying value of the investments by recognizing any amounts that are in excess of future net tax benefits in other expense.

~~Table of Contents~~

The Company earns a return primarily through tax credits allocated to the affordable housing projects and the community revitalization projects. The Company does not consolidate these investments as the Company does not have a controlling financial interest in the investee entities. As of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, the Company had outstanding

Table of Contents

investments in these entities of ~~$382~~$406 million and ~~$388~~$416 million, respectively, and related contingent liabilities for unconditional and legally binding delayed equity contributions of ~~$82~~$97 million and ~~$92~~$111 million, respectively. Of the above outstanding equity investments, the Company had ~~$353~~$368 million and ~~$350~~$375 million of investments related to affordable housing projects as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively, which had ~~$82~~$91 million and ~~$80~~$100 million of related contingent liabilities for unconditional and legally binding delayed equity contributions, respectively.

The Company holds non-controlling equity positions in several payment services entities. Most of these investments are not subject to equity method accounting because the Company does not have significant influence over the investee. The common or preferred equity securities that the Company holds typically do not have readily determinable fair values. As a result, the majority of these investments are carried at cost minus impairment, if any. As of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, the carrying value of these investments, which are recorded within other assets on the Company's condensed consolidated statements of financial condition, was ~~$39~~$31 million and ~~$36~~$39 million, respectively.

The Company also holds non-controlling equity positions in payment ~~service~~services entities that have publicly traded stock and therefore have readily determinable fair values. As a result, these investments are carried at fair value based on the quoted share prices. As of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, the carrying value of these investments, which are recorded within other assets on the Company's condensed consolidated statements of financial condition, was ~~$58~~$31 million and ~~$461~~$41 million, respectively. During the three ~~and nine~~ months ended ~~September 30, 2022,~~March 31, 2023, the Company recognized ~~unrealized losses of $37 million and $394 million, respectively, and realized gains of approximately $32 million and $182 million, respectively,~~an immaterial net loss on the condensed consolidated statements of income related to these investments. The Company recognized ~~unrealized losses~~a net loss of ~~approximately $167 million and unrealized gains of approximately $562~~$165 million during the three ~~and nine~~ months ended ~~September 30, 2021, respectively, related to these investments.~~March 31, 2022.

3. Loan Receivables

The Company has two loan portfolio segments: credit card loans and other loans.

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


		September 30, 2022		December 31, 2021			March 31, 2023		December 31, 2022
Credit card loans(1)(2)	Credit card loans(1)(2)	$	83,630	$	74,369	Credit card loans(1)(2)	$	89,755	$	90,113
Other loans(3)	Other loans(3)					Other loans(3)
Private student loans(4)	Private student loans(4)	10,349		10,113		Private student loans(4)	10,480		10,308
Personal loans	Personal loans	7,674		6,936		Personal loans	8,374		7,998
Other loans	Other loans	3,255		2,266		Other loans	4,065		3,701
Total other loans	Total other loans	21,278		19,315		Total other loans	22,919		22,007
Total loan receivables	Total loan receivables	104,908		93,684		Total loan receivables	112,674		112,120
Allowance for credit losses	Allowance for credit losses	(7,061)		(6,822)		Allowance for credit losses	(7,691)		(7,374)
Net loan receivables	Net loan receivables	$	97,847	$	86,862	Net loan receivables	$	104,983	$	104,746

(1)Amounts include carrying values of ~~$14.4~~$12.2 billion and ~~$13.3~~$13.5 billion underlying investors' interest in trust debt at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively, and ~~$10.3~~$12.3 billion and ~~$11.9~~$12.2 billion in seller's interest at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively. See Note 4: Credit Card and Private Student Loan Securitization Activities for additional information.

(2)Unbilled accrued interest receivable on credit card loans, which is presented as part of other assets in the Company's condensed consolidated statements of financial condition, was ~~$507~~$628 million and ~~$423~~$611 million at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively.

(3)Accrued interest receivable on private student, personal and other loans, which is presented as part of other assets in the Company's condensed consolidated statements of financial condition, was ~~$504~~$501 million, ~~$43~~$52 million and $9$12 million, respectively, at ~~September 30, 2022~~March 31, 2023 and ~~$443~~$468 million, ~~$42~~$49 million and $6$11 million, respectively, at December 31, ~~2021.~~2022.

(4)~~Amounts include carrying values of $182 million and $207 million in loans pledged as collateral against the note issued from a private student loan securitization trust at September 30, 2022~~At March 31, 2023 and December 31, ~~2021, respectively. See Note 4: Credit Card and Private Student Loan Securitization Activities for additional information.~~2022, there were $6.0 billion of private student loans in repayment.

109

Table of Contents

Credit Quality Indicators

As part of credit risk management activities, on an ongoing basis, the Company reviews information related to the performance of a customer's account with the Company and information from credit bureaus, such as FICO or other credit scores, relating to the customer's broader credit performance. The Company actively monitors key credit quality indicators, including FICO scores and delinquency status, for credit card, private student and personal loans. These indicators are important to understand the overall credit performance of the Company's customers and their ability to repay.

FICO scores are generally obtained at the origination of the account and are refreshed monthly or quarterly thereafter to assist in predicting customer behavior. Historically, the Company has noted that accounts with FICO scores below 660 have larger delinquencies and credit losses than those with higher credit scores.

The following table provides the distribution of the amortized cost basis (excluding accrued interest receivable presented in other assets) by the most recent FICO scores available for the Company's customers for credit card, private student and personal loan receivables (dollars in millions):


		Credit Risk Profile by FICO Score																	Credit Risk Profile by FICO Score
		September 30, 2022								December 31, 2021									March 31, 2023								December 31, 2022
		660 and Above				Less than 660 or No Score				660 and Above				Less than 660 or No Score					660 and Above				Less than 660 or No Score				660 and Above				Less than 660 or No Score
		$		%		$		%		$		%		$		%			$		%		$		%		$		%		$		%
Credit card loans~~(1)~~	Credit card loans~~(1)~~	$	68,999	83	%	$	14,631	17	%	$	62,262	84	%	$	12,107	16	%	Credit card loans~~(1)~~	$	72,515	81	%	$	17,240	19	%	$	73,827	82	%	$	16,286	18	%
Private student loans by origination year~~(3)~~(2)	Private student loans by origination year~~(3)~~(2)																	Private student loans by origination year~~(3)~~(2)
2023																		2023	$	171	98	%	$	4	2	%
2022	2022	$	949	93	%	$	69	7	%									2022	1,560		94	%	104		6	%	$	1,172	94	%	$	77	6	%
2021	2021	1,699		96	%	79		4	%	$	1,251	94	%	$	73	6	%	2021	1,612		95	%	84		5	%	1,668		95	%	81		5	%
2020	2020	1,402		96	%	61		4	%	1,561		96	%	59		4	%	2020	1,304		95	%	67		5	%	1,365		95	%	65		5	%
2019	2019	1,254		95	%	62		5	%	1,439		96	%	61		4	%	2019	1,162		94	%	68		6	%	1,221		95	%	67		5	%
2018		973		94	%	59		6	%	1,147		95	%	59		5	%
Prior	Prior	3,521		94	%	221		6	%	4,215		94	%	248		6	%	Prior	4,060		93	%	284		7	%	4,306		94	%	286		6	%
Total private student loans	Total private student loans	$	9,798	95	%	$	551	5	%	$	9,613	95	%	$	500	5	%	Total private student loans	$	9,869	94	%	$	611	6	%	$	9,732	94	%	$	576	6	%
Personal loans by origination year	Personal loans by origination year																	Personal loans by origination year
2023																		2023	$	1,317	100	%	$	6	—	%
2022	2022	$	3,371	99	%	$	38	1	%									2022	3,834		97	%	119		3	%	$	4,270	98	%	$	77	2	%
2021	2021	2,238		97	%	80		3	%	$	3,326	99	%	$	37	1	%	2021	1,699		95	%	97		5	%	1,958		96	%	91		4	%
2020	2020	942		96	%	39		4	%	1,622		98	%	39		2	%	2020	653		94	%	39		6	%	790		95	%	40		5	%
2019	2019	550		93	%	43		7	%	1,052		94	%	62		6	%	2019	355		91	%	33		9	%	444		92	%	38		8	%
2018		210		89	%	27		11	%	435		91	%	44		9	%
Prior	Prior	113		83	%	23		17	%	276		87	%	43		13	%	Prior	188		85	%	34		15	%	249		86	%	41		14	%
Total personal loans	Total personal loans	$	7,424	97	%	$	250	3	%	$	6,711	97	%	$	225	3	%	Total personal loans	$	8,046	96	%	$	328	4	%	$	7,711	96	%	$	287	4	%

(1)Amounts include $663 million and $813 million of revolving line-of-credit arrangements that were converted to term loans as a result of a troubled debt restructuring ("TDR") program as of September 30, 2022 and December 31, 2021, respectively.

~~(2)~~A majority of private student loan originations occur in the third quarter and disbursements can span multiple calendar years.

~~(3)~~(2)FICO score represents the higher credit score of the cosigner or borrower.

1110

Table of Contents

Delinquencies are an indicator of credit quality at a point in time. A loan balance is considered delinquent when contractual payments on the loan become 30 days past due.

The amortized cost basis (excluding accrued interest receivable presented in other assets) of delinquent loans in the Company's loan portfolio is shown below for credit card, private student and personal loan receivables (dollars in millions):


		September 30, 2022						December 31, 2021							March 31, 2023						December 31, 2022
		30-89 Days Delinquent		90 or More Days Delinquent		Total Past Due		30-89 Days Delinquent		90 or More Days Delinquent		Total Past Due			30-89 Days Delinquent		90 or More Days Delinquent		Total Past Due		30-89 Days Delinquent		90 or More Days Delinquent		Total Past Due
Credit card loans	Credit card loans	$	991	$	770	$	1,761	$	670	$	562	$	1,232	Credit card loans	$	1,273	$	1,204	$	2,477	$	1,250	$	1,028	$	2,278
Private student loans by origination year(1)	Private student loans by origination year(1)													Private student loans by origination year(1)
2023														2023	$	—	$	—	$	—
2022	2022	$	—	$	—	$	—							2022	2		1		3		$	—	$	—	$	—
2021	2021	6		—		6		$	—	$	—	$	—	2021	8		5		13		6		1		7
2020	2020	14		2		16		4		1		5		2020	13		6		19		14		3		17
2019	2019	19		5		24		9		2		11		2019	18		7		25		19		5		24
2018		20		7		27		14		4		18
Prior	Prior	99		29		128		94		29		123		Prior	116		35		151		128		36		164
Total private student loans	Total private student loans	$	158	$	43	$	201	$	121	$	36	$	157	Total private student loans	$	157	$	54	$	211	$	167	$	45	$	212
Personal loans by origination year	Personal loans by origination year													Personal loans by origination year
2023														2023	$	—	$	—	$	—
2022	2022	$	5	$	1	$	6							2022	22		6		28		$	12	$	3	$	15
2021	2021	12		4		16		$	5	$	1	$	6	2021	18		6		24		15		6		21
2020	2020	7		3		10		7		2		9		2020	7		2		9		8		2		10
2019	2019	8		3		11		11		4		15		2019	5		3		8		6		2		8
2018		4		2		6		6		3		9
Prior	Prior	3		1		4		6		3		9		Prior	5		2		7		6		3		9
Total personal loans	Total personal loans	$	39	$	14	$	53	$	35	$	13	$	48	Total personal loans	$	57	$	19	$	76	$	47	$	16	$	63

(1)Private student loans may include a deferment period, during which borrowers are not required to make payments while enrolled in school at least half time as determined by the school. During a deferment period, these loans do not advance into delinquency.

1211

Table of Contents

Allowance for Credit Losses

The following tables provide changes in the Company's allowance for credit losses (dollars in millions):


		For the Three Months Ended September 30, 2022											For the Three Months Ended March 31, 2023
		Credit Card Loans		Private Student Loans		Personal Loans		Other Loans		Total Loans			Credit Card Loans		Private Student Loans		Personal Loans		Other Loans		Total Loans
Balance at June 30, 2022		$	5,307	$	832	$	572	$	46	$	6,757
Balance at December 31, 2022												Balance at December 31, 2022	$	5,883	$	839	$	595	$	57	$	7,374
Cumulative effect of ASU No. 2022-02 adoption(1)												Cumulative effect of ASU No. 2022-02 adoption(1)	(66)		—		(2)		—		(68)
Balance at January 1, 2023												Balance at January 1, 2023	5,817		839		593		57		7,306
Additions	Additions											Additions
Provision for credit losses(1)		649		20		69		5		743
Provision for credit losses(2)												Provision for credit losses(2)	1,002		60		68		5		1,135
Deductions	Deductions											Deductions
Charge-offs	Charge-offs	(592)		(29)		(38)		—		(659)		Charge-offs	(879)		(33)		(54)		—		(966)
Recoveries	Recoveries	197		6		17		—		220		Recoveries	195		6		15		—		216
Net charge-offs	Net charge-offs	(395)		(23)		(21)		—		(439)		Net charge-offs	(684)		(27)		(39)		—		(750)

Balance at September 30, 2022		$	5,561	$	829	$	620	$	51	$	7,061
Balance at March 31, 2023												Balance at March 31, 2023	$	6,135	$	872	$	622	$	62	$	7,691

		For the Three Months Ended September 30, 2021											For the Three Months Ended March 31, 2022
		Credit Card Loans		Private Student Loans		Personal Loans		Other Loans		Total Loans			Credit Card Loans		Private Student Loans		Personal Loans		Other Loans		Total Loans
Balance at June 30, 2021		$	5,409	$	828	$	745	$	44	$	7,026
Balance at December 31, 2021												Balance at December 31, 2021	$	5,273	$	843	$	662	$	44	$	6,822
Additions	Additions											Additions
Provision for credit losses(1)		178		46		(64)		—		160
Provision for credit losses(2)												Provision for credit losses(2)	178		45		(30)		—		193
Deductions	Deductions											Deductions
Charge-offs	Charge-offs	(495)		(23)		(38)		—		(556)		Charge-offs	(541)		(24)		(38)		—		(603)
Recoveries	Recoveries	206		6		19		—		231		Recoveries	210		6		19		—		235
Net charge-offs	Net charge-offs	(289)		(17)		(19)		—		(325)		Net charge-offs	(331)		(18)		(19)		—		(368)

Balance at September 30, 2021		$	5,298	$	857	$	662	$	44	$	6,861
Balance at March 31, 2022												Balance at March 31, 2022	$	5,120	$	870	$	613	$	44	$	6,647

		For the Nine Months Ended September 30, 2022
		Credit Card Loans		Private Student Loans		Personal Loans		Other Loans		Total Loans
Balance at December 31, 2021		$	5,273	$	843	$	662	$	44	$	6,822
Additions
Provision for credit losses(1)		1,395		54		19		7		1,475
Deductions
Charge-offs		(1,720)		(86)		(115)		—		(1,921)
Recoveries		613		18		54		—		685
Net charge-offs		(1,107)		(68)		(61)		—		(1,236)

Balance at September 30, 2022		$	5,561	$	829	$	620	$	51	$	7,061

		For the Nine Months Ended September 30, 2021
		Credit Card Loans		Private Student Loans		Personal Loans		Other Loans		Total Loans
Balance at December 31, 2020		6,491		840		857		38		8,226
Additions
Provision for credit losses(1)		(18)		61		(96)		6		(47)
Deductions
Charge-offs		(1,778)		(63)		(150)		—		(1,991)
Recoveries		603		19		51		—		673
Net charge-offs		(1,175)		(44)		(99)		—		(1,318)

Balance at September 30, 2021		$	5,298	$	857	$	662	$	44	$	6,861

(1)Represents the adjustment to the allowance for credit losses as a result of the adoption of ASU No. 2022-02 on January 1, 2023, which eliminated the requirement to apply discounted cash flow measurements for certain troubled debt restructurings.

(2)Excludes a ~~$30~~$33 million and ~~$25~~$39 million adjustment of the liability for expected credit losses on unfunded commitments for the three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021, respectively, and $1 million and $2 million for the nine months ended September 30, 2022 and 2021,~~ respectively, as the liability is recorded in accrued expenses and other liabilities in the Company's condensed consolidated statements of financial condition.

The allowance for credit losses was approximately ~~$7.1~~$7.7 billion at ~~September 30, 2022,~~March 31, 2023, which reflects a ~~$304~~$385 million build over ~~June 30, 2022 and a $239 million build from~~ December 31, ~~2021.~~2022. The build in the allowance for credit losses for the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 was primarily driven by ~~continued~~a modestly more pessimistic economic outlook and growth in revolving loan ~~growth.~~balances.

~~Table of Contents~~

The allowance estimation process begins with a loss forecast that uses certain macroeconomic variables and multiple macroeconomic scenarios among its inputs. In estimating the allowance at ~~September 30, 2022,~~March 31, 2023, the Company used a macroeconomic forecast that projected the following weighted average amounts: (i) an unemployment rate ~~of 4.2%~~ending 2023 at ~~the end of 2022,~~4.7% and peaking at ~~4.6% during 2023 and finishing the year at 4.5%;~~4.8% in early 2024 and (ii) ~~0.2% annualized decline~~0.96% growth rate in ~~the~~ real gross domestic product ~~for 2022 and 1.8% annualized growth~~ in ~~the real gross domestic product for~~ 2023.

In estimating expected credit losses, the Company considered the uncertainties associated with borrower behavior and payment trends, as well as ~~higher~~recent and expected macroeconomic conditions, such as high consumer price inflation ~~experienced during 2022~~ and the fiscal and monetary policy responses to that inflation. ~~During 2022, the~~The Federal Reserve raised its federal funds rate target range ~~multiple times~~substantially during 2022 in an effort to slow economic growth and ~~signaled additional rate hikes throughout~~reduce inflation. Most economists and financial market participants expect U.S. economic growth and inflation to continue to slow during 2023 as the ~~remainder of the year. In recognition of the risks related~~economy responds to the ~~macroeconomic environment,~~lagged effects of tighter monetary policy and credit conditions, which may contract further after the ~~estimation~~failure of ~~the allowance for credit losses has required significant management judgment.~~two domestic banks in March.

The forecast period the Company deemed to be reasonable and supportable was 18 months for all periods presented. The ~~18-month~~18 months reasonable and supportable forecast period was deemed appropriate given the current economic conditions. For all periods presented, the Company determined that a reversion period of 12 months was appropriate for the same reason. The Company applied a weighted reversion method to provide a more reasonable transition to historical losses for all loan products for all periods presented.

The increase in net charge-offs for credit card, private student loans and personal loans for the three months ended September 30, 2022, when compared to the same period in 2021, was primarily due to credit normalization. Table of Contents

The net charge-offs for credit card ~~and personal~~ loans ~~decreased~~increased for the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, when compared to the ~~same period in 2021.~~three months ended March 31, 2022, primarily due to continued credit normalization and the seasoning of vintages from the past two years. Thedecrease in net charge-offs for credit card was primarily driven by lower average balances at charge off. The decrease in net charge-offs for personal loans was primarily driven by continued benefit from tighter credit underwriting standards implemented in 2020. The increase in net charge-offs for private student and personal loans increased for the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, when compared to the ~~same period in 2021, was~~three months ended March 31, 2022, primarily ~~driven by~~due to continued credit ~~normalization and the diminishing benefit from pandemic programs.~~normalization.

Net charge-offs of principal are recorded against the allowance for credit losses, as shown in the preceding table. Information regarding net charge-offs of interest and fee revenues on credit card and other loans is as follows (dollars in millions):
For the Three Months Ended September 30, For the Nine Months Ended September 30,
2022 2021 2022 2021
Interest and fees accrued subsequently charged-off, net of recoveries (recorded as a reduction of interest income) $ 74 $ 57 $ 209 $ 232
Fees accrued subsequently charged-off, net of recoveries (recorded as a reduction to other income) $ 24 $ 15 $ 68 $ 59


	For the Three Months Ended March 31,
		2023		2022
Interest and fees accrued subsequently charged-off, net of recoveries (recorded as a reduction of interest income)		$	128	$	66
Fees accrued subsequently charged-off, net of recoveries (recorded as a reduction to other income)		$	41	$	21

Gross principal charge-offs of the Company's loan portfolio are presented in the table below, on a year-to-date basis, for credit card, private student and personal loan receivables (dollars in millions):



	For the Three Months Ended March 31, 2023
Credit card loans	$	879
Private student loans by origination year
2023	$	—
2022	—
2021	2
2020	5
2019	5
Prior	21
Total private student loans	$	33
Personal loans by origination year
2023	$	—
2022	16
2021	18
2020	9
2019	7
Prior	4
Total personal loans	$	54

1413

Table of Contents

Delinquent and Non-Accruing Loans

The amortized cost basis (excluding accrued interest receivable presented in other assets) of delinquent and non-accruing loans in the Company's loan portfolio is shown below for each class of loan receivables (dollars in millions):
30-89 Days
Delinquent 90 or
More Days
Delinquent Total Past
Due 90 or
More Days
Delinquent
and
Accruing
Total
Non-accruing(1)
At September 30, 2022
Credit card loans $ 991 $ 770 $ 1,761 $ 741 $ 188
Other loans
Private student loans 158 43 201 42 8
Personal loans 39 14 53 13 7
Other loans 9 10 19 1 21
Total other loans 206 67 273 56 36
Total loan receivables $ 1,197 $ 837 $ 2,034 $ 797 $ 224
At December 31, 2021
Credit card loans $ 670 $ 562 $ 1,232 $ 527 $ 194
Other loans
Private student loans 121 36 157 35 8
Personal loans 35 13 48 12 7
Other loans 7 7 14 1 16
Total other loans 163 56 219 48 31
Total loan receivables $ 833 $ 618 $ 1,451 $ 575 $ 225
(1)


	30-89 Days Delinquent		90 or More Days Delinquent		Total Past Due		90 or More Days Delinquent and Accruing		Total Non-accruing(2)
At March 31, 2023
Credit card loans	$	1,273	$	1,204	$	2,477	$	1,154	$	219
Other loans
Private student loans	157		54		211		54		8
Personal loans	57		19		76		18		8
Other loans	14		13		27		1		25
Total other loans	228		86		314		73		41
Total loan receivables	$	1,501	$	1,290	$	2,791	$	1,227	$	260

At December 31, 2022
Credit card loans	$	1,250	$	1,028	$	2,278	$	1,003	$	176
Other loans
Private student loans	167		45		212		45		8
Personal loans	47		16		63		16		7
Other loans	13		12		25		1		23
Total other loans	227		73		300		62		38
Total loan receivables	$	1,477	$	1,101	$	2,578	$	1,065	$	214

(1)The payment status of both modified and unmodified loans is included in this table.

(2)The Company estimates that the gross interest income that would have been recorded under the original terms of non-accruing credit card loans was $8 million and $6 million for the three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021, and $17 million and $21 million for the nine months ended September 30, 2022 and 2021,~~ respectively. The Company does not separately track the amount of gross interest income that would have been recorded under the original terms of loans. Instead, the Company estimated this amount based on customers' current balances and most recent interest rates.

~~The payment status~~

Table of ~~modified loans, including those identified as TDRs and those exempt from the TDR designation pursuant~~Contents

Loan Modifications to ~~the CARES Act, is reflected in the Company’s delinquency reporting.~~

~~Troubled Debt Restructurings~~Borrowers Experiencing Financial Difficulty

The Company has internal loan modification programs that provide relief to credit card, private student and personal loan borrowers who ~~may be~~are experiencing financial hardship. ~~The Company considers a modified loan in which a concession has been granted to the borrower to be a TDR based on the cumulative length of the concession period and credit quality of the borrower.~~ The internal loan modification programs include both temporary and permanent programs, which vary by product. External loan modification programs, through third party consumer credit counseling agencies, are also available for credit card and personal loans. ~~The Company evaluates new~~Those programs ~~to determine which of them meet the definition of~~feature interest rate reductions, payment delays, term extensions, or a TDR. Temporary and permanent modifications on credit card and personal loans, as well as temporary modifications on private student loans and certain grants of private student loan forbearance, generally result in the loans being classified as TDRs. In addition, loans that defaulted from, or successfully completed a loan modification program or forbearance, continue to be classified as TDRs, except as noted in the following paragraph. See the table below that presents the carrying value of loans that entered a TDR program and experienced a default during the period for more information.combination thereof.

For credit card customers, the Company offers both temporary and permanent hardship programs. The temporary hardship programs consist of an interest rate reduction ~~and, in some cases, a reduced minimum payment, both~~ lasting for a period no longer than 12 months. Charging privileges on these accounts are generally suspended while in the program. However, if the customer meets certain criteria, charging privileges may be reinstated following completion of the program. Credit card accounts of borrowers who have previously participated in a temporary interest rate reduction program and that have both demonstrated financial stability and had their charging privileges reinstated at a market-based interest rate, are excluded from the balance of TDRs.

The permanent modification program involves closing the account, changing the structure of the loan to a fixed payment loan with a maturity no longer than 72 months and reducing the interest rate on the loan. The permanent

~~Table of Contents~~

modification program does not typically provide for the forgiveness of unpaid principal, but may allow for the reversal of certain unpaid interest or fee assessments. The Company also makes permanent loan modifications for customers who request financial assistance through external sources, such as a consumer credit counseling agency program. These loans typically receive a reduced interest rate, ~~generally reflect fixed~~typically continue to be subject to the original minimum payment terms and do not normally include waiver of unpaid principal, interest or fees. ~~These permanent loan modifications remain in the population of TDRs until they are paid off or charged off.~~

At September 30, 2022 and December 31, 2021, there were $5.5 billion and $5.8 billion, respectively, of private student loans in repayment and $76 million and $64 million, respectively, in forbearance. To assist private student loan borrowers who are experiencing temporary financial difficulties but are willing to resume making payments, the Company may offer a payment delay (in the form of hardship forbearance ~~payment deferral,~~or a temporary payment ~~reduction,~~reduction), or a temporary interest rate ~~reduction or extended terms. A modified loan typically meets the definition~~reduction. Typically programs are offered up to six consecutive months at one time with a lifetime usage cap, most commonly, of ~~a TDR based on the cumulative length of the concession period and a determination of financial distress based on an evaluation of the borrower's credit quality using FICO scores.~~12 months.

For personal loan customers, the Company offers various payment programs, including temporary and permanent programs, in certain situations. The temporary programs normally consist of reducing the minimum payment for no longer than 12 months and, in certain circumstances, the interest rate on the loan is reduced. The permanent programs involve extending the loan term and, in certain circumstances, reducing the interest rate on the loan. The total term of the loan, including modification, may not exceed nine years. The Company also allows permanent loan modifications for customers who request financial assistance through external sources, similar to the credit card customers discussed above. Payments are modified based on the new terms agreed upon with the credit counseling agency. ~~Personal loans included~~

In addition to the programs described above, the Company will in ~~temporary~~certain cases accept partial payment in full satisfaction of the outstanding receivable. This is a form of principal forgiveness also known as a settlement. The difference between the loan balance and ~~permanent programs are classified~~the amount received in settlement is recorded as ~~TDRs.~~a charge-off.

The Company monitors borrower performance after using payment programs or forbearance. The Company believes the programs are useful in assisting customers experiencing financial difficulties and allowing them to make timely payments. In addition to helping customers with their credit needs, these programs are designed to maximize collections and ultimately the Company’s profitability. The Company plans to continue to use payment programs ~~and forbearance~~ to provide relief to customers experiencing ~~temporary~~ financial ~~difficulties~~difficulties.

Table of Contents

ASU No. 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and ~~expects~~Vintage Disclosures, became effective for the Company on January 1, 2023. The new guidance eliminated Subtopic 310-40, Troubled Debt Restructurings, and implemented enhanced disclosure requirements regarding loan modifications to ~~have additional~~borrowers experiencing financial difficulty. The new disclosures are required to be applied on a prospective basis. There will be no comparative disclosures to prior periods until such time as both periods disclosed are subject to the new guidance.

The following table provides the period-end amortized cost basis, by modification category, of loans ~~classified as TDRs~~to borrowers experiencing financial difficulty that entered a modification program during the period (dollars in millions). Some of the loans presented in the ~~future~~table below may no longer be enrolled in a program at period-end:


	For the Three Months Ended March 31,
		2023
Credit card loans(1)(2)
Interest rate reduction		$	632
Total credit card loans(3)		$	632
% of total class of financing receivables		0.70		%

Private student loans(1)
Payment delay(4)		$	3
Interest rate reduction and payment delay(4)		29
Total private student loans(3)		$	32
% of total class of financing receivables		0.04		%

Personal loans(1)
Payment delay(4)		$	2
Term extension(5)		8
Interest rate reduction and payment delay(4)		14
Interest rate reduction and term extension(5)		6
Total personal loans(3)		$	30
% of total class of financing receivables		0.36		%

(1)Accrued interest receivable (including unbilled accrued interest receivable for credit card loans) on modified loans to borrowers experiencing financial difficulty, which is presented as part of other assets in the Company's condensed consolidated statements of financial condition, was immaterial at March 31, 2023.

(2) Accounts that entered a credit card loan modification program include $118 million that were converted from revolving line-of-credit arrangements to term loans during the three months ended March 31, 2023.

(3) For settlements, the amortized cost basis is zero at period-end and therefore there is no amount reported for principal forgiveness in the table above. See financial effects table below for principal forgiveness to borrowers experiencing financial difficulty.

(4) The Company defines a payment delay as a ~~result.~~temporary reduction in payments below the original contractually required payment amounts (e.g., interest only payments). The Company's credit card loan modification programs do not result in an other than insignificant delay in payment.

(5) The Company defines term extensions as only those modifications for which the maturity date is extended beyond the original contractual maturity date by virtue of a change in terms other than a payment delay as defined above. Modifications to credit card loans are not considered term extensions because credit card loans do not have a fixed repayment term.

The only non-cancellable commitments the Company has to lend additional funds to borrowers experiencing financial difficulty relate to certain private student loans. As of March 31, 2023, the amount of such commitments was immaterial.

