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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, 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 classTrading symbol(s)Name of each exchange on which registered
Common Stock, par value $0.01 per shareDFSNew 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 20, 2023, there were 250,057,955 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, 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.

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,
2023		December 31,
2022
Assets
Cash and cash equivalents$9,194 $8,856 
Restricted cash39 41 
Investment securities (includes available-for-sale securities of $13,079 and $11,987 reported at fair value with associated amortized cost of $13,447 and $12,167 at September 30, 2023 and December 31, 2022, respectively)
13,336 12,208 
Loan receivables
Loan receivables122,676 112,120 
Allowance for credit losses(8,665)(7,374)
Net loan receivables114,011 104,746 
Premises and equipment, net1,084 1,003 
Goodwill255 255 
Other assets5,513 4,597 
Total assets$143,432 $131,706 
Liabilities and Stockholders' Equity
Liabilities
Deposits
Interest-bearing deposit accounts$102,638 $90,151 
Non-interest bearing deposit accounts1,381 1,485 
Total deposits104,019 91,636 
Long-term borrowings19,467 20,108 
Accrued expenses and other liabilities5,710 5,618 
Total liabilities129,196 117,362 
Commitments, contingencies and guarantees (Notes 9, 12 and 13)
Stockholders' Equity
Common stock, par value $0.01 per share; 2,000,000,000 shares authorized; 570,780,616 and 569,689,007 shares issued at September 30, 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 September 30, 2023 and December 31, 2022, respectively
1,056 1,056 
Additional paid-in capital4,520 4,468 
Retained earnings30,236 28,207 
Accumulated other comprehensive loss(573)(339)
Treasury stock, at cost; 320,724,371 and 302,305,216 shares at September 30, 2023 and December 31, 2022, respectively
(21,009)(19,054)
Total stockholders' equity14,236 14,344 
Total liabilities and stockholders' equity$143,432 $131,706 
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,
2023		December 31,
2022
Assets
Restricted cash$39 $41 
Loan receivables$24,946 $25,937 
Allowance for credit losses allocated to securitized loan receivables$(1,129)$(1,152)
Other assets$4 $3 
Liabilities
Long-term borrowings$10,889 $10,259 
Accrued expenses and other liabilities$17 $14 
See Notes to the Condensed Consolidated Financial Statements.
1
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,
 2023202220232022
Interest income
Credit card loans$3,726 $2,783 $10,513 $7,475 
Other loans653 476 1,823 1,343 
Investment securities120 35 327 104 
Other interest income111 63 314 86 
Total interest income4,610 3,357 12,977 9,008 
Interest expense
Deposits1,061 345 2,722 658 
Short-term borrowings2 1 2 2 
Long-term borrowings225 168 622 416 
Total interest expense1,288 514 3,346 1,076 
Net interest income3,322 2,843 9,631 7,932 
Provision for credit losses1,702 773 4,109 1,476 
Net interest income after provision for credit losses1,620 2,070 5,522 6,456 
Other income
Discount and interchange revenue, net377 335 1,077 1,023 
Protection products revenue42 42 129 128 
Loan fee income194 168 546 450 
Transaction processing revenue82 65 221 183 
Gains (losses) on equity investments6 (4)(11)(208)
Other income21 19 71 64 
Total other income722 625 2,033 1,640 
Other expense
Employee compensation and benefits575 551 1,788 1,566 
Marketing and business development283 276 792 722 
Information processing and communications149 124 438 370 
Professional fees281 241 729 607 
Premises and equipment22 22 64 70 
Other expense144 154 430 386 
Total other expense1,454 1,368 4,241 3,721 
Income before income taxes888 1,327 3,314 4,375 
Income tax expense205 314 762 1,026 
Net income$683 $1,013 $2,552 $3,349 
Net income allocated to common stockholders$647 $975 $2,473 $3,267 
Basic earnings per common share$2.59 $3.57 $9.70 $11.70 
Diluted earnings per common share$2.59 $3.56 $9.69 $11.69 
See Notes to the Condensed Consolidated Financial Statements.
2
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,
 2023202220232022
Net income$683 $1,013 $2,552 $3,349 
Other comprehensive loss, net of tax
Unrealized losses on available-for-sale investment securities, net of tax(83)(100)(142)(262)
Unrealized (losses) gains on cash flow hedges, net of tax(20)(2)(92)3 
Other comprehensive loss(103)(102)(234)(259)
Comprehensive income$580 $911 $2,318 $3,090 

See Notes to the Condensed Consolidated Financial Statements.