Table of Contents

The following table provides information on the financial effects of loan modifications to borrowers experiencing financial difficulty, by modification type, made during the period (dollars in millions):


	For the Three Months Ended March 31,
		2023
Credit card loans
Weighted-average interest rate reduction		13.38		%
Principal forgiven		NM
Interest and fees forgiven(1)		$	12

Private student loans
Weighted-average interest rate reduction		8.02		%
Payment delay duration (in months)(2)		6 to 12
Principal forgiven		$	—

Personal loans
Weighted-average interest rate reduction		11.55		%
Weighted-average term extension (in months)		38
Payment delay duration (in months)(2)		6 to 12
Principal forgiven		$	—

(1) Represents the amount of interest and fees forgiven resulting from accounts entering into a credit card loan modification program.

(2) For private student loan payment delays, the Company offers up to six consecutive months of delay and most commonly limits assistance to a life of loan maximum of 12 months. For personal loan payment delays, the Company limits this assistance to a life of loan maximum of 12 months.

Loan receivables that have been modified are subject to the same requirements for the accrual of expected credit loss over their expected remaining lives as for unmodified loans. The allowance for credit losses incorporates modeling of historical loss data and thereby captures the higher risk associated with modified loans to borrowers experiencing financial difficulty based on their account attributes.

The following table presents the payment status and period-end amortized cost basis, by class of loan receivable, of loans that were modified on or after January 1, 2023 to borrowers experiencing financial difficulty (dollars in millions):


	Current		30-89 Days Delinquent		90 or More Days Delinquent
At March 31, 2023
Credit card loans	$	469	$	96	$	67
Private student loans	31		1		—
Personal loans	26		4		—
Total	$	526	$	101	$	67

The period-end amortized cost basis of loans modified on or after January 1, 2023 to borrowers experiencing financial difficulty which subsequently defaulted was immaterial for the three months ended March 31, 2023, for all classes of loan receivables. For purposes of this disclosure, a loan is considered to be defaulted when it is 60 days or more delinquent at month end. Loans that entered a modification program in any stage of delinquency but did not experience a further payment default are included in the aging table above but are not counted as defaulted for purposes of this disclosure.

Table of Contents

Troubled Debt Restructurings (Prior to 2023)

Prior to the adoption of ASU 2022-02, the Company considered a modified loan in which a concession had been granted to the borrower to be a TDR based generally on the cumulative length of the concession period and credit quality of the borrower. Due to differences between the legacy TDR requirements and current loan modification disclosure requirements, information presented in the disclosures below is not directly comparable to the disclosures under the current guidance.

To evaluate the primary financial effects that resulted from credit card loans entering into a TDR program during the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022, ~~and 2021,~~ the Company quantified the amount by which interest and fees were reduced during the periods. During the three months ended ~~September 30,~~March 31, 2022, ~~and 2021,~~ the Company forgave approximately $7 million of interest and fees resulting from accounts entering into a credit card loan TDR program. During the nine months ended September 30, 2022 and 2021, the Company forgave approximately $20 million and $28 million, respectively, of interest and fees resulting from accounts entering into a credit card loan TDR program. For all loan products, interest income on modified loans is recognized based on the modified contractual terms.

~~Table of Contents~~

The following table provides information on loans that entered a TDR program during the period (dollars in millions):


		For the Three Months Ended September 30,
		2022			2021				For the Three Months Ended March 31, 2022
		Number of Accounts	Balances		Number of Accounts	Balances			Number of Accounts	Balances
Accounts that entered a TDR program during the period	Accounts that entered a TDR program during the period							Accounts that entered a TDR program during the period
Credit card loans(1)	Credit card loans(1)	63,803	$	414	13,964	$	86	Credit card loans(1)	54,511	$	344
Private student loans	Private student loans	1,863	$	36	102	$	2	Private student loans	1,755	$	31
Personal loans	Personal loans	1,799	$	25	888	$	10	Personal loans	1,159	$	15

		For the Nine Months Ended September 30,
		2022			2021
		Number of Accounts	Balances		Number of Accounts	Balances
Accounts that entered a TDR program during the period
Credit card loans(1)		167,655	$	1,071	48,887	$	315
Private student loans		5,141	$	96	355	$	7
Personal loans		4,561	$	62	3,102	$	38

(1)Accounts that entered a credit card TDR program include ~~$80 million and $72~~$75 million that were converted from revolving line-of-credit arrangements to term loans during the three months ended ~~September 30, 2022 and 2021, respectively, and $225 million and $288 million for the nine months ended September 30, 2022 and 2021, respectively.~~March 31, 2022.

The number and balance of enrollments in credit card and private student ~~loan and personal~~ loan modification programs designated as TDRs increased during the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022, when compared to the same ~~periods~~period in 2021. The ~~increase is~~number and balance of enrollments in personal loan modification programs designated as TDRs decreased during the three months ended March 31, 2022, when compared to the same period in 2021, primarily due to tighter underwriting standards that the ~~expiration of the CARES Act exemption for new modifications effective January 1, 2022.~~Company implemented in early 2020.

The following table presents the carrying value of loans that experienced a default during the period that had been modified in a TDR during the 15 months preceding the end of each period (dollars in millions):


		For the Three Months Ended September 30,
		2022			2021				For the Three Months Ended March 31, 2022
		Number of Accounts	Aggregated Outstanding Balances Upon Default		Number of Accounts	Aggregated Outstanding Balances Upon Default			Number of Accounts	Aggregated Outstanding Balances Upon Default
TDRs that subsequently defaulted	TDRs that subsequently defaulted							TDRs that subsequently defaulted
Credit card loans(1)(2)	Credit card loans(1)(2)	7,784	$	38	3,679	$	21	Credit card loans(1)(2)	4,535	$	23
Private student loans(3)	Private student loans(3)	391	$	7	83	$	2	Private student loans(3)	106	$	2
Personal loans(2)	Personal loans(2)	606	$	9	399	$	6	Personal loans(2)	261	$	3

		For the Nine Months Ended September 30,
		2022			2021
		Number of Accounts	Aggregated Outstanding Balances Upon Default		Number of Accounts	Aggregated Outstanding Balances Upon Default
TDRs that subsequently defaulted
Credit card loans(1)(2)		18,022	$	89	14,205	$	84
Private student loans(3)		658	$	12	214	$	5
Personal loans(2)		1,142	$	16	1,287	$	18

(1)For credit card loans that default from a temporary loan modification program, accounts revert back to the pre-modification terms and charging privileges remain suspended in most cases.

(2)For credit card loans and personal loans, a customer defaults from a loan modification program after either two consecutive missed payments or at charge-off, depending on the program. The outstanding balance upon default is generally the loan balance at the end of the month prior to default.

(3)For student loans, a customer defaults from a loan modification after they are 60 or more days delinquent. The outstanding balance upon default is generally the loan balance at the end of the month prior to default.

~~Table of Contents~~

Of the account balances that defaulted as shown above for the three months ended ~~September 30,~~March 31, 2022, ~~and 2021,~~ approximately ~~60% and 62%, respectively, and for the nine months ended September 30, 2022 and 2021, approximately 62% and 66%, respectively,~~64% of the total balances were charged off at the end of the month in which they defaulted from a TDR program. For the three months ended March 31, 2022, for accounts that ~~have~~had defaulted from a TDR program and ~~have~~had not been subsequently charged off, the balances ~~are~~were included in the allowance for credit loss ~~analysis discussed above under “— Allowance for Credit Losses.”~~analysis.

Table of Contents

4. Credit Card and Private Student Loan Securitization Activities

The Company's securitizations are accounted for as secured borrowings and the related trusts are treated as consolidated subsidiaries of the Company. For a description of the Company's principles of consolidation with respect to VIEs, see Note 1: Background and Basis of Presentation to the consolidated financial statements in the Company's annual report on Form 10-K for the year ended December 31, ~~2021.~~2022.

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"). Credit card loan receivables are transferred into DCMT and beneficial interests in DCMT are transferred into DCENT. DCENT issues debt securities to investors that are reported primarily in long-term borrowings.

The DCENT debt structure consists of four classes of securities (DiscoverSeries Class A, B, C and D notes), with the most senior class generally receiving a triple-A rating. To issue senior, higher-rated classes of notes, it is necessary to obtain the appropriate amount of credit enhancement, generally through the issuance of junior, lower-rated or more highly subordinated classes of notes. Wholly-owned subsidiaries of Discover Bank hold the subordinated classes of notes. The Company is exposed to credit risk associated with trust receivables as of the balance sheet date through the retention of these subordinated interests. The ~~current~~estimate of expected credit ~~loss ("CECL")~~losses on trust receivables is included in the allowance for credit losses estimate.

The Company's retained interests in the trust's assets, consisting of investments in DCENT notes held by subsidiaries of Discover Bank, constitute intercompany positions that are eliminated in the preparation of the Company's condensed consolidated statements of financial condition.

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

~~Table of Contents~~

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


		September 30, 2022		December 31, 2021			March 31, 2023		December 31, 2022
Restricted cash	Restricted cash	$	1,858	$	2,574	Restricted cash	$	24	$	33

Investors' interests held by third-party investors	Investors' interests held by third-party investors	11,025		9,425		Investors' interests held by third-party investors	9,025		10,200
Investors' interests held by wholly owned subsidiaries of Discover Bank		3,333		3,899
Investors' interests held by wholly-owned subsidiaries of Discover Bank						Investors' interests held by wholly-owned subsidiaries of Discover Bank	3,197		3,341
Seller's interest	Seller's interest	10,345		11,918		Seller's interest	12,296		12,220
Loan receivables(1)	Loan receivables(1)	24,703		25,242		Loan receivables(1)	24,518		25,761
Allowance for credit losses allocated to securitized loan receivables(1)	Allowance for credit losses allocated to securitized loan receivables(1)	(1,153)		(1,371)		Allowance for credit losses allocated to securitized loan receivables(1)	(1,106)		(1,152)
Net loan receivables	Net loan receivables	23,550		23,871		Net loan receivables	23,412		24,609
Other assets	Other assets	5		3		Other assets	3		2
Carrying value of assets of consolidated variable interest entities	Carrying value of assets of consolidated variable interest entities	$	25,413	$	26,448	Carrying value of assets of consolidated variable interest entities	$	23,439	$	24,644

(1)The Company maintains its allowance for credit losses at an amount equal to lifetime expected credit losses associated with all loan receivables, which includes all loan receivables in the trusts. Therefore, the credit risk associated with the transferred receivables is fully reflected on the Company's statements of financial condition in accordance with GAAP.

Table of Contents

The debt securities issued by the consolidated trusts are subject to credit, payment and interest rate risks on the transferred credit card loan receivables. To protect investors in the securities, there are certain features or triggering events that will cause an early amortization of the debt securities, including triggers related to the impact of the performance of the trust receivables on the availability and adequacy of cash flows to meet contractual requirements. As of ~~September 30, 2022,~~March 31, 2023, no economic or other early amortization events have occurred.

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

Private Student Loan Securitization Activities

~~Private~~The Company's private student loan trust receivables ~~are~~ reported in loan receivables and the related debt issued by the trust is reported in long-term ~~borrowings.~~borrowings were immaterial as of March 31, 2023 and December 31, 2022. The ~~trust assets~~amounts are restricted from being sold or pledged as collateral for other borrowings and the cash flows from these restricted assets may be used only to pay obligations of the trusts. Except for the trust's restricted assets, the trust and investors have no recourseincluded, together with amounts related to the Company's ~~other assets or the Company's general credit for a shortage in cash flows.~~

Principal payments on the long-term secured borrowings are made as cash is collected on the underlying loans that are collateral on the secured borrowings. The Company does not have access to cash collected by the securitization trust until cash is released in accordance with the trust indenture agreement. Similar to the credit card securitizations, in the ~~Company continues to own~~supplemental information about assets and ~~service the private student loan receivables held by the trust and receives servicing fees from the trust based on a percentage~~liabilities of ~~the principal balance outstanding. Although the servicing fee income offsets the fee expense related to the trust and thus~~consolidated variable interest entities, which is ~~eliminated in consolidation, failure to service the transferred loan receivables in accordance~~presented with ~~contractual requirements could lead to a termination of the servicing rights and the loss of future servicing income, net of related expenses.~~

Under terms of the trust arrangement, the Company has the option, but not the obligation, to provide financial support to the trust, but has never provided such support. A substantial portion of the credit risk associated with the securitized loans has been transferred to a third party under an indemnification arrangement.

~~Table of Contents~~

~~The carrying values of these restricted assets, which are presented on~~ the Company's condensed consolidated statements of financial ~~condition as relating to securitization activities, are shown in the following table (dollars in millions):~~
September 30,
2022 December 31,
2021
Restricted cash $ 8 $ 8
Private student loan receivables 182 207
Carrying value of assets of consolidated variable interest entities $ 190 $ 215
condition.

5. Deposits

The Company ~~offers its deposit products to customers~~obtains deposits from consumers directly or through ~~two channels: (i) direct marketing, internet origination and~~ affinity relationships ("direct-to-consumer deposits")~~; and (ii) contractual arrangements with~~. Additionally, the Company obtains deposits through third-party securities brokerage firms that offer the Company's deposits to their customers ("brokered deposits"). Direct-to-consumer ~~deposits~~deposit products include ~~online~~ savings accounts, certificates of deposit, money market accounts, IRA savings accounts, IRA certificates of deposit and ~~checking/debit~~checking accounts. Brokered ~~deposits~~deposit products include certificates of deposit and sweep accounts.

Customer deposits held with Discover Bank are currently insured for up to $250,000 per account holder through the Federal Deposit Insurance Corporation (“FDIC”). At March 31, 2023 and December 31, 2022, the Company had approximately $5.9 billion and $8.9 billion of uninsured deposits, respectively. The decrease in uninsured deposits reported was primarily driven by leveraging technological capabilities enabling improved application of deposit account ownership attributes in deriving this amount. The amounts of uninsured deposits above were estimated based on the same methodologies and assumptions used for Discover Bank’s regulatory reporting at each respective balance sheet date.

The following table summarizes certificates of deposits maturing over the remainder of this year, over each of the next four years and thereafter (dollars in millions):


		At September 30, 2022			At March 31, 2023
2022		$	4,136
2023	2023	12,675		2023	$	13,792
2024	2024	4,820		2024	10,685
2025	2025	1,935		2025	3,314
2026	2026	1,223		2026	2,421
2027				2027	3,581
Thereafter	Thereafter	2,204		Thereafter	1,623
Total	Total	$	26,993	Total	$	35,416

Table of Contents

6. Long-Term Borrowings

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


		September 30, 2022					December 31, 2021			March 31, 2023					December 31, 2022
		Maturity	Interest Rate	Weighted-Average Interest Rate	Outstanding Amount		Outstanding Amount			Maturity	Interest Rate	Weighted-Average Interest Rate	Outstanding Amount		Outstanding Amount
Securitized Debt	Securitized Debt								Securitized Debt
Fixed-rate asset-backed securities(1)	Fixed-rate asset-backed securities(1)	2022-2026	0.58% - 3.56%	2.41%	$	8,405	$	5,588	Fixed-rate asset-backed securities(1)	2024-2026	0.58% - 5.03%	2.76%	$	7,792	$	8,401
Floating-rate asset-backed securities(2)	Floating-rate asset-backed securities(2)	2022-2024	3.15% - 3.42%	3.26%	2,599		3,347		Floating-rate asset-backed securities(2)	2023-2024	5.07% - 5.28%	5.23%	1,224		1,774
Total Discover Card Master Trust I and Discover Card Execution Note Trust	Total Discover Card Master Trust I and Discover Card Execution Note Trust				11,004		8,935		Total Discover Card Master Trust I and Discover Card Execution Note Trust				9,016		10,175

Floating-rate asset-backed security(3)(4)	Floating-rate asset-backed security(3)(4)	2031	7.25%	7.25%	88		104		Floating-rate asset-backed security(3)(4)	2031	9.00%	9.00%	79		84
Total private student loan securitization trust	Total private student loan securitization trust				88		104		Total private student loan securitization trust				79		84
Total long-term borrowings - owed to securitization investors	Total long-term borrowings - owed to securitization investors				11,092		9,039		Total long-term borrowings - owed to securitization investors				9,095		10,259

Discover Financial Services (Parent Company)	Discover Financial Services (Parent Company)								Discover Financial Services (Parent Company)
Fixed-rate senior notes	Fixed-rate senior notes	2022-2027	3.75% - 4.50%	4.06%	3,088		3,382		Fixed-rate senior notes	2024-2032	3.75% - 6.70%	4.68%	3,334		3,333
Fixed-rate retail notes	Fixed-rate retail notes	2022-2031	2.85% - 4.40%	3.75%	166		166		Fixed-rate retail notes	2023-2031	2.85% - 4.40%	3.77%	154		154

Discover Bank	Discover Bank								Discover Bank
Fixed-rate senior bank notes(1)	Fixed-rate senior bank notes(1)	2023-2030	2.45% - 4.65%	3.63%	5,344		5,385		Fixed-rate senior bank notes(1)	2023-2030	2.45% - 4.65%	3.68%	4,562		5,348
Fixed-rate subordinated bank notes(1)	Fixed-rate subordinated bank notes(1)	2028	4.68%	4.68%	487		505		Fixed-rate subordinated bank notes(1)	2028	4.68%	4.68%	493		489
Floating-rate Federal Home Loan Bank advance(5)									Floating-rate Federal Home Loan Bank advance(5)	2023	5.05%	5.05%	525		525
Total long-term borrowings	Total long-term borrowings				$	20,177	$	18,477	Total long-term borrowings				$	18,163	$	20,108

(1)The Company uses interest rate swaps to hedge portions of these long-term borrowings against changes in fair value attributable to changes in the ~~London Interbank Offered Rate ("LIBOR") or Overnight Index Swap ("OIS")~~applicable benchmark interest rates. The use of these interest rate swaps impacts the carrying value of the debt. See Note 15: Derivatives and Hedging Activities.

(2)DCENT floating-rate asset-backed securities include issuances with the following interest rate terms: 1-month LIBOR + 3339 to 60 basis points as of ~~September 30, 2022.~~March 31, 2023.

(3)The private student loan securitization trust floating-rate asset-backed security includes an issuance with the following interest rate term: Prime rate + 100 basis points as of ~~September 30, 2022.~~March 31, 2023.

(4)Repayment of this debt is dependent upon the timing of principal and interest payments on the underlying private student loans. The date shown represents the final maturity date.

(5)The floating-rate Federal Home Loan Bank (“FHLB”) advance includes the following interest rate term: SOFR + 23 basis points as of March 31, 2023.

The following table summarizes long-term borrowings maturing over the remainder of this year, over each of the next four years and thereafter (dollars in millions):


		September 30, 2022			March 31, 2023
2022		$	2,331
2023	2023	3,283		2023	$	1,841
2024	2024	3,729		2024	3,728
2025	2025	5,167		2025	6,172
2026	2026	2,658		2026	2,674
2027				2027	1,000
Thereafter	Thereafter	3,009		Thereafter	2,748
Total	Total	$	20,177	Total	$	18,163

As a member of the FHLB of Chicago, the Company has access to both short- and long-term advance structures with maturities ranging from overnight to 30 years. ~~At September 30, 2022,~~As of March 31, 2023, the Company had total committed borrowing capacity of ~~$2.1 billion based on the amount and type of assets pledged, none of which was drawn. At December 31, 2021, the Company had total committed borrowing capacity of $1.4~~$2.6 billion based on the amount and type of assets pledged, of which ~~$1.3~~the outstanding balance was comprised solely of a $525 million long-term advance. As of December 31, 2022, the Company had total committed borrowing capacity of $2.2 billion based on the amount and type of ~~short-term~~assets pledged, of which the outstanding balance was comprised solely of a $525 million long-term advance. These advances ~~were outstanding.~~are presented as short- or long-term borrowings on the condensed consolidated statements of financial condition as appropriate.

Table of Contents

Additionally, the Company has access to committed borrowing capacity through private securitizations to support the funding of its credit card loan receivables. As of ~~September 30, 2022,~~March 31, 2023, the total commitment of secured credit facilities

~~Table of Contents~~

through private providers was $3.5 billion, none of which was drawn. As of December 31, ~~2021,~~2022, the total commitment of secured credit facilities through private providers was ~~$4.0~~$3.5 billion, ~~$500 million~~none of which was ~~outstanding as a short-term draw.~~drawn. Access to the unused portions of the secured credit facilities is subject to the terms of the agreements with each of the providers. The secured credit facilities have various expirations in ~~2024.~~2024 and 2025. Borrowings outstanding under each facility bear interest at a margin above ~~LIBOR,~~the London Interbank Offered Rate ("LIBOR"), Term Secured Overnight Financing Rate ("SOFR") or the asset-backed commercial paper costs of each provider. The terms of each agreement provide for a commitment fee to be paid on the unused capacity and include various affirmative and negative covenants, including performance metrics and legal requirements similar to those required to issue any term securitization transaction.

7. Preferred Stock

The table below presents a summary of the Company's non-cumulative perpetual preferred stock that is outstanding at ~~September 30, 2022~~March 31, 2023 (dollars in millions, except per depositary share amounts):


Series	Series	Description		Initial Issuance Date	Liquidation Preference and Redemption Price per Depositary Share(1)			Per Annum Dividend Rate in effect at September 30, 2022			Total Depositary Shares Authorized, Issued and Outstanding			Carrying Value				Series	Description			Initial Issuance Date		Liquidation Preference and Redemption Price per Depositary Share(1)			Per Annum Dividend Rate in effect at March 31, 2023		Total Depositary Shares Authorized, Issued and Outstanding				Carrying Value
							September 30, 2022				December 31, 2021		September 30, 2022	December 31, 2021							March 31, 2023					December 31, 2022			March 31, 2023		December 31, 2022
C(2)(3)(4)	C(2)(3)(4)		Fixed-to-Floating Rate		10/31/2017			$	1,000		5.500	%	570,000	570,000		$	563			$	563		C(2)(3)(4)	Fixed-to-Floating Rate			10/31/2017		$	1,000	5.500	%	570,000		570,000		$	563	$	563
D(2)(5)(6)	D(2)(5)(6)	Fixed-Rate Reset		6/22/2020	$	1,000		6.125		%	500,000		500,000	493		493		D(2)(5)(6)	Fixed-Rate Reset			6/22/2020		$	1,000		6.125	%	500,000		500,000		493		493
Total Preferred Stock	Total Preferred Stock										1,070,000		1,070,000	$	1,056	$	1,056	Total Preferred Stock											1,070,000		1,070,000		$	1,056	$	1,056

(1)Redeemable at the redemption price plus declared and unpaid dividends.

(2)Issued as depositary shares, each representing 1/100th interest in a share of the corresponding series of preferred stock. Each preferred share has a par value of $0.01.

(3)Redeemable at the Company’s option, subject to regulatory approval, either (i) in whole or in part on any dividend payment date on or after October 30, 2027, or (ii) in whole but not in part, at any time within 90 days following a regulatory capital treatment event (as defined in the certificate of designations for the Series C preferred stock).

(4)Any dividends declared are payable semi-annually in arrears at a rate of ~~5.50%~~5.500% per annum until October 30, 2027. Thereafter, dividends declared will be payable quarterly in arrears at a floating rate equal to 3-month LIBOR plus a spread of 3.076% per annum.

(5)Redeemable at the Company’s option, subject to regulatory approval, either (i) in whole or in part during the three-month period prior to, and including, each reset date (as defined in the certificate of designations for the Series D preferred stock) or (ii) in whole but not in part, at any time within 90 days following a regulatory capital treatment event (as defined in the certificate of designations for the Series D Preferred Stock).

(6)Any dividends declared are payable semi-annually in arrears at a rate of 6.125% per annum until September 23, 2025, after which the dividend rate will reset every ~~five~~5 years to a fixed annual rate equal to the 5-year Treasury plus a spread of 5.783%.

Table of Contents

8. Accumulated Other Comprehensive Income

Changes in each component of accumulated other comprehensive income ("AOCI") were as follows (dollars in millions):
Unrealized (Losses) Gains on Available-for-Sale Investment Securities, Net of Tax Losses on Cash Flow Hedges, Net of Tax Losses on Pension Plan, Net of Tax AOCI
For the Three Months Ended September 30, 2022
Balance at June 30, 2022 $ (48) $ (4) $ (199) $ (251)
Net change (100) (2) — (102)
Balance at September 30, 2022 $ (148) $ (6) $ (199) $ (353)
For the Three Months Ended September 30, 2021
Balance at June 30, 2021 $ 198 $ (10) $ (227) $ (39)
Net change (29) — — (29)
Balance at September 30, 2021 $ 169 $ (10) $ (227) $ (68)
For the Nine Months Ended September 30, 2022
Balance at December 31, 2021 $ 114 $ (9) $ (199) $ (94)
Net change (262) 3 — (259)
Balance at September 30, 2022 $ (148) $ (6) $ (199) $ (353)
For the Nine Months Ended September 30, 2021
Balance at December 31, 2020 $ 284 $ (12) $ (227) $ 45
Net change (115) 2 — (113)
Balance at September 30, 2021 $ 169 $ (10) $ (227) $ (68)

~~Table of Contents~~


	Unrealized Losses on Available-for-Sale Investment Securities, Net of Tax		Losses on Cash Flow Hedges, Net of Tax		Losses on Pension Plan, Net of Tax		AOCI










For the Three Months Ended March 31, 2023
Balance at December 31, 2022	$	(136)	$	(14)	$	(189)	$	(339)
Net change	92		12		—		104
Balance at March 31, 2023	$	(44)	$	(2)	$	(189)	$	(235)

For the Three Months Ended March 31, 2022
Balance at December 31, 2021	$	114	$	(9)	$	(199)	$	(94)
Net change	(121)		2		—		(119)
Balance at March 31, 2022	$	(7)	$	(7)	$	(199)	$	(213)

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


		Before Tax		Tax Benefit (Expense)		Net of Tax			Before Tax		Tax (Expense) Benefit		Net of Tax
For the Three Months Ended September 30, 2022

For the Three Months Ended March 31, 2023								For the Three Months Ended March 31, 2023
Available-for-Sale Investment Securities								Available-for-Sale Investment Securities
Net unrealized holding gains arising during the period								Net unrealized holding gains arising during the period	$	122	$	(30)	$	92

Net change								Net change	$	122	$	(30)	$	92
Cash Flow Hedges								Cash Flow Hedges
Net unrealized gains arising during the period								Net unrealized gains arising during the period	$	10	$	(2)	$	8
Amounts reclassified from AOCI								Amounts reclassified from AOCI	5		(1)		4
Net change								Net change	$	15	$	(3)	$	12

For the Three Months Ended March 31, 2022								For the Three Months Ended March 31, 2022
Available-for-Sale Investment Securities	Available-for-Sale Investment Securities							Available-for-Sale Investment Securities
Net unrealized holding losses arising during the period	Net unrealized holding losses arising during the period	$	(133)	$	33	$	(100)	Net unrealized holding losses arising during the period	$	(160)	$	39	$	(121)

Net change	Net change	$	(133)	$	33	$	(100)	Net change	$	(160)	$	39	$	(121)
Cash Flow Hedges	Cash Flow Hedges							Cash Flow Hedges
Net unrealized losses arising during the period	Net unrealized losses arising during the period	$	(4)	$	1	$	(3)	Net unrealized losses arising during the period	$	(1)	$	—	$	(1)
Amounts reclassified from AOCI	Amounts reclassified from AOCI	2		(1)		1		Amounts reclassified from AOCI	1		2		3
Net change	Net change	$	(2)	$	—	$	(2)	Net change	$	—	$	2	$	2

For the Three Months Ended September 30, 2021
Available-for-Sale Investment Securities
Net unrealized holding losses arising during the period		$	(38)	$	9	$	(29)

Net change		$	(38)	$	9	$	(29)
Cash Flow Hedges
Net unrealized gains arising during the period		$	—	$	1	$	1
Amounts reclassified from AOCI		$	—	$	(1)	$	(1)
Net change		$	—	$	—	$	—

For the Nine Months Ended September 30, 2022
Available-for-Sale Investment Securities
Net unrealized holding losses arising during the period		$	(346)	$	84	$	(262)

Net change		$	(346)	$	84	$	(262)
Cash Flow Hedges
Net unrealized losses arising during the period		$	(2)	$	—	$	(2)
Amounts reclassified from AOCI		4		1		5
Net change		$	2	$	1	$	3

For the Nine Months Ended September 30, 2021
Available-for-Sale Investment Securities
Net unrealized holding losses arising during the period		$	(152)	$	37	$	(115)

Net change		$	(152)	$	37	$	(115)
Cash Flow Hedges
Net unrealized gains arising during the period		$	—	$	1	$	1
Amounts reclassified from AOCI		$	2	$	(1)	$	1
Net change		$	2	$	—	$	2

2423

Table of Contents

9. Income Taxes

The following table presents the calculation of the Company's effective income tax rate (dollars in millions):
For the Three Months Ended September 30, For the Nine Months Ended September 30,
2022 2021 2022 2021
Income before income taxes $ 1,318 $ 1,402 $ 4,388 $ 5,703
Income tax expense $ 312 $ 311 $ 1,029 $ 1,321
Effective income tax rate 23.6 % 22.2 % 23.4 % 23.2 %

Income tax expense was flat for the three months ended September 30, 2022, as compared to the same period in 2021. Income tax expense decreased $292 million for the nine months ended September 30, 2022, as compared to the same period in 2021, primarily due to a decrease in pretax income. The effective tax rate increased for the three and nine months ended September 30, 2022, as compared to the same periods in 2021, primarily due to a settlement with tax authorities in the prior periods.


	For the Three Months Ended March 31,
		2023			2022
Income before income taxes		$	1,268		$	1,618
Income tax expense		$	292		$	376
Effective income tax rate		23.0		%	23.3		%

The Company is subject to examination by the Internal Revenue Service ("IRS") and tax authorities in various state, local and foreign tax jurisdictions. The ~~IRS is examining the~~ Company's ~~2018~~ federal income tax ~~filing.~~filings are open to examinations for the tax years ended December 31, 2019 and forward. The Company regularly assesses the likelihood of additional assessments or settlements in each of the taxing jurisdictions. At this time, the potential change in unrecognized tax benefits is not expected to be ~~immaterial~~significant over the next 12 months. The Company believes that its reserves are sufficient to cover any tax, penalties and interest that would result from such examinations.

10. Earnings Per Share

The following table presents the calculation of basic and diluted earnings per share ("EPS") (dollars and shares in millions, except per share amounts):


		For the Three Months Ended September 30,				For the Nine Months Ended September 30,					For the Three Months Ended March 31,
		2022		2021		2022		2021				2023		2022
Numerator	Numerator									Numerator
Net income	Net income	$	1,006	$	1,091	$	3,359	$	4,382	Net income		$	976	$	1,242
Preferred stock dividends	Preferred stock dividends	(31)		(30)		(62)		(69)		Preferred stock dividends		(31)		(31)
Net income available to common stockholders	Net income available to common stockholders	975		1,061		3,297		4,313		Net income available to common stockholders		945		1,211
Income allocated to participating securities	Income allocated to participating securities	(8)		(6)		(20)		(24)		Income allocated to participating securities		(6)		(6)
Net income allocated to common stockholders	Net income allocated to common stockholders	$	967	$	1,055	$	3,277	$	4,289	Net income allocated to common stockholders		$	939	$	1,205
Denominator	Denominator									Denominator
Weighted-average shares of common stock outstanding	Weighted-average shares of common stock outstanding	273		298		279		303		Weighted-average shares of common stock outstanding		262		285
Effect of dilutive common stock equivalents		1		—		—		—

Weighted-average shares of common stock outstanding and common stock equivalents	Weighted-average shares of common stock outstanding and common stock equivalents	274		298		279		303		Weighted-average shares of common stock outstanding and common stock equivalents		262		285

Basic earnings per common share	Basic earnings per common share	$	3.54	$	3.54	$	11.74	$	14.17	Basic earnings per common share		$	3.58	$	4.23
Diluted earnings per common share	Diluted earnings per common share	$	3.54	$	3.54	$	11.73	$	14.16	Diluted earnings per common share		$	3.58	$	4.22

Anti-dilutive securities were not material and had no impact on the computation of diluted EPS for the three ~~or nine~~ months ended ~~September 30, 2022~~March 31, 2023 and ~~2021.~~2022.

2524

Table of Contents

11. Capital Adequacy

DFS is subject to the capital adequacy guidelines of the Federal Reserve. Discover Bank, the Company's banking subsidiary, is subject to various regulatory capital requirements as administered by the ~~Federal Deposit Insurance Corporation ("FDIC").~~FDIC. Failure to meet minimum capital requirements can result in the initiation of certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could limit the Company's business activities and have a direct material effect on the financial condition and operating results of DFS and Discover Bank. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, DFS and Discover Bank must meet specific risk-based capital requirements and leverage ratios that involve quantitative measures of assets, liabilities and certain off-balance sheet items, as calculated under regulatory guidelines. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

DFS and Discover Bank are subject to regulatory and capital rules issued by the Federal Reserve and FDIC, respectively, under the Basel Committee's December 2010 framework ("Basel III rules"). Under the Basel III rules, DFS and Discover Bank are classified as "standardized approach" entities. Standardized approach entities are defined as U.S. banking organizations with consolidated total assets over $50 billion but not exceeding $250 billion and consolidated total on-balance sheet foreign exposure less than $10 billion.

~~On March 27, 2020, federal bank regulatory agencies announced an interim and now~~In accordance with the final rule ~~that allows banks that have implemented~~on the ~~CECL accounting model to delay the estimated~~ impact of ~~CECL~~current expected credit losses ("CECL") on ~~regulatory capital for two years, followed by a three-year transition period. For purposes of calculating~~ regulatory capital, the Company has elected to ~~defer recognition of~~phase in the ~~estimated~~ impact of CECL on regulatory capital for two years in accordance with the final rule; after that period of deferral, which ended December 31, 2021, the estimated impact of CECL on regulatory capital will be phased in over three years beginning in 2022. Accordingly, the Company's Common Equity Tier 1 ("CET1") capital ratios ~~in 2020, 2021 and 2022~~ are higher than they otherwise would have been. The Company's CET1 capital ratios will continue to be favorably impacted by this election over the phase-in ~~period.~~period, which ends December 31, 2024.

As of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, DFS and Discover Bank met all Basel III minimum capital ratio requirements to which they were subject. DFS and Discover Bank also met the requirements to be considered "well-capitalized" under Regulation Y and prompt corrective action rules, respectively. There have been no conditions or events that management believes have changed DFS' or Discover Bank's category. To be categorized as "well-capitalized", DFS and Discover Bank must maintain minimum capital ratios outlined in the table below.

2625

Table of Contents

The following table shows the actual capital amounts and ratios of DFS and Discover Bank and comparisons of each to the regulatory minimum and "well-capitalized" requirements (dollars in millions):


		Actual				Minimum Capital Requirements			Capital Requirements To Be Classified as Well-Capitalized				Actual				Minimum Capital Requirements			Capital Requirements To Be Classified as Well-Capitalized
		Amount		Ratio(1)		Amount		Ratio	Amount(2)		Ratio(2)		Amount		Ratio(1)		Amount		Ratio	Amount(2)		Ratio(2)
September 30, 2022
March 31, 2023												March 31, 2023
Total capital (to risk-weighted assets)	Total capital (to risk-weighted assets)											Total capital (to risk-weighted assets)
Discover Financial Services	Discover Financial Services	$	17,867	16.7	%	$	8,573	≥8.0%	$	10,716	≥10.0%	Discover Financial Services	$	17,375	14.9	%	$	9,299	≥8.0%	$	11,623	≥10.0%
Discover Bank	Discover Bank	$	15,569	14.7	%	$	8,484	≥8.0%	$	10,605	≥10.0%	Discover Bank	$	15,928	13.9	%	$	9,186	≥8.0%	$	11,482	≥10.0%
Tier 1 capital (to risk-weighted assets)	Tier 1 capital (to risk-weighted assets)											Tier 1 capital (to risk-weighted assets)
Discover Financial Services	Discover Financial Services	$	15,994	14.9	%	$	6,430	≥6.0%	$	6,430	≥6.0%	Discover Financial Services	$	15,368	13.2	%	$	6,974	≥6.0%	$	6,974	≥6.0%
Discover Bank	Discover Bank	$	13,510	12.7	%	$	6,363	≥6.0%	$	8,484	≥8.0%	Discover Bank	$	13,089	11.4	%	$	6,889	≥6.0%	$	9,186	≥8.0%
Tier 1 capital (to average assets)	Tier 1 capital (to average assets)											Tier 1 capital (to average assets)
Discover Financial Services	Discover Financial Services	$	15,994	13.4	%	$	4,782	≥4.0%	N/A		N/A	Discover Financial Services	$	15,368	11.6	%	$	5,296	≥4.0%	N/A		N/A
Discover Bank	Discover Bank	$	13,510	11.4	%	$	4,737	≥4.0%	$	5,922	≥5.0%	Discover Bank	$	13,089	10.0	%	$	5,222	≥4.0%	$	6,528	≥5.0%
Common Equity Tier 1 (to risk-weighted assets)	Common Equity Tier 1 (to risk-weighted assets)											Common Equity Tier 1 (to risk-weighted assets)
Discover Financial Services	Discover Financial Services	$	14,938	13.9	%	$	4,822	≥4.5%	N/A		N/A	Discover Financial Services	$	14,312	12.3	%	$	5,231	≥4.5%	N/A		N/A
Discover Bank	Discover Bank	$	13,510	12.7	%	$	4,772	≥4.5%	$	6,893	≥6.5%	Discover Bank	$	13,089	11.4	%	$	5,167	≥4.5%	$	7,463	≥6.5%

December 31, 2021
December 31, 2022												December 31, 2022
Total capital (to risk-weighted assets)	Total capital (to risk-weighted assets)											Total capital (to risk-weighted assets)
Discover Financial Services	Discover Financial Services	$	17,150	17.6	%	$	7,775	≥8.0%	$	9,719	≥10.0%	Discover Financial Services	$	18,250	16.0	%	$	9,133	≥8.0%	$	11,416	≥10.0%
Discover Bank	Discover Bank	$	15,957	16.9	%	$	7,573	≥8.0%	$	9,466	≥10.0%	Discover Bank	$	16,579	14.7	%	$	9,015	≥8.0%	$	11,268	≥10.0%
Tier 1 capital (to risk-weighted assets)	Tier 1 capital (to risk-weighted assets)											Tier 1 capital (to risk-weighted assets)
Discover Financial Services	Discover Financial Services	$	15,395	15.8	%	$	5,831	≥6.0%	$	5,831	≥6.0%	Discover Financial Services	$	16,285	14.3	%	$	6,850	≥6.0%	$	6,850	≥6.0%
Discover Bank	Discover Bank	$	13,932	14.7	%	$	5,680	≥6.0%	$	7,573	≥8.0%	Discover Bank	$	13,683	12.1	%	$	6,761	≥6.0%	$	9,015	≥8.0%
Tier 1 capital (to average assets)	Tier 1 capital (to average assets)											Tier 1 capital (to average assets)
Discover Financial Services	Discover Financial Services	$	15,395	13.9	%	$	4,432	≥4.0%	N/A		N/A	Discover Financial Services	$	16,285	12.7	%	$	5,147	≥4.0%	N/A		N/A
Discover Bank	Discover Bank	$	13,932	12.8	%	$	4,365	≥4.0%	$	5,456	≥5.0%	Discover Bank	$	13,683	10.8	%	$	5,086	≥4.0%	$	6,357	≥5.0%
Common Equity Tier 1 (to risk-weighted assets)	Common Equity Tier 1 (to risk-weighted assets)											Common Equity Tier 1 (to risk-weighted assets)
Discover Financial Services	Discover Financial Services	$	14,339	14.8	%	$	4,373	≥4.5%	N/A		N/A	Discover Financial Services	$	15,229	13.3	%	$	5,137	≥4.5%	N/A		N/A
Discover Bank	Discover Bank	$	13,932	14.7	%	$	4,260	≥4.5%	$	6,153	≥6.5%	Discover Bank	$	13,683	12.1	%	$	5,071	≥4.5%	$	7,324	≥6.5%

(1)Capital ratios are calculated based on the Basel III standardized approach rules, subject to applicable transition provisions, including CECL transition provisions.

(2)The Basel III rules do not establish well-capitalized thresholds for these measures for bank holding companies. Existing well-capitalized thresholds established in the Federal Reserve's Regulation Y have been included where available.

12. Commitments, Contingencies and Guarantees

In the normal course of business, the Company enters into a number of off-balance sheet commitments, transactions and obligations under guarantee arrangements that expose the Company to varying degrees of risk. The Company's commitments, contingencies and guarantee relationships are described below.

Commitments

Unused Credit Arrangements

At ~~September 30, 2022,~~March 31, 2023, the Company had unused credit arrangements for loans of approximately ~~$225.6~~$229.1 billion. Such arrangements arise primarily from agreements with customers for unused lines of credit on certain credit cards and certain other loan products, provided there is no violation of conditions in the related agreements. These arrangements, substantially all of which the Company can terminate at any time and which do not necessarily represent future cash requirements, are periodically reviewed based on account usage, customer creditworthiness and loan qualification. As the Company’s credit card loans are unconditionally cancellable, no liability for expected credit losses is required for unused lines of credit. For all other loans, the Company records a liability for expected credit losses for unfunded commitments, which is presented as part of accrued expenses and other liabilities in the consolidated statements of financial condition.

2726

Table of Contents

Contingencies

~~See Note 2: Investments for a description of contingent liabilities related to the Company's community reinvestment initiatives.~~ See Note 13: Litigation and Regulatory Matters for a description of potential liability arising from pending litigation or regulatory proceedings involving the Company.

Guarantees

The Company has obligations under certain guarantee arrangements, including contracts, indemnification agreements and representations and warranties, which contingently require the Company to make payments to the guaranteed party based on changes in an underlying asset, liability or equity security of a guaranteed party, rate or index. Also included as guarantees are contracts that contingently require the Company to make payments to a guaranteed party based on another entity's failure to perform under an agreement. The Company's use of guarantees is disclosed below by type of guarantee.

Securitizations Representations and Warranties

As part of the Company's financing activities, the Company provides representations and warranties that certain assets pledged as collateral in secured borrowing arrangements conform to specified guidelines. Due diligence is performed by the Company, which is intended to ensure that asset guideline qualifications are met. If the assets pledged as collateral do not meet certain conforming guidelines, the Company may be required to replace, repurchase or sell such assets. In its credit card securitization activities, the Company would replace nonconforming receivables through the allocation of excess seller's interest or from additional transfers from the unrestricted pool of receivables. If the Company could not add enough receivables to satisfy the requirement, an early amortization (or repayment) of investors' interests would be triggered. In its student loan securitizations, the Company would generally repurchase the loans from the trust at the outstanding principal amount plus interest.

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

Counterparty Settlement Guarantees

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

•Merchant Guarantee. Diners Club has entered into contractual relationships with certain international merchants, which generally include travel-related businesses, for the benefit of all Diners Club licensees. The licensees hold the primary liability to settle the transactions of their customers 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 LLC retains counterparty exposure if an issuer fails to fulfill its settlement obligation.

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

The maximum potential amount of future payments related to such contingent obligations is dependent upon the transaction volume processed between the time a potential counterparty defaults on its settlement and the time at which the Company disables the settlement of any further transactions for the defaulting party. The Company has some contractual remedies to offset these counterparty settlement exposures (such as letters of credit or pledged deposits), however, there is no limitation on the maximum amount the Company may be liable to pay.

2827

Table of Contents

The actual amount of the potential exposure cannot be quantified as the Company cannot determine whether particular counterparties will fail to meet their settlement obligations. In the event all licensees and/or issuers were to become unable to settle their transactions, the Company estimates its maximum potential counterparty exposures to these settlement guarantees would be approximately ~~$110~~$120 million as of ~~September 30, 2022.~~March 31, 2023.

The Company believes that the estimated amounts of maximum potential future payments are not representative of the Company's actual potential loss exposure given Diners Club's and PULSE's insignificant historical losses from these counterparty exposures. As of ~~September 30, 2022,~~March 31, 2023, the Company had not recorded any contingent liability in the condensed consolidated financial statements for these counterparty exposures and management believes that the probability of any payments under these arrangements is low.

Discover Network Merchant Chargeback Guarantees

The Company operates the Discover Network, issues payment cards and permits third parties to issue payment cards. The Company is contingently liable for certain transactions processed on the Discover Network in the event of a dispute between the payment card customer and a merchant. The contingent liability arises if the disputed transaction involves a merchant or merchant acquirer with whom the Discover Network has a direct relationship. If a dispute is resolved in the customer's favor, the Discover Network will credit or refund the disputed amount to the Discover Network card issuer, who in turn credits its customer's account. The Discover Network will then charge back the disputed amount of the payment card transaction to the merchant or merchant acquirer, where permitted by the applicable agreement, to seek recovery of amounts already paid to the merchant for payment card transactions. If the Discover Network is unable to collect the amount subject to dispute from the merchant or merchant acquirer (e.g., in the event of merchant default or dissolution or after expiration of the time period for chargebacks in the applicable agreement), the Discover Network will bear the loss for the amount credited or refunded to the customer. In most instances, a loss by the Discover Network is unlikely to arise in connection with payments on card transactions because most products or services are delivered when purchased and credits are issued by merchants on returned items in a timely fashion, thus minimizing the likelihood of cardholder disputes with respect to amounts paid by the Discover Network. However, where the 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 three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 and ~~2021.~~2022.

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

The following table summarizes certain information regarding merchant chargeback guarantees (dollars in millions):
For the Three Months Ended September 30, For the Nine Months Ended September 30,
2022 2021 2022 2021
Aggregate sales transaction volume(1)
$ 66,766 $ 58,107 $ 189,505 $ 160,717


	For the Three Months Ended March 31,
		2023		2022
Aggregate sales transaction volume(1)		$	60,833	$	57,153

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

The Company did not record any contingent liability in the condensed consolidated financial statements for merchant chargeback guarantees as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021.~~2022. The Company mitigates the risk of potential loss exposure by withholding settlement from merchants, obtaining third-party guarantees, or obtaining escrow deposits or letters of credit from certain merchant acquirers or merchants that are considered a higher risk due to various factors such as time delays in the delivery of products or services. As of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, the Company had escrow deposits and settlement withholdings of ~~$11~~$12 million and ~~$15~~$11 million, respectively, which are recorded in interest-bearing deposit accounts and accrued expenses and other liabilities on the Company's condensed consolidated statements of financial condition.

2928

Table of Contents

13. Litigation and Regulatory Matters

In the normal course of business, from time to time, the Company has been named as a defendant in various legal actions, including arbitrations, class actions and other litigation, arising in connection with its activities. Certain of the actual or threatened legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. The litigation process is not predictable and can lead to unexpected results. The Company contests liability and/or the amount of damages as appropriate in each pending matter.

The Company has historically offered its customers an arbitration clause in its customer agreements. The arbitration clause allows the Company and its customers to quickly and economically resolve disputes. Additionally, the arbitration clause has in some instances limited the costs of, and the Company's exposure to, litigation. Future legal and regulatory challenges and prohibitions may cause the Company to discontinue its offering and use of such clauses. From time to time, the Company is involved in legal actions challenging its arbitration clause. Bills may be periodically introduced in Congress to directly or indirectly prohibit the use of pre-dispute arbitration clauses.

The Company is also involved, from time to time, in other reviews, investigations and proceedings (both formal and informal) by governmental agencies regarding the Company's business including, among other matters, consumer regulatory, accounting, tax and other operational matters. The investigations and proceedings may result in significant adverse judgments, settlements, fines, penalties, injunctions, decreases in regulatory ratings, customer restitution or other relief. These outcomes could materially impact the Company's condensed consolidated financial statements, increase its cost of operations, or limit the Company's ability to execute its business strategies and engage in certain business activities. Certain subsidiaries of the Company are subject to a consent order with the Consumer Financial Protection Bureau ("CFPB") regarding certain private student loan servicing practices, as described below. In addition, the Company is currently engaged in a review of Discover Bank's card product classification practices (which determine how certain credit cards are assigned to network product categories) and related risk management and governance issues. The Company is discussing these matters with, and is responding to inquiries on them from, various regulators and agencies. Pursuant to powers granted under federal banking laws, regulatory agencies have broad and sweeping discretion and may assess civil money penalties, require changes to certain business practices or require customer restitution at any time.

In accordance with applicable accounting guidance, the Company establishes an accrued liability for legal and regulatory matters when those matters present loss contingencies that are both probable and estimable.Litigation and regulatory settlement-related expenses were immaterial for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022. ~~Litigation and regulatory settlement-related expenses were $51 million and $54 million for the three and nine months ended September 30, 2021, respectively.~~

There may be an exposure to loss in excess of any amounts accrued. The Company believes the estimate of the aggregate range of reasonably possible losses (meaning the likelihood of losses is more than remote but less than likely), in excess of the amounts that the Company has accrued for legal and regulatory proceedings, is up to ~~$190~~$180 million as of ~~September 30, 2022.~~March 31, 2023. This estimated range of reasonably possible losses is based on currently available information for those proceedings in which the Company is involved and considers the Company's best estimate of such losses for those matters for which an estimate can be made. It does not represent the Company's maximum potential loss exposure. Various aspects of the legal proceedings underlying the estimated range will change from time to time and actual results may vary significantly from the estimate.

The Company's estimated range noted above involves significant judgment, given the varying stages of the proceedings, the existence of numerous yet to be resolved issues, the breadth of the claims (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 adversely affect the Company's reputation and be material to the Company's condensed consolidated financial condition, operating results and cash flows for a particular future period, depending on, among other things, the level of the Company's income for such period.

In July 2015, the Company announced that its subsidiaries, Discover Bank, The Student Loan Corporation and Discover Products Inc. (the "Discover Subsidiaries"), agreed to a consent order with the CFPB with respect to certain private student loan servicing practices (the “2015 Order”). The 2015 Order expired in July 2020. OnIn December ~~22,~~ 2020, the Discover Subsidiaries agreed to a consent order (the “2020 Order”) with the CFPB resolving the agency’s investigation into Discover Bank’s compliance with the 2015 Order. In connection with the 2020 Order, Discover is required to implement a redress and compliance plan and must pay at least $10 million in consumer redress to consumers who may have been harmed and has paid a $25 million civil money penalty to the CFPB.

Table of Contents

On March 8, 2016, a class-action lawsuit was filed against the Company, other credit card networks, other issuing banks and EMVCo in the U.S. District Court for the Northern District of California (B&R Supermarket, Inc., d/b/a Milam's Market, et al. v. Visa, Inc. et al.) alleging a conspiracy by defendants to shift fraud liability to merchants with the migration to the EMV

~~Table of Contents~~

security standard and chip technology. The plaintiffs assert joint and several liability among the defendants and seek unspecified damages, including treble damages, attorneys' fees, costs and injunctive relief. In May 2017, the Court entered an order transferring the entire action to a federal court in New York that is presiding over certain related claims that are pending in the actions consolidated as MDL 1720. OnIn August ~~28,~~ 2020, the Court granted the plaintiffs' Motion to Certify a Class. The defendants appealed the ruling, which was denied onin January ~~20,~~ 2021. Expert discovery closed on February 28, 2022. On June 3, 2022, the Court granted Plaintiffs' Motion to Approve Class Notices. The Company filed its renewed motion to compel arbitration, motion for summary judgment, and Daubert challenges on November 30, 2022, with briefing scheduled to close on July 27, 2023. The Company is not in a position at this time to assess the likely outcome or its exposure, if any, with respect to this matter. ~~Deadlines for the Company’s motion to compel arbitration, motion for summary judgment and Daubert challenges are set for November 30, 2022.~~However, the Company will seek to defend itself vigorously against all claims asserted by the plaintiffs.

14. Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Accounting Standards Codification ("ASC") Topic 820, Fair Value Measurement, provides a three-level hierarchy for classifying the inputs to valuation techniques used to measure fair value of financial instruments based on whether the inputs are observable or unobservable. It also requires certain disclosures about those measurements. The three-level valuation hierarchy is as follows:

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

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

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

The Company evaluates the classification of each fair value measurement within the hierarchy at least quarterly.

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

3130

Table of Contents

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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


		Quoted Price in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total			Quoted Price in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Balance at September 30, 2022
Balance at March 31, 2023										Balance at March 31, 2023
Assets	Assets									Assets
Fair value - OCI	Fair value - OCI									Fair value - OCI
U.S. Treasury and U.S. GSE securities	U.S. Treasury and U.S. GSE securities	$	6,084	$	8	$	—	$	6,092	U.S. Treasury and U.S. GSE securities	$	11,467	$	7	$	—	$	11,474
Residential mortgage-backed securities - Agency	Residential mortgage-backed securities - Agency	—		589		—		589		Residential mortgage-backed securities - Agency	—		543		—		543
Available-for-sale investment securities	Available-for-sale investment securities	$	6,084	$	597	$	—	$	6,681	Available-for-sale investment securities	$	11,467	$	550	$	—	$	12,017

Derivative financial instruments - cash flow hedges(1)	Derivative financial instruments - cash flow hedges(1)	$	—	$	2	$	—	$	2	Derivative financial instruments - cash flow hedges(1)	$	—	$	6	$	—	$	6

Fair value - Net income	Fair value - Net income									Fair value - Net income
Marketable equity securities	Marketable equity securities	$	58	$	—	$	—	$	58	Marketable equity securities	$	31	$	—	$	—	$	31

Derivative financial instruments - fair value hedges(1)										Derivative financial instruments - fair value hedges(1)	$	—	$	6	$	—	$	6

Liabilities	Liabilities									Liabilities
Fair value - OCI	Fair value - OCI									Fair value - OCI
Derivative financial instruments - cash flow hedges(1)	Derivative financial instruments - cash flow hedges(1)	$	—	$	4	$	—	$	4	Derivative financial instruments - cash flow hedges(1)	$	—	$	2	$	—	$	2

Balance at December 31, 2021
Balance at December 31, 2022										Balance at December 31, 2022
Assets	Assets									Assets
Fair value - OCI	Fair value - OCI									Fair value - OCI
U.S. Treasury and U.S. GSE securities	U.S. Treasury and U.S. GSE securities	$	6,505	$	9	$	—	$	6,514	U.S. Treasury and U.S. GSE securities	$	11,416	$	7	$	—	$	11,423
Residential mortgage-backed securities - Agency	Residential mortgage-backed securities - Agency	—		186		—		186		Residential mortgage-backed securities - Agency	—		564		—		564
Available-for-sale investment securities	Available-for-sale investment securities	$	6,505	$	195	$	—	$	6,700	Available-for-sale investment securities	$	11,416	$	571	$	—	$	11,987

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

Fair value - Net income	Fair value - Net income									Fair value - Net income

Marketable equity securities	Marketable equity securities	$	461	$	—	$	—	$	461	Marketable equity securities	$	41	$	—	$	—	$	41

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

Fair value - Net income										Fair value - Net income
Derivative financial instruments - fair value hedges(1)										Derivative financial instruments - fair value hedges(1)	$	—	$	2	$	—	$	2

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

Table of Contents

Available-for-Sale Investment Securities

Investment securities classified as available-for-sale consist of U.S. Treasury and U.S. GSE securities and RMBS. The fair value estimates of investment securities classified as Level 1, consisting of U.S. Treasury securities, are determined based on quoted market prices for the same securities. The fair value estimates of U.S. GSE securities and RMBS are classified as Level 2 and are valued by maximizing the use of relevant observable inputs, including quoted prices for similar securities, benchmark yield curves and market-corroborated inputs.

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

At ~~September 30, 2022,~~March 31, 2023, amounts reported in RMBS reflect U.S. government agency and U.S. GSE obligations issued by Ginnie Mae, Fannie Mae and Freddie Mac with an aggregate par value of ~~$617~~$559 million, a weighted-average coupon of ~~4.04%~~4.06% and a weighted-average remaining maturity of four years.

~~Table of Contents~~

Marketable Equity Securities

The Company holds non-controlling equity positions in payment service entities that have actively traded stock and therefore have readily determinable fair values. The Company classifies these equity securities as Level 1, the fair value estimates of which are determined based on quoted share prices for the same securities.

Derivative Financial Instruments

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

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

As of October 16, 2020, the Company revised its valuation methodology to reflect changes made by central clearinghouses that changed the discounting methodology and interest calculation of cash variation margin from Federal Funds OIS to the SOFR OIS for U.S. Dollar cleared interest rate swaps. The Company's valuation methodology will result in valuations for cleared interest rate swaps that better reflect cleared swap prices obtainable in the markets in which the Company transacts. Pursuant to ASC Topic 848, the Company has elected and applied certain optional expedients and exceptions that provide contract modification and hedge accounting relief to eligible interest rate swaps affected by the change in the discounting methodology. The changes in valuation methodology are applied prospectively as a change in accounting estimate and are immaterial to the Company’s financial statements.