3
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 LossTreasury
Stock		Total
Stockholders'
Equity
Preferred StockCommon Stock
 SharesAmountSharesAmount
For the Three Months Ended September 30, 2022
Balance at June 30, 202211 $1,056 569,564 $6 $4,417 $26,531 $(251)$(18,240)$13,519 
Net income— — — — — 1,013 — — 1,013 
Other comprehensive loss — — — — — — (102)— (102)
Purchases of treasury stock— — — — — — — (212)(212)
Common stock issued under employee benefit plans— — 31 — 2 — — — 2 
Common stock issued and stock-based compensation expense— — 42 — 25 — — — 25 
Dividends — common stock ($0.60 per share)
— — — — — (166)— — (166)
Dividends — Series C preferred stock ($2,750 per share)
— — — — — (15)— — (15)
Dividends — Series D preferred stock ($3,062.50 per share)
— — — — — (16)— — (16)
Balance at September 30, 202211 $1,056 569,637 $6 $4,444 $27,347 $(353)$(18,452)$14,048 
For the Three Months Ended September 30, 2023
Balance at June 30, 202311 $1,056 570,628 $6 $4,508 $29,761 $(470)$(21,005)$13,856 
Net income— — — — — 683 — — 683 
Other comprehensive loss — — — — — — (103)— (103)
Purchases of treasury stock— — — — — — — (4)(4)
Common stock issued under employee benefit plans— — 32 — 3 — — — 3 
Common stock issued and stock-based compensation expense— — 121 — 9 — — — 9 
Dividends — common stock ($0.70 per share)
— — — — — (177)— — (177)
Dividends — Series C preferred stock ($2,750 per share)
— — — — — (15)— — (15)
Dividends — Series D preferred stock ($3,062.50 per share)
— — — — — (16)— — (16)
Balance at September 30, 202311 $1,056 570,781 $6 $4,520 $30,236 $(573)$(21,009)$14,236 
See Notes to the Condensed Consolidated Financial Statements.
4
Additional
Paid-in
Capital		Retained
Earnings		Accumulated Other Comprehensive LossTreasury
Stock		Total
Stockholders'
Equity
Preferred StockCommon Stock
SharesAmountSharesAmount
For the Nine Months Ended September 30, 2022
Balance at December 31, 202111 $1,056 568,831 $6 $4,369 $24,538 $(94)$(16,695)$13,180 
Net income— — — — — 3,349 — — 3,349 
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, 202211 $1,056 569,637 $6 $4,444 $27,347 $(353)$(18,452)$14,048 
For the Nine Months Ended September 30, 2023
Balance at December 31, 202211 $1,056 569,689 $6 $4,468 $28,207 $(339)$(19,054)$14,344 
Cumulative effect of ASU No. 2022-02 adoption— — — — — 52 — — 52 
Net income— — — — — 2,552 — — 2,552 
Other comprehensive loss — — — — — — (234)— (234)
Purchases of treasury stock— — — — — — — (1,955)(1,955)
Common stock issued under employee benefit plans— — 90 — 9 — — — 9 
Common stock issued and stock-based compensation expense— — 1,002 — 43 — — — 43 
Dividends — common stock ($2.00 per share)
— — — — — (513)— — (513)
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, 202311 $1,056 570,781 $6 $4,520 $30,236 $(573)$(21,009)$14,236 
See Notes to the Condensed Consolidated Financial Statements.
5
DISCOVER FINANCIAL SERVICES
Condensed Consolidated Statements of Cash Flows (unaudited)
(dollars in millions)
 For the Nine Months Ended September 30,
 20232022
Cash flows provided by operating activities
Net income$2,552 $3,349 
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses4,109 1,476 
Deferred income taxes(470)(317)
Depreciation and amortization354 424 
Amortization of deferred revenues(335)(261)
Net losses on investments and other assets40 246 
Other, net63 73 
Changes in assets and liabilities:
Increase in other assets(436)(350)
(Decrease) increase in accrued expenses and other liabilities(190)325 
Net cash provided by operating activities5,687 4,965 
Cash flows provided by (used for) investing activities
Maturities of available-for-sale investment securities1,431 1,677 
Purchases of available-for-sale investment securities(2,627)(2,001)
Maturities of held-to-maturity investment securities12 26 
Purchases of held-to-maturity investment securities(49)(40)
Net change in principal on loans originated for investment(13,145)(12,297)
Proceeds from the sale of other investments4 325 
Purchases of other investments(60)(135)
Purchases of premises and equipment(235)(178)
Net cash used for investing activities(14,669)(12,623)
Cash flows provided by (used for) financing activities
Net change in short-term borrowings— (1,750)
Net change in deposits12,348 10,482 
Proceeds from issuance of securitized debt2,232 4,626 
Maturities and repayment of securitized debt(1,489)(2,566)
Proceeds from issuance of other long-term borrowings523 — 
Maturities and repayments of other long-term borrowings(1,808)(322)
Proceeds from issuance of common stock9 7 
Purchases of treasury stock(1,937)(1,757)
Dividends paid on common and preferred stock(560)(524)
Net cash provided by financing activities9,318 8,196 
Net increase in cash, cash equivalents and restricted cash336 538 
Cash, cash equivalents and restricted cash, at the beginning of the period8,897 11,332 
Cash, cash equivalents and restricted cash, at the end of the period$9,233 $11,870 
Reconciliation of cash, cash equivalents and restricted cash
Cash and cash equivalents$9,194 $10,004 
Restricted cash39 1,866 
Cash, cash equivalents and restricted cash, at the end of the period$9,233 $11,870 
See Notes to the Condensed Consolidated Financial Statements.