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

The Company also has assets that, under certain conditions, are subject to measurement at fair value on a non-recurring basis. These assets include those associated with acquired businesses, including goodwill. For these assets, measurement at fair value in periods subsequent to the initial recognition of the assets may be applicable whenever one is tested for impairment. No impairments were recognized related to these assets during the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022. ~~The Company recognized $92 million of impairments related to these assets during the nine months ended September 30, 2021.~~

3332

Table of Contents

Financial Instruments Measured at Other Than Fair Value

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


Balance at September 30, 2022		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total		Carrying Value
Balance at March 31, 2023												Balance at March 31, 2023	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total		Carrying Value
Assets	Assets											Assets
Amortized cost	Amortized cost											Amortized cost
Residential mortgage-backed securities - Agency	Residential mortgage-backed securities - Agency	$	—	$	191	$	—	$	191	$	216	Residential mortgage-backed securities - Agency	$	—	$	212	$	—	$	212	$	231
Held-to-maturity investment securities	Held-to-maturity investment securities	$	—	$	191	$	—	$	191	$	216	Held-to-maturity investment securities	$	—	$	212	$	—	$	212	$	231

Net loan receivables	Net loan receivables	$	—	$	—	$	104,096	$	104,096	$	97,847	Net loan receivables	$	—	$	—	$	111,546	$	111,546	$	104,983

Carrying value approximates fair value(1)	Carrying value approximates fair value(1)											Carrying value approximates fair value(1)
Cash and cash equivalents	Cash and cash equivalents	$	10,004	$	—	$	—	$	10,004	$	10,004	Cash and cash equivalents	$	10,130	$	—	$	—	$	10,130	$	10,130
Restricted cash	Restricted cash	$	1,866	$	—	$	—	$	1,866	$	1,866	Restricted cash	$	33	$	—	$	—	$	33	$	33

Accrued interest receivables(2)	Accrued interest receivables(2)	$	—	$	1,103	$	—	$	1,103	$	1,103	Accrued interest receivables(2)	$	—	$	1,264	$	—	$	1,264	$	1,264

Liabilities	Liabilities											Liabilities
Amortized cost	Amortized cost											Amortized cost
Time deposits(3)	Time deposits(3)	$	—	$	26,699	$	—	$	26,699	$	26,993	Time deposits(3)	$	—	$	35,026	$	—	$	35,026	$	35,416

Long-term borrowings - owed to securitization investors	Long-term borrowings - owed to securitization investors	$	—	$	10,660	$	88	$	10,748	$	11,092	Long-term borrowings - owed to securitization investors	$	—	$	8,734	$	79	$	8,813	$	9,095
Other long-term borrowings	Other long-term borrowings	—		8,588		—		8,588		9,085		Other long-term borrowings	—		8,664		—		8,664		9,068
Long-term borrowings	Long-term borrowings	$	—	$	19,248	$	88	$	19,336	$	20,177	Long-term borrowings	$	—	$	17,398	$	79	$	17,477	$	18,163

Carrying value approximates fair value(1)	Carrying value approximates fair value(1)											Carrying value approximates fair value(1)
Accrued interest payables(2)	Accrued interest payables(2)	$	—	$	160	$	—	$	160	$	160	Accrued interest payables(2)	$	—	$	300	$	—	$	300	$	300

Balance at December 31, 2021
Balance at December 31, 2022												Balance at December 31, 2022
Assets	Assets											Assets
Amortized cost	Amortized cost											Amortized cost
Residential mortgage-backed securities - Agency	Residential mortgage-backed securities - Agency	$	—	$	206	$	—	$	206	$	204	Residential mortgage-backed securities - Agency	$	—	$	199	$	—	$	199	$	221
Held-to-maturity investment securities	Held-to-maturity investment securities	$	—	$	206	$	—	$	206	$	204	Held-to-maturity investment securities	$	—	$	199	$	—	$	199	$	221

Net loan receivables	Net loan receivables	$	—	$	—	$	94,176	$	94,176	$	86,862	Net loan receivables	$	—	$	—	$	110,796	$	110,796	$	104,746

Carrying value approximates fair value(1)	Carrying value approximates fair value(1)											Carrying value approximates fair value(1)
Cash and cash equivalents	Cash and cash equivalents	$	8,750	$	—	$	—	$	8,750	$	8,750	Cash and cash equivalents	$	8,856	$	—	$	—	$	8,856	$	8,856
Restricted cash	Restricted cash	$	2,582	$	—	$	—	$	2,582	$	2,582	Restricted cash	$	41	$	—	$	—	$	41	$	41

Accrued interest receivables(2)	Accrued interest receivables(2)	$	—	$	948	$	—	$	948	$	948	Accrued interest receivables(2)	$	—	$	1,211	$	—	$	1,211	$	1,211

Liabilities	Liabilities											Liabilities
Amortized cost	Amortized cost											Amortized cost
Time deposits(3)	Time deposits(3)	$	—	$	21,490	$	—	$	21,490	$	21,125	Time deposits(3)	$	—	$	32,710	$	—	$	32,710	$	33,070
Short-term borrowings		$	—	$	1,750	$	—	$	1,750	$	1,750

Long-term borrowings - owed to securitization investors	Long-term borrowings - owed to securitization investors	$	—	$	8,953	$	104	$	9,057	$	9,039	Long-term borrowings - owed to securitization investors	$	—	$	9,862	$	84	$	9,946	$	10,259
Other long-term borrowings	Other long-term borrowings	—		10,013		—		10,013		9,438		Other long-term borrowings	—		9,468		—		9,468		9,849
Long-term borrowings	Long-term borrowings	$	—	$	18,966	$	104	$	19,070	$	18,477	Long-term borrowings	$	—	$	19,330	$	84	$	19,414	$	20,108

Carrying value approximates fair value(1)	Carrying value approximates fair value(1)											Carrying value approximates fair value(1)
Accrued interest payables(2)	Accrued interest payables(2)	$	—	$	184	$	—	$	184	$	184	Accrued interest payables(2)	$	—	$	308	$	—	$	308	$	308

(1)The carrying values of these assets and liabilities approximate fair value due to their short-term nature.

(2)Accrued interest receivable and payable carrying values are presented as part of other assets orand accrued expenses and other liabilities, respectively, in the Company's condensed consolidated statements of financial condition.

(3)Excludes deposits without contractually defined maturities for all periods presented.

3433

Table of Contents

15. Derivatives and Hedging Activities

The Company uses derivatives to manage its exposure to various financial risks. The Company does not enter into derivatives for trading or speculative purposes. Certain derivatives used to manage the Company's exposure to foreign currency are not designated as hedges and do not qualify for hedge accounting.

Derivatives may give rise to counterparty credit risk, which generally is mitigated through collateral arrangements as described under the sub-heading "— Collateral Requirements and Credit-Risk Related Contingency Features." The Company enters into derivative transactions with established dealers that meet minimum credit criteria established by the Company. All counterparties must be pre-approved before engaging in any transaction with the Company. The Company regularly monitors counterparties to ensure compliance with the Company's risk policies and limits. In determining the counterparty credit risk valuation adjustment for the fair values of derivatives, if any, the Company considers collateral and legally enforceable master netting agreements that mitigate credit exposure to related counterparties.

All derivatives are recorded in other assets at their gross positive fair values and in accrued expenses and other liabilities at their gross negative fair values. See Note 14: Fair Value Measurements for a description of the valuation methodologies used for derivatives. Cash collateral amounts associated with derivative positions that are cleared through an exchange are legally characterized as settlement of the derivative positions. Such collateral amounts are reflected as offsets to the associated derivatives balances recorded in other assets or in accrued expenses and other liabilities. Other cash collateral posted and held balances are recorded in other assets and deposits, respectively, in the condensed consolidated statements of financial condition. Collateral amounts recorded in the condensed consolidated statements of financial condition are based on the net collateral posted or held position for each applicable legal entity's master netting arrangement with each counterparty.

Derivatives Designated as Hedges

Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows arising from changes in interest rates, or other types of forecasted transactions, are considered cash flow hedges. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges.

Cash Flow Hedges

The Company uses interest rate swaps to manage its exposure to variability in cash flows related to changes in interest rates on interest-earning assets and funding instruments. These interest rate swaps qualify for hedge accounting in accordance with ASC Topic 815, Derivatives and Hedging ("ASC 815"). At ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, the Company's outstanding cash flow hedges ~~related only~~primarily relate to interest receipts from credit card receivables and had an initial maximum period of ~~three~~four years and ~~two~~three years, respectively.

The change in the fair value of derivatives designated as cash flow hedges is recorded in OCI and is subsequently reclassified into earnings in the period that the hedged forecasted cash flows affect earnings. Amounts reported in AOCI related to derivatives at ~~September 30, 2022,~~March 31, 2023, will be reclassified to interest income and interest expense as interest receipts and payments are accrued on the Company's then outstanding credit card ~~receivables.~~receivables and certain floating-rate debt, respectively. During the next 12 months, the Company estimates it will reclassify ~~$11~~$30 million ofinto pretax earnings ~~primarily~~ related to its ~~derivatives designated as~~ cash flow hedges.

Fair Value Hedges

The Company is exposed to changes in the fair value of its fixed-rate debt obligations due to changes in interest rates. ~~At September 30, 2022 and December 31, 2021, the~~The Company ~~used~~uses interest rate swaps to manage its exposure to changes in the fair value of certain fixed-rate long-term borrowings, including securitized debt and bank notes, attributable to changes in the ~~Federal Funds OIS rate, which is a~~respective benchmark interest rate defined by ASC 815. At December 31, 2021, the Company also used an interest rate swap to manage its exposure to changes in fair value of certain securitized debt attributable to changes in the 1-month LIBOR rate, which is a benchmark interest rate defined by ASC 815.rates. These interest rate swaps qualify as fair value hedges in accordance with ASC 815. Changes in the fair values of both (i) the derivatives and (ii) the hedged long-term borrowings attributable to the interest-rate risk being hedged are recorded in interest expense. The changes generally provide substantial offset to one another, with any difference recognized in interest expense.

3534

Table of Contents

Derivatives Not Designated as Hedges

Foreign Exchange Forward Contracts

The Company has foreign exchange forward contracts that are economic hedges and are not designated as accounting hedges. The Company enters into foreign exchange forward contracts to manage foreign currency risk. Changes in the fair value of these contracts are recorded in other income on the condensed consolidated statements of income.

Derivatives Cleared Through an Exchange

Cash variation margin payments on derivatives cleared through an exchange are legally considered settlement payments and are accounted for with corresponding derivative positions as one unit of account and not presented separately as collateral. With settlement payments on derivative positions cleared through this exchange reflected as offsets to the associated derivative asset and liability balances, the fair values of derivative instruments and collateral balances shown are generally reduced.

Derivatives Activity

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


		September 30, 2022							December 31, 2021							March 31, 2023							December 31, 2022
		Notional Amount		Number of Outstanding Derivative Contracts	Derivative Assets		Derivative Liabilities		Notional Amount		Derivative Assets(1)		Derivative Liabilities(1)			Notional Amount		Number of Outstanding Derivative Contracts	Derivative Assets		Derivative Liabilities		Notional Amount		Derivative Assets		Derivative Liabilities
Derivatives designated as hedges	Derivatives designated as hedges														Derivatives designated as hedges
Interest rate swaps—cash flow hedge~~(2)~~	Interest rate swaps—cash flow hedge~~(2)~~	$	3,250	6	$	2	$	4	$	250	$	—	$	—	Interest rate swaps—cash flow hedge~~(2)~~	$	5,500	10	$	6	$	2	$	5,000	$	1	$	3
Interest rate swaps—fair value hedge	Interest rate swaps—fair value hedge	$	3,425	4	—		—		$	6,125	—		—		Interest rate swaps—fair value hedge	$	4,100	5	6		—		$	4,425	—		2
Derivatives not designated as hedges	Derivatives not designated as hedges														Derivatives not designated as hedges
Foreign exchange forward contracts~~(3)~~(1)	Foreign exchange forward contracts~~(3)~~(1)	$	24	7	—		—		$	36	—		—		Foreign exchange forward contracts~~(3)~~(1)	$	25	7	—		—		$	25	—		—

Total gross derivative assets/liabilities~~(4)~~(2)	Total gross derivative assets/liabilities~~(4)~~(2)				2		4				—		—		Total gross derivative assets/liabilities~~(4)~~(2)				12		2				1		5
Less: collateral held/posted~~(5)~~(3)	Less: collateral held/posted~~(5)~~(3)				—		—				—		—		Less: collateral held/posted~~(5)~~(3)				—		(2)				—		(5)
Total net derivative assets/liabilities	Total net derivative assets/liabilities				$	2	$	4			$	—	$	—	Total net derivative assets/liabilities				$	12	$	—			$	1	$	—

(1)~~The gross and net derivative assets and liabilities were immaterial as of December 31, 2021.~~

~~(2)~~At September 30, 2022, the Company had two forward-starting interest rate swaps with a total notional amount of $1 billion with interest payments set to be exchanged starting in the fourth quarter of 2022. At December 31, 2021, the Company had no forward-starting interest rate swaps.

~~(3)~~The foreign exchange forward contracts have notional amounts of EUR 6 million, GBP 6 million, SGD 1 million, INR 788 million and AUD 2 million as of ~~September 30, 2022,~~March 31, 2023, and notional amounts of EUR 6 million, GBP 6 million, SGD 1 million, INR 788 million and AUD 142 million as of December 31, ~~2021.~~2022.

~~(4)~~(2)In addition to the derivatives disclosed in the table, the Company enters into forward contracts to purchase when-issued mortgage-backed securities as part of its community reinvestment initiatives. At ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, the Company had one outstanding contract with a total notional amount of ~~$10~~$35 million and ~~$50~~$48 million, respectively, and immaterial fair values.

~~(5)~~(3)Collateral amounts, which consist of cash and investment securities, are limited to the related derivative asset/liability balance and do not include excess collateral received/pledged.

The following amounts were recorded on the statements of financial condition related to cumulative basis adjustments for fair value hedges (dollars in millions):
September 30, 2022 December 31, 2021
Carrying Amount of Hedged Liabilities
Cumulative Amount of Fair Value Hedging Adjustment Decreasing the Carrying Amount of Hedged Liabilities(1)
Carrying Amount of Hedged Liabilities
Cumulative Amount of Fair Value Hedging Adjustment Increasing the Carrying Amount of Hedged Liabilities(1)
Long-term borrowings $ 3,385 $ (4) $ 6,158 $ 83


	March 31, 2023				December 31, 2022
	Carrying Amount of Hedged Liabilities		Cumulative Amount of Fair Value Hedging Adjustment Increasing the Carrying Amount of Hedged Liabilities(1)		Carrying Amount of Hedged Liabilities		Cumulative Amount of Fair Value Hedging Adjustment (Decreasing) the Carrying Amount of Hedged Liabilities(1)
Long-term borrowings	$	4,094	$	27	$	4,386	$	(3)

(1)The balance includes ~~$33~~$23 million and ~~$48~~$28 million of cumulative hedging adjustments related to discontinued hedging relationships as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively.

3635

Table of Contents

The following table summarizes the impact of the derivative instruments on income and indicates where within the condensed consolidated financial statements such impact is reported (dollars in millions):

Location and Amount of (Losses) Gains Recognized on the Condensed Consolidated Statements of Income
Interest Expense
Long-Term Borrowings Interest Income (Credit Card) Other Income
For the Three Months Ended September 30, 2022
Total amounts of income and expense line items presented in the condensed consolidated statements of income, where the effects of fair value or cash flow hedges are recorded $ (168) $ 2,783 $ 19
The effects of cash flow and fair value hedging
Losses on cash flow hedging relationship
Amounts reclassified from OCI into earnings $ (1) $ (1) $ —
Gains (losses) on fair value hedging relationships
Gains on hedged items $ 3 $ — $ —
Losses on interest rate swaps (11) — —
Total losses on fair value hedging relationships $ (8) $ — $ —
The effects of derivatives not designated in hedging relationships
Gains on derivatives not designated as hedges $ — $ — $ 1
For the Three Months Ended September 30, 2021
Total amounts of income and expense line items presented in the condensed consolidated statements of income, where the effects of fair value or cash flow hedges are recorded $ (113) $ 2,193 $ 18
Gains (losses) on fair value hedging relationships
Gains on hedged items $ 45 $ — $ —
Losses on interest rate swaps (9) — —
Total gains on fair value hedging relationships $ 36 $ — $ —

~~Table of Contents~~


		Location and Amount of (Losses) Gains Recognized on the Condensed Consolidated Statements of Income
		Interest Expense		Interest Income (Credit Card)
		Long-Term Borrowings				Other Income
For the Nine Months Ended September 30, 2022

										Location and Amount of (Losses) Gains Recognized on the Condensed Consolidated Statements of Income
										Interest Expense		Interest Income (Credit Card)
										Long-Term Borrowings
For the Three Months Ended March 31, 2023									For the Three Months Ended March 31, 2023
Total amounts of income and expense line items presented in the condensed consolidated statements of income, where the effects of fair value or cash flow hedges are recorded	Total amounts of income and expense line items presented in the condensed consolidated statements of income, where the effects of fair value or cash flow hedges are recorded	$	(416)	$	7,475		$	64	Total amounts of income and expense line items presented in the condensed consolidated statements of income, where the effects of fair value or cash flow hedges are recorded	$	(189)	$	3,321

The effects of cash flow and fair value hedging	The effects of cash flow and fair value hedging								The effects of cash flow and fair value hedging
Losses on cash flow hedging relationships
Gains (losses) on cash flow hedging relationships									Gains (losses) on cash flow hedging relationships
Amounts reclassified from OCI into earnings	Amounts reclassified from OCI into earnings	$	(3)	$	(1)		$	—	Amounts reclassified from OCI into earnings	$	2	$	(7)

Gains on fair value hedging relationships
Gains on hedged items		$	72	$	—		$	—
Losses on interest rate swaps		(61)		—			—
Total gains on fair value hedging relationships		$	11	$	—		$	—
Losses on fair value hedging relationships									Losses on fair value hedging relationships
Losses on hedged items									Losses on hedged items	$	(35)	$	—
Gains on interest rate swaps									Gains on interest rate swaps	21		—
Total losses on fair value hedging relationships									Total losses on fair value hedging relationships	$	(14)	$	—

The effects of derivatives not designated in hedging relationships
Gains on derivatives not designated as hedges		$	—	$	—		$	2

For the Nine Months Ended September 30, 2021

For the Three Months Ended March 31, 2022									For the Three Months Ended March 31, 2022
Total amounts of income and expense line items presented in the condensed consolidated statements of income, where the effects of fair value or cash flow hedges are recorded	Total amounts of income and expense line items presented in the condensed consolidated statements of income, where the effects of fair value or cash flow hedges are recorded	$	(356)	$	6,452		$	47	Total amounts of income and expense line items presented in the condensed consolidated statements of income, where the effects of fair value or cash flow hedges are recorded	$	(117)	$	2,268

The effects of cash flow and fair value hedging	The effects of cash flow and fair value hedging								The effects of cash flow and fair value hedging
Losses on cash flow hedging relationships	Losses on cash flow hedging relationships								Losses on cash flow hedging relationships
Amounts reclassified from OCI into earnings	Amounts reclassified from OCI into earnings	$	(2)	$	—		$	—	Amounts reclassified from OCI into earnings	$	(1)	$	—

Gains on fair value hedging relationships	Gains on fair value hedging relationships								Gains on fair value hedging relationships
Gains on hedged items	Gains on hedged items	$	167	$	—		$	—	Gains on hedged items	$	47	$	—
Losses on interest rate swaps	Losses on interest rate swaps	(38)		—			—		Losses on interest rate swaps	(32)		—
Total gains on fair value hedging relationships	Total gains on fair value hedging relationships	$	129	$	—		$	—	Total gains on fair value hedging relationships	$	15	$	—

For the impact of the derivative instruments on OCI, see Note 8: Accumulated Other Comprehensive Income.

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 and foreign exchange forward contracts. The Company has not sought a legal opinion in relation to the enforceability of its master netting arrangements and, as such, does not report any of these positions on a net basis. Collateral is required by either the Company or its subsidiaries or the counterparty depending on the net fair value position of the derivatives held with that counterparty. These collateral receivable or payable amounts are generally not offset against the fair value of these derivatives but are recorded separately in other assets or deposits. Most of the Company's cash collateral amounts relate to positions cleared through an exchange and are reflected as offsets to the associated derivatives balances recorded in other assets and accrued expenses and other liabilities.

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

3836

Table of Contents

16. Segment Disclosures

The Company manages its business activities in two segments: Digital Banking and Payment Services.

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

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

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

•The Company aggregates operating segments when determining reportable segments.

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

•Through its operation of the Discover Network, the Digital Banking segment incurs fixed marketing, servicing and infrastructure costs that are not specifically allocated among the segments, except for an allocation of direct and incremental costs driven by the Company's Payment Services segment.

•The Company's assets are not allocated among the operating segments in the information reviewed by the Company's chief operating decision-maker.

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

•Income taxes are not specifically allocated between the operating segments in the information reviewed by the Company's chief operating ~~decision-maker.~~decision maker.

3937

Table of Contents

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

Digital
Banking Payment
Services Total
For the Three Months Ended September 30, 2022
Interest income
Credit card loans $ 2,783 $ — $ 2,783
Private student loans 211 — 211
Personal loans 221 — 221
Other loans 44 — 44
Other interest income 98 — 98
Total interest income 3,357 — 3,357
Interest expense 514 — 514
Net interest income 2,843 — 2,843
Provision for credit losses 773 — 773
Other income 541 95 636
Other expense 1,346 42 1,388
Income before income taxes $ 1,265 $ 53 $ 1,318
For the Three Months Ended September 30, 2021
Interest income
Credit card loans $ 2,193 $ — $ 2,193
Private student loans 184 — 184
Personal loans 219 — 219
Other loans 30 — 30
Other interest income 48 — 48
Total interest income 2,674 — 2,674
Interest expense 269 — 269
Net interest income 2,405 — 2,405
Provision for credit losses 185 — 185
Other income (loss) 447 (75) 372
Other expense 1,151 39 1,190
Income (loss) before income taxes $ 1,516 $ (114) $ 1,402

~~Table of Contents~~


		Digital Banking		Payment Services		Total			Digital Banking		Payment Services		Total
For the Nine Months Ended September 30, 2022
For the Three Months Ended March 31, 2023								For the Three Months Ended March 31, 2023
Interest income	Interest income							Interest income
Credit card loans	Credit card loans	$	7,475	$	—	$	7,475	Credit card loans	$	3,321	$	—	$	3,321
Private student loans	Private student loans	597		—		597		Private student loans	252		—		252
Personal loans	Personal loans	633		—		633		Personal loans	248		—		248
Other loans	Other loans	113		—		113		Other loans	64		—		64
Other interest income	Other interest income	190		—		190		Other interest income	192		—		192
Total interest income	Total interest income	9,008		—		9,008		Total interest income	4,077		—		4,077
Interest expense	Interest expense	1,076		—		1,076		Interest expense	945		—		945
Net interest income	Net interest income	7,932		—		7,932		Net interest income	3,132		—		3,132
Provision for credit losses	Provision for credit losses	1,476		—		1,476		Provision for credit losses	1,102		—		1,102
Other income	Other income	1,584		89		1,673		Other income	533		88		621
Other expense	Other expense	3,624		117		3,741		Other expense	1,342		41		1,383
Income (loss) before income tax expense		$	4,416	$	(28)	$	4,388
Income before income taxes								Income before income taxes	$	1,221	$	47	$	1,268

For the Nine Months Ended September 30, 2021
For the Three Months Ended March 31, 2022								For the Three Months Ended March 31, 2022
Interest income	Interest income							Interest income
Credit card loans	Credit card loans	$	6,452	$	—	$	6,452	Credit card loans	$	2,268	$	—	$	2,268
Private student loans	Private student loans	554		—		554		Private student loans	190		—		190
Personal loans	Personal loans	662		—		662		Personal loans	206		—		206
Other loans	Other loans	85		—		85		Other loans	32		—		32
Other interest income	Other interest income	156		—		156		Other interest income	40		—		40
Total interest income	Total interest income	7,909		—		7,909		Total interest income	2,736		—		2,736
Interest expense	Interest expense	875		—		875		Interest expense	257		—		257
Net interest income	Net interest income	7,034		—		7,034		Net interest income	2,479		—		2,479
Provision for credit losses	Provision for credit losses	(45)		—		(45)		Provision for credit losses	154		—		154
Other income		1,284		833		2,117
Other income (loss)								Other income (loss)	486		(63)		423
Other expense	Other expense	3,290		203		3,493		Other expense	1,092		38		1,130
Income before income tax expense		$	5,073	$	630	$	5,703
Income (loss) before income taxes								Income (loss) before income taxes	$	1,719	$	(101)	$	1,618

4138

Table of Contents

17. Revenue from Contracts with Customers

ASC Topic 606, Revenue from Contracts with Customers ("ASC 606"), generally applies to the sales of any good or service for which no other specific accounting guidance is provided. ASC 606 defines a principles-based model under which revenue from a contract is allocated to the distinct performance obligations within the contract and recognized in income as each performance obligation is satisfied. The Company's revenue that is subject to this model includes discount and interchange, protection products fees, transaction processing revenue and certain amounts classified as other income.

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

Digital Banking Payment Services Total
For the Three Months Ended September 30, 2022
Other income subject to ASC 606
Discount and interchange revenue, net(1)
$ 327 $ 19 $ 346
Protection products revenue 42 — 42
Transaction processing revenue — 65 65
Other income 3 16 19
Total other income subject to ASC 606(2)
372 100 472
Other income not subject to ASC 606
Loan fee income 168 — 168
Unrealized gains (losses) on equity investments — (37) (37)
Realized gains on equity investments 1 32 33
Total other income (loss) not subject to ASC 606 169 (5) 164
Total other income (loss) by operating segment $ 541 $ 95 $ 636
For the Three Months Ended September 30, 2021
Other income subject to ASC 606
Discount and interchange revenue, net(1)
$ 280 $ 19 $ 299
Protection products revenue 43 — 43
Transaction processing revenue — 58 58
Other income 3 15 18
Total other income subject to ASC 606(2)
326 92 418
Other income not subject to ASC 606
Loan fee income 121 — 121
Unrealized gains (losses) on equity investments — (167) (167)
Total other income not subject to ASC 606 121 (167) (46)
Total other income (loss) by operating segment $ 447 $ (75) $ 372

~~Table of Contents~~


		Digital Banking		Payment Services		Total			Digital Banking		Payment Services		Total
For the Nine Months Ended September 30, 2022
For the Three Months Ended March 31, 2023								For the Three Months Ended March 31, 2023
Other income subject to ASC 606	Other income subject to ASC 606							Other income subject to ASC 606
Discount and interchange revenue, net(1)	Discount and interchange revenue, net(1)	$	995	$	61	$	1,056	Discount and interchange revenue, net(1)	$	321	$	20	$	341
Protection products revenue	Protection products revenue	128		—		128		Protection products revenue	43		—		43
Transaction processing revenue	Transaction processing revenue	—		183		183		Transaction processing revenue	—		67		67
Other income	Other income	9		55		64		Other income	3		19		22
Total other income subject to ASC 606(2)	Total other income subject to ASC 606(2)	1,132		299		1,431		Total other income subject to ASC 606(2)	367		106		473
Other income not subject to ASC 606	Other income not subject to ASC 606							Other income not subject to ASC 606
Loan fee income	Loan fee income	450		—		450		Loan fee income	166		—		166
Unrealized gains (losses) on equity investments		—		(394)		(394)
Realized gains on equity investments		2		184		186
Gains (losses) on equity investments								Gains (losses) on equity investments	—		(18)		(18)
Total other income (loss) not subject to ASC 606	Total other income (loss) not subject to ASC 606	452		(210)		242		Total other income (loss) not subject to ASC 606	166		(18)		148
Total other income by operating segment	Total other income by operating segment	$	1,584	$	89	$	1,673	Total other income by operating segment	$	533	$	88	$	621

For the Nine Months Ended September 30, 2021
For the Three Months Ended March 31, 2022								For the Three Months Ended March 31, 2022
Other income subject to ASC 606	Other income subject to ASC 606							Other income subject to ASC 606
Discount and interchange revenue, net(1)	Discount and interchange revenue, net(1)	$	826	$	53	$	879	Discount and interchange revenue, net(1)	$	298	$	22	$	320
Protection products revenue	Protection products revenue	129		—		129		Protection products revenue	44		—		44
Transaction processing revenue	Transaction processing revenue	—		167		167		Transaction processing revenue	—		57		57
Other (loss) income		(4)		51		47
Other income								Other income	3		21		24
Total other income subject to ASC 606(2)	Total other income subject to ASC 606(2)	951		271		1,222		Total other income subject to ASC 606(2)	345		100		445
Other income not subject to ASC 606	Other income not subject to ASC 606							Other income not subject to ASC 606
Loan fee income	Loan fee income	333		—		333		Loan fee income	140		—		140
Unrealized gains on equity investments		—		562		562
Gains (losses) on equity investments								Gains (losses) on equity investments	1		(163)		(162)
Total other income (loss) not subject to ASC 606								Total other income (loss) not subject to ASC 606	141		(163)		(22)
Total other income (loss) by operating segment								Total other income (loss) by operating segment	$	486	$	(63)	$	423

Total other income not subject to ASC 606		333		562		895
Total other income by operating segment		$	1,284	$	833	$	2,117

(1)Net of rewards, including Cashback Bonus rewards, of ~~$811~~$716 million and ~~$689~~$635 million for the three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021, respectively, and $2.2 billion and $1.8 billion for the nine months ended September 30, 2022 and 2021,~~ respectively.

(2)Excludes $6 milliondeposit product fees that are reported within net interest income ~~which~~for the three months ended March 31, 2023. Deposit product fees were immaterial for the three ~~and nine~~ months ended ~~September 30, 2022 and 2021.~~March 31, 2022.

For a detailed description of the Company's significant revenue recognition accounting policies, see Note 2: Summary of Significant Accounting Policies to the consolidated financial statements in the Company's annual report on Form 10-K for the year ended December 31, ~~2021.~~2022.

18. Subsequent Events

The Company has evaluated events and transactions that have occurred subsequent to ~~September 30, 2022,~~March 31, 2023, and determined that there were no subsequent events that would require recognition or disclosure in the condensed consolidated financial statements.

4339

Table of Contents

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this quarterly report. This quarterly report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements, which speak to our expected business and financial performance, among other matters, contain words such as "believe," "expect," "anticipate," "intend," "plan," "aim," "will," "may," "should," "could," "would," "likely," "forecast," and similar expressions. Such statements are based on the current beliefs and expectations of our management and are subject to significant risks 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 of this quarterly report 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: the effect of the coronavirus disease 2019 ("COVID-19") pandemic and measures taken to mitigate the pandemic, including their impact on our credit quality and business operations as well as their impact on general economic and financial markets, changes in economic variables, such as the availability of consumer credit, the housing market, energy costs, the number and size of personal bankruptcy filings, the rate of unemployment, the levels of consumer confidence 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 accounting guidance, tax reform, financial regulatory reform, consumer financial services practices, anti-corruption and funding, capital and liquidity; the actions and initiatives of current and potential competitors; our ability to manage our expenses; our ability to successfully achieve card acceptance across our networks and maintain relationships with network ~~participants;~~participants and merchants; our ability to sustain and grow our private student loan, personal loan and home loan 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; our ability to manage our credit risk, market risk, liquidity risk, operational risk, legal and compliance 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 our investment portfolio; limits on our ability to pay dividends and repurchase our common stock; limits on our ability to receive payments from our subsidiaries; fraudulent activities or material security breaches of our or others' key systems; our ability to remain organizationally effective; 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, geopolitical events, climate change, pandemics and unforeseen or catastrophic events; our ability to introduce new products and services; our ability to manage our relationships with third-party ~~vendors;~~vendors, as well as those with which we have no direct relationship such as our employees' internet service providers; our ability to maintain current technology and integrate new and acquired ~~systems;~~systems and technology; our ability to collect amounts for disputed transactions from merchants and merchant acquirers; our ability to attract and retain employees; our ability to protect our reputation and our intellectual property; our ability to comply with regulatory requirements; and new lawsuits, investigations or similar matters or unanticipated developments related to current matters. We routinely evaluate and may pursue acquisitions of or investments in businesses, products, technologies, loan portfolios or deposits, which may involve payment in cash or our debt or equity securities.

Additional factors that could cause our results to differ materially from those described below can be found in this section of this quarterly report and in "Risk Factors," "Business," and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our annual report on Form 10-K for the year ended December 31, ~~2021,~~2022, which is filed with the Securities and Exchange Commission ("SEC") and available at the SEC's internet site (https://www.sec.gov).

Introduction and Overview

Discover Financial Services ("DFS") is a digital banking and payment services company. We provide digital banking products and services and payment services through our subsidiaries. We offer our customers credit card loans, private student loans, personal loans, home loans and deposit products. We also operate the Discover Network, the PULSE network ("PULSE") and Diners Club International ("Diners Club"), collectively known as the Discover Global Network. The Discover Network processes transactions for Discover-branded credit and debit cards and provides payment transaction processing and settlement services. PULSE operates an electronic funds transfer network, providing financial institutions issuing debit cards on the PULSE network with access to ATMs domestically and internationally and merchant acceptance throughout the United States of America ("U.S.") for debit card transactions. Diners Club is a global payments network of licensees, which are generally financial institutions, that issue Diners Club branded credit and charge cards and/or provide card acceptance services.

4440

Table of Contents

Our primary revenues consist of interest income earned on loan receivables and fees earned from customers, financial institutions, merchants and issuers. The primary expenses required to operate our business include funding costs (interest expense), credit loss provisions, customer rewards and expenses incurred to grow, manage and service our loan receivables and networks. Our business activities are funded primarily through consumer deposits, securitization of loan receivables and the issuance of unsecured debt.

~~COVID-19 Pandemic~~

For a discussion on how the risks related to the COVID-19 pandemic may affect our businesses, results of operations and financial condition, see "Risk Factors" in our annual report on Form 10-K for the year ended December 31, 2021.

Quarter Highlights

The highlights below compare results as of and for the three months ended ~~September 30, 2022,~~March 31, 2023, against results for the same period in the prior year.

•Net income was $1.0 billion, or ~~$3.54~~$3.58 per diluted share, compared to net income of ~~$1.1~~$1.2 billion, or ~~$3.54~~$4.22 per diluted share, in the prior year.

•Total loans grew ~~$15.4~~$19.2 billion, or ~~17%~~21%, to ~~$104.9~~$112.7 billion.

•Credit card loans grew ~~$13.3~~$16.0 billion, or ~~19%~~22%, to ~~$83.6~~$89.8 billion.

•The net charge-off rate for credit card loans increased 27126 basis points to ~~1.92%~~3.10% and the delinquency rate for credit card loans over 30 days past due increased 6399 basis points to ~~2.11%~~2.76%.

•Direct-to-consumer deposits grew ~~$4.2~~$11.6 billion, or 7%18%, to ~~$66.2~~$75.3 billion.

•Payment Services transaction volume for the segment was ~~$84.1~~$85.1 billion, up 10%.

Outlook

The outlook below provides our current expectations for our financial results based on market conditions, the regulatory and legal environment and our business strategies.

•We expect ~~elevated~~continued loan growth ~~based on~~driven by recent account growth, moderation in the payment rate and our current ~~expectations~~expectation of sales ~~trends and recent account growth.~~trends.

•Based on the current interest rate environment, net interest margin is expected to modestly increase in comparison to ~~2021.~~2022.

•We expect the total net charge-off rate to ~~remain relatively flat,~~increase, in comparison to the prior year, ~~resulting from lower than expected losses year-to-date.~~driven by continued credit normalization and seasoning of recent vintages.

•~~We expect elevated employee compensation~~Total expenses are expected to increase, driven by investments in acquisition and ~~benefits expense from higher headcount, but~~brand, compliance initiatives, technology and analytics. We remain committed to managing expenses ~~and will continue~~while continuing to make investments ~~for~~in profitable ~~long term~~long-term growth.

Regulatory Environment and Developments

Banking

Capital Standards and Stress Testing

As a bank holding company, DFS is subject to mandatory supervisory stress tests every other year and is required to submit annual capital plans to the Federal Reserve based on forward-looking internal analysis of income and capital levels under ~~expected~~baseline and stressful conditions. DFS is also subject to capital buffer requirements, including the Stress Capital Buffer ("SCB"), which requires maintenance of regulatory capital levels above a threshold ~~established~~ based on the results of supervisory stress tests after accounting for planned dividend payments.

In January 2021, the Federal Reserve finalized regulatory amendments that made targeted changes to the capital planning, regulatory reporting and SCB requirements for firms subject to Category IV standards, including DFS, to be consistent with the Federal Reserve’s regulatory tailoring framework. The final rules generally align to instructions the Federal Reserve previously provided to Category IV firms regarding their respective capital plan submissions. The amended rules also provide Category IV firms with the option to submit to supervisory stress tests during off years if they wish for the Federal Reserve to reset the stress test portion of their SCB requirement. ~~In connection with the final rulemaking, the~~The Federal

~~Table of Contents~~

Reserve also revised the scope of application of its existing regulatory guidance for capital planning to align with the tailoring framework. However, the timing

Table of Contents

and substance of any additional changes to existing guidance or new guidance are uncertain. Moreover, following the failure of two domestic banks during March 2023, members of Congress, the President of the United States and various bank regulatory authorities have made public statements indicating a desire for additional prudential regulation for Category IV firms like DFS. While we cannot currently predict the timing or substance of any such regulatory change, if any such change were adopted, it could roll back some or all of the regulatory tailoring currently applicable to DFS or otherwise tighten the prudential regulatory requirements that would apply to DFS.

In June ~~2021,~~2022, the Federal Reserve ~~publicly announced the~~released results of ~~its supervisory stress tests for~~ the ~~firms required to participate in the 2021 comprehensive capital analysis~~2022 Comprehensive Capital Analysis and ~~review~~Review ("CCAR") ~~process.~~exercise. Our capital levels demonstrated resiliency under stress, staying well above regulatory minimums. Based on these results, in August 2022, our new SCB was set at 2.5%, the lowest possible requirement. This new SCB is effective October 1, 2022, through September 30, 2023. In accordance with the capital plan rule amendments, ~~that were finalized in January 2021, DFS~~we elected not to participate in the ~~2021~~2023 supervisory stress tests. Nevertheless, ~~DFS was required~~we submitted to ~~submit~~the Federal Reserve on April 5, 2023, a capital plan based on a forward-looking internal assessment of income and capital under baseline and stressful conditions. The Federal Reserve ~~thereafter used~~will use our ~~2021~~2023 capital plan submission to assess ~~its~~our capital planning process and positions and ~~in August 2021, announced DFS' adjusted~~to reset the portion of our SCB requirement that is based on four quarters of ~~3.6% to reflect DFS'~~ planned common stock dividends. ~~This adjusted SCB is effective through October 1, 2022. Discover was a full participant in the 2022 CCAR process and submitted the 2022 Capital Plan to~~We expect the Federal Reserve ~~by the April 5, 2022 due date.~~

Onwill provide these results in late June 23, 2022, the Federal Reserve released results of the 2022 CCAR exercise. Discover’s results showed strong capital levels under stress, well above regulatory minimums. These results were used to set the new SCB effective October 1, 2022. On August 4, 2022, the Federal Reserve disclosed the new SCB for DFS is 2.5%, the lowest possible requirement.or early July 2023.

London Interbank Offered Rate

In July 2017, the UK Financial Conduct Authority ("FCA") announced that it would no longer encourage or compel banks to continue to contribute quotes and maintain the London Interbank Offered Rate ("LIBOR") after 2021. To support a smooth transition away from LIBOR, the Federal Reserve and the Federal Reserve Bank of New York convened the Alternative Reference Rates Committee ("ARRC"), a group of private-market participants tasked with facilitating a successful transition from U.S. dollar ("USD") LIBOR to a more robust reference rate. The ARRC ~~initially~~ identified the Secured Overnight Financing Rate ("SOFR") as its recommended alternative reference rate for USD LIBOR. The ARRC has also established several priorities and milestones to support the use of SOFR and SOFR-based indices, including developing contractual "fallback" language for capital markets and consumer products; providing clarity on legal, tax, accounting and regulatory matters; promoting broad outreach and education efforts around the LIBOR transition; and recommending spread adjustments for SOFR and SOFR-based indices, which will be of critical importance to market participants once USD LIBOR settings cease in 2023.

~~With regard to recent LIBOR transition developments, in~~In March 2021, the FCA announced the future cessation and loss of representativeness for all LIBOR benchmark settings. While non-USD and several less frequently referenced USD LIBOR settings ceased publication immediately after December 31, 2021, commonly referenced USD LIBOR settings will cease publication immediately after June 30, 2023; this future cessation event will trigger fallback provisions in many financial contracts ~~to convert their~~that require conversion of the benchmark index from LIBOR to an alternative rate. In July 2021, the ARRC announced its recommendation of forward-looking term rates based on SOFR as additional alternative reference rate options.

In December 2021, the Consumer Financial Protection Bureau ("CFPB") finalized a rule to facilitate transition from LIBOR, which became effective on April 1, 2022. Specifically, this final rule provides guidance on LIBOR replacements and the LIBOR transition for purposes of Regulation Z. We have communicated with the CFPB regarding our plans for the LIBOR transition.

A cross-functional team is overseeing and managing our transition away from the use of LIBOR. This team assesses evolving industry and marketplace norms and conventions for LIBOR-indexed instruments, evaluates the impacts stemming from the future cessation of LIBOR publication and oversees and takes actions to transition our LIBOR exposures to alternative benchmark rates, usually SOFR. Our existing LIBOR exposures are limited to two ~~instruments—~~instruments — variable-rate student loans and capital markets securities.

As of ~~September 30, 2022,~~March 31, 2023, LIBOR-indexed variable-rate loans comprised approximately ~~40%~~36% of our private student loan portfolio and approximately 4% of our aggregate loan portfolio. These outstanding student loans indexed to LIBOR will convert to a SOFR index in 2023 when 3-month USD LIBOR ~~will no longer~~ceases to be ~~published. U.S. banking regulators have directed banks to cease entering into new contracts that use USD LIBOR as~~ a representative reference ~~rate after December 31, 2021. Therefore, as~~rate. As of November 2021, we no longer originate new variable-rate student loans indexed to LIBOR. Instead, new originations of such loans are indexed solely to 3-month term SOFR published by the Chicago Mercantile Exchange.

~~Table of Contents~~

We ceased entering into new LIBOR-indexed interest rate derivatives in 2018 and have since actively ~~reduced~~eliminated LIBOR exposures in our derivatives portfolio. During the third quarter of 2021, we terminated our last LIBOR-indexed interest rate swap maturing after June 2023; our last LIBOR-indexed interest rate swap matured in January 2022.

Table of Contents

Most of our capital markets securities indexed to USD LIBOR are floating-rate asset-backed securities. Beginning in 2018, we included fallback provisions in all newly issued securities that will facilitate an orderly transition from LIBOR to an appropriate reference rate, which may be based on SOFR, once 1- and 3-month LIBOR cease to be published after June 2023. Approximately $1.5 billion of our capital markets securities that mature after June 2023 with no fallback provisions would be covered under ~~New York LIBOR legislation enacted in April 2021 or~~ federal legislation enacted in March ~~2022, which preempts the New York LIBOR legislation.~~2022. This legislation ~~would~~will allow us to replace the LIBOR index with SOFR under a safe harbor provision. Approximately $500 million of our capital markets securities have a rate reset in August 2023 that ~~contains a~~contain fallback ~~provision~~provisions that ~~may~~are not be covered under the ~~New York~~federal LIBOR ~~legislation or the federal~~ legislation; however, we may decide to exercise our right to call and redeem those securities on their reset ~~date.~~date or rely on the existing fallback provisions.

We have prepared for the cessation of USD LIBOR by taking steps to avoid new exposures and actively reduce our remaining exposures. We completed scheduled transition work before year-end 2021, including providing our stakeholders with information about the cessation of USD LIBOR and how it will affect their contracts with us. The transition process will continue through the end of 2023.

Consumer Financial Services

The CFPB regulates consumer financial products and services and examines certain providers of consumer financial products and services, including Discover. The CFPB's authority includes rulemaking, supervisory and enforcement powers with respect to federal consumer protection laws; preventing "unfair, deceptive or abusive acts or practices" ("UDAAP") and ensuring that consumers have access to fair, transparent and competitive financial products and services. Historically, the CFPB's policy priorities focused on several financial products of the type we offer (e.g., credit cards and other consumer lending products). In addition, the CFPB is required by statute to undertake certain actions including its biennial review of the consumer credit card market.

Under Director Rohit Chopra’s leadership, the CFPB’s priorities have focused on and are expected to continue focusing on, among other things, increased enforcement of existing consumer protection laws, with a particular focus on fees charged to consumers, UDAAP, fair lending, student lending and servicing, debt collection and credit reporting. Additionally, detection of repeat offenders, such as companies that violate a formal court or agency order, has become a ~~top~~ priority for the CFPB. ~~In remarks by~~ Director Chopra, in March 2022, he identified, as repeat offenders, several companies that have had multiple enforcement actions, including us. The CFPB has recently taken action against financial institutions for violating prior enforcement actions. Enhanced regulatory requirements, potential supervisory findings, or enforcement actions and ratings could negatively impact our ability to implement certain consumer-focused enhancements to product features and functionality and business strategies, limit or change our business practices, limit our consumer product offerings, cause us to invest more management time and resources in compliance efforts or limit our ability to obtain related required regulatory approvals. The additional expense, time and resources needed to comply with ongoing or new regulatory requirements may adversely impact the cost of and access to credit for consumers and results of business operations.

In December 2020, certain of our subsidiaries entered into a consent order with the CFPB regarding identified private student loan servicing practices. See Note 13: Litigation and Regulatory Matters to our condensed consolidated financial statements for more information.

~~Table of Contents~~

Data Security and Privacy

Policymakers at the federal and state levels remain focused on enhancing data security and data breach incident response requirements. Furthermore, regulations and legislation at various levels of government have been proposed and enacted to augment consumer data privacy ~~standards. The~~standards, including the capture and use of consumer biometrics. For example, the California Consumer Privacy Act ("CCPA") ~~creates~~, which became effective in 2020, created a broad set of privacy rights and remedies modeled in part on the European Union's General Data Protection Regulation. The ~~CCPA went into effect in January 2020, and the California Attorney General's final regulations became effective in August 2020, with enforcement beginning in July 2020. The~~ California Privacy Rights Act ("CPRA"), ~~a ballot measure led by the original proponent of the CCPA, passed in November 2020, with an~~which became effective ~~date of~~on January 1, 2023, ~~and enforcement set to begin on July 1, 2023. The CPRA replaces~~amends the CCPA, ~~to enhance~~enhancing consumer privacy protections ~~further~~ and ~~creates~~creating a new California Privacy Protection Agency ("CPPA"). The CPPA ~~Board released a Notice~~will begin enforcement of ~~Proposed Rulemaking initiating a 45-day comment period, which closed~~the CPRA on ~~August 23, 2022, with final regulations still forthcoming.~~July 1, 2023. While the CPRA retains an exemption for information collected, processed, sold, or disclosed subject to the Gramm-Leach-Bliley Act, we continue to evaluate the impact of the CPRA, as well as other federal and state laws, on our businesses and other providers of consumer financial services.

Table of Contents

Environmental, Social and Governance Matters

Environmental, social and governance ("ESG") issues, including climate change, human capital and governance practices, are a significant area of focus by lawmakers at the state and federal levels, regulatory agencies, shareholders and other stakeholders. Proposed legislation and rulemakings have been issued or are being considered, including proposals to require disclosure of climate, cybersecurity and other ESG metrics and risk. The potential impact to us of these legislative and regulatory developments is uncertain at this time.

In particular, in March 2022, the Securities and Exchange Commission proposed climate-related disclosure requirements. Through an enterprise-wide working group, we continue to assess the potential impact of the proposed rules, if adopted.

~~Table of Contents~~

Segments

We manage our business activities in two segments, Digital Banking and Payment Services, based on the products and services provided. For a detailed description of the operations of each segment, as well as the allocation conventions used in our business segment reporting, see Note 16: Segment Disclosures to our condensed consolidated financial statements.

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


		For the Three Months Ended September 30,				For the Nine Months Ended September 30,					For the Three Months Ended March 31,
		2022		2021		2022		2021				2023		2022
Digital Banking	Digital Banking									Digital Banking
Interest income	Interest income									Interest income
Credit card loans	Credit card loans	$	2,783	$	2,193	$	7,475	$	6,452	Credit card loans		$	3,321	$	2,268
Private student loans	Private student loans	211		184		597		554		Private student loans		252		190
Personal loans	Personal loans	221		219		633		662		Personal loans		248		206
Other loans	Other loans	44		30		113		85		Other loans		64		32
Other interest income	Other interest income	98		48		190		156		Other interest income		192		40
Total interest income	Total interest income	3,357		2,674		9,008		7,909		Total interest income		4,077		2,736
Interest expense	Interest expense	514		269		1,076		875		Interest expense		945		257
Net interest income	Net interest income	2,843		2,405		7,932		7,034		Net interest income		3,132		2,479
Provision for credit losses	Provision for credit losses	773		185		1,476		(45)		Provision for credit losses		1,102		154
Other income	Other income	541		447		1,584		1,284		Other income		533		486
Other expense	Other expense	1,346		1,151		3,624		3,290		Other expense		1,342		1,092
Income before income taxes	Income before income taxes	1,265		1,516		4,416		5,073		Income before income taxes		1,221		1,719
Payment Services	Payment Services									Payment Services

Other income (loss)	Other income (loss)	95		(75)		89		833		Other income (loss)		88		(63)
Other expense	Other expense	42		39		117		203		Other expense		41		38
Income (loss) before income taxes	Income (loss) before income taxes	53		(114)		(28)		630		Income (loss) before income taxes		47		(101)
Total income before income taxes	Total income before income taxes	$	1,318	$	1,402	$	4,388	$	5,703	Total income before income taxes		$	1,268	$	1,618

Table of Contents

The following table presents information on transaction volume (dollars in millions):


		For the Three Months Ended September 30,				For the Nine Months Ended September 30,					For the Three Months Ended March 31,
		2022		2021		2022		2021				2023		2022
Network Transaction Volume	Network Transaction Volume									Network Transaction Volume
PULSE Network	PULSE Network	$	63,437	$	59,872	$	186,265	$	183,126	PULSE Network		$	65,268	$	59,836
Network Partners	Network Partners	11,894		10,377		34,109		29,474		Network Partners		10,628		10,683
Diners Club(1)	Diners Club(1)	8,793		6,547		24,350		18,570		Diners Club(1)		9,211		7,176
Total Payment Services	Total Payment Services	84,124		76,796		244,724		231,170		Total Payment Services		85,107		77,695
Discover Network — Proprietary(2)	Discover Network — Proprietary(2)	56,633		49,360		160,600		135,763		Discover Network — Proprietary(2)		51,826		48,129
Total Network Transaction Volume	Total Network Transaction Volume	$	140,757	$	126,156	$	405,324	$	366,933	Total Network Transaction Volume		$	136,933	$	125,824
Transactions Processed on Networks	Transactions Processed on Networks									Transactions Processed on Networks
Discover Network	Discover Network	924		868		2,671		2,345		Discover Network		850		831
PULSE Network	PULSE Network	1,611		1,415		4,534		4,124		PULSE Network		1,625		1,399
Total Transactions Processed on Networks		2,535		2,283		7,205		6,469
Total Transaction Processed on Networks										Total Transaction Processed on Networks		2,475		2,230
Credit Card Volume	Credit Card Volume									Credit Card Volume
Discover Card Volume(3)	Discover Card Volume(3)	$	58,561	$	50,389	$	165,324	$	138,772	Discover Card Volume(3)		$	54,129	$	49,379
Discover Card Sales Volume(4)	Discover Card Sales Volume(4)	$	54,793	$	47,613	$	154,982	$	130,817	Discover Card Sales Volume(4)		$	50,588	$	46,329

(1)Diners Club volume is derived from data provided by licensees for Diners Club branded cards issued outside North America and is subject to subsequent revision or amendment.

(2)Represents gross Discover card sales volume on the Discover Network.

(3)Represents Discover card activity related to sales net of returns, balance transfers, cash advances and other activity.

(4)Represents Discover card activity related to sales net of returns.

~~Table of Contents~~

Digital Banking

Our Digital Banking segment reported pretax income of ~~$1.3~~$1.2 billion ~~and $4.4 billion, respectively,~~ for the three ~~and nine~~ months ended ~~September 30, 2022,~~March 31, 2023, as compared to ~~a pretax income of $1.5~~$1.7 billion ~~and $5.1 billion, respectively,~~ for the three ~~and nine~~ months ended ~~September 30, 2021.~~March 31, 2022.

Net interest income increased for the three ~~and nine~~ months ended ~~September 30, 2022,~~March 31, 2023, as compared to the ~~same periods in 2021,~~three months ended March 31, 2022, primarily driven by a higher yield on loans and a higher average level of loan receivables, ~~and higher yield on loans,~~ partially offset by higher funding costs. Interest income increased ~~for the three and nine months ended September 30, 2022, as~~ compared to the ~~same periods in 2021,~~prior year primarily due to higher market rates and a higher average level of loan ~~receivables and higher market rates.~~receivables. Interest expense increased ~~for the three and nine months ended September 30, 2022, as~~ compared to the ~~same periods in 2021,~~prior year primarily due to higher funding costs driven by higher market ~~rates. The interest expense increase for the three months ended September 30, 2022 was also driven by~~rates and a larger funding base.

For the three ~~and nine~~ months ended ~~September 30, 2022,~~March 31, 2023, the ~~overall portfolio~~ provision for credit losses increased as compared to the ~~same periods in 2021. The increase was~~three months ended March 31, 2022, primarily driven by ~~continued~~ loan growth and credit normalization. For a detailed discussion on provision for credit losses, see "— Loan Quality — Provision and Allowance for Credit Losses."

Total other income for the Digital Banking segment increased for the three ~~and nine~~ months ended ~~September 30, 2022,~~March 31, 2023, as compared to the ~~same periods in 2021, which was~~three months ended March 31, 2022, primarily due to increases in loan fee income and net discount and interchange ~~revenue and loan~~revenue. Loan fee ~~income.~~income increased primarily due to a higher volume of late payments. The increase in discount and interchange revenue was partially offset by an increase in rewards, both of which were driven by higher sales volume. ~~Loan fee income increased primarily due to a higher volume of late payments.~~

Total other expense increased for the three ~~and nine~~ months ended ~~September 30, 2022,~~March 31, 2023, as compared to the ~~same periods in 2021,~~three months ended March 31, 2022, primarily due to increases in ~~marketing and business development,~~ employee compensation and benefits, professional fees and ~~professional fees.~~marketing and business development. The increase in employee compensation and benefits was driven primarily by higher headcount. Professional fees increased primarily due to increased consulting supporting consumer compliance initiatives and investments in technology. The increase in marketing and business development was ~~driven by~~primarily from growth investments in card and consumer banking. ~~Employee compensation and benefits increased primarily from higher headcount. The increase in professional fees was due primarily to investments in technology and increased consulting costs.~~

Discover card sales volume was ~~$54.8~~$50.6 billion ~~and $155 billion, respectively,~~ for the three ~~and nine~~ months ended ~~September 30, 2022,~~March 31, 2023, which was an increase of ~~15.1% and 18.5%, respectively,~~9.2% as compared to the ~~same periods in 2021.~~three months ended March 31, 2022. This volume growth was primarily driven by higher consumer ~~spending across all spending categories.~~spending.

Table of Contents

Payment Services

Our Payment Services segment reported pretax income of ~~$53~~$47 million ~~and a pretax loss of $28 million, respectively,~~ for the three ~~and nine~~ months ended ~~September 30, 2022,~~March 31, 2023, as compared to pretax loss of ~~$114~~$101 million ~~and pretax income of $630 million, respectively,~~ for the ~~same periods in 2021.~~three months ended March 31, 2022. The increase in segment pretax income ~~for the three months ended September 30, 2022~~ was primarily ~~driven by the change in fair value of equity investments that are carried at fair value because the shares are publicly traded. The fair value adjustments resulted in the recognition of~~due to smaller ~~unrealized~~ losses ~~in the current period compared to the prior period. Also contributing to the increase were realized gains~~ on equity investments, ~~due to sales in~~which were the ~~current period.~~

~~The decrease in segment pretax income~~result of smaller mark-to-market adjustments for ~~the nine months ended September 30, 2022 was driven by fair value adjustments of~~ equity investments that resulted in the recognition of unrealized losses in the current period and unrealized gains in the prior period. This decrease was offset by an increase in realized gains on equity investments due to sales in the current period.measured at fair value.

Critical Accounting Estimates

In preparing our consolidated financial statements in conformity with accounting principles generally accepted in the U.S. ("GAAP"), management must make judgments and use estimates and assumptions about the effects of matters that are uncertain. For estimates that involve a high degree of judgment and subjectivity, it is possible that different estimates could reasonably be derived for the same period. For estimates that are particularly sensitive to changes in economic or market conditions, significant changes to the estimated amount from period to period are also possible. Management believes the current assumptions and other considerations used to estimate amounts reflected in our consolidated financial statements are appropriate. However, if actual experience differs from the assumptions and other considerations used in estimating amounts in our consolidated financial statements, the resulting changes could have a material effect on our consolidated results of

~~Table of Contents~~

operations and, in certain cases, could have a material effect on our consolidated financial condition. Management has identified the estimates related to our allowance for credit losses as a critical accounting estimate.

Allowance for Credit Losses

The allowance for credit losses was ~~approximately $7.1~~$7.7 billion at ~~September 30, 2022,~~March 31, 2023, which reflects a ~~$304~~$385 million build ~~over June 30,~~from the amount of the allowance for credit losses at December 31, 2022. The allowance for credit losses represents management’s estimate of expected credit losses over the remaining expected life of our financial assets measured at amortized ~~cost and certain off-balance sheet loan commitments.~~cost. Changes in the allowance for credit losses, and in the related provision for credit losses, can materially affect net income.

In estimating the expected credit losses, we use a combination of statistical models and qualitative analysis. There is a significant amount of judgment applied in selecting inputs and analyzing the results produced to estimate the allowance for credit losses. For more information on these judgments and our accounting policies and methodologies used to determine the allowance for credit losses, see "Management's Discussion and Analysis of Financial Condition and Results of Operations — Loan Quality," Note 4: Loan Receivables and Note 2: Summary of Significant Accounting Policies to our consolidated financial statements in our annual report on Form 10-K for the year ended December 31, ~~2021.~~2022.

One of the key assumptions requiring significant judgment in estimating the current expected credit losses ("CECL") on a quarterly basis is the determination of the macroeconomic forecasts used in the loss forecast models. For the reasonable and supportable loss forecast period, we consider forecasts of multiple economic scenarios that generally include a base scenario with one or more optimistic (upside) or pessimistic (downside) scenarios. These scenarios ~~incorporate~~comprise a variety of macroeconomic variables, including annualized gross domestic product growth and unemployment rate. The scenarios that are chosen each quarter and the amount of weighting given to each scenario depend on a variety of factors including recent economic events, leading economic indicators, views of internal and third-party economists and industry trends. Assumptions about the macroeconomic environment are inherently uncertain and, as a result, actual changes in the allowance for credit losses may be different from the simulated scenario presented below.

To demonstrate the sensitivity of the estimated credit losses to the macroeconomic scenarios, we ~~compared~~measured the ~~modeled credit losses determined using~~impact of altering the weighting of macroeconomic scenarios used in our ~~base and one or more adverse macroeconomic scenarios.~~loss forecast. Our allowance for credit losses would increase by approximately ~~$578~~$522 million at ~~September 30, 2022~~March 31, 2023 if we applied 100% weight to the most adverse scenario in our sensitivity analysis to reflect ~~the economic deterioration from a resurgence of COVID-19 and resulting economic stress, as well as increasing~~continued inflationary pressures, including persistent supply-chain disruptions and the influence of geopolitical ~~events.~~events, as well as high interest rates and growing unemployment rates.

The sensitivity disclosed above is hypothetical. It is difficult to estimate how potential changes in any one factor or input, such as the weighting of macroeconomic forecasts, might affect the overall allowance for credit losses because we consider a variety of factors and inputs in estimating the allowance for credit losses. The macroeconomic scenarios used are constructed with interrelated projections of multiple economic variables and loss estimates are produced that consider the historical correlation of those economic variables with credit losses. The inputs in the macroeconomic scenarios may not change at the same rate and may not be consistent across all geographies or product types, and changes in factors and inputs may be directionally inconsistent, such that improvement in one factor or input may offset deterioration in others. As a result, the sensitivity analysis above does not necessarily reflect the nature and extent of future changes in the allowance for credit losses. It is intended to provide insights into the impact of different judgments about the economy on our modeled loss

Table of Contents

estimates for the loan portfolio and does not imply any expectation of future losses. Furthermore, the hypothetical increase in our allowance for credit losses for loans does not incorporate the impact of management judgment for qualitative factors applied in the current allowance for credit losses, which may have a positive or negative effect on our actual financial condition and results of operations.

The overall economic environment directly impacts the macroeconomic variables that are used in the loss forecast models. If management used different assumptions about the economic environment in estimating expected credit losses, the impact to the allowance for credit losses could have a material effect on our consolidated financial condition and results of operations. In addition, if we experience ~~a rapidly changing~~significant instability in the economic environment, ~~as experienced during the COVID-19 pandemic,~~ the uncertainty around the credit loss forecasts may increase, both due to the uncertainty of the economic forecasts and the challenges our models may have in incorporating them.