6
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 2022 audited consolidated financial statements filed with the Company's annual report on Form 10-K for the year ended December 31, 2022.
Immaterial Restatement of Prior Period Financial Statements
As reported in the second quarter of 2023, beginning in 2007, the Company incorrectly classified certain credit card accounts into its highest merchant and merchant acquirer pricing tier. The Company determined the revenue impact of the incorrect card product classification was immaterial to the consolidated financial statements for all impacted prior periods. For comparative purposes, the Company has made these corrections to the consolidated financial statements for the prior periods presented in this Form 10-Q. Additionally, prior period amounts in the applicable notes to the consolidated financial statements have been corrected. The impacts of the misclassification and subsequent corrections are contained entirely within the Digital Banking segment. See Note 18: Immaterial Restatement of Prior Period Financial Statements for additional information and quantification of the prior period restatement impacts.
7
Recently Issued Accounting Pronouncement (Not Yet Adopted)
In March 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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.
2.    Investments
The Company's investment securities consist of the following (dollars in millions):
September 30,
2023		December 31,
2022
U.S. Treasury(1) and U.S. GSE(2) securities
$12,606 $11,423 
Residential mortgage-backed securities - Agency(3)
730 785 
Total investment securities$13,336 $12,208 
(1)Includes $285 million and $97 million of U.S. Treasury securities pledged as swap collateral as of September 30, 2023 and December 31, 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.
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
At September 30, 2023
Available-for-Sale Investment Securities(1)
U.S. Treasury and U.S. GSE securities$12,942 $— $(336)$12,606 
Residential mortgage-backed securities - Agency505 — (32)473 
Total available-for-sale investment securities$13,447 $— $(368)$13,079 
Held-to-Maturity Investment Securities(2)
Residential mortgage-backed securities - Agency(3)
$257 $— $(31)$226 
Total held-to-maturity investment securities$257 $— $(31)$226 
At December 31, 2022
Available-for-Sale Investment Securities(1)
U.S. Treasury and U.S. GSE securities$11,580 $21 $(178)$11,423 
Residential mortgage-backed securities - Agency587 — (23)564 
Total available-for-sale investment securities$12,167 $21 $(201)$11,987 
Held-to-Maturity Investment Securities(2)
Residential mortgage-backed securities - Agency(3)
$221 $— $(22)$199 
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.
8
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 does not have the intent to sell any available-for-sale securities in an unrealized loss position and 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.
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 PositionLess than 12 monthsMore than 12 months
Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses
At September 30, 2023
Available-for-Sale Investment Securities
U.S. Treasury and U.S. GSE securities203 $8,314 $(205)$4,292 $(131)
Residential mortgage-backed securities - Agency31 $— $— $473 $(32)
At December 31, 2022
Available-for-Sale Investment Securities
U.S. Treasury and U.S. GSE securities123 $9,060 $(175)$106 $(3)
Residential mortgage-backed securities - Agency34 $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, 2023 and 2022. 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, 2023 and 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, 2023One 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
U.S. Treasury and U.S. GSE securities$1,874 $10,747 $321 $— $12,942 
Residential mortgage-backed securities - Agency(1)
1 76 33 395 505 
Total available-for-sale investment securities$1,875 $10,823 $354 $395 $13,447 
Held-to-Maturity Investment Securities — Amortized Cost
Residential mortgage-backed securities - Agency(1)
$— $— $— $257 $257 
Total held-to-maturity investment securities$— $— $— $257 $257 
Available-for-Sale Investment Securities — Fair Values
U.S. Treasury and U.S. GSE securities$1,842 $10,449 $315 $— $12,606 
Residential mortgage-backed securities - Agency(1)
1 72 31 369 473 
Total available-for-sale investment securities$1,843 $10,521 $346 $369 $13,079 
Held-to-Maturity Investment Securities — Fair Values
Residential mortgage-backed securities - Agency(1)
$— $— $— $