~~Table of Contents~~

Earnings Summary

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


		For the Three Months Ended September 30,				2022 vs. 2021 Increase (Decrease)				For the Nine Months Ended September 30,				2022 vs. 2021 Increase (Decrease)					For the Three Months Ended March 31,	2023 vs. 2022 Increase (Decrease)
		2022		2021		$		%		2022		2021		$		%				2023		2022		$		%
Interest income	Interest income	$	3,357	$	2,674	$	683	26	%	$	9,008	$	7,909	$	1,099	14	%	Interest income		$	4,077	$	2,736	$	1,341	49	%
Interest expense	Interest expense	514		269		245		91	%	1,076		875		201		23	%	Interest expense		945		257		688		268	%
Net interest income	Net interest income	2,843		2,405		438		18	%	7,932		7,034		898		13	%	Net interest income		3,132		2,479		653		26	%
Provision for credit losses	Provision for credit losses	773		185		588		318	%	1,476		(45)		1,521		(3,380)	%	Provision for credit losses		1,102		154		948		616	%
Net interest income after provision for credit losses	Net interest income after provision for credit losses	2,070		2,220		(150)		(7)	%	6,456		7,079		(623)		(9)	%	Net interest income after provision for credit losses		2,030		2,325		(295)		(13)	%
Other income	Other income	636		372		264		71	%	1,673		2,117		(444)		(21)	%	Other income		621		423		198		47	%
Other expense	Other expense	1,388		1,190		198		17	%	3,741		3,493		248		7	%	Other expense		1,383		1,130		253		22	%
Income before income tax expense		1,318		1,402		(84)		(6)	%	4,388		5,703		(1,315)		(23)	%
Income before income taxes																		Income before income taxes		1,268		1,618		(350)		(22)	%
Income tax expense	Income tax expense	312		311		1		—	%	1,029		1,321		(292)		(22)	%	Income tax expense		292		376		(84)		(22)	%
Net income	Net income	$	1,006	$	1,091	$	(85)	(8)	%	$	3,359	$	4,382	$	(1,023)	(23)	%	Net income		$	976	$	1,242	$	(266)	(21)	%
Net income allocated to common stockholders	Net income allocated to common stockholders	$	967	$	1,055	$	(88)	(8)	%	$	3,277	$	4,289	$	(1,012)	(24)	%	Net income allocated to common stockholders		$	939	$	1,205	$	(266)	(22)	%

5247

Table of Contents

Net Interest Income

The ~~table~~tables that ~~follows~~follow this section ~~has~~have been provided to supplement the discussion below and provide further analysis of net interest income, ~~and~~ net interest ~~margin.~~margin and the impact of rate and volume changes on net interest income. Net interest income represents the difference between interest income earned on our interest-earning assets and the interest expense incurred to finance those assets. We analyze net interest income in total by calculating net interest margin (net interest income as a percentage of average total loan receivables) and net yield on interest-earning assets (net interest income as a percentage of average total interest-earning assets). We also separately consider the impact of the level of loan receivables and the related interest yield and the impact of the cost of funds related to each of our funding sources, along with the income generated by our liquidity portfolio, on net interest income.

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

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

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

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

•The interest rates necessary to attract and maintain direct-to-consumer deposits;

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

•Changes in the interest rate environment, including the levels of interest rates and the relationships among interest rate indices, such as the prime rate, the federal funds rate, the interest rate on reserve balances, LIBOR and ~~LIBOR;~~SOFR; and

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

5348

Table of Contents

Average Balance Sheet Analysis

(dollars in millions)
For the Three Months Ended September 30,
2022 2021
Average Balance Yield/Rate Interest Average Balance Yield/Rate Interest
Assets
Interest-earning assets
Cash and cash equivalents $ 10,057 2.29 % $ 58 $ 12,192 0.16 % $ 3
Restricted cash 853 2.25 % $ 5 571 0.03 % NM
Other short-term investments NM 0.10 % NM NM 0.10 % NM
Investment securities 6,000 2.32 % 35 8,431 2.09 % 45
Loan receivables(1)
Credit card loans(2)(3)
81,445 13.56 % 2,783 69,416 12.53 % 2,193
Private student loans 10,132 8.26 % 211 9,932 7.36 % 184
Personal loans 7,408 11.83 % 221 6,900 12.61 % 219
Other loans 3,050 5.70 % 44 2,108 5.41 % 30
Total loan receivables 102,035 12.67 % 3,259 88,356 11.79 % 2,626
Total interest-earning assets 118,945 11.20 % 3,357 109,550 9.68 % 2,674
Allowance for credit losses (6,758) (7,020)
Other assets 5,923 6,430
Total assets(4)
$ 118,110 $ 108,960
Liabilities and Stockholders' Equity
Interest-bearing liabilities
Interest-bearing deposits
Time deposits $ 25,279 1.97 % 125 $ 22,804 1.76 % 101
Money market deposits 8,432 1.92 % 41 8,108 0.53 % 11
Other interest-bearing savings deposits 44,372 1.60 % 179 41,059 0.42 % 44
Total interest-bearing deposits 78,083 1.76 % 345 71,971 0.86 % 156
Borrowings
Short-term borrowings 98 1.62 % $ 1.00 6 0.24 % NM
Securitized borrowings(5)(6)(7)
10,246 2.79 % 72 8,292 1.10 % 22
Other long-term borrowings(6)(7)
9,087 4.20 % 96 9,550 3.78 % 91
Total borrowings 19,431 3.45 % 169 17,848 2.53 % 113
Total interest-bearing liabilities 97,514 2.09 % 514 89,819 1.19 % 269
Other liabilities and stockholders' equity(8)
20,596 19,141
Total liabilities and stockholders' equity $ 118,110 $ 108,960
Net interest income $ 2,843 $ 2,405
Net interest margin(9)
11.05 % 10.80 %
Net yield on interest-earning assets(10)
9.48 % 8.71 %
Interest rate spread(11)
9.11 % 8.49 %

~~Table of Contents~~


		For the Nine Months Ended September 30,													For the Three Months Ended March 31,
		2022						2021							2023						2022
		Average Balance		Yield/Rate		Interest		Average Balance		Yield/Rate		Interest			Average Balance		Yield/Rate		Interest		Average Balance		Yield/Rate		Interest
Assets	Assets													Assets
Interest-earning assets	Interest-earning assets													Interest-earning assets
Cash and cash equivalents	Cash and cash equivalents	$	9,074	1.20	%	$	81	$	15,725	0.12	%	$	14	Cash and cash equivalents	$	7,344	4.71	%	$	85	$	8,519	0.20	%	$	4
Restricted cash	Restricted cash	556		1.19	%	5		536		0.03	%	NM		Restricted cash	588		4.05	%	6		774		0.02	%	NM
Other short-term investments		NM		0.11	%	NM		235		0.12	%	NM

Investment securities	Investment securities	6,094		2.28	%	104		9,125		2.08	%	142		Investment securities	12,235		3.36	%	101		6,509		2.23	%	36
Loan receivables(1)	Loan receivables(1)													Loan receivables(1)
Credit card loans(2)(3)	Credit card loans(2)(3)	76,832		13.01	%	7,475		68,522		12.59	%	6,452		Credit card loans(2)(3)	89,460		15.06	%	3,321		73,042		12.59	%	2,268
Private student loans	Private student loans	10,225		7.81	%	597		10,044		7.38	%	554		Private student loans	10,546		9.68	%	252		10,381		7.41	%	190
Personal loans	Personal loans	7,101		11.92	%	633		6,953		12.73	%	662		Personal loans	8,155		12.35	%	248		6,909		12.09	%	206
Other loans		2,697		5.60	%	113		2,002		5.64	%	85
Other														Other	3,888		6.64	%	64		2,359		5.60	%	32
Total loan receivables	Total loan receivables	96,855		12.17	%	8,818		87,521		11.84	%	7,753		Total loan receivables	112,049		14.06	%	3,885		92,691		11.80	%	2,696
Total interest-earning assets	Total interest-earning assets	112,579		10.70	%	9,008		113,142		9.35	%	7,909		Total interest-earning assets	132,216		12.51	%	4,077		108,493		10.23	%	2,736
Allowance for credit losses	Allowance for credit losses	(6,740)						(7,521)						Allowance for credit losses	(7,307)						(6,818)
Other assets	Other assets	6,014						6,189						Other assets	6,494						6,248
Total assets(4)	Total assets(4)	$	111,853					$	111,810					Total assets(4)	$	131,403					$	107,923
Liabilities and Stockholders’ Equity
Liabilities and Stockholders' Equity														Liabilities and Stockholders' Equity
Interest-bearing liabilities	Interest-bearing liabilities													Interest-bearing liabilities
Interest-bearing deposits	Interest-bearing deposits													Interest-bearing deposits
Time deposits	Time deposits	$	21,772	1.73	%	281		$	24,856	1.90	%	354		Time deposits	$	33,194	3.17	%	$	259	$	19,924	1.53	%	$	75
Money market deposits	Money market deposits	8,322		1.14	%	71		8,151		0.53	%	32		Money market deposits	8,769		3.77	%	82		8,207		0.59	%	12
Other interest-bearing savings deposits	Other interest-bearing savings deposits	43,476		0.94	%	306		40,760		0.43	%	133		Other interest-bearing savings deposits	49,255		3.42	%	415		42,487		0.50	%	52
Total interest-bearing deposits	Total interest-bearing deposits	73,570		1.20	%	658		73,767		0.94	%	519		Total interest-bearing deposits	91,218		3.36	%	756		70,618		0.80	%	139
Borrowings	Borrowings													Borrowings
Short-term borrowings	Short-term borrowings	300		0.69	%	2		3		0.21	%	NM		Short-term borrowings	—		—	%	—		667		0.49	%	1
Securitized borrowings(5)(6)(7)	Securitized borrowings(5)(6)(7)	8,758		2.06	%	135		9,798		1.05	%	77		Securitized borrowings(5)(6)(7)	9,667		3.67	%	87		7,739		1.29	%	24
Other long-term borrowings~~(7)~~(8)	Other long-term borrowings~~(7)~~(8)	9,233		4.07	%	281		10,037		3.72	%	279		Other long-term borrowings~~(7)~~(8)	9,372		4.40	%	102		9,432		3.99	%	93
Total borrowings	Total borrowings	18,291		3.05	%	418		19,838		2.40	%	356		Total borrowings	19,039		4.03	%	189		17,838		2.68	%	118
Total interest-bearing liabilities	Total interest-bearing liabilities	91,861		1.57	%	1,076		93,605		1.25	%	875		Total interest-bearing liabilities	110,257		3.48	%	945		88,456		1.18	%	257
Other liabilities and stockholders’ equity(8)		19,992						18,205
Total liabilities and stockholders’ equity		$	111,853					$	111,810
Other liabilities and stockholders' equity(9)														Other liabilities and stockholders' equity(9)	21,146						19,467
Total liabilities and stockholders' equity														Total liabilities and stockholders' equity	$	131,403					$	107,923
Net interest income	Net interest income					$	7,932					$	7,034	Net interest income					$	3,132					$	2,479
Net interest margin(9)				10.95	%					10.74	%
Net yield on interest-earning assets(10)				9.42	%					8.31	%
Interest rate spread(11)				9.13	%					8.10	%
Net interest margin(10)														Net interest margin(10)			11.34	%					10.85	%
Net yield on interest-earning assets(11)														Net yield on interest-earning assets(11)			9.61	%					9.27	%
Interest rate spread(12)														Interest rate spread(12)			9.03	%					9.05	%

(1)Average balances of loan receivables and yield calculations include non-accruing loans. If the non-accruing loan balances were excluded, there would not be a material impact on the amounts reported above.

(2)Interest income on credit card loans includes ~~$99~~$105 million and ~~$73~~$76 million of amortization of balance transfer fees for the three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021, respectively, and $261 million and $217 million for the nine months ended September 30, 2022 and 2021,~~ respectively.

(3)Includes the impact of interest rate swap agreements used to change a portion of floating-rate assets to fixed-rate assets for the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 and ~~2021.~~2022.

(4)The return on average assets, based on net income, was ~~0.85%~~0.74% and ~~1.00%~~1.15% for the three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021, respectively, and 3.00% and 3.92% for the nine months ended September 30, 2022 and 2021,~~ respectively.

(5)Includes the impact of one terminated derivative formerly designated as a cash flow hedge for the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 and ~~2021.~~2022.

(6)Includes the impact of interest rate swap agreements used to change a portion of fixed-rate funding to floating-rate funding for the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 and ~~2021.~~2022.

(7)Includes the impact of terminated derivatives formerly designated as fair value hedges for the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 and ~~2021.~~2022.

(8)Includes the impact of interest rate swap agreements used to change a portion of floating-rate funding to fixed-rate funding for the three months ended March 31, 2023.

(9)The return on average stockholders' equity, based on net income, was ~~6.86%~~27.00% and ~~8.08%~~9.00% for the three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021, respectively, and 23.61% and 34.96% for the nine months ended September 30, 2022 and 2021,~~ respectively.

~~(9)~~(10)Net interest margin represents net interest income as a percentage of average total loan receivables.

~~(10)~~(11)Net yield on interest-earning assets represents net interest income as a percentage of average total interest-earning assets.

~~(11)~~(12)Interest rate spread represents the difference between the rate on total interest-earning assets and the rate on total interest-bearing liabilities.

5549

Table of Contents

Loan Quality

~~Impact of the COVID-19 Pandemic on the Loan Portfolio~~

The COVID-19 pandemic and its impact on the economy significantly affected our sales volume and credit card loan growth during the first half of 2021. We tightened credit standards for new accounts and for growing existing accounts across all products and reduced our marketing and customer acquisition expenditures at the onset of the pandemic. Recognizing the strong economic recovery from the COVID-19 pandemic-induced recession, we returned most of our underwriting criteria to pre-pandemic standards and resumed our investment in marketing and business development during the second quarter of 2021. This change in our credit underwriting, in addition to changes in consumer spending behavior, increased marketing and the re-opening of the U.S. economy upon expiration of certain COVID-19 containment measures, contributed to an increase in sales volume for the three and nine months ended September 30, 2022, when compared to the same periods in 2021. Our outstanding loan receivables as of September 30, 2022, increased when compared to December 31, 2021, due to strong sales and new account growth.

Troubled debt restructuring ("TDR") program balances and the number of accounts reported as TDRs were favorably impacted by accounting and financial reporting exemptions provided by the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") for the year ended December 31, 2021. See Note 4: Loan Receivables to our annual report on Form 10-K for the year ended December 31, 2021, for more information about the impact of the CARES Act on loan modifications.

The table below reflects the number and balance of both new loan modifications reported as TDRs and new loan modifications excluded from the TDR designation pursuant to the CARES Act (dollars in millions):
Accounts that entered a loan modification program and were classified as TDRs during the period
Accounts that entered a loan modification program and were exempt from the TDR designation pursuant to the CARES Act(1)
Number of Accounts Balances Number of Accounts Balances
For the Three Months Ended September 30, 2022
Credit card loans 63,803 $ 414 — $ —
Private student loans 1,863 $ 36 — $ —
Personal loans 1,799 $ 25 — $ —
For the Three Months Ended September 30, 2021
Credit card loans 13,964 $ 86 27,925 $ 200
Private student loans 102 $ 2 2,325 $ 46
Personal loans 888 $ 10 239 $ 3
For the Nine Months Ended September 30, 2022
Credit card loans 167,655 $ 1,071 — $ —
Private student loans 5,141 $ 96 — $ —
Personal loans 4,561 $ 62 — $ —
For the Nine Months Ended September 30, 2021
Credit card loans 48,887 $ 315 97,449 $ 697
Private student loans 355 $ 7 7,038 $ 135
Personal loans 3,102 $ 38 1,177 $ 18

~~(1)Accounts that entered into a loan modification on or after January 1, 2022, are not eligible for this exemption.~~

The number and balance of new credit card and personal loan modifications increased during the three and nine months ended September 30, 2022, when compared to total modifications, including both TDRs and those exempt from the TDR designation, in the same periods in 2021. The increase was primarily due to the expiration of government stimulus and disaster relief programs.

~~Table of Contents~~

The number and balance of new private student loan modifications decreased during the three and nine months ended September 30, 2022, when compared to total modifications, including both TDRs and those exempt from the TDR designations, in the same periods in 2021, due primarily to heightened utilization of programs in the prior periods driven by the impacts of the COVID-19 pandemic on student loan borrowers.

The following table provides the number of accounts that exited a temporary loan modification program that were exempt from the TDR designation pursuant to the CARES Act and corresponding outstanding balances along with the amount of the outstanding balances that were delinquent (30 or more days past due) upon exiting the temporary loan modification program (dollars in millions):

For the Three Months Ended September 30,
2022 2021
Number of Accounts Outstanding Balances
Balances Delinquent(1)
Number of Accounts Outstanding Balances
Balances Delinquent(1)
Credit card loans 20,229 $ 109 $ 23 42,067 $ 254 $ 35
Private student loans 308 $ 7 NM 2,290 $ 40 NM
Personal loans 70 $ 1 NM 1,307 $ 21 NM
For the Nine Months Ended September 30,
2022 2021
Number of Accounts Outstanding Balances
Balances Delinquent(1)
Number of Accounts Outstanding Balances
Balances Delinquent(1)
Credit card loans 79,621 $ 437 $ 89 155,712 $ 955 $ 129
Private student loans 3,773 $ 74 $ 5 6,024 $ 106 NM
Personal loans 598 $ 8 $ 2 4,101 $ 61 NM

~~(1)~~Includes balances charged off at the end of the month the account exited the temporary loan modification program. The balances charged off were not meaningful for the three and nine months ended September 30, 2022 and 2021.

Our estimate of expected loss reflected in our allowance for credit losses includes the risk associated with all loans, including all modified loans. Refer to Note 3: Loan Receivables to our condensed consolidated financial statements for more details on modification programs, TDRs and the allowance for credit losses.

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


		September 30, 2022		December 31, 2021			March 31, 2023		December 31, 2022
Credit card loans	Credit card loans	$	83,630	$	74,369	Credit card loans	$	89,755	$	90,113
Other loans	Other loans					Other loans
Private student loans	Private student loans	10,349		10,113		Private student loans	10,480		10,308
Personal loans	Personal loans	7,674		6,936		Personal loans	8,374		7,998
Other loans	Other loans	3,255		2,266		Other loans	4,065		3,701
Total other loans	Total other loans	21,278		19,315		Total other loans	22,919		22,007
Total loan receivables	Total loan receivables	104,908		93,684		Total loan receivables	112,674		112,120
Allowance for credit losses	Allowance for credit losses	(7,061)		(6,822)		Allowance for credit losses	(7,691)		(7,374)
Net loan receivables	Net loan receivables	$	97,847	$	86,862	Net loan receivables	$	104,983	$	104,746

~~Table of Contents~~

Provision and Allowance for Credit Losses

Provision for credit losses is the expense related to maintaining the allowance for credit losses at an appropriate level to absorb the estimate of credit losses anticipated over the remaining expected life of loan receivables at each period end date. In deriving the estimate of expected credit losses, we consider the collectability of principal, interest and fees associated with our loan receivables. We also consider expected recoveries of amounts that were either previously ~~charged off~~charged-off or are expected to be charged-off. Establishing the estimate for expected credit losses requires significant management judgment. The factors that influence the provision for credit losses include:

•Increases or decreases in outstanding loan balances, including:

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

•The level of new account and loan originations and loan maturities; and

•Changes in the overall mix of accounts and products within the portfolio;

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

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

•The level and direction of historical losses; and

•Regulatory changes or new regulatory guidance.

Refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting ~~Estimates"~~Estimates — Allowance for Credit Losses" and Note 3: Loan Receivables to our condensed consolidated financial statements for more details on how we estimate the allowance for credit losses.

Table of Contents

The following tables provide changes in our allowance for credit losses (dollars in millions):

~~Table of Contents~~


		For the Three Months Ended September 30, 2022											For the Three Months Ended March 31, 2023
		Credit Card Loans		Private Student Loans		Personal Loans		Other Loans		Total Loans			Credit Card Loans		Private Student Loans		Personal Loans		Other Loans		Total Loans
Balance at June 30, 2022		$	5,307	$	832	$	572	$	46	$	6,757
Balance at December 31, 2022												Balance at December 31, 2022	$	5,883	$	839	$	595	$	57	$	7,374
Cumulative effect of ASU No. 2022-02 adoption(1)												Cumulative effect of ASU No. 2022-02 adoption(1)	(66)		—		(2)		—		(68)
Balance at January 1, 2023												Balance at January 1, 2023	5,817		839		593		57		7,306
Additions	Additions											Additions
Provision for credit losses(1)		649		20		69		5		743
Provision for credit losses(2)												Provision for credit losses(2)	1,002		60		68		5		1,135
Deductions	Deductions											Deductions
Charge-offs	Charge-offs	(592)		(29)		(38)		—		(659)		Charge-offs	(879)		(33)		(54)		—		(966)
Recoveries	Recoveries	197		6		17		—		220		Recoveries	195		6		15		—		216
Net charge-offs	Net charge-offs	(395)		(23)		(21)		—		(439)		Net charge-offs	(684)		(27)		(39)		—		(750)

Balance at September 30, 2022		$	5,561	$	829	$	620	$	51	$	7,061
Balance at March 31, 2023												Balance at March 31, 2023	$	6,135	$	872	$	622	$	62	$	7,691

		For the Three Months Ended September 30, 2021											For the Three Months Ended March 31, 2022
		Credit Card Loans		Private Student Loans		Personal Loans		Other Loans		Total Loans			Credit Card Loans		Private Student Loans		Personal Loans		Other Loans		Total Loans
Balance at June 30, 2021		$	5,409	$	828	$	745	$	44	$	7,026
Balance at December 31, 2021												Balance at December 31, 2021	$	5,273	$	843	$	662	$	44	$	6,822
Additions	Additions											Additions
Provision for credit losses(1)		178		46		(64)		—		160
Provision for credit losses(2)												Provision for credit losses(2)	178		45		(30)		—		193
Deductions	Deductions											Deductions
Charge-offs	Charge-offs	(495)		(23)		(38)		—		(556)		Charge-offs	(541)		(24)		(38)		—		(603)
Recoveries	Recoveries	206		6		19		—		231		Recoveries	210		6		19		—		235
Net charge-offs	Net charge-offs	(289)		(17)		(19)		—		(325)		Net charge-offs	(331)		(18)		(19)		—		(368)

Balance at September 30, 2021		$	5,298	$	857	$	662	$	44	$	6,861
Balance at March 31, 2022												Balance at March 31, 2022	$	5,120	$	870	$	613	$	44	$	6,647

		For the Nine Months Ended September 30, 2022
		Credit Card Loans		Private Student Loans		Personal Loans		Other Loans		Total Loans
Balance at December 31, 2021		$	5,273	$	843	$	662	$	44	$	6,822
Additions
Provision for credit losses(1)		1,395		54		19		7		1,475
Deductions
Charge-offs		(1,720)		(86)		(115)		—		(1,921)
Recoveries		613		18		54		—		685
Net charge-offs		(1,107)		(68)		(61)		—		(1,236)

Balance at September 30, 2022		$	5,561	$	829	$	620	$	51	$	7,061

		For the Nine Months Ended September 30, 2021
		Credit Card Loans		Private Student Loans		Personal Loans		Other Loans		Total Loans
Balance at December 31, 2020		$	6,491	$	840	$	857	$	38	$	8,226
Additions
Provision for credit losses(1)		(18)		61		(96)		6		(47)
Deductions
Charge-offs		(1,778)		(63)		(150)		—		(1,991)
Recoveries		603		19		51		—		673
Net charge-offs		(1,175)		(44)		(99)		—		(1,318)

Balance at September 30, 2021		$	5,298	$	857	$	662	$	44	$	6,861

(1)Represents the adjustment to the allowance for credit losses as a result of the adoption of ASU No. 2022-02 on January 1, 2023.

(2)Excludes a ~~$30~~$33 million and ~~$25~~$39 million adjustment ofto the liability for expected credit losses on unfunded commitments for the three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021, respectively, and $1 million and $2 million for the nine months ended September 30, 2022 and 2021,~~ respectively, as the liability is recorded in accrued expenses and other liabilities in our condensed consolidated statements of financial condition.

The allowance for credit losses was approximately ~~$7.1~~$7.7 billion at ~~September 30, 2022,~~March 31, 2023, which reflects a ~~$304~~$385 million build ~~over June 30, 2022 and a $239 million build~~ from the amount of the allowance for credit losses at December 31, ~~2021.~~2022. The build in the allowance for credit losses for the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 was primarily driven by ~~continued~~a modestly more pessimistic economic outlook and growth in revolving loan ~~growth.~~balances.

~~Table of Contents~~

~~Our~~The allowance estimation process begins with a loss forecast that uses certain macroeconomic variables and multiple macroeconomic scenarios among its inputs. In estimating the allowance at ~~September 30, 2022,~~March 31, 2023, we used a macroeconomic forecast that projected the following weighted average amounts: (i) an unemployment rate ~~of 4.2%~~ending 2023 at ~~the end of 2022,~~4.7% and peaking at ~~4.6% during 2023 and finishing the year at 4.5%;~~4.8% in early 2024 and (ii) ~~0.2% annualized decline~~0.96% growth rate in ~~the~~ real gross domestic product ~~for 2022 and 1.8% annualized growth~~ in ~~the real gross domestic product for~~ 2023.

In estimating expected credit losses, we considered the uncertainties associated with borrower behavior and payment trends, as well as ~~higher~~recent and expected macroeconomic conditions, such as high consumer price inflation ~~experienced during 2022~~ and the fiscal and monetary policy responses to that inflation. ~~During 2022, the~~The Federal Reserve raised its federal funds rate target range ~~multiple times~~substantially during 2022 in an effort to slow economic growth and ~~signaled additional rate hikes throughout~~reduce inflation. Most economists and financial market participants expect U.S. economic growth and inflation to continue to slow during 2023 as the ~~remainder of the year. In recognition of the risks related~~economy responds to the ~~macroeconomic environment,~~lagged effects of tighter monetary policy and credit conditions, which may contract further after the ~~estimation~~failure of ~~the allowance for credit losses has required significant management judgment.~~two domestic banks in March.

The forecast period we deemed to be reasonable and supportable was 18 months for all periods presented. The 18-month reasonable and supportable forecast period was deemed appropriate given the current economic conditions. For all periods presented, we determined that a reversion period of 12 months was appropriate for the same reason. We applied a weighted reversion method to provide a more reasonable transition to historical losses for all loan products for all periods presented.

The provision for credit losses is the amount of expense realized after considering the level of net charge-offs in the period and the required amount of allowance for credit losses at the balance sheet date. For the three ~~and nine~~ months ended ~~September 30, 2022,~~March 31, 2023, the provision for credit losses increased by ~~$583~~$942 million ~~and $1.5 billion respectively,~~ compared to the same ~~periods~~period in ~~2021. The increase was~~2022, primarily driven by ~~continued~~ loan growth and credit normalization.

Table of Contents

Net Charge-offs

Our net charge-offs include the principal amount of losses charged off less principal recoveries and exclude charged-off and recovered interest and fees and fraud losses. Charged-off and recovered interest and fees are recorded in interest income and loan fee income, respectively, which is effectively a reclassification of the provision for credit losses, while fraud losses are recorded in other expense.

The following table presents amounts and rates of net charge-offs of key loan products (dollars in millions):


		For the Three Months Ended September 30,								For the Nine Months Ended September 30,									For the Three Months Ended March 31,
		2022				2021				2022				2021						2023	2022
		$		%		$		%		$		%		$		%					$		%		$		%
Credit card loans	Credit card loans	$	395	1.92	%	$	289	1.65	%	$	1,107	1.93	%	$	1,175	2.29	%	Credit card loans			$	684	3.10	%	$	331	1.84	%
Private student loans	Private student loans	$	23	0.91	%	$	17	0.68	%	$	68	0.89	%	$	44	0.58	%	Private student loans			$	27	1.04	%	$	18	0.69	%
Personal loans	Personal loans	$	21	1.14	%	$	19	1.11	%	$	61	1.16	%	$	99	1.91	%	Personal loans			$	39	1.94	%	$	19	1.12	%

The net charge-offs and net charge-off ~~rates~~rate for ~~all loan products~~credit card loans increased for the three months ended September 30, 2022, when compared to the same periods in 2021, primarily due to credit normalization. The net charge-offs and net charge-off rates for credit card and personal loans decreased for the nine months ended September 30, 2022, as compared to the same period in 2021. The decrease in net charge-offs for credit card was primarily driven by lower average balances at charge off. The net charge-off rate for credit card benefited from a higher average level of loan receivables period-over-period. The decrease in net charge-offs and the net charge-off rate for personal loans was primarily driven by continued benefit from tighter credit underwriting standards implemented in 2020. The increase in net charge-offs and the net charge-off rate for private student loans for the nine months ended September 30, 2022,March 31, 2023, when compared to the same period in ~~2021, was~~2022, primarily ~~driven by~~due to continued credit normalization and the ~~diminishing benefit~~seasoning of vintages from ~~pandemic programs.~~the past two years. The net charge-offs and net charge-off rate for private student and personal loans increased for the three months ended March 31, 2023, when compared to the same period in 2022, primarily due to continued credit normalization.

~~Table of Contents~~

Delinquencies

Delinquencies are an indicator of credit quality at a point in time. A loan balance is considered delinquent when contractual payments on the loan become 30 days past due.

The following table presents the amounts and delinquency rates of key loan products that are 30 and 90 days or more delinquent, and loan receivables that are not accruing interest regardless of delinquency ~~and loans restructured in TDR programs~~ (dollars in millions):


		September 30, 2022				December 31, 2021					March 31, 2023				December 31, 2022
		$		%		$		%			$		%		$		%
Loans 30 or more days delinquent	Loans 30 or more days delinquent									Loans 30 or more days delinquent
Credit card loans	Credit card loans	$	1,761	2.11	%	$	1,232	1.66	%	Credit card loans	$	2,477	2.76	%	$	2,278	2.53	%
Private student loans	Private student loans	$	201	1.94	%	$	157	1.55	%	Private student loans	$	211	2.02	%	$	212	2.05	%
Personal loans	Personal loans	$	53	0.69	%	$	48	0.69	%	Personal loans	$	76	0.91	%	$	63	0.80	%

Total loan receivables	Total loan receivables	$	2,034	1.94	%	$	1,451	1.55	%	Total loan receivables	$	2,791	2.48	%	$	2,578	2.30	%

Loans 90 or more days delinquent~~(1)~~	Loans 90 or more days delinquent~~(1)~~									Loans 90 or more days delinquent~~(1)~~
Credit card loans	Credit card loans	$	770	0.92	%	$	562	0.76	%	Credit card loans	$	1,204	1.34	%	$	1,028	1.14	%
Private student loans	Private student loans	$	43	0.42	%	$	36	0.35	%	Private student loans	$	54	0.52	%	$	45	0.43	%
Personal loans	Personal loans	$	14	0.18	%	$	13	0.20	%	Personal loans	$	19	0.23	%	$	16	0.21	%

Total loan receivables	Total loan receivables	$	837	0.80	%	$	618	0.66	%	Total loan receivables	$	1,290	1.15	%	$	1,101	0.98	%

Loans not accruing interest	Loans not accruing interest	$	224	0.21	%	$	225	0.24	%	Loans not accruing interest	$	260	0.23	%	$	214	0.19	%

Troubled debt restructurings:
Credit card loans(2)(3)(4)
Currently enrolled		$	1,371	1.64	%	$	833	1.12	%
No longer enrolled		212		0.25		267		0.36
Total credit card loans		$	1,583	1.89	%	$	1,100	1.48	%
Private student loans(5)		$	309	2.99	%	$	249	2.46	%
Personal loans(6)		$	177	2.31	%	$	187	2.70	%

~~(1)~~
~~Credit~~

The 30-day delinquency rates for credit card loans that were 90 or more days delinquent at September 30, 2022 and December 31, 2021, included $55 million and $73 million, respectively, in modified loans exempt from the TDR designation pursuant to the CARES Act. Within private student and personal loans ~~that were 90 or more days delinquent~~ at ~~September 30, 2022 and~~March 31, 2023, increased compared to December 31, ~~2021,~~2022, primarily driven by credit normalization and the ~~respective amounts associated with modifications exempt~~seasoning of vintages from the ~~TDR designation under the CARES Act were immaterial.~~

~~(2)We estimate that interest income recognized on credit card~~past two years. The 30-day delinquency rate for private student loans restructured in TDR programs was $35 million and $24 million for the three months ended September 30, 2022 and 2021, respectively, and $87 million and $84 million for the nine months ended September 30, 2022 and 2021, respectively. We do not separately track interest income on loans in TDR programs. We estimate this amount by applying an average interest rateremained relatively flat at March 31, 2023, compared to ~~the average loans in the various TDR programs.~~

~~(3)~~We estimate that the incremental interest income that would have been recorded in accordance with the original terms of credit card loans restructured in TDR programs was $37 million and $34 million for the three months ended September 30, 2022 and 2021, respectively, and $100 million and $106 million for the nine months ended September 30, 2022 and 2021, respectively. We do not separately track the amount of incremental interest income that would have been recorded if the loans in TDR programs had not been restructured and interest had instead been recorded in accordance with the original terms. We estimate this amount by applying the difference between the average interest rate earned on non-modified loans and the average interest rate earned on loans in the TDR programs to the average loans in the TDR programs.

~~(4)Credit card loans restructured in TDR programs include $89 million and $45 million at September 30, 2022 and~~ December 31, ~~2021, respectively, which are also included in loans 90 or more days delinquent.~~

~~(5)~~Private student loans restructured in TDR programs include $8 million and $7 million at September 30, 2022 and December 31, 2021, respectively, which are also included in loans 90 or more days delinquent.

~~(6)Personal loans restructured in TDR programs include $4 million at September 30, 2022 and December 31, 2021, which are also included in loans 90 or more days delinquent.~~2022.

The 30-day and 90-day delinquency rates in the table above include all loans, including TDRs, modified loans exempt from TDR status and prior modifications that are no longer required to be reported as TDRs. The 30-day and 90-day delinquency rates for credit card and private student loans at ~~September 30, 2022,~~March 31, 2023, increased compared to December 31, ~~2021,~~2022, primarily driven by credit normalization. The ~~30-day and~~increase in the 90-day delinquency rate for credit card loans was also driven by the seasoning of vintages from the past two years. The 90-day delinquency rates for personal loans ~~at September 30, 2022,~~ remained relatively flat at March 31, 2023, compared to December 31, ~~2021.~~

~~The balance of credit card and private student loans reported as TDRs increasedat September 30, 2022, compared to December 31, 2021, primarily due to the expiration of the CARES Act exemption for new modifications effective January 1,~~2022.

6152

Table of Contents

2022. The balance of personal loans reported as TDRs decreased at September 30, 2022, compared to December 31, 2021, primarily due to continued benefit from tighter credit underwriting standards implemented in 2020, partially offset by enrollments in loan modification programs that are no longer exempt from the TDR designation under the CARES Act. To provide additional clarity with respect to credit card loans classified as TDRs, the table above presents loans that are currently enrolled in modification programs separately from loans that have exited those programs but retain that classification.

The following table provides the balance of loan receivables restructured through a temporary loan modification program that were exempt from the TDR designation pursuant to the CARES Act (dollars in millions):

September 30, 2022 December 31, 2021
$ % $ %
Credit card loans $ 1,261 1.51 % $ 1,620 2.18 %
Private student loans $ 202 1.95 % $ 242 2.39 %
Personal loans $ 22 0.29 % $ 45 0.65 %

We believe loan modification programs are useful in assisting customers experiencing financial difficulties and help to prevent defaults. We plan to continue to use loan modification programs as a means to provide relief to customers experiencing financial difficulties. See Note 3: Loan Receivables to our condensed consolidated financial statements for additional description of our use of loan modification programs to provide relief to customers experiencing financial hardship.

Modified and Restructured Loans

For information regarding modified and restructured loans, see ~~"— Loan Quality~~ — ~~Delinquencies", "— Loan Quality~~ — ~~Impact of the COVID-19 Pandemic on the Loan Portfolio" and~~ Note 3: Loan Receivables to our condensed consolidated financial statements.

Other Income

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


		For the Three Months Ended September 30,				2022 vs 2021 Increase (Decrease)				For the Nine Months Ended September 30,				2022 vs. 2021 Increase (Decrease)					For the Three Months Ended March 31,	2023 vs. 2022 Increase (Decrease)
		2022		2021		$		%		2022		2021		$		%				2023		2022		$		%
Discount and interchange revenue, net(1)	Discount and interchange revenue, net(1)	$	346	$	299	$	47	16	%	$	1,056	$	879	$	177	20	%	Discount and interchange revenue, net(1)		$	341	$	320	$	21	7	%
Protection products revenue	Protection products revenue	42		43		(1)		(2)	%	128		129		(1)		(1)	%	Protection products revenue		43		44		(1)		(2)	%
Loan fee income	Loan fee income	168		121		47		39	%	450		333		117		35	%	Loan fee income		166		140		26		19	%
Transaction processing revenue	Transaction processing revenue	65		58		7		12	%	183		167		16		10	%	Transaction processing revenue		67		57		10		18	%
Unrealized (losses) gains on equity investments		(37)		(167)		130		(78)	%	(394)		562		(956)		(170)	%
Realized gains on equity investments		33		—		33		NM		186		—		186		NM
Losses on equity investments																		Losses on equity investments		(18)		(162)		144		(89)	%
Other income	Other income	19		18		1		6	%	64		47		17		36	%	Other income		22		24		(2)		(8)	%
Total other income	Total other income	$	636	$	372	$	264	71	%	$	1,673	$	2,117	$	(444)	(21)	%	Total other income		$	621	$	423	$	198	47	%

Total other income increased for the three months ended ~~September 30, 2022,~~March 31, 2023, as compared to the ~~same period in 2021,~~three months ended March 31, 2022, primarily due to ~~the change~~smaller losses on equity investments and increases in ~~fair value of equity investments,~~loan fee income and net discount and interchange ~~revenue, loan~~revenue. The smaller losses on equity investments were the result of smaller mark-to-market adjustments for equity investments measured at fair value. Loan fee income ~~and realized gains on equity investments. The fair value adjustments resulted in the recognition~~increased primarily due to a higher volume of ~~smaller unrealized losses in the current period compared to the prior period.~~late payments. The increase in discount and interchange revenue was partially offset by an increase in rewards, both of which were driven by higher sales volume. ~~Loan fee income increased primarily due to a higher volume of late payments. Realized gains on equity investments increased due to sales in the current period.~~

Total other income decreased for the nine months ended September 30, 2022, as compared to the same period in 2021, primarily due the change in fair value of equity investments offset by increases in realized gains on equity investments, net discount and interchange revenue and loan fee income. The fair value adjustments resulted in the recognition of unrealized losses in the current period and unrealized gains in the prior period. Realized gains on equity investments increased due to

~~Table of Contents~~

sales in the current period. The increase in discount and interchange revenue was partially offset by an increase in rewards, both of which were driven by higher sales volume. Loan fee income increased primarily due to a higher volume of late payments.

Other Expense

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


		For the Three Months Ended September 30,				2022 vs. 2021 Increase (Decrease)				For the Nine Months Ended September 30,				2022 vs. 2021 Increase (Decrease)					For the Three Months Ended March 31,				2023 vs. 2022 Increase (Decrease)
		2022		2021		$		%		2022		2021		$		%			2023		2022		$		%
Employee compensation and benefits	Employee compensation and benefits	$	551	$	483	$	68	14	%	$	1,566	$	1,487	$	79	5	%	Employee compensation and benefits	$	625	$	500	$	125	25	%
Marketing and business development	Marketing and business development	276		210		66		31	%	722		539		183		34	%	Marketing and business development	241		192		49		26	%
Information processing and communications	Information processing and communications	124		121		3		2	%	370		375		(5)		(1)	%	Information processing and communications	139		125		14		11	%
Professional fees	Professional fees	241		198		43		22	%	607		567		40		7	%	Professional fees	232		177		55		31	%
Premises and equipment	Premises and equipment	22		23		(1)		(4)	%	70		69		1		1	%	Premises and equipment	22		24		(2)		(8)	%
Other expense	Other expense	174		155		19		12	%	406		456		(50)		(11)	%	Other expense	124		112		12		11	%
Total other expense	Total other expense	$	1,388	$	1,190	$	198	17	%	$	3,741	$	3,493	$	248	7	%	Total other expense	$	1,383	$	1,130	$	253	22	%

Total other expense increased for the three ~~and nine~~ months ended ~~September 30, 2022,~~March 31, 2023, as compared to the ~~same periods in 2021,~~three months ended March 31, 2022, primarily due to increases in ~~marketing and business development,~~ employee compensation and benefits, professional fees and ~~professional fees.~~marketing, and business development. The increase in employee compensation and benefits was driven primarily by higher headcount. Professional fees increased primarily due to increased consulting supporting consumer compliance initiatives and investments in technology. The increase in marketing and business development was ~~driven by~~primarily from growth investments in card and consumer banking. Employee compensation and benefits increased primarily from higher headcount. The increase in professional fees was due primarily to investments in technology and increased consulting costs. The increase in total other expense for the nine months ended September 30, 2022 was offset primarily by a decrease in other expense driven by certain one-time items in the prior period.

Table of Contents

Income Tax Expense

The following table presents the calculation of the effective income tax rate (dollars in millions):
For the Three Months Ended September 30, For the Nine Months Ended September 30,
2022 2021 2022 2021
Income before income taxes $ 1,318 $ 1,402 $ 4,388 $ 5,703
Income tax expense $ 312 $ 311 $ 1,029 $ 1,321
Effective income tax rate 23.6 % 22.2 % 23.4 % 23.2 %


	For the Three Months Ended March 31,
		2023			2022
Income before income taxes		$	1,268		$	1,618
Income tax expense		$	292		$	376
Effective income tax rate		23.0		%	23.3		%

Liquidity and Capital Resources

Funding and Liquidity

We seek to maintain stable, diversified and cost-effective funding sources and a strong liquidity profile to fund our business and repay or refinance our maturing obligations under normal operating conditions and periods of economic or financial stress. In managing our liquidity risk, we seek to maintain a prudent liability maturity profile and ready access to an ample store of primary and contingent liquidity sources. Our primary funding sources include direct-to-consumer and brokered deposits, public term asset-backed securitizations and other short-term and long-term borrowings. Our primary liquidity sources include a portfolio composed of highly liquid, unencumbered assets, including cash and cash equivalents and investment securities, as well as secured borrowing capacity through private term asset-backed securitizations and Federal Home Loan Bank ("FHLB") advances. In addition, we have unused borrowing capacity at the Federal Reserve discount window, which provides another source of contingent liquidity.

~~Table of Contents~~

Funding Sources

Deposits

We ~~offer deposit products to customers~~obtain deposits from consumers directly or through ~~two channels: (i) direct marketing, internet origination and~~ affinity relationships ("direct-to-consumer deposits")~~; and (ii) contractual arrangements with~~. Additionally, we obtain deposits through third-party securities brokerage firms that offer our deposits to their customers ("brokered deposits"). Direct-to-consumer ~~deposits~~deposit products include ~~online~~ savings accounts, certificates of deposit, money market accounts, IRA savings accounts, IRA certificates of deposit and ~~checking/debit~~checking accounts. We gather these deposits from retail customers of our bank, many of whom have more than one Discover product. These deposits originate from a large and diverse customer base, and therefore, the majority of these deposit account balances are insured according to the Federal Deposit Insurance Corporation's ("FDIC") insurance limits. Our cost of insuring these deposits is likely to rise as the FDIC recently stated it plans, as required by law, to charge banks a special assessment to cover the cost of losses to the Deposit Insurance Fund incurred after the failure of two domestic banks in March 2023. Brokered ~~deposits~~deposit products include certificates of deposit and sweep accounts. In ~~December 2020,~~accordance with the ~~Federal Deposit Insurance Corporation ("FDIC") issued the~~FDIC final rule on revisions to its brokered deposits ~~regulation. In accordance with this final rule, our regulatory reporting reflects the changes required to deposit categorizations. Specifically,~~regulation, we no longer categorize certain retail deposit products such as affinity deposits and deposits generated through certain sweep deposit relationships ~~will no longer be categorized~~ as brokered for regulatory reporting purposes. At ~~September 30, 2022,~~March 31, 2023, we had ~~$66.2~~$75.3 billion of direct-to-consumer deposits and ~~$16.6~~$20.4 billion of brokered deposits, of which there are ~~$71.8~~$78.3 billion of deposit balances due in less than one year and ~~$11.0~~$17.4 billion of deposit balances due in one year or thereafter.

Credit Card Securitization Financing

We securitize credit card receivables as a source of funding. We access the asset-backed securitization market using the Discover Card Master Trust I ("DCMT") and the Discover Card Execution Note Trust ("DCENT"). In connection with our securitization transactions, credit card receivables are transferred to DCMT. DCMT has issued a certificate representing the beneficial interest in its credit card receivables to DCENT. We issue DCENT DiscoverSeries notes in public and private transactions, which are collateralized by the beneficial interest certificate held by DCENT. From time to time, we may add credit card receivables to DCMT to create sufficient funding capacity for future securitizations while managing seller's interest. We retain significant exposure to the performance of the securitized credit card receivables through holding the seller's interest and subordinated classes of DCENT DiscoverSeries notes. At ~~September 30, 2022,~~March 31, 2023, we had ~~$11.0~~$9.0 billion of outstanding public asset-backed securities and ~~$3.3~~$3.2 billion of outstanding subordinated asset-backed securities that had been issued to our ~~wholly owned~~wholly-owned subsidiaries.

Table of Contents

The securitization structures include certain features designed to protect investors. The primary feature relates to the availability and adequacy of cash flows in the securitized pool of receivables to meet contractual requirements, the insufficiency of which triggers early repayment of the securities. We refer to this as "economic early amortization," which is based on excess spread levels. Excess spread is the amount by which income received with respect to the securitized credit card receivables during a collection period including interest collections, fees and interchange, exceeds the fees and expenses of DCENT during such collection period, including interest expense, servicing fees and charged-off receivables. In the event of an economic early amortization, which would occur if the excess spread fell below 0% on a three-month rolling average basis, we would be required to repay all outstanding securitized borrowings using available collections received with respect to the securitized credit card receivables. For the three months ended ~~September 30, 2022,~~March 31, 2023, the DiscoverSeries three-month rolling average excess spread was ~~14.21%~~14.45%. The period of ultimate repayment would be determined by the amount and timing of collections received.

Through our ~~wholly owned~~wholly-owned indirect subsidiary, Discover Funding LLC, we are required to maintain an interest in a contractual minimum level of receivables in DCMT in excess of the face value of outstanding investors' interests. This minimum interest is referred to as the minimum seller's interest. The required minimum seller's interest in the pool of trust receivables is approximately 7% in excess of the total investors' interests, which includes interests held by third parties as well as those interests held by us. If the level of receivables in DCMT were to fall below the required minimum, we would be required to add receivables from the unrestricted pool of receivables, which would increase the amount of credit card receivables restricted for securitization investors. A decline in the amount of the excess seller's interest could occur if balance repayments and charge-offs exceeded new lending on the securitized accounts or as a result of changes in total outstanding investors' interests. Seller's interest exhibits seasonality as higher receivable balance repayments tend to occur in the first calendar year quarter. If we could not add enough receivables to satisfy the minimum seller's interest requirement, an early amortization (or repayment) of investors' interests would be triggered.

An early amortization event would impair our liquidity and may require us to utilize our available non-securitization-related contingent liquidity or rely on alternative funding sources, which may or may not be available at the time. We have several strategies we can deploy to prevent an early amortization event. For instance, we could add receivables to DCMT, which would reduce our available borrowing capacity at the Federal Reserve discount window. As of ~~September 30, 2022,~~March 31, 2023, there were ~~$24.7~~$24.5 billion of credit card receivables in the trust and no accounts were added to those restricted for securitization

~~Table of Contents~~

investors for the three ~~and nine~~ months ended ~~September 30, 2022.~~March 31, 2023. Alternatively, we could employ structured discounting, which was used effectively in 2009 to bolster excess spread and mitigate early amortization risk.

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


At September 30, 2022		Total		Less Than One Year		One Year and Thereafter
At March 31, 2023								At March 31, 2023	Total		Less Than One Year		One Year and Thereafter
Scheduled maturities of borrowings - owed to credit card securitization investors	Scheduled maturities of borrowings - owed to credit card securitization investors	$	11,004	$	3,292	$	7,712	Scheduled maturities of borrowings - owed to credit card securitization investors	$	9,016	$	300	$	8,716

The "AAA(sf)" and "Aaa(sf)" ratings of the DCENT DiscoverSeries Class A Notes issued to date have been based, in part, on an FDIC rule, which created a safe harbor that provides that the FDIC, as conservator or receiver, will not use its power to disaffirm or repudiate contracts, seek to reclaim or recover assets transferred in connection with a securitization, or recharacterize assets transferred in connection with a securitization as assets of the insured depository institution, provided such transfer satisfies the conditions for sale accounting treatment under previous GAAP. Although the implementation of Financial Accounting Standards Board ("FASB") Accounting Standards Codification Topic 860, Transfers and Servicing, no longer qualified certain transfers of assets for sale accounting treatment, the FDIC approved a final rule that preserved the safe-harbor treatment applicable to revolving trusts and master trusts, including DCMT, so long as those trusts would have satisfied the original FDIC safe harbor if evaluated under GAAP pertaining to transfers of financial assets in effect prior to December 2009. However, other legislative and regulatory developments may impact our ability or desire to issue asset-backed securities in the future.

Federal Home Loan Bank Advances

Discover Bank is a member bank of the FHLB of Chicago, one of 11 FHLBs that, along with the Office of Finance, compose the FHLB System. The FHLBs are government-sponsored enterprises of the U.S. ("U.S. GSEs") chartered to improve the availability of funds to support home ownership. As such, senior debt obligations of the FHLBs feature the same credit ratings as U.S. Treasury securities and are considered high-quality liquid assets for bank regulatory purposes.

Table of Contents

Consequently, the FHLBs benefit from consistent capital market access during nearly all macroeconomic and financial market conditions and low funding costs, which they pass on to their member banks when they borrow advances. Thus, we consider FHLB advances a stable and reliable funding source for Discover Bank for short-term contingent liquidity and long-term asset-liability management.

As a member of the FHLB of Chicago, Discover Bank has access to short- and long-term advance structures with maturities ranging from overnight to 30 years. At ~~September 30, 2022,~~March 31, 2023, we had total committed borrowing capacity of ~~$2.1~~$2.6 billion based on the amount and type of assets pledged, ~~none~~ of which ~~was drawn.~~$525 million of long-term advances were outstanding with the FHLB of Chicago. Under certain stressed conditions, we could pledge our liquidity portfolio securities and borrow against them at a modest reduction to their value.

~~Other Long-Term Borrowings—Private Student Loans~~

At September 30, 2022, $88 million of principal was outstanding on securitized debt assumed as part of our acquisition of The Student Loan Corporation. Principal and interest payments on the underlying private student loans will reduce the balance of these secured borrowings over time.

~~Table of Contents~~

Other Long-Term Borrowings—Corporate and Bank Debt

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


At ~~September 30, 2022~~March 31, 2023	Principal Amount Outstanding
Discover Financial Services (Parent Company) fixed-rate senior notes, maturing ~~2022-2027~~2024-2032	$	~~3,100~~3,350
Discover Financial Services (Parent Company) fixed-rate retail notes, maturing ~~2022-2031~~2023-2031	$	~~167~~155
Discover Bank fixed-rate senior bank notes, maturing 2023-2030	$	~~5,350~~4,550
Discover Bank fixed-rate subordinated bank notes, maturing 2028	$	500

At ~~September 30, 2022, $501~~March 31, 2023, $548 million of interest on our fixed-rate debt is due in less than one year and ~~$1.1~~$1.5 billion of interest is due in one year and thereafter. See Note 6: Long-Term Borrowings to our condensed consolidated financial statements for more information on the maturities of our long-term borrowings. Certain DFS senior notes require us to offer to repurchase the notes at a price equal to 101% of their aggregate principal amount plus accrued and unpaid interest in the event of a change of control involving us and corresponding ratings downgrade below investment grade.

Short-Term Borrowings

As part of our regular funding strategy, we may, from time to time, borrow short-term funds in the federal funds market or the repurchase ("repo") market through repurchase agreements. Federal funds are short-term, unsecured loans between banks or other financial entities with a Federal Reserve account. Funds borrowed in the repo market are short-term, collateralized loans, usually secured with highly rated investment securities such as U.S. Treasury bills or notes, or mortgage bonds or debentures issued by government agencies or U.S. GSEs. At ~~September 30, 2022,~~March 31, 2023, there were no outstanding balances in the federal funds market or under repurchase agreements. Additionally, we have access to short-term advance structures through the FHLB of Chicago and privately placed asset-backed securitizations. At September 30, 2022, there were no short-term advances outstanding from the FHLB.

Additional Funding Sources

Private Asset-Backed Securitizations

We have access to committed borrowing capacity through privately placed asset-backed securitizations. While we may utilize funding from these private securitizations from time to time for normal business operations, their committed nature also makes them a reliable contingency funding source. Therefore, we reserve some undrawn capacity, informed by our liquidity stress test results, for potential contingency funding needs. At ~~September 30, 2022,~~March 31, 2023, we had a total committed capacity of $3.5 billion, none of which was drawn. We seek to ensure the stability and reliability of these securitizations by staggering their maturity dates, renewing them ~~approximately one year prior to~~well ahead of their scheduled maturity dates and periodically drawing them for operational tests and seasonal funding needs.

Federal Reserve

Discover Bank has access to the Federal Reserve Bank of Philadelphia's discount window. As of ~~September 30, 2022,~~March 31, 2023, Discover Bank had ~~$39.9~~$43.8 billion of available borrowing capacity through the discount window based on the amount and type of assets pledged, primarily consumer loans. As of ~~September 30, 2022,~~March 31, 2023, we have no borrowings outstanding under the discount window and reserve this capacity as a source of contingent liquidity.

Table of Contents

Funding Uses

Our primary uses of funds include the extensions of loans and credit to customers, primarily through Discover Bank; the maintenance of sufficient working capital for routine operations; the service of our debt and capital obligations, including interest, principal and dividend payments; and the purchase of investment securities for our liquidity portfolio.

In addition to originating consumer loans to new customers, we also extend credit to existing customers, which primarily arises from agreements for unused lines of credit on certain credit cards and certain other loan products, provided there is no violation of conditions established in the related agreement. At ~~September 30, 2022,~~March 31, 2023, our unused credit arrangements were approximately ~~$225.6~~$229.1 billion. These arrangements, substantially all of which we can terminate at any time

~~Table of Contents~~

and which do not necessarily represent future cash requirements, are periodically reviewed based on account usage, customer creditworthiness and loan qualification.

In the normal course of business, we enter into various contracts for goods and services, such as consulting, outsourcing, data, sponsorships, software licenses, telecommunications and global merchant acceptance, ~~and cashback rewards,~~ among other things. These contracts are legally binding and specify all significant terms, including any applicable fixed future cash payments.

As of ~~September 30, 2022,~~March 31, 2023, we have debt obligations, common stock and preferred stock outstanding. Refer to “— Funding Sources” and “— Capital” for more information related to our debt obligations and capital service, respectively, and the timing of expected payments.

We assess funding uses and liquidity needs under stressed and normal operating conditions, considering primary uses of funding, such as on-balance sheet loans and contingent uses of funding, such as the need to post additional collateral for derivatives positions. To anticipate funding needs under stress, we conduct liquidity stress tests to assess the impact of idiosyncratic, systemic and hybrid (i.e., idiosyncratic and systemic) scenarios with varying levels of liquidity risk reflecting a range of stress severity. If we determine we have excess cash and cash equivalents above what is required for daily operations, we may invest in highly liquid, unencumbered assets that we expect to be able to convert to cash quickly and with little loss of value using the repo market or outright sales.

Guarantees

Guarantees are contracts or indemnification agreements that may require us to make payments to a guaranteed party based on changes in an underlying asset, liability, or equity security of a guaranteed party, rate or index. Also included in guarantees are contracts that may 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. In the ordinary course of business, we guarantee payment on behalf of subsidiaries relating to contractual obligations with external parties. The activities of the subsidiaries covered by any such guarantees are included in our consolidated financial statements. See Note 12: Commitments, Contingencies and Guarantees to our consolidated financial statements for further discussion regarding our guarantees.

Credit Ratings

Our borrowing costs and capacity in certain funding markets, including those for securitizations and unsecured senior and subordinated debt, may be affected by the credit ratings of DFS, Discover Bank and the securitization trusts. Downgrades in these credit ratings could result in higher interest expense on our unsecured debt and asset securitizations, as well as higher credit enhancement requirements for both our public and private asset securitizations. In addition to increased funding costs, deterioration in our credit ratings could reduce our borrowing capacity in the unsecured debt and asset securitization capital markets.

Table of Contents

On March 7, 2023, Moody's Investors Service upgraded the long-term credit ratings and assessments of DFS and Discover Bank. Moody's noted the ratings upgrade reflected our solid market position in the U.S. general purpose credit card and other consumer lending markets, as well as our strong profitability, prudent credit underwriting, conservative risk management and anticipated resilience to a severe economic downturn because of good asset quality and balance sheet management. The table below reflects our current credit ratings and outlooks:

~~Moody's~~Moody’s Investors Service

Standard & Poor's

Fitch
Ratings

Discover Financial Services

Senior unsecured debt

~~Baa3~~Baa2

BBB-

BBB+

Outlook for Discover Financial Services senior unsecured debt

~~Positive~~Stable

Stable

Discover Bank

Senior unsecured debt

~~Baa2~~Baa1

BBB

BBB+

Outlook for Discover Bank senior unsecured debt

~~Positive~~Stable

Stable

Subordinated debt

~~Baa2~~Baa1

BBB-

BBB

Discover Card Execution Note Trust (DCENT)

Class A(1)

Aaa(sf)

AAA(sf)

(1)An "sf" in the rating denotes rating agency identification for structured finance product ratings.

A credit rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating organization. Each rating should be evaluated independently of any other rating. A credit

~~Table of Contents~~

rating outlook reflects an agency's opinion regarding the likely rating direction over the medium term, often a period of about a year, and indicates the agency's belief that the issuer's credit profile is consistent with its current rating level at that point in time.

Liquidity

We seek to ensure that we have adequate liquidity to sustain business operations, fund asset growth and satisfy debt obligations under stressed and normal operating conditions. In addition to the funding sources discussed in the previous section, we also maintain highly liquid, unencumbered assets in our liquidity portfolio that we expect to be able to convert to cash quickly and with little loss of value using either the repo market or outright sales.

We maintain a liquidity risk and funding management policy, which outlines the overall framework and general principles we follow in managing liquidity risk across our business. The Board of Directors approves the policy and the Asset and Liability Management Committee (the "ALCO") is responsible for its implementation. Additionally, we maintain a liquidity management framework document that outlines the general strategies, objectives and principles we utilize to manage our liquidity position and the various liquidity risks inherent in our business model. We seek to balance the trade-offs between maintaining too much liquidity, which may be costly, with having too little liquidity, which could cause financial distress. The ALCO, chaired by our Treasurer, has cross-functional membership and manages liquidity risk centrally. The ALCO monitors the liquidity risk profiles of DFS and Discover Bank and oversees any actions Corporate Treasury may take to ensure that we maintain ready access to our funding sources and sufficient liquidity to meet current and projected needs. In addition, the ALCO and our Board of Directors regularly review our compliance with our liquidity limits at DFS and Discover Bank, which are established in accordance with the liquidity risk appetite set by our Board of Directors.

We employ a variety of metrics to monitor and manage liquidity. We utilize early warning indicators ("EWIs") to detect emerging liquidity stress events and a reporting and escalation process designed to be consistent with regulatory guidance. The EWIs include both idiosyncratic and systemic measures and are monitored daily and reported to the ALCO regularly. A warning from one or more of these indicators triggers prompt review and decision-making by our senior management team and, in certain instances, may lead to the convening of a senior-level response team and activation of our contingency funding plan.

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

Table of Contents

Our primary contingency liquidity sources include our liquidity portfolio securities, which we could sell, repo or borrow against, and private securitizations with unused borrowing capacity. In addition, we could borrow FHLB advances by pledging securities to the FHLB of Chicago. Moreover, we have unused borrowing capacity with the Federal Reserve discount window, which provides an additional source of contingency liquidity. We seek to maintain sufficient liquidity to satisfy all maturing obligations and fund business operations for at least 12 months in a severe stress environment. In such an environment, we may also take actions to curtail the size of our balance sheet, which would reduce the need for funding and liquidity.

At ~~September 30, 2022,~~March 31, 2023, our liquidity portfolio iswas composed of highly liquid, unencumbered assets, including cash and cash equivalents and investment securities. Cash and cash equivalents were primarily deposits with the Federal Reserve. Investment securities primarily included debt obligations of the U.S. Treasury and U.S. GSEs and residential mortgage-backed securities ("RMBS") issued by U.S. government agencies or U.S. GSEs. These investments, nearly all of which are classified as available-for-sale, are considered highly liquid and we expect to have the ability to raise cash by selling them, utilizing repurchase agreements or pledging certain of these investments to access secured funding. The size and composition of our liquidity portfolio may fluctuate based on the size of our balance sheet as well as operational requirements, market conditions and interest rate risk management objectives.

~~Table of Contents~~

At ~~September 30, 2022,~~March 31, 2023, our liquidity portfolio and undrawn credit facilities were ~~$61.5~~$70.8 billion, which ~~is $8.6~~was $3.5 billion higher than the balance at December 31, ~~2021,~~2022. Our liquidity portfolio and undrawn credit facilities grew primarily as a result of the purchase of treasury securities and additional borrowing capacity ~~available through~~with the ~~discount window.~~Federal Reserve. During the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and December 31, 2022, the average balance of our liquidity portfolio was ~~$16.0~~$19.5 billion and ~~$15.3~~$16.3 billion, respectively. Our liquidity portfolio and undrawn facilities consist of the following (dollars in millions):


		September 30, 2022		December 31, 2021			March 31, 2023		December 31, 2022
Liquidity portfolio	Liquidity portfolio					Liquidity portfolio
Cash and cash equivalents(1)	Cash and cash equivalents(1)	$	9,205	$	8,080	Cash and cash equivalents(1)	$	9,354	$	7,585

Investment securities(2)	Investment securities(2)	6,837		6,879		Investment securities(2)	12,096		12,213
Total liquidity portfolio	Total liquidity portfolio	16,042		14,959		Total liquidity portfolio	21,450		19,798
Private asset-backed securitizations(3)	Private asset-backed securitizations(3)	3,500		3,500		Private asset-backed securitizations(3)	3,500		3,500
Federal Home Loan Bank of Chicago	Federal Home Loan Bank of Chicago	2,078		150		Federal Home Loan Bank of Chicago	2,056		1,712
Primary liquidity sources	Primary liquidity sources	21,620		18,609		Primary liquidity sources	27,006		25,010
Federal Reserve discount window(3)	Federal Reserve discount window(3)	39,888		34,254		Federal Reserve discount window(3)	43,780		42,268
Total liquidity portfolio and undrawn credit facilities	Total liquidity portfolio and undrawn credit facilities	$	61,508	$	52,863	Total liquidity portfolio and undrawn credit facilities	$	70,786	$	67,278

(1)Cash in the process of settlement and restricted cash are excluded from cash and cash equivalents for liquidity purposes.

(2)Excludes ~~$35~~$132 million and ~~$27~~$97 million of U.S. Treasury securities that have been pledged as swap collateral in lieu of cash as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively.

(3)See "— Additional Funding Sources" for additional information.

Bank Holding Company Liquidity

The primary uses of funds at the unconsolidated DFS level include debt service obligations (interest payments and return of principal) and capital service and management activities, including dividend payments on capital instruments and the periodic repurchase of shares of our common stock. Our primary sources of funds at the bank holding company level include the proceeds from the issuance of unsecured debt and capital securities, as well as dividends from our subsidiaries, notably Discover Bank. Under periods of idiosyncratic or systemic stress, the bank holding company could lose or experience impaired access to the capital markets. In addition, our regulators have the discretion to restrict dividend payments from Discover Bank to the bank holding company.

We utilize a measure referred to as Number of Months of Pre-Funding to determine the length of time DFS can meet upcoming funding obligations, including common and preferred stock dividend payments and debt service obligations using existing cash resources. In managing this metric, we structure our debt maturity schedule to manage prudently the amount of debt maturing within a short period. See Note 6: Long-Term Borrowings to our condensed consolidated financial statements for further information regarding our debt.

Table of Contents

Capital

Our primary sources of capital are the earnings generated by our businesses and the proceeds from issuances of capital securities. We seek to manage capital to a level and composition sufficient to support our businesses' growth, account for their risks, and meet regulatory requirements, rating agency targets and debt investor expectations. Within these constraints, we are focused on deploying capital in a manner that provides attractive returns to our stockholders. The level, composition and utilization of capital are influenced by changes in the economic environment, strategic initiatives and legislative and regulatory developments.

Under regulatory capital requirements adopted by the Federal Reserve and the FDIC, DFS, along with Discover Bank, must maintain minimum capital levels. Failure to meet minimum capital requirements can result in the initiation of certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could limit our business activities and have a direct material effect on our financial condition and operating results. We must meet specific capital requirements that involve quantitative measures of assets, liabilities and certain off-balance sheet items, as calculated under regulatory guidance and regulations. Current or future legislative or regulatory reforms, such as those related to the adoption of the CECL accounting model, may require us to hold more capital or adversely impact our capital level. We consider the potential impacts of these reforms in managing our capital position.

DFS and Discover Bank are subject to regulatory capital rules issued by the Federal Reserve and the FDIC, respectively, under the Basel Committee's December 2010 framework ("Basel III rules"). Under the Basel III rules, DFS and

~~Table of Contents~~

Discover Bank are classified as "standardized approach" entities as they are U.S. banking organizations with consolidated total assets over $50 billion but not exceeding $250 billion and consolidated total on-balance sheet foreign exposures less than $10 billion. The Basel III rules require DFS and Discover Bank to maintain minimum risk-based capital and leverage ratios and define what constitutes capital for purposes of calculating those ratios.

~~On March 27, 2020, federal bank regulatory agencies announced an interim and now~~In accordance with the final rule ~~that allows banks that have implemented~~on the ~~CECL accounting model to delay the estimated~~ impact of CECL on regulatory capital, ~~for two years, followed by a three-year transition period. For purposes of calculating regulatory capital,~~ we have elected to ~~defer recognition of~~phase in the ~~estimated~~ impact ~~of CECL on regulatory capital for two years in accordance with the final rule; after that period of deferral, the estimated impact of CECL on regulatory capital will be phased in~~ over three years, beginning in 2022. ~~Electing~~By electing this option, ~~raised~~ our Common Equity Tier 1 ("CET1") capital ratios ~~in 2022 and 2021.~~ are higher than they otherwise would have been.The phase-in of the CECL accounting model decreased CET1 by ~~$537 million~~$1.1 billion as of January 1, ~~2022.~~2023. For additional information regarding the risk-based capital and leverage ratios, see Note 11: Capital Adequacy to our condensed consolidated financial statements.

On March 4, 2020, the Federal Reserve announced the SCB final rule, which imposes limitations on DFS' capital distributions if we do not maintain our risk-based capital ratios above stated regulatory minimum ratios based on the results of supervisory stress tests. Under this rule, DFS is required to assess whether our planned capital actions are consistent with the effective capital distribution limitations that will apply on a pro-forma basis throughout the planning horizon.

The SCB requirement is institution-specific and is calculated as the greater of (i) 2.5% and (ii) the sum of (a) the difference between DFS' actual CET1 ratio at the beginning of the forecast and the projected minimum CET1 ratio based on the Federal Reserve's models in its nine-quarter Severely Adverse stress scenario, plus (b) the sum of the dollar amount of DFS' planned common stock dividend distributions for each of the fourth through seventh quarters of its nine-quarter capital planning horizon, expressed as a percentage of ~~RWAs.~~risk-weighted assets. For Category IV firms, including DFS, the Federal Reserve calculates each firm's SCB biennially in even-numbered calendar years, and did so in 2022. Based on the results of the 2022 CCAR exercise released by the Federal Reserve, our new SCB was set at 2.5%, the lowest possible requirement, effective October 1, 2022, through September 30, 2023. In odd-numbered years, each firm subject to Category IV standards that did not opt-in to such year's supervisory stress tests as part of the Federal Reserve's CCAR process receives an adjusted SCB requirement that is updated to reflect its planned common stock dividends per the firm's annual capital plan. ~~On August 5, 2021,~~We elected not to opt-in for 2023 and submitted a capital plan to the Federal Reserve ~~notified DFS of its adjusted SCB requirement of 3.6% based~~ on ~~the planned common stock dividends~~April 5, 2023, and we expect results will be provided in ~~the 2021 Capital Plan. DFS’ SCB was effective on October 1, 2021, and slightly increased from our SCB in effect for the preceding year, which was 3.5%.~~late June or early July 2023. See "— Regulatory Environment and Developments — Banking — Capital Standards and Stress Testing" for additional information.

DFS elected to not participate in the Federal Reserve's supervisory stress test in 2021, but did participate in 2022. As part of CCAR, DFS submitted an annual capital plan by the April 5, 2022 due date ("2022 Capital Plan"). On June 23, 2022, the Federal Reserve released results of the 2022 CCAR stress test. Discover’s results showed strong capital levels under stress, well above regulatory minimums. These results were used to set the new SCB effective October 1, 2022. On August 4, 2022, the Federal Reserve disclosed the new SCB for DFS is 2.5%, the lowest possible requirement.

At ~~September 30, 2022,~~March 31, 2023, DFS and Discover Bank met the requirements for "well-capitalized" status under the Federal Reserve's Regulation Y and the prompt corrective action rules and corresponding FDIC requirements, respectively, exceeding the regulatory minimums to which they were subject under the applicable rules.

Basel III rules also require disclosures relating to market discipline. This series of disclosures is commonly referred to as "Pillar 3." The objective is to increase the transparency of capital requirements for banking organizations. We are required to make prescribed regulatory disclosures quarterly regarding our capital structure, capital adequacy, risk exposures and ~~risk-weighted~~risk-

Table of Contents

weighted assets. We make the Pillar 3 disclosures publicly available on our website in a report called "Basel III Regulatory Capital Disclosures."

We disclose tangible common equity, which represents common equity less goodwill and intangibles. Management believes that common stockholders' equity excluding goodwill and intangibles is meaningful to investors as a measure of our true net asset value. At ~~September 30, 2022,~~March 31, 2023, tangible common equity is considered to be a non-GAAP financial measure as it is not formally defined by GAAP or codified in the federal banking regulations. Other financial services companies may also disclose this measure and definitions may vary. We advise users of this information to exercise caution in comparing this measure for different companies.

~~Table of Contents~~

The following table reconciles total common stockholders' equity (a GAAP financial measure) to tangible common equity (dollars in millions):


		September 30, 2022		December 31, 2021			March 31, 2023		December 31, 2022
Total common stockholders' equity(1)	Total common stockholders' equity(1)	$	13,230	$	12,352	Total common stockholders' equity(1)	$	13,259	$	13,534
Less: goodwill	Less: goodwill	(255)		(255)		Less: goodwill	(255)		(255)

Tangible common equity	Tangible common equity	$	12,975	$	12,097	Tangible common equity	$	13,004	$	13,279

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

Our Board of Directors declared the following common stock dividends during ~~2022~~2023 and ~~2021:~~2022:

Declaration Date

Record Date

Payment Date

Dividend per Share

2023

April 17, 2023

May 25, 2023

June 08, 2023

0.70

January 17, 2023

February 23, 2023

March 09, 2023

0.60

Total common stock dividends

1.30

2022

October 18, 2022

November 23, 2022

December 08, 2022

0.60

July 20, 2022

August 25, 2022

September 08, 2022

0.60

April 27, 2022

May 26, 2022

June 09, 2022

0.60

January 18, 2022

February ~~18, 2021~~17, 2022

March ~~04, 2021~~03, 2022

0.50

Total common stock dividends

2.30

~~2021~~

~~October 19, 2021~~

~~November 24, 2021~~

~~December 09, 2021~~

~~0.50~~

~~July 20, 2021~~

~~August 19, 2021~~

~~September 02, 2021~~

~~0.50~~

~~April 20, 2021~~

~~May 20, 2021~~

~~June 03, 2021~~

~~0.44~~

~~January 19, 2021~~

~~February 18, 2021~~

~~March 04, 2021~~

~~0.44~~

~~Total common stock dividends~~

~~1.88~~

Our Board of Directors declared the following Series C preferred stock dividends during ~~2022~~2023 and ~~2021:~~2022:

Declaration Date

Record Date

Payment Date

Dividend per Depositary Share

2023

January 17, 2023

April 14, 2023

May 01, 2023

27.50

Total Series C preferred stock dividends

27.50

2022

July 20, 2022

October 14, 2022

October 31, 2022

27.50

January 18, 2022

April 15, 2022

May 02, 2022

27.50

Total Series C preferred stock dividends

55.00

~~2021~~

~~July 20, 2021~~

~~October 15, 2021~~

~~November 01, 2021~~

~~27.50~~

~~January 19, 2021~~

~~April 15, 2021~~

~~April 30, 2021~~

~~27.50~~

~~Total Series C preferred stock dividends~~

~~55.00~~

Table of Contents

Our Board of Directors declared the following Series D preferred stock dividends during ~~2022~~2023 and ~~2021:~~2022:

Declaration Date

Record Date

Payment Date

Dividend per Depositary Share

2023

January 17, 2023

March 08, 2023

March 23, 2023

30.625

Total Series D preferred stock dividends

30.625

2022

July 20, 2022

September 08, 2022

September 23, 2022

30.625

January 18, 2022

March 08, 2022

March 23, 2022

30.625

Total Series D preferred stock dividends

~~61.25~~61.250

~~2021~~

~~July 20, 2021~~

~~September 08, 2021~~

~~September 23, 2021~~

~~30.625~~

~~January 19, 2021(1)~~

~~March 08, 2021~~

~~March 23, 2021~~

~~46.110~~

~~Total Series D preferred stock dividends~~

~~76.735~~

~~(1)The dividend includes $30.63 semi-annual dividend per depositary share plus $15.48 to account for the long first dividend period.~~

~~Table of Contents~~

Our Board of Directors approved a new share repurchase program in April ~~2022.~~2023. The new program authorizes up to ~~$4.2~~$2.7 billion of share repurchases through June 30, ~~2023. This share repurchase authorization~~2024, and replaced ~~a $2.4~~the prior $4.2 billion share repurchase ~~program, which expired on March 31, 2022.~~program. If and when we repurchase our shares under the program, we may use various methods, including open market purchases, privately negotiated transactions or other purchases, including block trades, accelerated share repurchase transactions, or any combination of such methods. During the three months ended ~~September 30, 2022,~~March 31, 2023, we repurchased approximately 211.3 million shares for approximately ~~$210 million. During the nine months ended September 30, 2022, we repurchased approximately 16 million shares for approximately $1.7~~$1.2 billion.

The amount and size of any future dividends and share repurchases will depend on our results of operations, financial condition, capital levels, cash requirements, future prospects, regulatory review and other factors. As we previously disclosed in July 2022, we suspended our existing share repurchase program because of an internal investigation relating to our student loan servicing practices and related compliance matters that is being conducted under the oversight of a board-appointed independent special committee. The investigation is ongoing, and the previously announced suspension of our share repurchase program remains in effect. We continue to communicate with our regulators regarding the internal investigation, and we may be subject to reviews, investigations, proceedings or other actions in connection with our student loan servicing practices and related compliance matters. The declaration and payment of future dividends and the amount thereof are subject to the discretion of our Board of Directors. Holders of our shares of common stock are subject to the prior dividend rights of holders of our preferred stock or the depositary shares representing such preferred stock outstanding. No dividend may be declared or paid or set aside for payment on our common stock if full dividends have not been declared and paid on all outstanding shares of preferred stock in any dividend period. In addition, as noted above, banking laws and regulations and our banking regulators may limit our ability to pay dividends and make share repurchases, including limitations on the extent our banking subsidiary (Discover Bank) can provide funds to us through dividends, loans or otherwise. Further, current or future regulatory reforms may require us to hold more capital or could adversely impact our capital level. As a result, there can be no assurance that we will declare and pay any dividends or repurchase any shares of our common stock in the future.

7262

Table of Contents

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk refers to the risk that a change in the level of one or more market prices, rates, indices, correlations or other market factors will result in losses for an investment position or portfolio. We are exposed to market risk primarily from changes in interest rates.

Interest Rate Risk

We borrow money from various depositors and institutions to provide loans to our customers and invest in other assets and our business. These loans to customers and other assets earn interest, which we use to pay interest on the money borrowed. Our net interest income and, therefore, earnings will be reduced if the interest rate earned on assets increases at a slower pace than the interest rate paid on our borrowings. Changes in interest rates and our competitors' responses to those changes may influence customer payment rates, loan balances or deposit account activity. As a result, we may incur higher funding costs that could decrease our earnings.

Our interest rate risk management policies are designed to measure and manage the potential volatility of earnings that may arise from changes in interest rates by having a portfolio that reflects our mix of variable- and fixed-rate assets and liabilities. To the extent that the repricing characteristics of the assets and liabilities in a particular portfolio are not sufficiently matched, we may utilize interest rate derivative contracts, such as swap agreements, to achieve our objectives. Interest rate swap agreements effectively convert the underlying asset or liability from fixed- to floating-rate or from floating- to fixed-rate. See Note 15: Derivatives and Hedging Activities to our condensed consolidated financial statements for information on our derivatives activity.

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

Our interest-rate-sensitive assets include our variable-rate loan receivables and certain assets in our liquidity portfolio. We have limitations on our ability to mitigate interest rate risk by adjusting rates on existing balances. Further, competitive actions may limit our ability to increase the rates that we charge to customers for new loans. At ~~September 30, 2022,~~March 31, 2023, the majority of our credit card and private student loans charge variable rates. Fixed-rate assets that will mature or otherwise contractually reset to a market-based indexed rate or other fixed-rate prior to the end of the 12-month measurement period are considered to be rate sensitive. The latter category includes certain revolving credit card loans that may be offered at below-market rates for an introductory period, such as balance transfers and special promotional programs, after which the loans will contractually reprice in accordance with our normal market-based pricing structure. For assets with a fixed interest rate that contractually will, or is assumed to, reset to a market-based indexed rate or other fixed rate during the next 12 months, earnings sensitivity is measured from the expected repricing date. In addition, for all interest rate sensitive assets, earnings sensitivity is calculated net of expected credit losses. For purposes of this analysis, expected credit losses are assumed to remain unchanged relative to our baseline expectations over the analysis horizon.

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

Table of Contents

Net interest income sensitivity simulations require assumptions regarding market conditions, consumer behavior and the growth and composition of our balance sheet. The degree by which our deposit rates change when benchmark interest rates change, our deposit “beta,” is one of the most significant of these assumptions. Assumptions about deposit beta and other matters are inherently uncertain and, as a result, actual earnings may differ from the simulated earnings presented below. Our actual earnings depend on multiple factors including, but not limited to, the direction and timing of changes in interest rates, the movement of short-term interest rates relative to long-term rates, balance sheet composition, competitor actions affecting pricing decisions in our loans and deposits, the mix of promotional balances in our card portfolio, the level

~~Table of Contents~~

of interest charge-offs and recoveries, the influence of loan repayment rates on revolving balances and strategic actions undertaken by our management.

Our current short-term interest rate risk position is modestly ~~asset-sensitive. We believe this position is prudent given benchmark~~asset-sensitive, but we have taken actions to bring our net interest ~~rates have been prone~~income sensitivity closer to ~~rise~~neutral as the Federal Reserve has ~~raised~~slowed its ~~federal funds rate target in response to high inflation.~~pace of monetary policy tightening and the outlook for near-term U.S. economic growth may be weakening. The following table shows the impacts to net interest income over the following 12-month period that we estimate would result from an immediate and parallel change in interest rates affecting all interest rate sensitive assets and liabilities (dollars in millions):
At September 30, 2022 At December 31, 2021
Basis point change $ % $ %
+100 $ 205 1.66 % $ 154 1.51 %
-100 $ (199) (1.61) % NM NM

An estimated impact on net interest income of a decrease in interest rates at December 31, 2021 was not provided as many of our interest rate sensitive assets and liabilities were tied to interest rates (i.e., prime and federal funds) that were near their historical minimum levels and, therefore, could not materially decrease.


	At March 31, 2023				At December 31, 2022
Basis point change	$		%		$		%
+100	$	187	1.36	%	$	183	1.40	%
-100	$	(193)	(1.40)	%	$	(190)	(1.45)	%

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

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 Rule 13a-15(f) and 15d-15(f)) that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

7464

Table of Contents

Glossary of Acronyms

•ALCO: Asset and Liability Management Committee

•AOCI: Accumulated Other Comprehensive Income (Loss)

•~~ARRC:~~ARRC: Alternative Reference Rates Committee

•ASC: Accounting Standards Codification

•ASU: Accounting Standards Update

•~~CARES Act: Coronavirus Aid, Relief, and Economic Security Act~~

•CCAR: Comprehensive Capital Analysis and Review

•CCPA: California Consumer Privacy Act

•CECL: Current Expected Credit Loss

•CET1: Common Equity Tier 1

•CFPB: Consumer Financial Protection Bureau

•~~COVID-19: Coronavirus Disease 2019~~

•CPPA: California Privacy Protection Agency

•CPRA: California Privacy Rights Act

•DCENT: Discover Card Execution Note Trust

•DCMT: Discover Card Master Trust I

•DFS: Discover Financial Services

•EPS: Earnings Per Share

•~~ESG:~~ESG: Environmental, Social and Governance

•EWI: Early Warning Indicator

•FASB: Financial Accounting Standards Board

•~~FCA:~~FCA: UK Financial Conduct Authority

•FDIC: Federal Deposit Insurance Corporation

•~~FHLB:~~FHLB: Federal Home Loan Bank

•GAAP: Accounting Principles Generally Accepted in the United States

•IRS: Internal Revenue Service

•LIBOR: London Interbank Offered Rate

•OCI: Other Comprehensive Income (Loss)

•~~OIS: Overnight Index Swap~~

•RMBS: Residential Mortgage-Backed Securities

•SCB: Stress Capital Buffer

•~~SEC:~~SEC: Securities and Exchange Commission

•~~SOFR:~~SOFR: Secured Overnight Financing Rate

•TDR: Troubled Debt Restructuring

•~~UDAAP:~~UDAAP: Unfair, Deceptive or Abusive Acts or Practices

•U.S.: United States of America

•~~USD:~~USD: United States Dollar

•U.S. GSE: Government-sponsored Enterprise of the U.S.

•VIE: Variable Interest Entity

7565

Table of Contents

Part II. OTHER INFORMATION

Item 1. Legal Proceedings

See Note 13: Litigation and Regulatory Matters to our condensed consolidated financial statements for a description of legal proceedings.

Item 1A. Risk Factors

There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2021.~~2022.

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

Issuer Purchases of Equity Securities

The following table sets forth information regarding purchases of our common stock related to our share repurchase program and employee transactions made by us or on our behalf during the most recent quarter.
Period Total Number of Shares Purchased Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Plan or Program Maximum Dollar Value of Shares that may yet be purchased under the Plans or Programs
July 1 - 31, 2022
Repurchase program(1)
2,099,205 $ 100.07 2,099,205 $ 3,389,926
Employee transactions(3)
1,142 $ 100.44 N/A N/A
August 1 - 31, 2022
Repurchase program(1)(2)
— $ — — $ 3,389,926
Employee transactions(3)
15,846 $ 102.13 N/A N/A
September 1 - 30, 2022
Repurchase program(1)(2)
— $ — — $ 3,389,926
Employee transactions(3)
422 $ 100.50 N/A N/A
Total
Repurchase program(1)(2)
2,099,205 $ 100.07 2,099,205 $ 3,389,926
Employee transactions(3)
17,410 $ 101.98 N/A N/A


Period	Total Number of Shares Purchased	Average Price Paid Per Share(3)		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)
January 1 - 31, 2023
Repurchase program(1)	3,783,000	$	104.85	3,783,000	$	2,392,991,230
Employee transactions(2)	584	$	97.83	N/A	N/A
February 1 - 28, 2023
Repurchase program(1)	3,157,000	$	114.46	3,157,000	$	2,031,648,805
Employee transactions(2)	270,411	$	115.83	N/A	N/A
March 1 - 31, 2023
Repurchase program(1)	4,341,133	$	101.82	4,341,133	$	1,589,626,286
Employee transactions(2)	257	$	114.77	N/A	N/A

Total
Repurchase program(1)	11,281,133	$	106.37	11,281,133	$	1,589,626,286
Employee transactions(2)	271,252	$	115.79	N/A	N/A

(1)In April ~~2022,~~2023, our Board of Directors approved a new share repurchase program authorizing the purchase of up to ~~$4.2~~$2.7 billion of our outstanding shares of common stock through June 30, ~~2023.~~2024. This share repurchase authorization replaced our prior ~~$2.4~~$4.2 billion share repurchase ~~program that expired March 31, 2022.~~program.

(2)Share repurchases were suspended because of an internal investigation relating to our student loan servicing practices and related compliance matters. See "— Liquidity and Capital Resources — Capital" for additional information.

~~(3)~~Reflects shares withheld (under the terms of grants under employee stock compensation plans) to offset tax withholding obligations that occur upon the delivery of outstanding shares underlying restricted stock units or upon the exercise of stock ~~options.~~options

(3)Average price paid per share excludes any excise tax.

7666

Table of Contents

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

Item 6. Exhibits

See "Exhibit Index" for documents filed herewith and incorporated herein by reference.

Exhibit Index


Exhibit Number						Description



















10.1						Form 2023 Award Certificate for Restricted Stock Units under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan.

10.2						Form 2023 Award Certificate for Performance Stock Units under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan.

10.3						Form 2023 Special Award Certificate for Restricted Stock Units under Discover Financial Services Amended and Restated 2014 Omnibus Incentive Plan.

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

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

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

101						Interactive Data File — the following financial statements from Discover Financial Services Quarterly Report on Form 10-Q formatted in inline XBRL: (1) Condensed Consolidated Statements of Financial Condition, (2) Condensed Consolidated Statements of Income, (3) Condensed Consolidated Statements of Comprehensive Income, (4) Condensed Consolidated Statements of Changes in Stockholders' Equity, (5) Condensed Consolidated Statements of Cash Flows and (6) Notes to the Condensed Consolidated Financial Statements.

104						Cover Page Interactive Data File — the cover page from Discover Financial Services Quarterly Report on Form 10-Q formatted in inline XBRL and contained in Exhibit 101.

7767

Table of Contents

Signature

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


			Discover Financial Services (Registrant)

			By:						/s/ JOHN T. GREENE
									John T. Greene Executive Vice President, Chief Financial Officer

Date: ~~October 27, 2022~~April 24, 2023

7868


Part I	FINANCIAL INFORMATION
Item 1.	Financial Statements	1
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	4440
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	7363
Item 4.	Controls and Procedures	7464
Part II	OTHER INFORMATION
Item 1.	Legal Proceedings	7666
Item 1A.	Risk Factors	7666
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	7666
Item 3.	Defaults Upon Senior Securities	7767
Item 4.	Mine Safety Disclosures	7767
Item 5.	Other Information	7767
Item 6.	Exhibits	7767


	Unrealized (Losses) Gains on Available-for-Sale Investment Securities, Net of Tax		Losses on Cash Flow Hedges, Net of Tax		Losses on Pension Plan, Net of Tax		AOCI
For the Three Months Ended September 30, 2022
Balance at June 30, 2022	$	(48)	$	(4)	$	(199)	$	(251)
Net change	(100)		(2)		—		(102)
Balance at September 30, 2022	$	(148)	$	(6)	$	(199)	$	(353)

For the Three Months Ended September 30, 2021
Balance at June 30, 2021	$	198	$	(10)	$	(227)	$	(39)
Net change	(29)		—		—		(29)
Balance at September 30, 2021	$	169	$	(10)	$	(227)	$	(68)

For the Nine Months Ended September 30, 2022
Balance at December 31, 2021	$	114	$	(9)	$	(199)	$	(94)
Net change	(262)		3		—		(259)
Balance at September 30, 2022	$	(148)	$	(6)	$	(199)	$	(353)

For the Nine Months Ended September 30, 2021
Balance at December 31, 2020	$	284	$	(12)	$	(227)	$	45
Net change	(115)		2		—		(113)
Balance at September 30, 2021	$	169	$	(10)	$	(227)	$	(68)


	Accounts that entered a loan modification program and were classified as TDRs during the period			Accounts that entered a loan modification program and were exempt from the TDR designation pursuant to the CARES Act(1)
	Number of Accounts	Balances		Number of Accounts	Balances
For the Three Months Ended September 30, 2022
Credit card loans	63,803	$	414	—	$	—
Private student loans	1,863	$	36	—	$	—
Personal loans	1,799	$	25	—	$	—

For the Three Months Ended September 30, 2021
Credit card loans	13,964	$	86	27,925	$	200
Private student loans	102	$	2	2,325	$	46
Personal loans	888	$	10	239	$	3

For the Nine Months Ended September 30, 2022
Credit card loans	167,655	$	1,071	—	$	—
Private student loans	5,141	$	96	—	$	—
Personal loans	4,561	$	62	—	$	—

For the Nine Months Ended September 30, 2021
Credit card loans	48,887	$	315	97,449	$	697
Private student loans	355	$	7	7,038	$	135
Personal loans	3,102	$	38	1,177	$	18


Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plan or Program	Maximum Dollar Value of Shares that may yet be purchased under the Plans or Programs
July 1 - 31, 2022
Repurchase program(1)	2,099,205	$	100.07	2,099,205	$	3,389,926
Employee transactions(3)	1,142	$	100.44	N/A	N/A
August 1 - 31, 2022
Repurchase program(1)(2)	—	$	—	—	$	3,389,926
Employee transactions(3)	15,846	$	102.13	N/A	N/A
September 1 - 30, 2022
Repurchase program(1)(2)	—	$	—	—	$	3,389,926
Employee transactions(3)	422	$	100.50	N/A	N/A

Total
Repurchase program(1)(2)	2,099,205	$	100.07	2,099,205	$	3,389,926
Employee transactions(3)	17,410	$	101.98	N/A	N/A